All you need to know about Lithium Finance (LITH)

Introduction

In the cryptocurrency market, users can trade on traditional centralized exchange platforms and choose other DEXs. Therefore, the price of the same asset may vary on different platforms, leading to the demand for quotes between platforms. The quotation of crypto assets on the blockchain is completed mainly by oracles (such as Chainlink, API3, etc.). In addition to price data, other information also needs to be transmitted to the chain by oracles.

Regarding oracles that provide quotations on the market, most projects offer liquidity asset quotation functions. Due to the immediacy of trading, quotations must be updated in real-time between different platforms. Therefore, timeliness is one of the essential criteria for evaluating oracles. In contrast, the quotation function of illiquid assets is relatively lacking. Usually, illiquid assets are non-homogeneous products with relatively low trading frequency. Therefore, auctions are more commonly used for trading in such products on the market, and the price will not appear until the transaction is completed. Lithium Finance focuses on illiquid assets and is a protocol for evaluating illiquid assets. It matches the demand for prices and the supply of quotations through economic incentives. This article will focus on its product design and provide a detailed analysis of its ecological, financial model, and development status.

What is Lithium Finance?

Established in February 2021, the Lithium Finance team completed its token public sale by August. By September, internal network testing of the product was completed. The protocol, which primarily serves clients needing to value illiquid and private assets, is a dual-quote asset pricing protocol. It incentivizes user participation through a blend of economic tokens and reputation tokens.

The team secured $7.6 million in seed funding led by Hashed and Pantera Capital just four months after its establishment. The team has been operational for three years since its inception, but it remains relatively small. Changes in the CEO and CTO positions at the end of 2021 indicate human resources challenges. These issues have also caused delays in product development. To date, the product has not been officially launched on the mainnet, although a Beta version has been released on Polygon.

Business Logic

Lithium Finance is a DeFi oracle providing asset valuation based on artificial intelligence and machine learning algorithms. In November 2022, the team launched a beta version of Polygon, mainly introducing three basic functions: soliciting information from the community through incentive policies, proprietary machine learning algorithms, and a hybrid pricing model for asset valuation. The ecosystem primarily involves two parties: Price Seekers (Data Consumers) and Price Experts (Data Providers). Price Seekers are the main customer groups, such as project parties, issuers, and investors, who need the price of a certain illiquid asset. Price Experts are participants such as brokers, traders, and investors.

Price Seekers post questions about asset prices and provide bounties (with LITH as an incentive) to motivate Price Experts to submit accurate asset valuations within a predetermined submission period. Price Experts earn bounties and reputation rewards by answering price inquiries posted on the protocol. Lithium Finance uses an order book trading model, where Price Experts submit bid and ask prices, similar to market makers, within a specified time frame. The protocol aggregates the quotes from multiple Price Experts to form a pricing model and generates the final valuation submitted to the Price Seeker.

Currently, the protocol mainly provides price assessments for assets in the NFT market.

Source: lith finance

When inquiring, the price seeker can manually create a task through a web application or use API programming to input the following information: the asset details to be priced, the valuation method (e.g., equity value or enterprise value indicators), the start date, the submission deadline, the bounty pool, the minimum reputation threshold (this allows the price seeker only to accept pricing from a specific group of price experts), and the pricing frequency.

When publishing an inquiry, the protocol will create a new transaction within the Lithium smart contract on the blockchain. This transaction will reference a content identifier, which points to the content that will ultimately be stored on IPFS. Once created, price experts can quote through the pricing mechanism.

Tokenomics

Economic Token: LITH

LITH is the native economic token within the Lithium Finance ecosystem. All compensation and financial rewards within the protocol are denominated and paid in LITH. The primary use cases include:

1. Bounty: When price seekers inquire about prices, they will deposit a certain amount of LITH tokens into a reward pool to compensate price experts for providing asset pricing.
2. Staking: Price experts must stake a certain amount of LITH when answering asset inquiries. This is done to ensure the integrity and accuracy of valuations, and to calculate rewards on the other.
3. Reward Distribution: Reward distribution depends on the pricing accuracy and the amount of LITH staked. Under other conditions remaining the same, the more LITH experts stake, the more LITH rewards they will receive.

The team conducted IEO and IDO public sales for LITH tokens. An IEO event was held for two days on August 3, 2021, while the IDO was launched on the 5th. The maximum supply of LITH is 10 billion tokens, of which 200,000 were allocated for the IEO and 200,000 for the IDO. The initial price upon entering the market was $0.006.

The distribution of LITH tokens is illustrated in the figure below. Most tokens are allocated for operation and ecosystem construction, with 65% designated for staking rewards, community, and liquidity incentives. Tokens allocated for seed rounds and two private placement rounds account for 19%, while public sale tokens make up less than 1%. The remaining 15% of the tokens are assigned to the team and advisors.

Source: Lithium Finance

LITH tokens have a five-year unlocking period. The public sale portion is unlocked upon listing, 20% of the private financing portion is unlocked upon listing, and the remaining portion is linearly released daily over one year. Tokens allocated to the team and advisors have a 6-month lock-up period and are linearly unlocked quarterly over two years. Tokens allocated to seed round investors are linearly released in full within one year. Tokens for the community are unlocked 5% upon listing, and the remaining 5% are linearly released monthly over five years. Tokens for the ecosystem are unlocked 2% upon listing, and the remaining 5% are linearly released monthly over five years. The LITH used for liquidity market making is unlocked 5% upon listing, and the remaining 5% is linearly released monthly over five years.

Reputation Points

Reputation Points (RP) represent the reputation of protocol participants. They act as a weight factor when price experts participate in pricing. The more RP in the pool, the greater the price influence. Initially, the number of token RPs for price experts is 0. RP can only be obtained from ecosystem participation and cannot be transferred or traded. Over time, the more pricing price experts participate in, the more RP will improve the accuracy of pricing. As the reputation of price experts increases, their influence on market pricing will also be further enhanced.

Reputation points are divided into two categories: general RP and asset class or sector-specific RP. When making quotes, price experts need to stake reputation points. The more reputation points are staked, the larger the hypothetical order size submitted by the price expert. In each pricing query, price experts will be subject to some staking limits. Price experts with higher reputations can obtain higher staking limits.

Since reputation point RP determines the weight of the price estimate input, high-reputation price experts together become the market pricing leaders. Users with high reputations will become part of the market leader community.

Pricing Mechanism

Lithium Finance employs a dual-quote mechanism where price experts act as simulated market makers, providing bid and ask prices for assets. When a large number of participants are gathered within the protocol, a relatively accurate price is obtained. Price experts stake reputation points to represent the size of their submitted quote orders. However, reputation points are only used as the size of simulated orders for market clearing and are not used to purchase assets. Unlike traditional exchanges, market clearing on Lithium Finance is not real-time. All quotes are cleared at the end of the submission period. As shown in the figure below, the clearing price is determined after all prices are submitted, and the clearing price is $108.

Source: docs lith finance

To ensure the fairness of quotes and prevent manipulation, the protocol has also introduced an encrypted submission scheme to protect data privacy due to the complete transparency of transactions and data on the blockchain. All price estimates are encrypted before submission, and random data is injected into the data before price experts encrypt it. Only price experts know this random data, and no other price experts will have access to the relevant information until the reveal period.

Current Development

Lithium Finance’s product is not yet officially launched on the mainnet. Currently, only a beta version is released on Polygon. The development team is small, which has led to some delays. As per official data, the number of price experts now exceeds 200,000.

Source: lith finance

At the protocol level, they are actively seeking partners and have opened up smart node interfaces. They have established over 20 ecological cooperation agreements, including Deri Protocol, Injective Protocol, Palm NFT Studio, and others.

Source: lith finance

Conclusion

Lithium Finance offers valuation services for illiquid assets, a niche with few competitors and limited demand. The protocol encourages pricing experts to give precise estimates by rewarding them with economic tokens and reputation points. It also mitigates malicious actions through encryption and staking. The product’s design logic is robust. However, since its inception in February 2021, the project has seen a change in both its CEO and CTO, leading to delays in development progress. The project’s future remains uncertain while a beta version is available.