Project Spotlight — Pylon Protocol
By: Brian Curran
Tags: Finance, Creators, Cryptocurrency, Investing, Defi

Terra’s ecosystem is roaring. Dozens of applications are currently being incubated, are in development, have released prototypes, opened closed Beta programs, or are currently live. It’s an exciting time to be part of the Terra community.

In our fourth issue of Terra’s Project Spotlight, we’re thrilled to introduce Pylon Protocol — a yield-based saving, payment, and launchpad platform built on Terra.

Pylon is the fifth application to be incubated by the TFL team directly, following Chai, Mirror, Anchor, and Nebula. Like all of them, Pylon infuses itself with the theme of “looking outwards,” where adoption, accessibility, and use cases that appeal to the average user are powered by Terra’s DeFi ecosystem and presented to a global user set with a friendly user interface.

Background on Pylon Protocol

Pylon’s conception is driven by the expansive potential of integrating yield-based services that redefine the conventional one-off value transfer model. Pylon enables a much more effective mechanism for the exchange of value between long-term value creators (e.g., musicians, new crypto projects, SaaS software, etc.) and their users.

Part of the concept behind Pylon Protocol was inspired by Korea’s “key money deposit” housing system — where renters would pay 3/4 of the fee of the house upfront, and the landlords could invest that money elsewhere for that period of time. The renter would receive it all back after their lease expires.

The main difference between Pylon and this system is that the principal is protected (i.e., the landlord can’t take out the principal to spend it elsewhere) and that the beneficiaries/landlords would be receiving stable, consistent yield to make this relationship more attractive — as opposed to redirecting that money towards other risky investments.

The idea enshrined in Pylon is to swap “payments-in-principal with payments-in-cashflow” using Anchor’s high-yield, low-volatility deposit rate.

Anchor’s ability to unlock new dimensions for user engagement with products and services is powerful. It captures value over a more sustained period, fastening long-term incentives between stakeholders or supporters and the value creators much more closely than one-off models.

“Pylon unlocks a new suite of options for payments, philanthropy, patronage, investments, rentals, and savings,” says Woojin Lim, Co-Founder and Project Lead for Pylon. “Pylon reimagines long-term relationships and incentive contracts between payers and payees, consumers and creators, patrons and artists, investors and entrepreneurs, and many more.”

Wielding the phrase “Deposit Money, Spend Yields,” Pylon’s ambitions reflect the idea that principal-protected yield payments of stablecoins erode the notion of short-term payments of principal enduring as the status quo. Fusing the advantages of stablecoins, the high-yields of Anchor, and the composability of DeFi Pylon ushers in a new primitive of incentive alignment — “no-fee” products and services or “lossless,” value-additive investments.

For the first time, people can allocate capital where payments and savings are sustained via cash flow rather than upfront expenditure.

It’s difficult to initiate Pylon’s feature set without the underlying mechanisms sourced from Terra’s DeFi ecosystem — like high-yields via Anchor Protocol.

Imagine trying to pay for subscriptions with yield from TradFi instruments. Not only are the yields currently infinitesimal, requiring more upfront capital allocation to a deposit contract, but they’re also not easily integrated into applications as open protocols with SDKs and widgets. Nor is the current payment infrastructure adequate to achieve “no fee” services, where repetitive, manual input of card info is cumbersome and fees for one-off transactions are burdensome.

This is one of the marked advantages that DeFi-sourced fintech applications have over TradFi incumbents. Rapid prototyping, composability, and enticing yields characteristic of DeFi have been present since the onset of DeFi, but it’s only with outward-thinking designs like Pylon when DeFi begins to unleash its true potential — unseating the status quo.

But Pylon is also so much more than an extension of Anchor’s possibilities. As a protocol, it’s enveloped by the creative designs of its users and integrations. Lim continues:

“It allows all kinds of platforms and projects to integrate the ‘Deposit with Pylon’ widget seamlessly. Think GoFundMe-like fundraising sites, OnlyFans-esque gated content platforms, Alchemix-style loans that repay themselves over time, mystery-box savings accounts, newsletter and magazine subscriptions, all the way to Pylon widget integration into preexisting subscription services such as Netflix or Spotify.”

Notably, Pylon’s build is not confined to Anchor. Pylon builds on stable yield-bearing protocols, so the team is looking to eventually expand on the sources from which the yield is drawn for later iterations. Pylon is a pillar from which to push the boundaries of long-term incentive alignment across markets, and its mechanics are elegantly simple.

How Does Pylon Work?

Pylon is a general-purpose framework for principal-protected, yield-based products and services that extends Anchor’s feature set to the vast potential of customizable deposit contracts and yield redirection. Pylon is powered by Anchor, a low-volatility savings protocol that generates stable yields of ~20% per annum — passing borrowers’ staking rewards onto lenders. All funds entering Pylon (UST) are automatically deposited into Anchor (aUST) to generate stable yields.

It’s a vehicle for more efficient capital allocation, where current friction between users and value creators is replaced with robust incentive alignment.

Pylon consists of two primary groups:

Creators/Sellers Users

Creators are anyone that issues a product, seeks fundraising, or provides some type of service to an audience of patrons. Accessing Pylon’s features means creators initiate a deposit_contract with customizable terms like lock-up period, use of cash flows, and other aspects like incentives. The deposit contract directs the cash flow from yield-bearing Anchor UST (aUST) to addresses of the creator’s choosing.

For example, an early-stage project building on Terra can create a deposit contract for investors, specifying a lock-up period of 6 months with a linear vesting schedule. The contract can also prescribe certain incentives like tiered access to developments such as a Beta program or boosted yields from liquidity provision once the project goes live.

Users engage with the deposit contract directly by depositing UST, earning deposit provider tokens (for short, “DP tokens,” analogous to LP tokens) representing a stake in the investment relative to the size of UST deposited. DP tokens can be redeemable for UST (the original deposit) and could be used to claim project tokens or access different services — just like a membership badge/card.

DP tokens can be used to claim back deposited UST when its minimum deposit period expires, and also to claim project tokens relative to the yield generated from its underlying UST deposits. The Anchor yield directed to the deposit_contract can share cash flows with a governance token to align incentives over the entire project.

“Users can select their choice of deposit amounts and minimum deposit lockup/subscription periods (i.e. 3 months, 6 months, 12 months), which can be designated by creators and may correspond to different levels of membership or yield farming tiers that grant users different perks and benefits,” says Lim. “On some platforms, users may choose lock-up-free withdrawal options, while on other platforms, a small withdrawal fee (i.e. low/reduced yield returns) may apply for withdrawals earlier-than-pledged.”

The immediate consequence of the above is that projects are more incentivized to align their development prerogative with the community stakeholder’s idea for project direction since they can add/remove deposits. This fastens long-term value capture closer to the network stakeholders out of the gate by fusing governance decision-making with liquidity provision rather than eschewing one for the other. It also removes the incentive to dump project tokens by giving investors a longer-term time horizon for buying the project’s native tokens via a programmatic cash flow.

Besides being redeemable for project tokens, DP tokens can be held as corporate coupons to access a product or service. The tokens are pegged 1:1 to UST at the time of minting and can be exchanged for UST when users withdraw their initial deposits.

Pylon contains 3 core products:

Pylon Gateway (Launchpad) Pylon Widget Pylon Dashboard (Web App)

Pylon Gateway

The initial Pylon-integrated product will be the Pylon Gateway, a yield-funded launchpad for projects building on Terra. Using a “Stake to Invest” model, Gateway introduces users a pathway to make “lossless,” value-additive investments in projects with high-upside potential by depositing customizable amounts of UST into the Gateway.

Users scour a whitelisted set of projects on Gateway, view the terms of the deposit, and allocate principal-protected UST in return for DP tokens subject to the conditions of the project’s specific deposit_contract.

The crowdfunding-via-yield concept enables startup projects to bootstrap liquidity and funding that respond to project growth over a specified period detailed in the deposit contract. It’s like an IDO launchpad for Terra’s ecosystem, but with funding allocated through principal-protected yield rather than upfront capital expenditure, which carries a certain degree of risk.

For the community of depositors in a project, this induces a better long-term incentive alignment with the project’s direction. Since users can withdraw their initial capital after the lock-up period (alongside the native project’s token, paid for via yields), it’s in the best interest of the project’s team to fulfill roadmap promises and mandates from investors upon their initial investment.

“Compared to traditional investment platforms and startup fundraising (i.e. venture capital, angel finance, conventional ICO/IDO launchpads), where project teams may not be incentivized to deliver on future value if they receive all the funds upfront, Pylon Gateway allows both investors and project teams to configure different deposit contracts and flexible long-term funding options that provide consistent payouts that actively respond to project developments and investor demands,” says Lim.

Additionally, a yield-bearing IDO platform has notable advantages over current incumbents. For example, due to the Anchor yield, the IDO deposit volume or liquidity would be higher than typical yield farming projects because the prospects of a “lossless” investment are more enticing than the risk-heavy expenditure of capital for IDO platforms with one-off purchases of project tokens. The result is higher overall yields and returns.

Pylon Gateway is just the tip of the iceberg, however. Beyond Gateway, Pylon has an expansive design space targeting mainstream adoption.

Pylon Widget

The Pylon Widget is the protocol’s Swiss Army Knife, providing a tool that’s easily integrated into existing applications — both crypto-native and non-crypto. The Widget will be accompanied by an SDK, providing product or service providers of various types with a seamless ability to introduce yield-based payments, savings, and investing into their application or community of patrons.

The Widget prompts users to deposit UST and access services based on the terms of the provider via a simple pop-up available on the website of the provider. With plans for a built-in fiat on-ramp, users can go from fiat → UST → Pylon-integrated products or services within minutes.

The Widget is the key to expanding the surface of Pylon’s impact. It initiates use cases beyond a crypto-native audience where principal-protected capital is actively wielded for a “no-fee” subscription or “lossless” investment via an interface intuitive to every web user.

For example, imagine a social media platform and marketplace where creators and brands can set membership benefits depending on the total amount of UST staked. The Widget is directly available on the social media site, where users can access gated or premium content if they deposit UST past a specific threshold.

The Widget unlocks customizability and gamification in a way that’s conducive to stronger relationship-building between patrons, creators, and brands. Patrons can vote on governance, receive NFTs marking the duration of their support, and join premium tiers all through an integrated Widget available on the application itself.

In many instances, Pylon can act as a conduit for DAO-based social interactions between creators and patrons without having to build a DAO from scratch — the mechanism baked into Pylon serves as the foundation for complex interactions on top of it.

Pylon Dashboard

Pylon’s WebApp Dashboard allows users to easily trade and stake Pylon’s native utility tokens, vote on community governance proposals, engage with the Pylon community, and propose ideas for future platform growth.

Projecting Pylon’s Potential

Composability’s upper bound is simply creativity. Reconfiguring value transfer models from one-off to sustained opens up a new world of potential. Possible demographics that would be highly interested in using Pylon include sellers of intangible assets, sellers of recurring value, lenders of illiquid assets, and sellers of future value or unascertained goods — but also so much more.

Let’s explore some high-level examples, through the prism of both a crypto-native and mainstream audience.

Crypto-Native

Community treasuries in crypto have ballooned as valuations have soared since the Summer of DeFi in 2020. However, community-governed treasuries face many growing pains, including designing optimal mechanisms of social coordination, how funds should be distributed, and what to do with idle balances.

Critically, most community-governed treasuries are held in the project’s native token. This exposes treasury balance sheets to the volatility characteristic of new protocol tokens, with a dearth of treasuries holding balances in stablecoins or deploying idle capital in productive ways. Proposed solutions like “Buyback and Make” are promising, but uptake of active capital management in community treasuries is constrained by the coordination hurdles and nascence of the market.

Pylon provides a distinct avenue for community treasuries to deploy capital more actively while retaining the protected principal in a stablecoin — UST. For example, if there is $100 million in a community treasury in a project’s native $TOKEN, the community can vote to integrate Pylon, convert $20 million of $TOKEN to UST, and divert it into a deposit_contract that funds community initiatives with the yield generated from aUST.

With a 20% yield of $20 million equaling $4 million annually, this translates to $333K/month in spending that can be deployed for community growth via marketing, communications, graphic design, and other non-technical developments that attract professionals and creatives to an ecosystem.

Remember, the $20 million principal is protected, and all funding is generated via cash flows. Not only would the allocation to Pylon defend against larger portfolio drawdowns during adverse volatility in $TOKEN, but it also generates multiple opportune uses of the cash flow from Pylon.

One example includes using yield-based revenue to pay for a conversion-based advertising campaign for a project that only renews for a given month or quarter if specific KPIs designed from the outset of the campaign are hit. Another example could be splitting the monthly revenue into 2 buckets, with one subsidizing code audits for projects building on a network and the other bucket deployed in low-risk yield farming opportunities — such as LP’ing mARKK on Mirror Protocol to bolster yield further.

The possibilities are endless and get even more interesting in mainstream use cases.

Mainstream

Perhaps the most salient way to demonstrate Pylon’s potential in the mainstream is the widespread inconvenience of subscription-based fee models (i.e., paywalls) for accessing articles on the NYT, WSJ, and other major media publications.

Barely anybody is happy with the current method of paying a $100 yearly subscription to simply access a few articles per year they’re interested in reading.

The inability to discover a viable payment mechanism for accessing recurring services that aren’t excessively cumbersome is a critical problem facing media publications. They already have a difficult time onboarding more readers and generating a profit as print media has fallen by the wayside.

Enter Pylon — an Internet-native, principal-protected mechanism that is trivially integrated into any application.

For example, instead of making readers pay for a 1-year subscription when they simply want to read a handful of individual articles discovered in passing throughout a year, the WSJ could integrate the Pylon widget. If the yearly subscription is $50/year, then the reader simply deposits 250 UST into the widget’s 1-year deposit_contract (customized by the WSJ), which diverts the yield (denominated in aUST) to the WSJ over the course of the year. The reader could extract their deposit whenever they want the service to end, effectively making it “pay as you go” without constantly running into paywalls every time they want to read an article or paying the subscription amount upfront.

Again, the reader’s capital is principal-protected, meaning that they never actually pay for the subscription in a one-off manner.

Imagine musical artists struggling to elevate themselves in the competitive crucible of Spotify able to receive steady payouts from supporters rather than one-off donations — where supporters can receive NFTs and other premium content. Artists of all kinds can monetize content in a way that reflects fanbase growth over time.

Charity fundraising can undergo “perpetual endowments” funded by cash flows rather than principal expenditure. In a charity industry rife with fraud and misplaced funds, Pylon could help alleviate the principal-agent problem between philanthropists and charities, more effectively aligning the incentives of donors with the dispersal of funding from the charity.

The list goes on, and its only limit is you — the ambitious community member with an idea. Pylon helps you manifest your idea without upfront expenditure, reducing risk and incentive asymmetries in the process.

What to Watch For

Pylon is on the cusp of its launch of the Gateway, with more details from the team to follow soon, including Pylon’s tokenomics. Keep an eye out, as a snapshot for LUNA stakers will be taken, offering LUNAtics invested in the Terra ecosystem an early opportunity to participate in a new form of long-term value transfer.

For more details about Pylon, please refer to:

Website — https://www.pylon.money/

Twitter — https://twitter.com/pylon_protocol

Telegram — https://t.co/QZUvCj2mqD?amp=1

Medium — https://medium.com/terra-money/pylon-protocol-e2a622ac553e

If you are a project team hoping to launch on Pylon or a platform hoping to integrate with Pylon, please send a message to contact[at]pylon[dot]money

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