Disclaimer: the protocol has been audited, though one acknowledged issue is that the direction of liquidity in the protocol happens off-chain, i.e. the team needs to be fully trusted with that. This is a risk to take into account. Note that the protocol is only at its first stage of collecting capital, and haven't started deploying it yet. We can't speak of how successful it will be, but the design and idea is very interesting.
Tokemak is centralizing the process of liquidity providing through a protocol. In short, it allows for holders of base tokens (ETH & USDC currently) to deposit in genesis pools, and governance tokens (AAVE, SUSHI, ANGLE) to deposit in single-sided tokens reactors. Depositors receive tTokens representing their claim to the reactor's reserves, and get yield in the form of TOKE.
This liquidity sitting in reactors is then directed by TOKE holders (Liquidity Directors or LD) into any place that would require liquidity, typically an AMM pool, and the fees are collected by the protocol.
Diagram from Tokemak's documentation
TOKE is used for three things:
Briefly, it allows users to coordinate their capital allocation, protocols to have more efficient liquidity distribution, and the ecosystem in general to have more concentrated liquidity.
This has potentially many advantages for both liquidity providers and protocols.
Pros
Allows LPs to indirectly provide liquidity in the market by depositing only one asset, and get additional yield in TOKE tokens.
Tokemak gives users the ability to coordinate to distribute liquidity in specific pools through voting. I'm not sure how this will take shape yet and what the effect will be, but we could see this liquidity regroup in very specific pools, and AMMs could begin bribing Tokemak users to redirect this liquidity in their pools.
When a reactor is "ignited", the Tokemak team partners with the token's DAO to swap tokens (govToken <> TOKE) and creates a reserve used to mitigate IL in terms of token quantity. They have it detailed here, along with additional mechanisms to protect the funds: https://docs.tokemak.xyz/mechanics-and-functionality/guardrails-and-impermanent-loss-mitigation
Cons