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Roles and Participants

TODO

This section is mostly AI fluff and requires substantial revision to reflect actual protocol design decisions.

The Rarity protocol involves multiple participants, each with distinct responsibilities, incentives, and trust assumptions. Understanding these roles is essential to grasping how the system maintains authenticity, liquidity, and price integrity while minimizing trust requirements.

Issuers​

Issuers are whitelisted entities that acquire real-world assets, tokenize them, and launch collections on Rarity. They're the bridge between physical assets and on-chain tokens—the ones who find the rare asset, negotiate the purchase, arrange custody, and mint the corresponding tokens.

Responsibilities: Acquire authenticated assets at verifiable prices. Provide complete documentation covering provenance and custody. Mint tokens according to the collection model. Attest to acquisition prices on-chain via cryptographic commitments. Post-launch, act as active market makers and maintain liquidity reserves (by default, 10% of assets and 10% of funds raised).

Incentives: Earn curation fees from collection performance. Retain a portion of minted tokens for market-making. Build reputation for future collections. Participate in profit-sharing from supply management mechanisms.

Trust and accountability: Must acquire assets at fair market prices, provide accurate documentation, and act in the protocol's best interest. Economic bonds get slashed for misrepresentation. Reputation is at stake for future collections. Whitelisting can be revoked for violations.

Custodians​

Custodians are third-party entities that physically hold and verify real-world assets. They securely store assets, verify authenticity and condition, provide custody receipts and documentation, attest to asset existence on-chain, and handle logistics for external owner deposits.

Incentives: Earn custody fees from issuers or asset owners. Build reputation for attracting more business.

Trust and accountability: Must maintain secure storage facilities, accurately verify asset authenticity, and avoid collusion with issuers. Accountability comes through professional reputation, insurance, legal liability, and third-party audits.

Initial implementation: In early collections, issuers may also serve as custodians for assets they acquire directly, maintaining physical custody while providing on-chain attestations. As the protocol matures, independent third-party custodians are expected to take on this role, providing additional separation of concerns and trust minimization.

Token holders​

Token holders (collectors) acquire and hold collection tokens, gaining fractional ownership exposure to underlying assets. They conduct due diligence before investing, participate in governance if applicable, and optionally provide liquidity to secondary markets.

Benefits: Exposure to rare assets with fractional ownership. 24/7 tradability and DeFi composability. Yield opportunities through lending or liquidity provision. Can trade tokens freely, use them as collateral, participate in mark-to-truth auctions, and exit positions at any time via the AMM.

Liquidity providers​

Liquidity providers deposit tokens and stablecoins into the concentrated liquidity AMM to earn trading fees. They provide two-sided liquidity, manage positions and price ranges, and monitor impermanent loss.

Incentives: Earn trading fees from all swaps. Potential protocol incentives. Profit from bid-ask spreads in active market-making.

Risks: Impermanent loss from price movements. Smart contract risk. Liquidity concentration risk in CL AMMs.

Professional market makers​

Professional market makers are sophisticated liquidity providers who actively manage concentrated liquidity positions to ensure deep, efficient markets with tight spreads. They have real-time information about off-chain asset markets (auction results, dealer quotes, appraisals) and use this to price accurately and adjust positions proactively.

Responsibilities: Provide deep liquidity in tight ranges around fair value. Actively rebalance positions as prices move. Maintain tight spreads and sufficient depth for large trades. Manage inventory to avoid becoming too long or short.

Incentives: Earn higher trading fees through concentrated positions. Potential protocol incentives and liquidity mining rewards. Profit-sharing from supply management mechanisms. Build reputation for future collections.

Trust minimization: While market makers provide essential liquidity, they cannot manipulate prices without economic consequences. Mark-to-Truth auctions create arbitrage opportunities when prices deviate from fundamentals. TWAP/RWAP smoothing prevents manipulation of protocol-critical functions. Permissionless competition allows others to undercut poor market makers.

Initial implementation: In early collections, issuers will serve as the primary market makers using their liquidity reserves (10% of assets + 10% of funds raised). As collections mature, professional third-party market makers are expected to take over this role, with issuers acting as fallback liquidity providers.

Traders and arbitrageurs​

Traders buy and sell tokens on the AMM for speculation, arbitrage, or portfolio rebalancing. They execute trades based on market analysis and contribute to price discovery. Their trading provides continuous price discovery, creates volume that generates LP fees, and helps converge prices toward fundamentals.

Arbitrageurs are sophisticated traders who exploit price discrepancies between Rarity pools and external markets or between related collections. They enforce price consistency across markets, quickly correct mispricings, and provide exit liquidity during volatile periods. They earn risk-free or low-risk profits from price discrepancies and MEV opportunities in mark-to-truth auctions.

External asset owners​

External asset owners are individuals or entities who own real-world assets and want to tokenize them without selling to an issuer. They send their physical asset to a whitelisted custodian, who verifies authenticity and quality. The issuer attests to verification on-chain, tokens are minted and transferred to the original owner, and the owner can trade, lend, or hold tokens.

Key distinction: Unlike issuer-acquired assets, these have no acquisition price. Supply management mechanisms (especially hold periods) still apply to prevent disorderly market entry. This enables liquidity for previously illiquid assets without needing to sell, while retaining upside exposure and accessing DeFi.

Trust relationships​

Trust in Rarity is minimized but not eliminated. Limited trust is required for issuer acquisition prices (must trust issuer acquired at stated prices), custodian verification (must trust custodians verify authenticity correctly), and issuer market-making (must trust issuer acts responsibly).

Trust is minimized through economic bonds that get slashed for misrepresentation, reputation systems with whitelisting and track records, cryptographic attestations that are verifiable on-chain, and market validation where trading proves acceptance of issuer claims.

Trustless components require no trust: token supply and minting are verifiable on-chain, trading mechanics are enforced by smart contracts, supply management mechanisms execute programmatically, price discovery emerges from market activity, and mark-to-truth auctions use committed capital rather than opinions.

Incentive alignment​

Issuers and collectors are aligned because issuers earn fees based on collection performance, collectors benefit from issuer's active market-making, and both want healthy, liquid markets with fair pricing.

Liquidity providers and traders are aligned because LPs earn fees from trader volume, traders benefit from LP-provided liquidity, and both want tight spreads and deep markets.

Protocol and all participants are aligned because the protocol earns fees from all activity, participants benefit from robust infrastructure, and everyone wants sustainable growth and security.