Here is a thread that was posted earlier today that quoted an article I put together.
@khaleelkazi/re-leothreads-2bmmimkfz
I wanted to elaborate on this point to explain how vital this is to the LEO platform and the tokenomics. We are seeing a massive shift, akin to Leo Power.
So let us dive right in.
Vehicle currency
LEO is now a vehicle currency. What does this mean?
To best explain it, we look at the number one vehicle currency, the US Dollar. This is the link between all currencies. It is why the USD accounts for 88% of all pairs on the FOREX market and is involved in the overwhelming majority of transactions.
We have to keep in mind that the USD is a medium of exchange while LEO is a value capture token. We will explain that in a second.
When companies want to go from the Australian dollar to Mexican peso, they use the USD. That is the vehicle that carries the value.
How this works is a company Down Under will remit payment through its bank. The Australian dollars are taken from the account. next, the AUD is converted to USD and transmitted through the international system. On the other end, the Mexican bank receives payment and puts the Pesos in the account.
International trade is why central banks have to have US dollars. It needs to offer it to the commercial banks, the ones that do business with companies operating internationally. The Mexican company is not going to accept AUD and the Australians do not have pesos.
The US dollar solves this.
LEO operates in the same manner. To go from any Hive related coin or token, LEO is required. One this is acquired, it is bridged over to Arbitrum, showing up there as LEO. It then is swapped into CACAO before being converted into any outside coin or token.
It is no different than the US dollar in this regard.
Value Capture Token
LEO is a value capture token. This means it is a horrible medium of exchange. Fortunately, LEO is not operating in this manner.
Instead, LEO on Hive (actually Hive-Engine) is simply replaced with LEO on Avalanche. It is a 1:1 move. If one is simply bridging, the aLEO is held in the wallet, the same as LEO on H-E. This does not change.
However, if there is a swap, it is simply swapped for CACAO instantly.
Where this is important is in regards to market supply. There is a fine line between having liquidity and locking the token up. An over abundance of LEO on the market could cause price decline. This can be offset by demand, something that a vehicle currency requires.
LEO Entering And Not Coming Out
The system needs LEO in both the diesel pool on H-E and the LP on Maya. Where it resides will fluctuate as transactions occur.
What I think is essential is the fact that, for the most part, once the LEO enters, it should not leave. While it is not locked up like Leo Power, requiring a power down, it is effectively removed from circulation. That sounds odd when talking about liquidity on the open market.
Let me explain further.
While there is a chance that someone goes through the pools, buys LEO and powers it up, there is a much greater chance the application is used to enter or exit the system. Thus, value is transferring through LEO into something else. It obviously works in both directions.
Essentially, the LEO in the pools is placed there on a semi-permanent basis. Of course, one can remove the stake in either of the pools and move the money elsewhere. That said, if the return is there with growing activity, why would someone pass that up?
The majority of the time, people will not.
Like central banks requiring US dollars so companies in that system can operate internationally, this systems requires LEO in the pools. Anyone wants to use LeoDex is going to have to access LEO. The key to the structure is someone can show up with the coins or tokens that want to be swapped and the system will handle the rest.
To make this work, we have to have LEO available to facilitate the transactions.
This is where the pools enter.