Tokenomics DAO and Forgd are now flying the same flag at Forgd.com, and we are thrilled to unveil our joint plans to provide an integrated suite of services and products designed to support projects from inception to post-launch.

Our partnership is uniquely positioned to tackle the entire lifecycle of token creation, offering a seamless journey throughout the process.

We aim to make the pathway to launching a token as straightforward and effective as possible, allowing project teams to focus on building unique protocols with robust fundamentals.

New Offerings and Innovations

In line with our vision to innovate, we have developed new tools and services that leverage the expertise of both Tokenomics DAO and Forgd.

• We built a hands-on modeling and simulation workbook by merging our extensive knowledge databases into one end-to-end educational guide, laying the foundation for a holistic process.

• A revamped version of the Tokenomics Design Space that benefits from the combined knowledge and foundation will combine aspects of modeling token demand and simulating price discovery in different market and liquidity conditions. This gives protocols insights into how their design decisions might impact their token performance.

• With AMM², projects can deploy automated market-making strategies for all centralized and decentralized exchanges from a single dashboard. Our advanced algorithms are accessible to beginners and experts.

• Automate token distribution with customizable smart contracts. Ensure investors, advisors, and employees receive tokens in a timely manner. Monitor unlocks and sell pressure from a single dashboard.

• Monitor market makers through a centralised dashboard giving you insights into real-time KPIs such as spreads, volume, and depth across all major CEXs & DEXs.

Future Vision and Goals

Looking ahead, our partnership is set to redefine how projects handle their token pre-TGE and post-listing operations. All key aspects of a project’s go-to-market strategy such as Tokenomics design, Market Making, Exchange listing, and Automation of Token Vesting will be made available as self-service tools that can be utilized at a team’s own discretion, at their own pace. This will allow Forgd to support a large number of projects in a scalable capacity in a manner that is unattainable by traditional incubation platforms.

Forgd aims to partner directly with all base layer ecosystems, operating as a self-service incubator accessible to any entrepreneur building on their software layer.

Our combined expertise will continue to drive innovation, fostering an environment where projects can thrive and succeed.

The strategic initiatives we are launching represent a significant milestone in our journey together. Tokenomics DAO and Forgd are not just reshaping how tokens are launched; we are setting the stage for a future where projects are empowered to reach their full potential with fewer obstacles and greater support.

Tokenomics DAO is proud to announce a new growth phase via a strategic partnership with Forgd. As part of this partnership, Forgd has acquired Tokenomics DAO, and the teams have consolidated all offerings into a single platform at Forgd.com. This union combines Tokenomics DAO’s expertise in token design with the Forgd team’s knowledge of go-to-market strategies to create a holistic product and service portfolio for blockchain projects to optimize token & protocol performance.

Tokenomics DAO: Pioneers in Tokenomics

Tokenomics DAO has been a beacon of innovation in tokenomics. With a proven track record of developing sophisticated frameworks that assess and optimize token utility and value flows, Tokenomics DAO has helped shape the economic structures of numerous blockchain projects. Our expertise is in creating novel design approaches, educational content, and thought leadership.

Recognizing the Need for Comprehensive Solutions

Tokenomics DAO is highly focused on the specific niche of designing tokenomics. Launching a token, however, is often not isolated, and the current user experience requires blockchain projects to engage various service providers such as market makers, exchanges, and data analytics providers to support essential tasks. Optimizing this user experience has been a priority for Tokenomics DAO for quite some time, and together with Forgd, we can now offer this seamless end-to-end process to any protocol.

Forgd’s Complementary Strengths

Forgd brings an expansive toolkit to the partnership to optimize token and protocol performance pre and post-TGE. With tools that support everything from liquidity provision, exchange listing, growth capital, and detailed performance analytics, Forgd is uniquely equipped to bring Tokenomics DAO’s designs to life.

This synergy allows us to create a holistic suite of self-service tools to address the full spectrum of needs in any project's development phase—from inception through scaling and beyond.

Strategic Motivation Behind the Partnership

The primary motivation for this partnership is to create a unified service and product offering that can handle the complexities of launching tokens so that projects can focus on building unique protocols with robust fundamentals. Combining our strengths, Tokenomics DAO and Forgd can offer a more rounded and comprehensive suite of services that can significantly reduce fragmentation. This not only streamlines the process but also enhances the solutions' effectiveness.

If we look at Jupiter's recent $JUP airdrop, the answer is that most sell.

Receivers of rewards have two options: 1) selling or 2) holding.

If we break these down deeper, selling or holding is a matter of the individual's risk appetite to hold the token. Typically, a crypto startup is quite risky, so people will have a threshold for how much of their portfolio they want to allocate. If rewards go beyond that threshold and the incentive to hold is not strong enough, they will likely end up sold.

Why reward at all?

Rewards are a powerful tool token launchers have at hand. Minting tokens costs nothing, so selling them initially is all profit. A concept called seigniorage.

Projects end up with free internet money and can incentivize others (liquidity providers, users, etc.) to interact with the protocol. By doing so, a marketplace could be bootstrapped. Subsidise buyers and sellers to get the ball rolling.

The plan? Hopefully, the number of buyers and sellers will keep the marketplace running organically without internet money over time.

No doubt, free internet money is a great tool. Nearly every project launching tokens uses it for incentives. The point is, though, how well do these incentives work?

Can they be effective, though?

Staking rewards are incentives, too. In the original form, staking is a mechanism where a Proof-of-Stake base layer pays validators minted internet money.

Non-base-layers, however, have adopted this tactic to pay token holders to hold onto their tokens. Currently, it is a prevalent mechanism that is implemented by many protocols.

If we talk about staking rewards from non-base-layers, the goal is usually customer retention, i.e., people are rewarded for already owning and holding the token.

Can a token reward campaign retain token holders? 

In Is Revenue Share Any Good?, I compared the yield GMX is paying to the yield of corporate bonds. Most people are unlikely to hold a risky asset such as $GMX for a yield as low as 3-4%. They will hold the asset for speculation as they see potential in the project and take the yield as a bonus.

In this case, I’d argue that the token reward campaign can’t retain holders or at least has a very low impact.

Average Customer Retention

Token holders and customers are not the same, but some overlap exists. 

We can consider staking rewards as customer retention or token holder retention costs. It is similar to dividends as a mechanism to retain shareholders (except that dividends are not payment-in-kind).

In the same way, Airdrops could be seen as a form of customer acquisition cost.

Unfortunately, there is not much data on the effectiveness of staking rewards, but there are some great examples of Airdrops.

Airdrops have mainly failed in acquiring and retaining customers/token holders (see Uniswap, Looksrare, and other NFT platforms).

For example, seven percent of airdrop receivers still held $UNI sometime after the airdrop. This, to some degree, matches Jupiter's airdrop campaign above.

Kerman Kohli takes this further, breaking down the customer acquisition cost for the Looksrare airdrop:

Although Airdrop metrics are not perfectly comparable to staking, they show a poor or expensive rate of actual acquisition with reward campaigns. I assume staking won’t be that different.

By the way. Here is Jupiter:

For comparison (source):

Supply Meets Demand

What makes it even worse is that projects are not just spending dollars on acquiring customers; they are spending tokens. Many of these tokens will end up as sell pressure on the market.

If they are not met with enough buyers, the token price might drop, making the incentives less powerful (e.g., the same ten tokens are emitted, but each is worth less in dollar terms). A feedback loop.

I guess what I’m trying to say is that token incentives are helpful, but they might not be as effective as one thinks, AND when bringing all these tokens into circulation, one needs to ensure a strong enough reason to buy and hold. This could be a juicy real yield, governance rights, a token buyback, or a good project with solid growth.

The tokenomics consists of a revenue share that increases the longer one stakes (you can read the full breakdown here).

Sharing revenue with token holders is a good way of creating demand for a token. You buy the token, hold it, and get revenue.

Contrast this to purely holding a token for speculation, and you get why a project would implement a mechanism like that into their tokenomics.

It’s been a while since I went on to compare shares to tokens here, so in this piece, I want to investigate further what is driving demand and the role a revenue share mechanism might play.

A practical example: GMX

What triggered the whole thought about demand through revenue share was this:

Here, GMX tells us on their earn site that for every US Dollar you invest, you get an annual return of 3.3%.

3.3% does not seem super tempting to me.

GMX is a crypto startup with a lot of risk in holding the token. For that, I feel 3% isn’t much.

Compare it to top-rated US corporate bonds (long-term average lies around 4% annual return):

Bond yield isn’t the same as a crypto token with APR, but I can’t find a lot of startups that even pay dividends.

This is what makes the idea of revenue-sharing even more interesting.

Here’s my take: Nobody buys a growth stock for dividends. Few regular growth companies even pay dividends. They reinvest their profits into growth, hence growth stocks.

In crypto, however, this seems to be a popular way of attracting demand for a token.

Why?

Do people buy the token for the revenue share?

When we talk about demand drivers, we typically think of the part of the tokenomics that makes people interested in buying the token. The idea here is simple.

Sharing revenue with token holders turns the token into a yield-bearing asset. You hold it and get some pay for it. In theory, it could convince you to buy and hold the token.

Getting back to GMX, however. 3.3% per year isn’t much if we consider what the money could earn elsewhere.

At most, this yield can be seen as a tiny little bonus, but the main reason must be something different.

Speculation?

Speculating on the price appreciation of a token that represents a great product?

That seems more like it.

Speculation the biggest demand driver?

If revenue share isn’t why you’re buying a token, it might be something more akin to the stock market.

Let’s compare.

I’d see GMX as a startup or an early-stage growth company. They typically don’t pay dividends, and most investors buy their stock to speculate on its growth potential.

Buy —> hope that you have discovered something that isn’t priced in yet —> wait for the market to catch up, i.e. stock price to go up —> sell.

In the case of GMX, most investors will probably think the product is cool and hope to sell their tokens for a profit later on.

I doubt revenue share will play a significant role at all.

There's nothing bad about speculation. Nothing new, either. People speculate in growth stocks in just the same way.

In my Shares vs. tokens piece, I’ve highlighted that people buy growth stocks because they assume they can collect a dividend at some point. This potential can form the foundation of speculation.

Let’s get back to GMX and dig a bit deeper. Maybe the GMX boosting mechanism can help us assess people's interest in revenue sharing.

Stake for a boost!

The theory: People buy the token for yield.

This is hard to measure.

We could look at the boost stats since GMX incentivizes stakers to keep staking by giving them a yield boost (via multiplier points).

I created a basic dashboard to gain insights into stakers.

It clearly shows that people stake for a long time, but that doesn’t mean they do it for the revenue share. They could also just like the project and take the revenue share as a bonus.

In the high-risk, high-reward scenario GMX is in, I can’t imagine people buying the token just for a 3% APY.

The fundamental question to me then is this:

If most people are more interested in a 10x than a small APY, why do projects pay out their revenue to holders? Wouldn’t it be better to reinvest the funds into growth or keep them in the treasury until a good growth opportunity arises?

Why do crypto projects go through all this to offer average returns to people? Why not reinvest in the project as any good growth company would and try to grow 10x?

Is the token part of the product?

I’m personally much more interested in a really good project. A well-designed token is important, too, but if the product executes well and grows, I’m not sure if revenue share is the godsend solution that everyone is using right now.

Many protocols use revenue sharing as a marketing tactic to attract customers. You throw investors a bone. It makes them feel like you’ve thought about your demand drivers. It helps with their investment thesis.

Someone will buy the token because of revenue share, right?

People can build an investment thesis around the demand for the token being covered by a mechanism like this.

I don’t want to disregard revenue share completely. It can be useful.

But, I also think there are alternatives that projects can implement:

1. Accumulate profits in treasury and reinvest profits via governance to drive growth. Governance then becomes the demand driver for your token.

2. Just grow. Why not cut fees even more to attract even more volume and liquidity, building out the moat? This would resemble aggressive growth companies. Governance could still be a demand driver as, with sufficient growth, the project could start paying a dividend.

3. Buyback and reinvest or buyback and burn. This is a more direct mechanism and is also very similar to stocks. The demand driver is owning an asset that gets more scarce over time.

Value Capture for the Investor

Value is created when a problem gets solved for a user. It is then up to the company that is providing this solution to capture said value. Value capture refers to the process of capturing or realising a portion of the value that is created by a particular activity or asset. Value can be captured by the company itself in the form of IP, infrastructure, assets, etc or it can be translated to the share price. Since we’re interested in investing here we will only be concerned with the latter, the investment vehicle. 

There are two main forms of value capture that investors are interested in:

1. Capital gains (asset appreciation): This is the most common way to make money from stocks. It occurs when you buy a stock for a lower price and then sell it for a higher price. You are essentially capturing a portion of the value that the company has created. This is because the stock price reflects the company's expected future earnings, and as the company grows and becomes more profitable, its stock price is likely to increase.
   For example, if you buy a stock for $10 and then sell it for $20, you have made a capital gain of $10 per share.
   

2. Dividends: Some companies distribute a portion of their profits to their shareholders in the form of dividends. This can be seen as a form of value capture for shareholders, as they are receiving a direct payment from the company's profits.
   For example, if a stock has a dividend yield of 2% and a current price of $100, then the annual dividend is $2.

In both cases, investors are capturing value that is being created by the company. This value is not created by the investors themselves; it is created by the company through its operations and its ability to generate profits. However, investors can capture a portion of this value by buying and holding shares of the company's stock.

When it comes to the crypto space, there exist two types of value capture:

1. Value accrual to the project
   Value that is being directed back to the project itself. This normally takes the form of a percentage of revenue/assets being directed to back the treasury, i.e owned by the protocol (which in turn can be owned by the community)
   

2. Value accrual to the token
   Value that is being directed back to the token. This is also known as token mapping since value created is being mapped onto the token. There is yet another distinction that we can make here:

   1. Direct token value accrual: revenue created by the project is used to manipulate the supply/demand dynamic of the token. Manipulating the supply/demand dynamic essentially implies the balancing of the two, since price (also known as equilibrium) is the intersection of supply and demand, thus by constraining supply via locks, burns, buybacks, and more –essentilly mechanisms, we can affect the price of a token.

   2. Indirect token value accrual: revenue gets distributed to token holders. The reason that this accrues value to the token is because the token acts as a requirement to receive revenue share –and thus is a type of demand driver whose premise is to incentivise users to constrain supply so as to manipulate the supply/demand dynamic. Simply put, users want to earn yield and thus will buy the token to do so. Indirect value accrual does not have the same effect as direct value accrual since it does not affect the supply/demand dynamic directly.

Tokens Are Not Shares

There is one main difference that has to be pointed out when it comes to thinking about Shares vs Tokens. Namely, the fact that tokens have what is called Utility.

Unlike shares, tokens have a use-case or Utility. This refers to how the token is being used within the project and by whom. The reason for holding shares is to be exposed to some form of income (i.e an investment vehicle whereby one can be exposed to capital gains and/or dividends) or to own a part of the company (i.e when you own a share you own part of the underlying company’s assets). The reason for holding a token can be both of these things, but it can also be due to the added feature of utility. 

Aside from being an investment vehicle and granting ownership, tokens can be so much more due to the fact that they can have an actual use case within the system that they are designed for. Here are some well-known use-cases:

• Cryptoeconomic security
  Tokens play a crucial role in (1) preventing Sybil attacks by making it costly for attackers to create and maintain multiple identities, (2) aligning incentives between validators and the network, etc

• Gas token
  Users require tokens to access blockspace

• Membership token
  Users require tokens to access a gated community

• Bootstrap network effects/userbase
  Users are encouraged to use the product which can help solve the cold start problem

This is where the major difference stems from. Tokens can be integrated, via their Uility, into the system in different ways. This means that there is an extra factor to take into consideration due to the fact that Utility can have a varying degree on the token demand and thus price. Similarly, the Business Model that a protocol employs can affect token demand since this is akin to a stock dividend and can make the asset a more attractive investment, thus increasing the holder base. 

Tokens Don’t Behave Like Shares

Tokens are subject to a vastly different market dynamic vs their TradFi counterparts. Have you ever wondered why a token’s price drops when more tokens hit the market but the same is not true for a stock when new shares hit the market? In fact, for stocks, new shares being issued can even be seen as bullish and increase the share price. So what’s going on?

When more tokens are issued and thus the circulating supply increases, it directly dilutes the value of existing tokens, as the same amount of value is now spread across a larger supply. This increase in supply can lead to a decrease in the token's price due to the basic principle of supply and demand.

Unlike tokens, the issuance of new shares in a company doesn't directly dilute the value of existing shares. This is due to a few reasons such as: 

• Companies have assets and operations that generate revenue and earnings. Crypto protocols also have the latter, yet when it comes to tokens the market doesn’t yet seem to perceive value from these factors, unlike stocks which the market primarily derives its value from these factors.

• Companies’ share issuance is dynamic; new shares are issued as and when (not on a fixed issuance rate as with many token models) and the company has much more control over where these shares actually end up (with whom). This results in a general dampening of sell pressure on shares. However, in the case of tokens, they are normally distributed to stakeholders, AMMs or alike –i.e the market in general.

• Token issuance has been inextricably linked with an incentive-reward nature. It has become common knowledge in the crypto space that “User performs action A, protocol rewards user with token X”. This is alien in the realm of shares. 

Much of the above can be attributed to the fact that the crypto market is relatively young and speculative compared to the stock market. Tokens are often valued based on their potential utility, future adoption, and perceived scarcity. Therefore, an increase in supply can easily trigger a sell-off as investors fear dilution and a decrease in token value.

In the stock market, investors focus on a company's financial performance, growth prospects, and industry trends. The issuance of new shares is typically viewed as a sign of confidence in the company's future growth potential, and it may not have a significant impact on the stock price unless it's done in a large or unexpected manner.

Simply put, the valuation of a token differs from that of a stock due to, in the case of the former, investors focusing on factors like utility, scarcity (i.e supply and demand dynamic) and adoption. Whereas in the latter, investors focus on financial metrics such as earnings, revenue and growth prospects to evaluate a stock. The different reactions of tokens and stocks to increased supply are primarily due to the fundamental differences in their underlying mechanisms, market dynamics and investor perception.

Tokens Have a Different Demand Profile

We have covered the fact that tokens have an added feature known as Utlity and that they are affected more than stocks when it comes to their supply and demand dynamic. Therefore, it only follows that we should have a good understanding of the token’s supply dynamics and possible drivers of demand (also known as demand drivers). 

It goes as follows: 

A protocol sets a max supply (there are cases of protocols with infinite supplies, for the purpose of this explanation it is indifferent). We can understand this max supply as being theoretically divided into two main groups

• Internal supply: tokens allocated to team, investors and any possible bodies such as a treasury or foundation. 

• External supply: tokens allocated to the community. 

Note that this is a theoretical division of the max supply and is used simply to improve understanding; all tokens are fungible.

Internal supply is (should be) subject to a cliff and vest period, normally these tokens cannot be used during this period, thus we can earmark these tokens since they’re not circulating and thus do not affect price. External supply has multiple ways of being distributed such as LM programs, airdrops, community rewards, etc. The thing to understand here is that the external supply’s demand profile is closely related to three core factors:

• Utility: user is required to hold the token in order to perform their desired task.
  E.g., User has to hold ETH to transact on chain

• Demand Mechanisms: users are encouraged to acquire the token in order to perform their desired task.
  E.g., Lock CRV (thus receiving veCRV) in order to gain boost, rewards and voting rights

• Business Model: user receives revenue share by having exposure to the token.
  E.g., Users stake SUSHI (thus receiving xSUSHI) which entitles them to revenue share

These three factors are ways by which a protocol captures value. Value capture is what investors want, as stated at the beginning, this is primarily done via capital gains or a dividend. Both of these are affected by the factors stated above, namely the effect that Utility can have on token demand due to it being a requirement in order to perform their desired task. The effect that Demand Mechanisms can have on token demand is due to the aligning of incentives between users and the protocol itself. Finally, the effect that the Business Model can have on token demand is due to the dividend-like aspects of revenue being distributed back to tokenholders.

Conclusion – A Tokenomics Analysis Is the Edge

A tokenomics analysis is the only way to properly understand all of these dynamics and have an informed outlook on the prospects of the token in question. We are using frameworks (i.e those of stocks) that were not designed for crypto assets and thus only provide a partial view of the state. 

If you aren’t performing a tokenomics analysis on your medium to long-term investments then you are doing yourself a disservice akin to having a map with a missing piece of the route, you don’t have the full picture of how your trajectory may be affected. 

In order to make an educated decision as to whether you should invest in a token or not you need to understand the token utility, different demand mechanisms at play and the business model since it can have a vast impact on its price which is, after all, what you're interested in as an investor. 

If you feel confused and are not sure where to start, fret not. We’re proud to announce Luminous Ledger, a research newsletter aimed at helping you navigate the turbulent cryptocurrency markets.

The best part? It’s free!

We adopt a thesis-driven, qualitative investing approach with a focus on tokenomics that makes big bets on cryptocurrency as a whole. The industry is too small for quantitative investing metrics to arbitrate investing decisions.

Head over to Luminous Ledger 

Luminous Ledger Newsletter

The only free research newsletter you’ll ever need to navigate the turbulent cryptocurrency markets ✦ by @imajinl and @Masonfasco

Decentralized Applications, or dApps, are an integral part of Web3, being the interface to facilitate transactions, investments, and various other activities for approximately 99% of users in the Web3 ecosystem. These platforms, powered by smart contracts on blockchains, offer permissionless and automated processes around the clock without the need for intermediaries.

Smart contracts serve as the foundation of dApps, so their security and reliability are of utmost importance. To ensure their resilience against malicious attacks that could lead to a loss of user funds, smart contracts get audited, sometimes even multiple times - true to the motto “4 eyes see more than 2”. 

However, just as it has become standard practice to audit smart contracts, the auditing of tokenomics is equally important for the long-term success of the respective project. Nearly every blockchain project, beyond dApps, incorporates its native token, often placed as a central element of its business model or ecosystem. In this article, I will explain why tokenomics auditing is crucial, and why you should think about getting a second pair of eyes to look over your tokenomics..

Smart Contract Audits

Smart contracts serve as the backbone of dApps, enabling seamless platform functionality without intermediaries. The immutability and constant availability of these contracts on the blockchain ensure uninterrupted, permissionless and trustless transaction execution, around the clock.

A crucial aspect amplifying the significance of auditing is that smart contracts, particularly in DeFi protocols like lending/borrowing platforms,  hold user deposits. Take Aave and Compound, for instance, where billions of dollars are stored within their smart contracts. Consequently, the robustness of these contracts must be bulletproof to safeguard the funds.

Audited smart contracts bring several benefits. First and foremost, the confidence and trust of users and investors in the platform increase significantly. The stamp of approval from auditors often implies a certain quality standard for the protocol, depending on the credibility of the auditing entity of course. Furthermore, a commitment to conducting audits demonstrates the project's dedication to security and willingness to invest in fortifying its infrastructure.

Tokenomics Audits

Image Source: fortune.com 

Having gained insight into the significance of smart contract audits, it becomes apparent that for dApps embracing a token economy, tokenomics audits hold equal importance. If you choose to integrate a web3-based token economy into your business model, its success depends not only on reliable smart contracts but also on the effectiveness of the token economy and how well it is aligned with the strategic goals of your business model. 

Above all, it's important to recognize that not every Web3 project necessitates its token, let alone within established business models. Consider, for instance, whether your token predominantly functions as a medium of exchange within your platform. Reflect on whether this truly enhances your business model or if it inadvertently presents obstacles for both your current and prospective users. Tokens primarily functioning as mediums of exchange can easily be substituted with more fitting alternatives, like reputable stablecoins such as USDC or BUSD.

Your token should consistently provide value to your users, rather than hinder your scalability efforts. To gauge its value proposition, begin by questioning why someone should buy the token, and more importantly, why they should hold it. If you can address the first question but stumble with the second, your token may merely serve as a transaction facilitator—a medium of exchange without substantial substance. An answer to the latter question would reveal concrete value drivers that benefit token holders throughout their holding duration. And I don’t mean speculation. 

Beyond that, a well-functioning token economy should comprise critical factors from the quantitative side of tokenomcis like reasonable token allocation to avoid centralization, a carefully planned release schedule to prevent excessive inflation and a reasonable valuation when aiming for a token sale.

To address these concerns, a tokenomics audit involves experts meticulously scrutinizing the tokenomics, both qualitative and quantitative, checking if the project's goals are aligned with the tokenomics. An essential aspect of this assessment involves employing game theory to understand how users will interact with the token and the project, thereby exploring potential unintended consequences and feedback loops that can quickly end in vicious circles.

By analyzing and optimizing these economic mechanisms, projects can enhance their value proposition and build trust among users and investors, fortifying their position in the ever-evolving landscape of blockchain technology.

The Benefit of Tokenomics Audits

Just as smart contract audits enhance user confidence and trust in the project, tokenomics audits ensure the viability of your tokenomics strategy within your business model. These audits assure users and investors that the token adds value and is thoughtfully designed, instilling further confidence in the project.

Moreover, a well-executed tokenomics audit goes beyond validating the token's basic functionality; it delves into the alignment of the token's utilities with the overall project goals. By examining the token's role in incentivizing network participants, fostering user engagement, and promoting long-term growth, the audit helps optimize the token economy for sustained success.

Additionally, tokenomics audits serve as a crucial risk management tool. By identifying potential flaws or vulnerabilities in the token's design early on, projects can proactively address and mitigate risks before they impact the platform or its users. This proactive approach not only safeguards the project's reputation but also reduces the likelihood of unforeseen challenges arising in the future.

Furthermore, the findings of a comprehensive tokenomics audit can be leveraged as a valuable communication tool. Transparently sharing the audit results with the community demonstrates a commitment to openness and accountability, which can lead to stronger community support and engagement.

Conclusion

Now you know why it's important to audit smart contracts but also why tokenomics should be audited. Smart contract audits serve as a foundation ensuring the security and reliability of dApps, while tokenomics audits play a vital role in validating the viability and value of the token economy within a business model. Audited Tokenomics can bolster user confidence, attract investors, and establish themselves as trustworthy players in the blockchain landscape. 

Looking for a Tokenomics audit service?

Discover the cutting-edge Tokenomics DAO's auditing service! Learn more about it here: https://design.tokenomicshub.xyz/audit-design-help

Introduction 

Ethereum has played a crucial role in the DeFi revolution, being the birthplace of decentralized finance. Ethereum has given rise to several notable DeFi projects that have revolutionized the landscape. These projects include Aave, which has created a decentralized lending marketplace for borrowers and lenders, Uniswap, which has introduced automated market makers to the decentralized exchange market; and Yearn Finance, which has introduced yield aggregators to help users maximize their returns. However, EVM networks like Ethereum are vulnerable to hacks and exploits, producing a bottleneck for mainstream adoption.

A Layer-1 Built For DeFi 

Radix is a monolithic delegated proof of stake Layer-1 that aims to revolutionize smart contract development and unleash the full potential of decentralized finance (DeFi). Unlike other competing Layer-1s, Radix is not a blockchain. The up-and-coming L1 addresses multiple challenges holding back the current DeFi landscape from mainstream adoption. For too long, developers have had to tackle issues such as the difficulty of developing production-quality dApps, lack of modularity and standardization, broken incentive models, and limited scalability. Radix attempts to solve these issues by introducing an asset-oriented smart contract paradigm, a modular on-network blueprint catalogue, a decentralized and self-incentivizing developer ecosystem, and unlimited dApp scalability through the Cerberus consensus protocol. The protocol aims to provide developers with the tools and environment necessary to build scale, secure, and efficient DeFi applications.

Similar Projects

Radix shares similarities with well-known existing DLT solutions such as Solana, Aptos, and Sui. These projects all share a form of proof of stake, a rust-based smart contract programming language, and low transaction fees. In addition, projects such as Aptos and Sui utilize the Move programming language. This object-oriented language shares a few similarities with Radix's asset-oriented smart contract programming language, Scrypto. Readers can go here for a deep dive into comparisons between Radix and Sui.

This article will dive into the network's native token, $XRD, and analyze its various functions, value capture, and how it facilitates the flow of value throughout the ecosystem and its participants. Readers can go here for more detailed information concerning other protocol aspects.

$XRD Tokenomics 

Below we can see the token flow diagram for Radix. This showcases how the system works, where the relevant sinks and faucets are and how value flows through/around the protocol.

Ecosystem Participants 

Delegator 

Users who stake their tokens with a Validator Node contribute to the consensus process and earn staking yield denominated in $XRD. Emissions from staking are derived from minting new $XRD tokens, representing 50% of the token allocation in aggregate. Delegators are typically long-term holders of tokens due to the opportunity cost of staking.

Developer  

Developers are technical users who play a crucial role in creating dApps and fungible and non-fungible tokens. They can set royalties on their code, allowing them to receive payments denominated in $XRD directly to their wallet whenever another user instantiates a copy of their contract or performs method calls. The royalty system incentivizes developers to contribute valuable code to the ecosystem and furthers the viability of working on open-source code.

Full Node 

A computer that runs Radix ledger client software stores a record of transactions and performs various network functions.

General User 

A non-specialized user interacting with dApps, fungible and non-fungible tokens within the Radix ecosystem. They engage with the applications and assets built by developers, leveraging the functionalities provided and paying transaction fees in $XRD.

Validator Node 

A full node that participates in consensus by verifying, voting on, and maintaining a record of transactions. Validator nodes stake $XRD tokens and earn a share of $XRD emissions based on ranking within the top 100 validator nodes. They must also maintain a minimum uptime of 98%.

Since the release of Babylon, validators will now be allocated 50% of the transaction fees in $XRD.

Validator Set 

A validator set consists of nodes that validate transactions on the same shard. It is important to note that until the Xi'an update in 2024, Radix remains an un-sharded network, only requiring one validator set currently, and the one validator set consists solely of the top 100 validator nodes. 

Protocol Components 

Figure 1 

Radix Dual Layer Protocol 

Note. From Far, B. (2021, June 11). Radix DLT. Cerberus Infographic Series - Chapter I: The Radix Blog: Radix DLT. https://www.radixdlt.com/blog/cerberus-infographic-series-chapter-i

Cerberus 

Conceived and built by Bitcoin OG Dan Hughes, Cerberus is a consensus protocol offering linear scalability and cross-shard atomic composability. Linear scalability refers to the ability to scale linearly as more nodes are added to the network. As a result, the network can handle increasing transactions without slowing down or compromising its performance. Cerberus achieves this by pre-sharding the ledger into 2^256 shards, collectively known as the shard space (See Figure 3.). On the other hand, atomic composability means that transactions from various dApps can be combined to create more complex offerings. If one of these transactions fails, the entire "manifest" of transactions will fail. In addition, the protocol prevents Sybil attacks through a delegated proof of stake model that weights votes according to their native token $XRD. See Figure 2. for more detail on the consensus and transaction process.

Figure 2 

Cerberus Consensus Process 

Note. From Far, B. (2021, June 11). Radix DLT. Cerberus Infographic Series - Chapter I: The Radix Blog: Radix DLT. https://www.radixdlt.com/blog/cerberus-infographic-series-chapter-i

Figure 3 

Cerberus Shardspace 

Note. From Far, B. (2021, June 11). Radix DLT. Cerberus Infographic Series - Chapter I: The Radix Blog: Radix DLT. https://www.radixdlt.com/blog/cerberus-infographic-series-chapter-i

Radix Engine 

The Radix engine (See Figure 4.), which is the application layer of Radix, can be compared to the Ethereum Virtual Machine (EVM). Unlike other smart contract platforms, the Radix engine considers assets as a global feature of the platform itself, making token creation much simpler by enabling direct requests from the platform with desired parameters. Furthermore, the environment treats tokens as physical objects stored in user-controlled accounts. In other virtual machines, assets such as tokens refer to balances within a smart contract. Mimicking physical asset behaviour makes it more intuitive and user-friendly for developers. Furthermore, the asset-oriented paradigm eliminates risks such as reentrancy attacks. In order to maintain security, the Radix engine uses a Finite State Machine (FSM) that ensures the behaviour and integrity of assets on the platform. 

Figure 4 

Radix Engine V2 

Note. From Radix DeFi White Paper (p. 12). (2022). [White Paper]. Radix Foundation Limited. https://radixdlt.com/whitepapers/defi

Scrypto 

The smart contract programming language for Radix is called Scrypto, designed to simplify writing smart contracts. The language is built off of the low-level programming language known as Rust. Scrypto allows developers to create smart contracts known as components, which are instantiated from objects known as blueprints.

Figure 5 

Packages, Blueprints & Components 

Note. From Radix DeFi White Paper (p. 14). (2022). [White Paper]. Radix Foundation Limited. https://radixdlt.com/whitepapers/defi

As shown in Figure 5, the blueprints act as a skeletal structure of the component. A collection of blueprints forms what is known as a package. The Scrypto language has three main concepts; resources, buckets, and vaults (See Figure 6.). Resources can be fungible or non-fungible tokens, while buckets are transient containers that transport resources. Finally, vaults are permanent containers for resources. 

Figure 6 

Resources, Buckets & Vaults 

Note. From Radix DeFi White Paper (p. 13). (2022). [White Paper]. Radix Foundation Limited. https://radixdlt.com/whitepapers/defi

Value Creation 

Value creation refers to how the protocol is creating value and for whom. Value is created when a problem gets solved. Read here to understand more about value creation.

Scaling dApps For Real-World Demand 

DeFi's scalability potential is limited by current DLT solutions through slow network throughput and high fees. Layer-2s have tried to solve the scalability issues of networks such as Ethereum's mainnet but have done so by compromising atomic composability between themselves and their dApps.

The Cerberus consensus protocol has been designed for unlimited dApp scalability. The protocol utilizes specialized sharding and a "braided" multi-shard consensus mechanism for the parallelization and atomic composition of assets and smart contracts.

Asset-Oriented Smart Contracts 

Currently, there is difficulty in developing production-quality dApps on platforms that use the EVM and its variations. Developing even simple functionality into your dApp requires complex code. The added code complexity leads to hacks and potential exploits.

Radix aims to solve this issue by introducing a new paradigm of asset-oriented smart contracts with the Radix Engine and Scrypto programming language. The asset-oriented architecture enables easy and safe DeFi dApp development, expanding the pool of developers and reducing hacks.

Building With Legos 

Building new products composed across numerous dApps proves to be a challenge. EVM-based smart contracts are known to developers for their lack of modularity, reusability, and standardization. The result is repetitive reimplementations of simple functionality, such as tokens and NFTs.

The solution to this issue is to make code modularity a network feature with an on-network blueprint catalogue. As a result, developers can contribute and access reusable and proven functionality, promoting shared computing and decentralized development.

Incentivizing Open-Source Development 

The current funding options for Web3 developers do not align with the ecosystem's ethos. For the most part, developer incentives currently rely on centralized funding sources. The unintended consequences of this funding route are wasted resources and difficulty in rewarding valuable contributions.

Scrypto developers will rejoice that a new funding route is possible—a decentralized, self-incentivizing developer ecosystem with programmable developer royalties. As a result, developers are rewarded for valuable code in every transaction, fostering sustainable growth and community building.

Note. Radix will introduce additional subsidies for the royalties at the onset of the feature’s release but will taper off over time. Generally speaking, the developer royalties are paid by the users instantiating the blueprints or performing method calls.

Overall Goal 

Radix is looking to bring the world of DeFi to the masses by building a ledger that can meet the needs of the global financial system, streamlining the developer experience, and cutting overall complexity for a UX that is appealing to the average person. 

Value Capture 

This refers to how the protocol is capturing the value it creates. Essentially, if value is being created then it has to flow somewhere (ideally to wherever the protocol deems most viable). Value capture can be broken down into (1) value accrual to the protocol and (2) value accrual to the token. Read here to understand more about value capture.

Value Accrual to Protocol 

Besides developer royalty fees on Radix, 50% of the transaction fees on the network are burnt. The remaining 50% are allocated to validators. No share of these fees flows to any particular protocol treasury or a treasury of entities such as Radix DLT Ltd. or Radix Tokens (Jersey). However, entities such as Radix Tokens (Jersey) are incentivized through their initial token allocation in their treasury. The burning mechanism balances the inflationary nature of network staking emissions.

Value Accrual to Token 

Keeping with the value of decentralization, value capture solely occurs through value accrual to the token. The accrual occurs through three avenues: staking, burning, and yield. Staking is a direct form of value accrual, where tokens are "locked" to help perform consensus, constraining the supply and putting upward pressure on price. Delegators or Validators that wish to unstake their tokens are subject to a 1-3 week unstaking period. The burning mechanism is an indirect form of value accrual. As more transactions occur on the network, token burn reduces the supply and "indirectly" causes upwards price pressure. Lastly, a yield on the token entices potential holders to purchase $XRD.  

Business Model 

It’s important to understand the business model of the protocol since it ties into how value is flowing in the system and is relevant for the sustainability of the protocol.

Currently, the Radix protocol's business model needs proper revenue sources. At this point, the protocol relies on $XRD emissions to incentivize various types of users within the ecosystem.

Emissions come from:

• Protocol emissions are solely sourced through staking.

• Amount to an estimated 300M units per year

• Due to be released every year for the next 40 years

• Since the Babylon release, 50% of transaction fees are burnt, while 50% are allocated to validators.

Note. Until the Babylon update is launched, validators will receive rewards solely from staking emissions. At Babylon, the tokenomics of $XRD changes, whereby 50% of the fees on the network get burnt, and the remaining 50% are allocated to validators.

Emissions are denominated in:

• $XRD

Emissions go to:

• Ecosystem participants help perform consensus and ensure network security

• The two main participants that perform these functions are Validator Nodes and Delegators.

• Radix Foundation and its subsidiaries that operate 4 out of the 100 active validator nodes

Token Utility 

This refers to how the token is being used within the project and by whom. Essentially the token’s use case. Read here to understand more about Token Utility.

Radix's native token, $XRD, shares a similar token utility to other competing proof of stake networks.

Gas Token 

Transaction fees must be paid for any user to participate in the network. These fees, or gas, must be paid in $XRD.

Network Securing 

As with other proof of stake networks, user types such as Validator Nodes or Delegators must attain $XRD to facilitate consensus and network security by staking tokens.

Medium of Exchange 

Due to it being the network's native token and, therefore, the most liquid, $XRD is the preferred means of payment for the network's dApps. Payment extends to goods and services these dApps provide and is the most prominent form of payment for dApp development.

$XRD Demand Drivers 

Demand for a token can from three sources, those being demand for the token due to its utility, demand due to a mechanism (i.e staking) and demand due to speculation. Essentially, demand drivers refer to who is buying/holding the token and why. Read here to understand more about Token Demand Drivers.

The $XRD token has four main demand drivers: Gas Fees, Node Requirement, Staking Rewards, and Protocol Success. These demand drivers come from Utility, Mechanism, and Speculation.

Gas Fees - (Utility) 

Individuals utilizing the ecosystem's dApps must pay gas for transactions. Gas fees are denominated in $XRD. As a result, users will need to purchase $XRD for paying gas fees and burning them in the process. The source of the demand driver is one of utility.

Node Requirement - (Utility) 

Validator Nodes require a certain amount of $XRD as collateral to participate in consensus and network security. Therefore, Nodes must acquire $XRD through direct ownership or Delegators in return for a staking yield. Just like Gas Fees, the source of this demand driver is utility.

Staking Rewards - (Mechanism) 

Investors seeking yield from proof of stake tokens, such as $XRD, will purchase to stake the token. The source of the demand driver is a mechanism of its proof of stake consensus model.

Protocol Success - (Speculation) 

Investors and traders are confident in the team's abilities at RDX Works, and Radix's DeFi dApp ecosystem will purchase and hold $XRD. The source of the demand driver is speculative. 

$XRD Distribution & Unlocks 

It’s important to understand how the supply is being split up into different allocations and how these allocations will be distributed (vested or emitted).

A Tale of Two Tokens - 

Before the launch of the Radix Ledger, eXRD, an ERC-20 version of the token, was made available. The purpose of this move was "intended to promote the distribution of Stake and achieve a high degree of decentralization before the release of the Radix Ledger (mainnet)" (Castellana et al., 2020). Once the Radix Ledger was released during the Olympia update, eXRD token holders could (and still can) participate in a one-way bridge process to exchange their ERC-20 version to the native $XRD on a 1:1 basis. 

Table 1 

Token Profiles 

Note.  Adapted from e-Radix. (n.d.). CoinGecko. https://www.coingecko.com/en/coins/e-radix, Radix. (n.d.). CoinGecko. https://www.coingecko.com/en/coins/radix & *Castellana, A., Hughes, D., & Ridyard, P. (2020). Economic Model (p. 7) [White Paper]. Radix Tokens (Jersey) Limited. https://www.radixdlt.com/whitepapers/economics 

Token Allocations - 

Figure 7 

Token Allocation: eXRD 

Note. From Castellana, A., Hughes, D., & Ridyard, P. (2020). Economic Model (p. 7) [White Paper]. Radix Tokens (Jersey) Limited. https://www.radixdlt.com/whitepapers/economics

Figure 8 

Token Allocation: eXRD & XRD 

Note. From Castellana, A., Hughes, D., & Ridyard, P. (2020). Economic Model (p. 10) [White Paper]. Radix Tokens (Jersey) Limited. https://www.radixdlt.com/whitepapers/economics

• Network Emission: Token allocation for rewarding Staking Nodes and Delegators for securing the network.

• Stable Coin Reserve: A reserve of $XRD that is indefinitely locked and removed from the circulating supply. The stablecoin reserve is meant to help bootstrap projects that intend to develop stablecoins for the network. If the reserve is unnecessary, it will remain locked and burned after the lockup period.

• Founder Retention: Tokens are reserved for team allocation.

• Radix Community: Allocation for early supporters of Radix when it was in its theoretical development phase (2013-2017).

• Liquidity Incentives: Tokens are reserved for liquidity mining programs.

• Radix Tokens (Jersey): Allocation to Radix Tokens (Jersey) Ltd. for funding awareness programs and operating expenditures.

• Developer Incentives: Tokens to bootstrap the developer royalty system and other related incentives.

• Network Subsidy: Allocation dedicated to funding grants.

• Token Sale: The initial token sale of eXRD opened on October 8th, 2020, and was completed on October 22nd, 2020.

Token Unlock Pivot - 

Initially, token unlocks for eXRD and $XRD was to be carried out according to price target milestones (See Table 2.). However, in Q3 of 2021, Radix surveyed to gauge if the community wanted to stick with price-based unlocks or a full token unlock. The community answered, and on September 15th, 2021, all Radix tokens (eXRD & $XRD) were unlocked (excl., staking emissions & stable coin reserve).

Table 2 

Initial Priced-Based Unlocking 

Note. From Castellana, A., Hughes, D., & Ridyard, P. (2020). Economic Model (p. 8) [White Paper]. Radix Tokens (Jersey) Limited. https://www.radixdlt.com/whitepapers/economics

Figure 9 

Token Distribution Schedule: Final Unlock

Note. Distribution Schedule as of complete unlock, September 15th, 2021. Includes $eXRD & $XRD. To keep matters simple, network emissions of $XRD will begin during the final unlock on September 15th, 2021 (as opposed to August 11th, 2021). Liquidity and Developer Incentives were combined, and locked Stable Coin Reserve resulted in a 2.4B discrepancy in the chart. Adapted from Castellana, A., Hughes, D., & Ridyard, P. (2020). Economic Model (p. 13-15) [White Paper]. Radix Tokens (Jersey) Limited. https://www.radixdlt.com/whitepapers/economics

Feedback Loops 

A tokenomics analysis is focused on how value flows through the system and how it interacts with different users/components of the protocol. Feedback loops are relevant since they may be positive or negative and thus have an outcome on the underlying value capture (be it on the protocol or token level).

Short On Supply 

As seen in Figure 10, two feedback loops reduce the circulating supply of $XRD, which inevitably causes upward pressure on the price. It's important to note that these downward pressures of circulating supply are less with inflationary staking emissions. Furthermore, the upwards pressure on price due to lowering circulating supply will also be dampened by some users selling their staking emissions.

Figure 10 

Circulating Supply Feedback Loops 

Note. Illustration depicting fundamental metrics of network adoption and transaction volumes' relationship with token mechanisms of burning and staking. Own work.

Network Adoption 

1. The first feedback loop begins on the left of Figure 10 with increasing network adoption. 

2. The increase in network adoption will lead to more users coming into Radix and staking their tokens. 

3. The result is that more tokens are locked up, and the circulating supply reduces. 

4. A lower circulating supply results in higher potential prices, all else equal. 

5. The increase in prices would increase general awareness of Radix and lead to higher network adoption, closing the loop.

Transaction Volumes 

1. The second feedback loop on the right begins with increasing transaction volumes on the Radix Ledger. 

2. The ever-increasing transaction volumes result in a higher burn rate of $XRD. 

3. Burning $XRD reduces the circulating supply. 

4. A declining circulating supply will cause upwards price pressure. 

5. As mentioned earlier, the upwards pressure in prices would increase the awareness of Radix and lead to increasing transaction volumes, closing the loop yet again.

Since the release of Babylon, the magnitude of the fee burn has been reduced by 50% while allocating more $XRD rewards to validators based on transaction volumes. Due to this change, it becomes more enticing for new validators to compete for one of the top 100 validator slots as transaction volumes increase. The fee change will be a boon for scalability in the long run, with the introduction of sharding during the Xi'an upgrade. On the flip side, declining transaction volumes and lower $XRD rewards for validators may risk the network's security by making the activity less appealing.

Connecting The Loops 

Some may have noticed that there is a double-edged arrow line that insinuates there is a connection between the above-described feedback loops. The arrow was added because, arguably, there is a direct feedback loop between network adoption and transaction volumes. As either increase, such will lead to a rise in the other. 

A Key Point to Consider

The prior feedback loop causes an upwards price pressure, as mentioned earlier. However, this could prove problematic in cases where the transaction fees are not adjusted to compensate for the rise in the price for $XRD. This situation would slow down the network since transacting becomes more costly. 

Code, Deploy, Get Paid 

Figure 11 

Developer Experience Feedback Loop 

Note. Illustration depicting the relationship between developer adoption, activity, and royalty payments. Own work.

Figure 11 describes a feedback loop related to the developer experience. As developer adoption and activity rises, so do blueprint instantiations and component method calls. As overall dApp activity increases, the amounts of royalties that get paid to developers increase. As it becomes more profitable to make an income off developer royalties, awareness of Radix will increase in the developer community, increasing activity and adoption and closing the loop.

Alternatively, the feedback loop works in the opposite direction as well. Assuming developer activity remains stagnant or declines over time, dApp activity suffers, and it becomes less economically viable to depend on the developer royalty system as a form of income.

Observations/Thoughts 

Emissions Schedule

Staking emissions are distributed over an approximately 40-year period. When emissions run dry, validators will need more incentives to facilitate consensus. By extension, stakers will have no use for pledging their tokens, and this could be seen as a direct threat to the network, which relies on stake to secure itself from attackers.

Solution: Capitalizing on Real-World Adoption

Keeping a similar intuition for developer royalty fees, either create a new fee on top of the existing developer royalties or tax a certain amount from developers to pay for staking emissions. 

Fee Burn

Although burning all transaction fees, with the sole exception of developer royalties, might sound enticing initially, there could be long-term consequences. A constant burning of all transaction fees places deflationary pressures on the $XRD token, causing an upwards movement in price. This might sound great to investors. However, users looking to participate in network activity will find it increasingly expensive. In addition, new entrants to the ecosystem that would like to stake or become a validator will find it inaccessible due to the costs. There is also an opportunity cost of burning all fees, whereby these tokens might be better suited to be allocated elsewhere to incentivize behaviours across various user types. The issue is further compounded when the $XRD emissions run out after a few decades. 

Solution: Babylon

Fortunately, the tokenomics of $XRD will change slightly with the upcoming Babylon update. Instead of 100% of transaction fees being burnt, 50% will be allocated to validators. For more information on this change, readers can go here.

Since the Babylon release, the described fee burn as noted above has been changed to partly allocate to validators.

Protocol Revenue

A downside to most proof of stake networks is the lack of protocol revenue sources. Due to the nature of this type of consensus, emissions are required to incentivize users to participate in securing the network. However, emissions should not be considered as revenues. 

Solution: Expand Developer Royalties

Add the capability for developers to accept non-native tokens, such as stablecoins, for their royalty fees in exchange for a small share. The non-native tokens could then be sent to an entity such as the Radix Foundation, or a protocol DAO could be established to collect these revenues.

Staking: Yield

As seen in other proof of stake networks, the staking yield on Radix is denominated in its native token, $XRD. This design has obvious implications, as it is inflationary and puts downward pressure on the token's price. Furthermore, users, depending on their strategy or situation, may opt to sell a large portion of their staking yield at fixed intervals, exacerbating the problem.

Solution: Real Yield

Allocate a share of protocol revenues, outlined in the previous section, in the form of non-native tokens. Therefore, users looking to “cash in” on their yield could do so with non-native tokens, decreasing the selling pressure of native token emissions.  

Staking: Time to Unstake

The current staking mechanism requires a 1-3 week unstaking period. Apart from the cooldown period, there are no other mechanisms to keep users staking and “locking” their tokens for extended periods. An issue arises where due to low switching costs, users can easily unstake to chase other staking yields of various proof of stake networks or even within these networks regarding DeFi dApps. 

Solution: Lock for Fixed Terms

Create fixed terms for stakers to lock their $XRD tokens in return for a higher yield. The yield could come from a new fee that could be introduced. Taking it a step further, a vote-escrow model, whereby stakers who lock their tokens for a fixed term receive a soulbound NFT representing their governance power over a protocol DAO. In addition, the soulbound token could outline additional NFT data such as the specific time lock, higher yield rates, etc. 

Validators  

Until the Xi'an update, validators must compete based on the amount of delegated staked to be in the top 100 validators to receive network emissions. Although the top 100 list allows many validators to participate in consensus and earn rewards, it does not prevent a minority from taking the majority of staking or "vote" power. An example is the Radix Foundation’s 4 active validators, which may stake 25% of the total staked supply.

Solution: A Level Playing Field 

As seen in other networks such as Flare, add an effect of diminishing returns for earning emissions past a certain threshold of stake or "vote" power. As a result, users would then be dissuaded from delegating stake to large validators and give opportunities to smaller players. 

Stablecoin Reserve 

As mentioned earlier, the stablecoin reserve is a 2.4B allocation of $XRD to the Radix Foundation to help bootstrap essential network infrastructure such as a decentralized stablecoin. Since the Foundation holds and manages the reserve, there is a centralization risk. Issues may arise in the future where decision-making is done in a way that needs to consider the needs and concerns of all Radix stakeholders.

Solution: Democratization 

Form a governance structure such as a DAO that is decentralized, on-chain, and democratizes at least some of the decision-making about the Stablecoin Reserve review process, use of the reserve through an on-chain treasury, and its allocation. 

Blueprint Catalogue and Developer Royalties 

The blueprint catalogue is a novel way to encourage modular dApp development. Coupled with developer royalties, the open-source model becomes more sustainable and financially feasible. However, this will not prevent some users from copying and pasting code inside the blueprint catalogue, bypassing the royalty system.

Solution: Recognize Just Actors 

Create a decentralized reputation system that appropriately rewards those using the catalogue. A special badge can be given out declaring that a user has properly instantiated the given blueprint and paid the royalty. Badge holders could be entitled to future financial and non-financial rewards.

Summary 

Radix is taking a different approach to solving the most pertinent issues in DeFi. Its novel consensus protocol, Cerberus, brings the crucial features of linear scalability and atomic composability to allow developers to build safer and more modular dApps at scale. Security is vital to bring DeFi to the masses, and the Radix Engine and the Scrypto programming language further bolster this by treating assets as first-class citizens on the platform.

Linear Scalability

Achieving linear scalability for any blockchain is no small feat, even more so when done on the main chain. Although there have been great strides to scale proof of stake networks such as Ethereum with sidechains, L2s, and other techniques, it remains a patchwork solution.

At the launch of the Xi’an update sometime in 2024, Radix’s consensus protocol, Cerberus, will allow for linear scalability by introducing sharding. In other words, as more nodes are added to the network, the throughput will increase accordingly. The performance testing of Cerberus in its various iterations has achieved more than 1 million transactions per second (TPS).

Atomic Composability

In most cases, other networks that solve the first issue of linear scalability will ultimately break the atomic composability of transactions. 

Radix has achieved not only the feat of linear scalability but has done so in a manner that retains the atomic composability of transactions. Simply put, atomic composability allows for bundling transactions across dApps into a single manifest for execution. Upon execution, if one transaction fails in the sequence, the whole manifest of transactions fails and reverts to its original state. 

Asset-Oriented Smart Contract Language

Today, most networks that use some version of the EVM, and its programming language, Solidity, are susceptible to more vulnerabilities, such as re-entrancy attacks, due to the message-based architecture and language. Tokens are not physically present in a user’s wallet but reference a balance in the token’s smart contract. 

Scrypto, a rust-based smart contract language, aims to solve the issue of message-based EVM networks with its asset-oriented design. Coupled with the Radix Engine, the equivalent of the EVM, developers using Scrypto can mimic physical asset behaviour across smart contracts, ensuring higher security.

Given a secure platform, developers can further the open-source movement with features like the blueprint catalogue in return for financial incentives such as the built-in developer royalties system. Its native token, $XRD, will be the medium by which all this value is captured and flows throughout the network and its participants. Radix aims to raise the DeFi revolution to the next level by making it feasible for mainstream adoption. With the Babylon update around the corner, bringing smart contracts to the mainnet, the protocol is positioned to be the next disruptive Layer-1.

If you’re interested in the condensed, need-to-know tokenomics information for Radix including all the resources used for this article, check out the report on Tokenomics Hub: https://tokenomicshub.xyz/radix

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains. The author of this article has a financial interest in the investment(s) discussed.

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Introduction

One crucial factor contributing to the security of blockchains is their closed ecosystem, which relies solely on the data generated within their network, known as on-chain data. However, this inherent characteristic poses limitations on blockchain technology, preventing it from working seamlessly with external data sources, commonly referred to as off-chain data. This is where Oracle Services come into play, and among them, Chainlink stands out as the most established Oracle Network, supporting nearly 2000 dApps across 15 different blockchains and layer-2 solutions.

Chainlink's primary mission centres around solving the "oracle problem," which arises from the inability of blockchains to natively interact with external off-chain systems due to the strong security properties imposed by their consensus mechanism. By bridging the gap between on-chain and off-chain data, Chainlink enables decentralized applications (dApps) to access reliable real-world data securely.

In this Tokenomics 101 analysis, a foundational understanding of the participants within an oracle network will be provided, and how they interact with Chainlink's native token, $LINK. The fundamental dynamics of Chainlink's tokenomics will be explored, as well as its role in incentivizing various ecosystem participants, contributing to the network's security, reliability, and growth.

$LINK Tokenomics

(A zoomable version of the diagram can be found here)

Ecosystem Participants

Oracle Nodes

Oracle Nodes play a crucial role in the Chainlink network, serving as intermediaries between (off-chain) data sources and smart contracts of dApps. These nodes are responsible for converting the necessary off-chain data into a format that smart contracts can understand and process, enabling the integration of external data within the blockchain environment. 

Each Oracle Node stakes a certain amount of $LINK tokens as collateral, guaranteeing reliable, honest, and high-quality performance. By doing so, they earn staking rewards and fees from dApps and/or blockchains.

Alerters

Alerters are stakeholders who actively monitor the performance of node operators. Their primary objective is to ensure that node operators fulfil their obligations as agreed upon within the network. Alerters diligently observe the operations of node operators and promptly raise alerts if they detect any discrepancies or failures in their performance. By alerting in a timely and accurate manner, Alerters contribute to maintaining the integrity and reliability of the Chainlink network. In recognition of their role, Alerters have the opportunity to receive rewards for their monitoring and active participation in upholding the network's standards.

Oracle Nodes can also act as Alerters, continuously monitoring their fellow Node-Peers. These nodes possess a 20-minute priority time, giving them the advantage of raising an alert before other Alerters can do so.

Data Providers

Data Providers contribute their data to the network. There are two methods through which data providers can participate in the Chainlink network:

1. Simple: Standard API Model

Data providers have the option to monetize their data by offering access to it through their already existing APIs. In this scenario, Chainlink nodes interact with the data provider's API to retrieve the required data. The data provider can seamlessly integrate with Chainlink, leveraging the network's capabilities to monetize their data without significant changes to their existing business model.

2. Advanced: Origin Signed Data

Alternatively, data providers also have the opportunity to directly bring their data on-chain. In this case, they become their own node within the Chainlink network, eliminating the need for other Chainlink nodes as intermediaries. By bringing their data on-chain, data providers can enhance the efficiency and reliability of data delivery, while maintaining control over the entire data provision process.

Data Recipient 

Data Recipients, essentially dApps within the ecosystem, play a crucial role as they rely on the provided data while aiming to avoid centralized data delivery infrastructure and services. These recipients seek decentralized oracle solutions, such as Chainlink, to access reliable and verified data, enabling them to maintain the trustless and transparent nature of blockchain applications. By leveraging decentralized data sources, these dApps can uphold the core principles of decentralization and enhance the security and reliability of their smart contract operations.

Protocol Components

In this section, two innovative programs launched by Chainlink will be introduced. The programs are designed to facilitate the broader adoption of decentralized oracle solutions and drive the growth of the Chainlink ecosystem.

Chainlink SCALE

The SCALE program, short for "Sustainable Chainlink Access for Layer 1 and 2 Enablement," empowers blockchains and layer-2 networks to accelerate smart contract innovation within their native ecosystems. In this program, the respective blockchains and layer-2 networks cover the operating costs, including transaction gas fees, of Chainlink oracle networks for a specified time period. As a result, these projects gain access to enhanced features and vital oracle services specifically tailored to meet their ecosystem needs. This may include configurations like Data Feeds with higher update frequencies, enabling the development of more sophisticated and low-latency smart contract applications. By facilitating the integration of Chainlink's reliable oracle solutions without financial barriers, the SCALE program effectively supports developers and projects, enabling them to leverage advanced oracle services and drive the growth of decentralized applications within their ecosystems.

Learn more about the Chainlink SCALE program here. 

Chainlink BUILD

Chainlink BUILD is an instrumental program aimed at fostering the growth and advancement of both early-stage and established projects within the Chainlink ecosystem. Through BUILD, participants gain enhanced access to Chainlink services and receive comprehensive technical support. In exchange for these valuable resources, projects commit a portion of their network fees and offer other incentives to the program, such as dedicating a percentage of their total token supply to BUILD. This commitment strengthens the overall network and facilitates the development of dApps that leverage Chainlink's decentralized oracle solutions.

Learn more about the Chainlink BUILD program here. 

These programs demonstrate Chainlink's dedication to supporting blockchain projects and nurturing the thriving ecosystem of decentralized applications. By offering sustainable access and fostering collaboration, Chainlink actively empowers developers and projects to leverage the power of secure and reliable external data in their smart contracts, leading to greater adoption and advancement of blockchain technology on a global scale.

Value Creation

The problem that Chainlink is addressing revolves around the critical issue of accessing reliable, real-world data within blockchain networks. Blockchains, by design, operate in a closed and isolated environment, making it challenging to interact with external data sources directly. However, many smart contract applications and decentralized platforms heavily rely on trustworthy data to execute automated actions. This creates a fundamental dilemma known as the "Oracle problem". Oracles act as bridges between the blockchain and the outside world, providing access to external data for smart contracts to process. However, integrating oracles into decentralized applications raises concerns about centralization, security, and data integrity. Traditional centralized oracles may pose a single point of failure and could be susceptible to manipulation, compromising the entire decentralized nature of blockchain systems. Hence, finding a robust, decentralized, and tamper-proof solution to the oracle problem is crucial for the widespread adoption and seamless functionality of smart contracts within the blockchain ecosystem. This is precisely the challenge that Chainlink seeks to solve through its innovative approach to decentralized oracle services.

Overall Goal

Chainlink effectively addresses the critical problem of connecting blockchain networks with external data resources through its decentralized oracle network. By harnessing a vast and diverse network of independent Oracle node operators, Chainlink provides a comprehensive solution to the Oracle problem. Through this network, smart contracts gain access to a wide range of decentralized services, enabling them to securely and efficiently interact with real-world data. 

Chainlink's Price Feeds offer essential financial market data, powering various DeFi applications with reliable information. Verifiable randomness ensures the creation of dynamic NFTs and enables fair on-chain gaming applications. The provision of proof of reserve assures users of the backing collateral supporting stablecoins and cross-chain tokens. Additionally, the Keeper Network introduces transaction automation bots, offering autonomous DevOps services. Chainlink's decentralized oracle network not only ensures data integrity and transparency but also mitigates the risks associated with centralization, such as single points of failure and data manipulation. By bridging the gap between blockchain and external data sources, Chainlink plays a pivotal role in unlocking the full potential of smart contracts and decentralized applications, fostering innovation and adoption across the blockchain ecosystem.

(Comp. Messari)

Value Capture

Value Accrual to Protocol

The protocol does not participate in value accrual. Instead, the fees and rewards are entirely earned by the Service Providers, primarily the Oracle Nodes.

Value Accrual to Token

There is no direct value accrual to $LINK. However, $LINK is used to pay for services on the Chainlink network and thus the Equation of Exchange suggests that the token price rises with increasing transactional volume, considering the total $LINK supply remains the same, as well as the average holding period of $LINK. 

In one of my previous Tokenomics 101s, I covered the Streamr network where I dived deeper into the Equation of Exchange, feel free to give it a read if you are interested in this topic. 

Business Model

(Please find an enlarged version of the image here)

Revenue comes from:

• dApps:

  • Chainlink BUILD Fees

  • Revenue Sharing

• Blockchains:

  • Chainlink SCALE Fees

Revenue is denominated in:

• Primarily in $LINK

Revenue goes to:

• Node Operator Stakers

• Community Stakers 

Token Utility

Fee Token

$LINK serves as the primary fee token within Chainlink's ecosystem. Users utilize $LINK tokens to access and acquire valuable data from the network.

Staking for Node Operations

To become a Chainlink node operator and participate in the network's decentralized oracle infrastructure, individuals must stake a certain amount of $LINK. This stake acts as collateral and ensures the integrity and reliability of its services.

Community Staking and Auto-Delegation

Apart from node operators, community members also have the opportunity to stake their $LINK tokens. These staked tokens are automatically delegated to eligible node operators, further strengthening the network's decentralization and encouraging active participation from the community.

Collateral for DeFi Loans

$LINK can be used as collateral to secure decentralized finance (DeFi) ecosystem loans. By pledging their $LINK tokens as collateral, individuals can access borrowing options and unlock liquidity while retaining ownership of their assets. This use case expands the utility of $LINK and enhances its role as a valuable asset within the DeFi space.

$LINK Demand Drivers

Demand for Decentralized Oracles 

With the increasing demand for trustworthy and authenticated data within blockchain applications, there is a growing need for Chainlink's robust oracle solutions. This surge in demand for Chainlink's oracle services drives the corresponding need for $LINK tokens, which are utilized as a means of payment to access and utilize these reliable data services.

Integration into DeFi Ecosystem 

Chainlink has become a fundamental component of the decentralized finance (DeFi) ecosystem. Many DeFi protocols rely on Chainlink's oracles to access external data for functions such as price feeds, lending/borrowing rates, and more. As the popularity and adoption of DeFi projects rise, the demand for $LINK tokens increases to access and utilize Chainlink's oracle services.

Node Operation and Staking 

To become a Chainlink node operator and participate in the network, individuals need to stake a certain amount of $LINK tokens. This requirement creates demand for $LINK tokens as aspiring node operators acquire them to fulfil the staking criteria and take part in the network's decentralized oracle infrastructure.

$LINK Distribution & Unlocks

Node Operators

A significant portion of the token supply, precisely 30% (300 million $LINK), has been allocated as rewards for Node Operators and Ecosystem Incentives. This allocation serves as an incentive to encourage active participation and contribution from Node Operators, who play a vital role in maintaining the integrity and functionality of the Chainlink network.

Initial Sale

During a public sale conducted in 2017, 35% (350 million $LINK) of the token supply was sold. This initial sale provided an opportunity for early participants and supporters of the project to acquire $LINK tokens and contribute to the growth and development of the Chainlink ecosystem.

Development Team

A separate allocation of 35% (350 million $LINK) has been allocated to Chainlink's parent company, which holds responsibility for the future development of the project. This allocation ensures that the development team has the necessary resources to further enhance and expand the capabilities of the Chainlink network, driving innovation and continuous improvement.

Based on our research, Chainlinks documentation does not provide specific details about the vesting schedule associated with the respective token allocations. If any member of the Chainlink team is reading this and possesses information regarding the vesting schedule, feel free to contact us. Your assistance in providing this information would be greatly appreciated.

Circulating Supply

As of the current date (09.07.2023), the circulating supply of $LINK stands at 538,099,970.45 tokens, which represents approximately 53.81% of the maximum supply capped at 1,000,000,000 $LINK. It's worth noting that for the token price to remain around the current value of approximately $6.15, the price would need to roughly double when the maximum supply is reached. This calculation considers the relationship between the circulating supply and the total supply and emphasizes the potential impact on the token's price as the supply approaches its maximum limit.

Feedback Loops

Enhancing the security and reliability of the Chainlink network

By attracting a greater number of independent node operators to join the network, the security and reliability of the Chainlink ecosystem are significantly strengthened. This is due to the increasing improbability of a malicious node being able to carry out fraudulent actions. As the network expands and incorporates more diverse and independent nodes, the overall system becomes more robust, resistant to attacks, and capable of delivering trustworthy and tamper-proof data to smart contracts. The decentralized nature of the oracle network ensures a higher level of resilience and mitigates the risk of single points of failure or manipulation.

Increase in demand for Chainlink's oracle services due to a higher number of oracle nodes

As the number of oracle nodes within the Chainlink network increases, the demand for Chainlink's oracle services experiences a corresponding rise. This growth in the number of independent nodes contributes to a more secure and decentralized network, reducing the vulnerability to malicious attacks. By bolstering security and enhancing the network's integrity, the value of the Chainlink network increases, attracting new users who prioritize higher security standards. This increased trust and confidence in the network drive the demand for Chainlink's oracle services as more users are onboarded, further solidifying the network's position as a trusted and reliable provider of decentralized oracle solutions.

Impact of increase/decrease in the required minimum collateral on network security

The security of the Chainlink network is significantly influenced by changes in the required minimum collateral for node operators. If Chainlink decides to increase the collateral requirements, it may result in some prospective nodes failing to meet the new criteria. Consequently, these nodes would be unable to contribute to the network's security, leading to reduced decentralization. On the other hand, a decrease in the collateral requirements could attract more nodes to join the network. However, a lower capital requirement might create a potential vulnerability, as it may not provide sufficient protection against malicious attacks.

Increase in $LINK's price due to more node operators

In addition to enhancing the security and reliability of the network, the growing number of node operators contributes to an increase in the demand for $LINK tokens. Aspiring node operators are required to stake $LINK in order to participate in the network, creating an increased demand for the token. This increased demand, driven by the need to acquire and stake $LINK, can potentially lead to upward pressure on the token's price as the network attracts more participants and expands its decentralized oracle infrastructure.

Increase in $LINK's price due to higher demand for oracle services

The rising demand for decentralized oracle services directly translates to an increased demand for $LINK tokens. As more blockchain applications, such as DeFi protocols, require reliable and verified data from external sources, the demand for Chainlink's oracle services grows. This surge in demand naturally leads to an increased demand for $LINK tokens, which are used as the primary means of accessing and paying for these oracle services. As a result, an upswing in the demand for $LINK can be expected, potentially driving an increase in the token's price as the ecosystem experiences a heightened demand for its oracle services.

Observations/Thoughts

A more transparent vesting schedule

For both current $LINK token holders and potential investors, having clarity on the inflation of $LINK over the upcoming years is of utmost importance. This information can be calculated if details about the release schedule and vesting plan were available. However, during the research, no reliable information on a vesting schedule could be found. With approximately 50% of the total supply already in circulation, it becomes particularly crucial to understand how and when the remaining 50% will enter the circulating supply. Having this information would provide valuable insights into the future supply dynamics and potential impact on the token's value and overall tokenomics.

Highly Gas-Cost Intense Business

The Oracle business is notably gas-intensive. While the revenue has generally exceeded the gas costs in recent months (measured against the ETH/USD price feed), there have been instances when the gas costs significantly outweighed the revenue. Should this situation persist over an extended period, it could potentially lead to nodes departing from the Chainlink network due to unprofitability. Such an outcome may compromise the network's decentralization and security, highlighting the need for careful management of incentives and pricing to sustain the network's long-term viability and integrity.

(Zoomable and interactive chart available here)

(Zoomable and interactive chart available here)

Summary

In this comprehensive Tokenomics 101 analysis of Chainlink ($LINK), the focus was on exploring the decentralized oracle network's tokenomics and its pivotal role in tackling the challenging "oracle problem." The introduction provided a concise overview of Chainlink's mission, aiming to connect blockchain networks with external data sources and emphasizing the significance of solving the oracle problem for decentralized applications.

Throughout the analysis, a deep dive into Chainlink's token utility revealed its fundamental role as the primary medium of exchange within the ecosystem. Additionally, the importance of staking $LINK for node operations and community engagement was highlighted, elucidating how these mechanisms contribute to network security and decentralization.

The Ecosystem Participants section offered valuable insights into the integral roles played by Oracle Nodes, Data Providers, and Alerters. By ensuring the security and reliability of the Chainlink network, each participant contributes to the ecosystem's success. Moreover, the distribution of token allocation shed light on the rewards and incentives provided to Node Operators and the initial sale of $LINK tokens, illustrating the strategic planning behind the token distribution.

Two pioneering programs, SCALE and BUILD, were discussed in detail, revealing Chainlink's commitment to promoting mass adoption and fostering project growth within the ecosystem. The impact of collateral requirements on network security was explored, emphasizing the need to strike the right balance to ensure optimal security without hindering participation.

Overall, Chainlink's tokenomics exemplify a thoughtfully designed system that incentivizes participation, enhances security, and fosters seamless data integration within blockchain applications. The network's innovative programs and efforts to overcome challenges demonstrate its commitment to mass adoption and continued growth. As the blockchain industry evolves, Chainlink's decentralized oracle solutions are poised to play an increasingly vital role in shaping the future of decentralized applications, powering the ecosystem forward with its reliable and secure data solutions.

In the heart of the ever-evolving world of decentralized finance (DeFi), an unlikely love story unfolds—one that brings together cutting-edge technology, innovation, and fervour for sustainable financial growth. The tale is set against the backdrop of Chronos Finance, a pioneering decentralized exchange (DEX) and liquidity provider on the Arbitrum Layer 2 (L2) network. This narrative doesn't just involve lines of codes and tokens, but a deep affection for solving pressing challenges in the DeFi space and a shared dream of fostering sustainable liquidity.

The model used by Chronos is built around the Ve(3,3) approach. This concept combines the vote escrow tokenomics, known as "ve," from protocols such as VeChain, Curve, and Convex, with Olympus DAO's (3,3) design. In simple terms, "ve" means that a user typically has to lock up a project's tokens to receive the corresponding ve token, which can provide voting rights, fee rewards, or other benefits. The "(3,3)" portion comes from Olympus DAO's design, which yields a particular set of results for users as illustrated in the table below:

The goal of ve(3,3) design is to merge these two powerful tokenomics strategies to overcome the challenges presented by current ve gauges models, liquidity mining and the liquidity bootstrapping method employed by most DeFi projects. Some key aspects of a ve(3,3) model are:

• Focus on fees incentives, as well as liquidity incentives (i.e. earn fees by locking the project’s token)*

• Typically uses a dual token system

• Rebase function

• Capital efficiency

• Sustainable liquidity

The novel ve(3,3) model balances the incentives of all stakeholders involved in the Chronos protocol, including $veCHR voters, liquidity providers, traders, and protocols. This harmonic structure fosters a virtuous cycle effect that balances incentives, rewards, and demand, leading to a healthier and more efficient ecosystem.

* The reader will get later in the article how Chronos implements a model that aligns emissions with fees and liquidity.

$CHR Tokenomics

The Chronos ve(3,3) system guarantees a steady cash flow to $CHR lockers from swap fees, along with voting rights, which give the power to direct $CHR emissions towards high-volume and bribed pools – a function that lets protocols to induce holders to direct more $CHR emissions toward specific pools. Interestingly, protocols can directly incentivize $CHR lockers to allocate more emissions to their own liquidity pools. When lockers are deciding on emissions, they are influenced by the fees generated and bribes offered, optimizing the gauge system and resulting in better-aligned $CHR emissions. This solution aims for improved capital efficiency and sustained liquidity for DAOs and protocols. It is also worth mentioning that Chronos isn't really a typical ve(3,3) DEX as it gets rid of the rebase function present in most ve(3,3) protocols.

Chronos, indeed, opted to implement a zero-rebase mechanism for long-term sustainability and maturity-adjusted LP returns, to align incentives with the project's long-term health. The team has also decided to not include certain ve(3,3) model functions such as the voters’ ability to receive boosted emissions by voting to their own liquidity pools. The rebase mechanism, intended as token inflation protection, can paradoxically cause inflation. In this scenario, if $veCHR voters aren't subject to dilution, they may neglect economic gauges, thus leading to unproductive capital. They could also unfairly direct emissions to uneconomical pools at minimal cost, potentially damaging the economy over time if rebase protection is in place.

Without rebasing, $veCHR voters are dissuaded from these harmful practices. Although they can still vote for uneconomical pools, their influence wanes over time. To sustain emissions to such pools, they must reintroduce capital into the system through bribes or additional $CHR accumulation. It’s worth noting that prospective entrants into the economy can be dissuaded from joining due to the substantial influence wielded by the initial participants in the governance process.

Ecosystem Participants

As anticipated, Chronos utilizes a custom ve(3,3) model to better incentivize all participants in the protocol. These are:

Users

They perform swaps within the platform and aim for the lowest slippage. Thus, they benefit from the high liquidity (TVL) that resides in the Chronos pools. They pay swap fees, which are then distributed to token lockers ($veCHR) based on their votes. I.e., $veCHR holders (token lockers) receive a pro-rata share of generated swap fees only for those pools they vote for.

Liquidity providers (LPs)

When depositing liquidity, they get LP tokens that can be staked to obtain maNFT. They don’t directly receive fees generated from swaps, as per usual AMMs design, rather they receive newly minted $CHR. With the maturity-adjusted return model, which directly derives from the Reliquary framework, LPs are also incentivized to commit their liquidity for a longer duration to receive maximal rewards. This aligns Chronos TVL with the long-term health and sustainability of the project.

Holders ($veCHR voters)

This kind of agent buys and locks $CHR to receive an ERC-721 (NFT) $veCHR to be eligible to participate in the governance process and control $CHR emissions direction. In order to maximize the fees he gets, he is incentivized to vote to direct incentives to high-volume and most bribed pools. The ERC-721 token can be traded in the Chronos marketplace. Finally, holders interact with protocols to accumulate bribes if they vote (direct emissions) for selected pools (the pool that the protocol is bribing).

Protocols

They benefit from a public liquidity layer and can easily bribe $veCHR voters to attract more incentives – and therefore, more liquidity – to their pools. The reader can clearly see how such a process can provide benefits for a specific gauge:

NFT holders

Minters and holders of the Lost Keys of Chronos collection are also an integral part of the economy, as they funded the project. The Lost Keys of Chronos, also known as chrNFT, is a collection of 5,555 items. Owning one of these grants gives you access to various revenue streams and a unique role within the community. It was sold at the following prices:

• Private sale: 0.30 $ETH

• Whitelisted minting: 0.325 $ETH

• Public minting: 0.35 $ETH

Sixty percent of the funds raised from the sales were directed towards providing $CHR liquidity and establishing the treasury at launch. The remaining forty percent was allocated for ongoing development, marketing, audits, design, team support, and other related costs.

NFT holders and minters received part of the total $CHR supply as airdrop with different vesting schedules and options to claim tokens over time (see details in the $CHR Distribution & Unlocks section). While 2% of all generated secondary sales royalties go to $chrNFT minters long life, 1% is distributed to $chrNFT stakers on top of swap fees cut earned by the protocol. It is safe to assume that these types of agents are driven by speculative behaviours. 

Protocol Components

AMM

Chronos leverages the same hybrid swap engine seen in other DEXs. It differentiates itself by using a different swap algorithm depending on how closely correlated assets are to one another. In particular:

• vAMM — for assets with low price correlation (i.e. ETH/USDC). The AMM relies on the same Uniswap V2 swap algorithm X*Y = K.

• sAMM — for closely correlated assets (i.e. USDC/USDT). Chronos uses the Solidly stable-swap algorithm X^3Y*Y^3X ≥ K.

The reason why Chronos utilizes different AMM curves is to deploy liquidity more efficiently and optimize from slippage.

Gauges

$CHR holders lock their tokens and get $veCHR to earn the right to vote on the platform's gauges.

Gauges control the rate of emissions to different liquidity pools within the DEX. Pools that receive more votes earn a greater proportion of $CHR incentives for that epoch. A $veCHR holder earns fees only from the gauges (pools) he has voted for. New gauges need to be approved by the Chronos team.

Bribes

On Chronos, outside parties provide economic incentives (bribes) to help convince $veCHR holders to vote for specific gauges each epoch. The bribe marketplace is permissionless and open to the public but only whitelisted tokens can be offered as bribes. Bribes can be made at any time during the epoch, and are held in escrow throughout the epoch’s duration. $veCHR voters can collect them as a lump sum once the epoch is concluded.

$CHRDistribution & Unlocks

Chronos is on a mission to evolve into a truly community-owned liquidity layer on Arbitrum, which is echoed in its distribution of platform ownership to both protocols and users through a transparent airdrop launch. This ensures the utmost level of decentralization in ownership and participation within the ecosystem. Notably, no venture capitalists play a role in the distribution process. The reader can find below the current $CHR holders distribution:

Source

The token is distributed across 7000 addresses and the majority of them are held in the veCHR address (38%), and the rest is mainly detained by smart contracts. It’s worth saying that 10% of the supply was sent to the null address so definitively removed from the circulating supply.

Chronos' native token, $CHR, has an initial supply of 50 million with a maximum supply estimated at 180 million. The initial allocation is as follows:

25% to veCHR Protocol Airdrop

Chronos underscores its commitment to engaging with the liquidity layer by earmarking a quarter of its tokens to $veCHR protocol airdrops. The airdropped $veCHR varies per protocol, ranging from 0.3% - 0.8%, based on the unique needs and value-add of each protocol. This creates an ideal starting point for protocols to familiarize themselves with the ecosystem, while preserving opportunities for them to acquire $CHR for long-term liquidity incentives, thanks to the no-rebase model and balanced quantities.

21% veCHR Airdrop for Users

A fifth of the total token supply is set aside for Chronos' regular users and partner protocols. Selected based on behaviors that foster the protocols' long-term stability - like locking, staking, holding, participating in governance, and continuous support - these users receive their allocation as $veCHR, locked for a maximum duration of two years.

A segment of this supply (2,000,000 $veCHR) was employed to encourage users to lock their $CHR tokens in the early stages of Chronos DEX going live. Those who opt for a two-year lock receive a bonus amount equivalent to 30% of their locked position in additional $veCHR, until the 2M token allocation is used up. This exemplifies Chronos' commitment to reward early members while ensuring the project's long-term sustainability.

9% $CHR/veCHR Airdrop for $chrNFT Minters

This portion is allocated to chrNFT minters, accessible right from the launch. A balanced split between $CHR and $veCHR is granted:

• 50% as veCHR, locked for 2 years

• 50% as $CHR, vested linearly over 8 weeks

Minters have the flexibility to claim their entire token share as $veCHR upon claiming the airdrop, instead of adhering to the 8-week vesting schedule.

18% Ecosystem Grants

A sizable segment of the initial supply funds a pool designated to back a variety of projects that intend to fast-track Chronos' growth. Shortlisted projects receive considerable support from the core team in areas like smart contract development, marketing, and business development.

4% DEX Liquidity

Paired with either $USDC or $ETH to ensure liquidity at launch, $750,000 from the $chrNFT minting funds are matched with 2,000,000 $CHR, starting at an initial price of $0.35 at launch.

18% Team Tokens

Allocated to the team to motivate their long-term involvement in Chronos.

• 50% as veCHR, locked for 2 years

• 50% as $CHR, vested over 2 years

This allocation, vested linearly over 2 years (beginning on Epoch 1) with no unlocked tokens at launch, aligns the core team's interests with Chronos. By receiving half of their supply as voted escrow tokens, team members can enjoy the protocol's success while maintaining a long-term perspective.

Source

That’s only the initial allocation, though. To attract LPs in perpetuity, Chronos also needs to have an emission schedule that goes beyond the initial allocation, which you can find below.

Please note that this emission schedule also reflects the V2 upgrade the protocol, announced recently.

The team made some significant revisions to the emission schedule of $CHR to coincide with the V2 upgrade. The most notable change is an increase in the weekly decay, moving up from the initial 1% to an updated 2%. So, starting from an initial emission-oriented supply of around 2.5M, the overall emissions reduce by 2% each epoch. 

This adjustment in the V2 emissions schedule will lead to a drop in the maximum supply - from the original 275 million down to 180 million under the V2 framework. In line with this accelerated emissions decay, Chronos also decided to increase the weekly treasury allocation. It's been ramped up from the previous rate of 2.5% to a more substantial 5%.

To give you a clear picture:

• Weekly emissions at inception were 2,600,000 $CHR

• The weekly emissions decay is now 2%

• The weekly allocation to the treasury wallet stands at 5%

This modification affects the total $CHR emission by reducing the maximum supply and accelerating emission reduction over time. This encourages LPs to join the protocol early in order to gain the majority of the new emissions. At the same time, they benefit from a limited supply that enhances their position, as it leads to less dilution over time. To note that, while V2 was announced in June but not yet fully deployed, we can clearly see a volume and fees decline as well as a protraction of a $CHR price decline. While the V2 hypothetically should bring some major improvements, only time will tell if it is worth it.

See here the comparison with the former V1 for reference.

Value Creation

Problem

Conventional DEXs, encounter challenges pertaining to revenue accrual for governance token holders and the provision of adequate incentives for liquidity providers.

To begin with, the swap/trading fees often fail to captivate sufficient LPs, necessitating the deployment of liquidity mining programs that distribute native tokens by generating more and more inflation over time. Unfortunately, such disbursements can induce an unfavourable impact on the tokens’ long-term value.

Subsequently, the token holders face the difficult task of channelling revenue from LPs to the DEX. Any income displaced would trigger an exodus of LPs, thereby diminishing the total liquidity and consequently impairing their overall trading volumes.

Another problem Chronos is trying to solve derives from the current ve(3,3) model used by other players in the market in which LPs earn direct fees and token emissions for supplying liquidity. By rewarding LPs this way, protocols can attract mercenary agents who farm the token and create selling pressure on it, overall impacting the platform TVL and creating a misalignment incentives environment. This can lead to reduced protocol usage by users who face an increasing slippage and less favourable trading conditions. 

Solution

Chronos facilitates the dependable trading of digital assets, characterized by minimal fees and limited slippage. Its routing engine is designed to automatically identify the most beneficial returns on every trade from the pools accessible.

The ve(3,3) model addresses several aforementioned challenges through an exclusive fee and incentive configuration, which includes:

• Channelling all transaction fees to $veCHR voters

• Incentivizing Liquidity Providers with $CHR emissions

• Permitting protocols to directly incentivize $veCHR voters by offering a share of emissions

• Sustaining $CHR emissions through transaction revenue and utility

This structure guarantees considerable utility and remunerations for holders who lock their $CHR, which sequentially aids in preserving the necessary liquidity.

Projects that aim to encourage liquidity for their tokens can directly incentivize $veCHR voters, thereby receiving a share of emissions. This strategy introduces an additional income source for $veCHR lockers and enables projects to efficiently procure liquidity, eliminating the need to rely heavily on high native token emissions.

Finally, Chronos is trying to propose a more incentive-aligned model, thus generating a potential increase in demand for the protocol, in which DAOs can stimulate their own pools through bribes and convey more $CHR emissions to them. The team effectively creates an incentive alignment by directing emissions based on bribes/fees generated for those pools.

Value Capture

Value Accrual to Protocol

The treasury is instrumental in bolstering ecosystem development, and initially draws sustenance from the token allocation and a portion of the $chrNFT primary sale. A significant 60% of the funds accrued from sales is allocated towards providing $CHR liquidity and enriching the treasury at launch. The remaining 40% is earmarked for ongoing development, marketing, and team expenses, among other costs. The treasury sees value accrual via a perpetual 2% inflow from all secondary NFT sales and 5% from weekly $CHR emissions.

The protocol certainly benefits from high TVL to ensure deep liquidity and low slippage so as to attract more users using the platform. For this reason, Chronos adopts a unique strategy to reward LPs. Intriguingly, LPs do not receive any trading fees, instead, they are awarded $CHR emissions subject to a voting process by $veCHR holders. The model enables liquidity providers to accrue enhanced emissions over time, whereby positions staked for longer durations garner higher $CHR percentages per epoch.

Staked positions are eligible to earn an emissions enhancement for up to 6 epochs, with the maximum boost reaching 2x, accruing linearly at 0.2x per epoch. After 6 epochs, the maNFT (LP staked token) is deemed fully mature and will persist in earning $CHR at the maximally boosted rate indefinitely, or until it is unstaked. While there is no lock-up period, LPs retain the freedom to un-stake their position whenever they desire. However, such a move will culminate in the forfeiture of any accrued emissions boost up to that point.

Value Accrual to Token

On the other side of the coin, locking is the main force that ultimately lets the token accrue value. 

In the Chronos ecosystem, $CHR holders can choose to vote-escrow their tokens, obtaining $veCHR in return. These $veCHR serve dual purposes: they allow holders to participate in voting on the platform's gauges, influencing the distribution of $CHR to liquidity pools, and they also enable holders to share in the platform's trading fees. The decision to lock tokens to obtain $veCHR is equally beneficial in both aspects, enhancing participation in platform governance while also providing a source of revenue.

All in all, $veCHR holders position themselves to benefit from the long-term success of Chronos, capitalizing on potential buying pressure due to a significant percentage of the token being staked. Being a fork of Solidly, the Chronos model resembles that of Curve, where holders leverage the governance token ($veCRV) to vote and direct emissions towards preferred pools. The value of $CHR and the success of Chronos will largely depend on the number of protocols that find it beneficial to accumulate $veCHR in exchange for enhanced emissions for their pools.

Business Model

Revenue comes from/goes to:

First sale revenues

Chronos is set on becoming a truly community-owned liquidity layer on Arbitrum. Consequently, it has transferred platform ownership to the Arbitrum community via a fair-launch airdrop. No investment rounds or initial funding phase were conducted; instead, funds were gathered exclusively from the sale of the Lost Keys of Chronos ($chrNFT), a limited collection of 5,555 pieces, with the following pricing structure:

• Private sale price: 0.30 $ETH

• Whitelisted mint price: 0.325 $ETH

• Public mint price: 0.35 $ETH

From the initial sale, 60% of the funds were allocated to providing $CHR liquidity and bolstering the treasury at launch. The remaining 40% is reserved for continuous development, marketing, audits, design, team expenses, and other costs.

Perpetual revenues

Regarding the revenue flow post-initial sale, Chronos secures an income stream for different participants. Chronos's modified fee structure ensures competitive swap prices and robust revenue generation for $veCHR voters (approximately 90% of total swap fees), and $chrNFT stakers (approximately 10% of total swap fees). This leads to an increase in both locking rates and incentives for liquidity provisions. It's important to note that swap fees do not contribute to the protocol treasury.

• vAMM swap fees: 0.20%

• sAMM swap fees: 0.04% 

The transaction fees on pools can be strategically adjusted by the Team.

Furthermore, we can break down royalties revenues from the NFT collection into the followings:

• Royalties for Minters: 2% of secondary sale royalties are permanently allocated to $chrNFT minters, irrespective of whether they hold or stake their NFTs.

• Royalties for Stakers: 1% of secondary sale royalties are added to the staking pool and can be claimed by those staking their $chrNFTs.

Revenue is denominated in:

NFT royalties are collected in $ETH terms, while swap fees are distributed to holders depending on the pool. Generally, the denomination is in the token pair or $CHR. Finally, bribes can be paid with any of the supported Chronos assets.

Token Utility

Chronos employs a dual-token model to inspire various stakeholders to perform distinct roles within its ecosystem: $CHR and $veCHR.

$CHR (Utility Token)

The principal utility token for Chronos is $CHR, an ERC-20 token utilized to motivate users to add liquidity and stake their LP tokens on the platform. LPs find the token attractive as trading fees are not received directly; instead, LP tokens must be locked to obtain the right to receive $CHR emissions. The procedure of staking LP tokens results in a maturity-adjusted return model, thereby encouraging LPs to commit their liquidity for extended periods to gain maximum rewards. Consequently, this aligns Chronos' TVL with the project's long-term sustainability and health.

$veCHR (Governance Token)

Any holder of $CHR can vote-escrow their tokens and receive an ERC-721 $veCHR in return. This grants holders the ability to vote on the platform's gauges, which regulate the distribution of $CHR incentives to Chronos' liquidity pools.

The lock (vote-escrowed) period can last up to two years and not less than 2 weeks, adhering to the linear relationship depicted below:

To encourage continuous locking and enduring stakeholder engagement, $veCHR voting power decreases linearly over time until it depletes at the conclusion of the initial lock period. Users must continually renew their lock duration to retain voting power, cultivating ongoing interaction and active participation within the Chronos ecosystem. In summary, a $veCHR holder gains the following benefits:

• Gauge voting: holders have the opportunity to vote for gauges on a weekly basis. These determine which pools will receive $CHR emissions for the subsequent epoch.

• Governance rights: holders can participate in governance and vote on proposals for protocol enhancement.

• Fee revenue: voters earn 90% of the swap fees generated by the pools voted for each epoch, with the remaining 10% allocated to $chrNFT stakers.

• Bribe revenue: voters earn 100% of the bribes for the pools voted for each epoch.

$CHR Demand Drivers

Previously, we noted that Chronos closely mirrors the Curve model, wherein holders utilize the governance token ($veCRV) to cast votes and steer emissions towards preferred pools. The value of $CHR, and consequently the success of Chronos, will predominantly hinge on the number of protocols that deem it advantageous to amass $veCHR in exchange for amplified emissions for their pools, i.e., DAOs and protocols accumulating and locking $CHR for $veCHR to direct emissions to their pools. 

To assess the competitivity of the protocol, let’s consider the following Dune chart:

Following an initial increase during the first epochs (weeks), it shows a slow decline across the remaining ones both on fees and bribes. This suggests that, as of now, protocols are not quite interested in bribing $ve holders to accumulate more $CHR.

It's worth noting that Arbitrum's success will be crucial here because Chronos' prosperity is closely linked to Arbitrum's, mainly the activity happening on the chain (traders and DAOs/protocols on Arbitrum will need a DEX to meet their liquidity needs).

Since acquiring $veCHR necessitates staking $CHR, it is likely that this action will diminish the number of tokens in circulation over time, thereby potentially escalating the price if sufficient demand exists. A similar staking mechanism applies to $chrNFT holders to obtain the right to receive sale royalties and a portion of swap fees generated by the protocol. Other utilities, including revenue sharing, governance rights, and secondary bribe income, can undoubtedly enhance the token demand. 

Another demand driver is that users can find trading on Chronos beneficial due to its low fees and user-friendly interface. It's important to mention that these users prefer token swapping with minimal slippage, which requires a large Total Value Locked (TVL). This is secured by a high deposit rate from Liquidity Providers (LPs), who are encouraged to make long-term commitments due to the platform's design (that we have discussed at length in previous sections).

Feedback Loops

Traditional ve(3,3) models often fall short when it comes to motivating liquidity providers (LPs) to support a project for the long haul. Although token voters remain engaged due to the locking function, liquidity providers have the flexibility to disengage at any point.

It has been observed in other implementations that the counter-cyclical effect which helps stabilize the emission token's price gets disrupted as soon as the price declines. In such scenarios, liquidity providers tend to withdraw their liquidity, causing a decrease in the TVL and further diminishing the token's value. This positive feedback loop interrupts the flow of operations, largely because LPs are motivated by immediate returns rather than the long-term welfare of the project.

Chronos, however, provides a solution to this problem by introducing 'maturity-adjusted returns'. This innovative feature allows liquidity providers to gain enhanced emissions over time. As a result, LPs are more likely to maintain their liquidity even amidst temporary price volatility of $CHR, fostering a robust, resilient, and sustainable platform. Moreover, $veCHR holders are insulated against short-term $CHR price fluctuations due to the locking incentive mechanism. Therefore, a minor downward fluctuation in $CHR price shouldn't sway the actions of both ve holders and LPs.

Now, let’s continue to analyze different scenarios and explore some other possible feedback loops that could emerge under certain conditions and how they may impact the project and token's value.

For instance, assuming an increase in the number of users transacting on the platform, a series of events could potentially occur. First, we would likely witness a surge in fee generation, followed by higher returns for both $veCHR and NFT stakers. This would lead to an uptick in demand for NFT staking, which, in turn, would result in a lower circulating supply. In response to these dynamics, we might see a potential rise in NFT buying pressure. At the same time, more royalties would be directed to the treasury, and the demand for $CHR locking would increase, further reducing the circulating supply. These factors could potentially amplify the buying pressure for $CHR. In addition, the platform would become more appealing to protocols, leading to more bribes paid. Motivated by the increasing price of $CHR, more liquidity providers would be drawn to deposit liquidity, thereby increasing the TVL in the platform.

Collectively, these changes form a positive feedback loop. An enhanced TVL would lead to less slippage for users' swaps, driving further fee generation and fueling the platform's growth in a positive cycle.

Moreover, if the $CHR price dips below a particular threshold, liquidity providers (LPs) who rely solely on $CHR emissions might no longer find it advantageous to invest in the protocol. If the price continues to spiral downward, this could significantly impact their profitability and prompt them to withdraw from the platform. Therefore, it's worth considering extra security measures to protect against such risks.

Observations/Thoughts

While the protocol seems to create a sustainable flywheel due to the business model and incentive mechanisms in place, we need to observe some potential downsides that can disrupt the economy which may lead to a reduced TVL and downward $CHR price action.

Furthermore, token lockers ($veCHR holders) could offset a downward trend in the $CHR price. Following a governance process, they could opt to allocate a portion of the fees to liquidity providers. This would serve to further incentivize them during the selected time period and/or based on the $CHR price movements. This proactive approach can provide a buffer against market volatility and ensure sustained participation from liquidity providers. On the other side, a lower $CHR price implies less demand for it, impacting the locking rate of $CHR. The team could explore the possibility to leverage the treasury and draw some funds from it to compensate for a decline period while increasing treasury inflows during bull periods. 

It appears that following the initial launch, the Treasury, and hence the project’s runway, relies solely on royalties collected from secondary NFT collection sales and on  5% of the weekly $CHR emissions that stream to it (the treasury). This presents a risk that the project could exhaust its funds if expenses surpass revenues, given the model's dependence on a single perpetual income stream. To mitigate this risk, the team could consider diverting a portion of swap-generated fees into the treasury and/or implementing a withdrawal fee. The latter would be collected when holders decide to un-stake their $CHR, contributing further to the treasury's funds.

Ultimately, the value of $CHR and the success of Chronos will hinge largely on the number of protocols that perceive accruing $veCHR as a beneficial strategy, in return for amplified emissions for their respective pools. This shows the importance of creating a mutually beneficial environment for all stakeholders, to ensure the long-term sustainability and success of the platform.

Reviewing the latest available data, we observe that after an initial uptrend in fees, revenues, and total value locked in May, the protocol experienced a significant decline:

Source

An extended bear market period undoubtedly had a negative impact. It is possible that we will observe a recovery in certain protocol KPIs when the market rebounds. However, when analyzing the cumulative volume generated to date, it appears to follow a logarithmic curve. This curve suggests a lack of momentum and a struggle to push the performance boundaries.

The following data showing the TVL also supports this perspective:

Source

Looking at veCHR holders, there's an increase in the total locked $CHR and the average locking duration over time. However, the decreasing red average line indicates a challenge in attracting more users to lock their assets on the platform. The partial release of V2 update hasn't yet proven its value proposition, with its benefits still unclear. It will be intriguing to watch how Chronos's KPIs evolve over the coming months in response to these protocol improvements.

Conducting a comparative analysis with direct competitors can provide additional insights. For instance, when we look at Solidly, we see a similar logarithmic pattern in the cumulative volume. Notably, Solidly generates approximately 1.7 times more volume than Chronos.

Low trading volumes have a negative impact on fees and revenues:

Furthermore, a comparison between Chronos and Velodrome reveals that while Velodrome generates more fees, it too follows a decreasing trend.

The cumulative volume appears to be levelling off, which mirrors the benchmark trend. This suggests that the bear market has affected the entire ecosystem. Velodrome, in particular, significantly outperforms in volume, currently sitting at around 6 billion.

The unique strategic decisions of Chronos, like the zero-rebase model, aren't currently helping it stand out in a crowded market. The charts above suggest that broad market weakness is limiting the potential of all projects, regardless of their specific design choices. It would be beneficial to track this data over a longer time frame to assess whether these products garner more interest during more favourable market conditions.

Summary

In conclusion, the robust and sustainable architecture of Chronos's ve(3,3) model emerges as a beacon of resilience and longevity in the tumultuous seas of decentralized finance. The well-orchestrated incentive mechanism bolsters the retention of both governance holders and liquidity providers, creating a cohesive and committed community that's central to Chronos's ethos.

The conspicuous absence of private investors or venture capital reinforces the essence of Chronos's dedication to decentralization. This strategic choice could minimize selling pressure, as it ensures that there are no stakeholders who acquired the token at a significantly lower price than the rest of the users.

The dual token model, intertwined with the thoughtful vesting approach, acts as a shield against mid-term $CHR price volatility. In the grand scheme of Chronos's narrative, this translates to a beautifully choreographed dance of technology and economics, ultimately resulting in a more vibrant, efficient, and resilient decentralized financial ecosystem.

From addressing traditional DEX challenges to harnessing the ve(3,3) economic model's capabilities and enhancing it to ensure long-term sustainability, Chronos Finance embarks on an exhilarating journey of love and commitment. It's a commitment to its users, the DeFi ecosystem, and the future of blockchain technology. The dedication to achieving a more sustainable, rewarding, and healthier ecosystem for all participants is a romance not just with innovation, but with a vision for a better and fairer financial future. In this tale, Chronos isn't just developing a protocol; it's writing a love letter to the DeFi community—a testament to its relentless pursuit of progress and sustainability.

Sources:

• Chronos official Medium page

• Chronos official docs

• CoinGecko data

• Coin Market Cap data

• Cointelegraph article

• Defillama

• Chronos Dune analytics

Introduction

At its core, ICHI aims to revolutionize the creation and management of community-governed, tokenized baskets known as oneTokens, or "Branded Dollars."

With ICHI, communities are able to tailor their own oneTokens to meet their unique requirements and aspirations. This flexibility opens up a world of possibilities, allowing communities to establish stablecoins pegged to their native tokens or curate baskets of tokens representing specific asset classes.

However, ICHI's vision extends beyond just tokenization. One of its current focuses is to create sustainable liquidity through its innovative Vaults, surpassing the capabilities of Uniswap V3. These Vaults combine single-token deposits with concentrated liquidity, enabling liquidity providers (LPs) to earn yields. Moreover, ICHI actively manages the Vaults to optimize each LP's position, ensuring it remains within the most profitable range. This strategic approach maximizes efficiency and offers users higher fees.

This article ventures into the era of community-driven finance, the concept of concentrated liquidity, explores the potential of ICHI Vaults, how the $ICHI token is integrated into the ICHI ecosystem, and how different participants interact with the token.

$ICHI Tokenomics

Below we can see the token flow diagram for ICHI. This showcases how the system works, where the relevant sinks and faucets are and how value flows through/around the protocol. 

A zoomable version of this diagram can be seen here

Ecosystem Participants

Liquidity Providers (LPs) 

Liquidity Providers (LPs) interact with the ICHI ecosystem by depositing tokens into the Vaults, providing liquidity for trading, earning fees and yields, and potentially participating in governance activities. LPs have the opportunity to earn additional yields through their participation in the ICHI Vaults. Vaults are designed to combine single-token deposits with concentrated liquidity, aiming to provide LPs with higher yields.

Token Holders/ Stakers  

Token Holders acquire the $ICHI token for various reasons. $ICHI holders possess governance rights that allow them to actively engage in community governance by proposing and voting on protocol changes. ICHI tokens offer opportunities for yield generation through staking programs or liquidity provisions in the protocol's Vaults. This can provide additional income or rewards for token holders. Stakers of ICHI tokens get xICHI tokens which can be used to participate in the governance of the protocol, This could involve voting on proposals, decision-making processes, or shaping the future development of the project.

How token Holders get $ICHI Tokens

• Decentralized exchanges like Uniswap

• Centralized Exchanges

• Depositing to a Vault/Angel Vault where the paired asset is $ICHI.

Communities 

Communities are the primary participants in the ICHI ecosystem. They are groups of individuals or organizations that create and govern their own Decentralized Monetary Authorities (DMAs) using the ICHI protocol. Communities define the asset composition, stability mechanisms, and governance rules for their DMAs.

Protocol Components

ICHI VAULTS

ICHI Vaults is a component within the ICHI protocol that allows liquidity providers (LPs) to deposit tokens and earn rewards. These Vaults use various strategies, such as slippage adjustment and liquidity concentration, to optimize liquidity provision and maximize earnings for LPs.

ANGEL VAULTS

Angel Vaults aim to align the incentives of DeFi projects and their liquidity providers (LPs) by concentrating the liquidity of a deposited asset below the price of a community's scarce crypto asset. To learn more about concentrating liquidity check here. 

ICHI Angel Vaults offers a solution that combines the benefits of Uniswap v2 and v3, enabling liquidity providers to earn more fees without having to actively manage the price ranges of their positions. In addition to providing liquidity providers with the opportunity to earn higher trading fees, Angel Vaults also provide a number of features that benefit the projects that establish them, including:

• Buy Liquidity: By providing single asset liquidity below the token price of a participating project, Angel Vaults increase the price of the project's token, benefiting its value and market dynamics.

• Deflationary Liquidity Rewards: Crypto projects can offset the cost of liquidity rewards by creating branded dollars through ICHI and establishing an Angel Vault with those branded dollars. This is achieved by locking the project's scarce token when minting the branded dollar and using it as the single asset deposited in the Angel Vault. This process creates upward price pressure and helps sustain the liquidity pool.

• Protocol Owned Liquidity (POL): Depositing a portion of the assets that back a project's branded dollar into the Angel Vault ensures the presence of sustainable and long-lasting liquidity. This benefits the project by providing stability and facilitating trading activities.

BRANDED DOLLAR

Branded Dollar is a community-branded version of a stablecoin that is tailored to the requirements and branding of that particular community. The Branded Dollar aims to provide stability and utility within its designated community.

ICHI FOUNDATION

The ICHI Foundation, established by ICHI token holders, has been formed to support the functioning of the ICHI DAO. As a recognized foundation based in the Cayman Islands, the ICHI Foundation assumes the responsibility of managing various entities on behalf of the ICHI Token Holders. These entities encompass a range of functions such as legal, public relations, development, marketing, and software organizations.

ICHI GOVERNANCE

ICHI Governance empowers token holders to actively shape the future of the protocol. It promotes community participation, decentralization, and collective decision-making

Value Creation

Value creation refers to how the protocol is creating value and for whom. Value is created when a problem gets solved. Read here to understand more about value creation.

ICHI VAULTS

ICHI Vaults are Uniswap v3 Liquidity management protocols created to allow Liquidity Providers (LPs) to enjoy the user-friendly experience of Uniswap v2 while also benefiting from the high fee-earning capability of concentrated liquidity on Uniswap v3. ICHI Vaults are unique in that they let LPs deposit a single token into a liquidity position on Uniswap V3 to earn and return an ERC-20 liquidity token that can be used in incentive programs.

ICHI's Vaults offer Liquidity Providers (LPs) a managed strategy that allows the protocol to increase LPs earnings in the deposited token (i.e. provide ICHI-ETH, earn fees denominated in ICHI & ETH) through various strategies. The Vaults utilize a feature known as Greedy Liquidity, which is implemented in two ways:

• Slippage Adjustment: By adjusting slippage, the risk of overselling is reduced while making it relatively easier to purchase tokens. This means that selling tokens becomes more expensive, discouraging excessive selling pressure, while buying tokens becomes more accessible, facilitating increased demand.

• Liquidity Concentration: The Vaults concentrate liquidity by accumulating the deposit asset. This ensures that LPs can acquire a larger portion of the token they initially deposited into the pool. This concentration of liquidity helps LPs maximize their holdings and potentially increase their returns.

These features aim to minimize selling pressure and provide LPs with the opportunity to accumulate more of the token they initially provided to the pool. You can learn more about concentrated liquidity and ICHI Vaults here.

How do Vaults operate?

Vaults employ inventory management techniques to ensure a controlled liquidity range, preventing excessive token sales below market value. It also focuses on liquidity concentration to optimize revenue and minimize selling pressure. However, Vaults are actively managed to ensure that the price range of each LP’s position remains within the most profitable range 

Benefits of Vaults:

• Automated Pool Management: Vaults take care of managing pool positions, removing the need for manual intervention from users.

• The simplicity of Single-Token Deposits: Vaults allow for straightforward deposits of a single token. This results in higher trading fees per unit of liquidity provided.

• Resistance to Impermanent Loss: Vaults are designed to mitigate the impact of impermanent loss, which is a common concern for liquidity providers in decentralized exchanges.

• Deeper On-Chain Liquidity: By concentrating liquidity, Vaults contribute to the availability of greater on-chain liquidity within the protocol.

• User Control: Vaults are non-custodial, meaning users maintain full control over their tokens.

Overall Goal

The overall goal of the ICHI protocol is focused on optimizing liquidity provision by utilizing Concentrated Liquidity Market Makers (CLMMs) and Vaults. By concentrating liquidity within specific price ranges, ICHI aims to enhance capital efficiency, reduce slippage, and provide better yield opportunities for liquidity providers. The focus of ICHI protocol was once the Branded Dollar, a customised stable coin for different communities. However, the focus recently shifted to Liquidity management through the creation of Vaults.

Value Capture

Value capture refers to how the protocol is capturing the value it creates. Essentially, if value is being created then it has to flow somewhere (ideally to wherever the protocol deems most viable). Value capture can be broken down into (1) value accrual to the protocol and (2) value accrual to the token. Read here to understand more about value capture.

Value Accrual to Protocol

The ICHI protocol generates revenue through a portion of the trading fees, with 10% of the fees directed to the protocol's treasury. This revenue stream contributes to the protocol's funding for development, maintenance, and various strategic initiatives.

Additionally, 10% of the trading fees are allocated towards covering the gas fees associated with rebalancing the pools. Rebalancing ensures that the pools remain at their most capital-efficient state by adjusting the asset weights and maintaining an optimal composition. By dedicating a portion of the trading fees to cover these gas fees, ICHI ensures its pools' efficient operation and management.

This dual allocation mechanism allows the ICHI protocol to both generate revenue and cover the necessary expenses associated with maintaining the pools in an efficient and optimal state.

Value Accrual to Token

The ICHI protocol generates fees or revenue through its Vaults, which includes trading fees and other activities. These earnings are distributed among the participants who have provided liquidity, specifically the ICHI token holders. A significant portion, 80% of these earnings, is shared with the token holders who have contributed to the liquidity pools.

This fee-sharing mechanism is designed to promote value accrual for ICHI token holders. By actively participating in liquidity provision, token holders not only contribute to the protocol's liquidity but also benefit from the generated fees. This aligns the interests of token holders with the growth and success of the protocol, incentivizing continued participation and engagement.

By distributing a substantial portion of the earnings to token holders, the ICHI protocol recognizes and rewards their contribution to the liquidity ecosystem. This fee-sharing mechanism enhances the value proposition of holding ICHI tokens, creating a direct link between participation in liquidity provision and the potential financial benefits for token holders.

The Staking of ICHI tokens can also potentially contribute to the appreciation of the token's price. When tokens are staked and locked in a smart contract, they are effectively taken out of circulation, reducing the available supply. If the demand for ICHI tokens increases while the supply is limited due to staking, it can create upward pressure on the token's price and also by staking ICHI tokens, holders may have the opportunity to earn additional rewards.

Business Model

It’s important to understand the business model of the protocol since it ties into how value is flowing in the system and is relevant to the sustainability of the protocol.

Revenue comes from:

• Liquidity Provider (LP) Trading Fees: ICHI Vaults incentivize liquidity providers by allowing them to earn fees for providing liquidity to the protocol. A portion of these fees is collected by the protocol as revenue. Higher trading volume generally translates to increased revenue for the protocol.

Revenue is denominated in:

UNI v3 LP tokens (ERC 20 Tokens), which is the pool token, based on a ratio gearing more toward 80/20. So for example: If you deposited in a pool that is ETH/ICHI. You would only be depositing ETH. But like any Uniswap pool, your position in the pool starts to become a mixture of ETH and ICHI. So when you withdraw you are getting both ETH and ICHI. But instead of a 50/50 split like some protocols, it leans more toward your initial deposited token which is ETH.

Revenue goes to:

• Liquidity Providers

• Rebalancing of pools

• Treasury

Token Utility

This refers to how the token is being used within the project and by whom. Essentially the token’s use case. Read here to understand more about Token Utility.

The $ICHI token is the native token of the ICHI protocol. It can be used to provide liquidity to ICHI Vaults. Holders of ICHI tokens can stake their tokens, thus receiving xICHI which gives users: 

• ICHIpowah to propose and vote on ICHI governance proposals to determine future features and/or parameters of the ICHI platform as well as protocol improvements, with voting weight calculated in proportion to the tokens staked.

• Rewards for participating in governance proposals. Only users who have participated in the submission of proposals, commenting, reviewing and/or voting are entitled to receive ICHI token governance rewards.

ICHI token is also used to incentivise and reward the community for providing liquidity to the Vaults and reward community members for their contributions.

$ICHI Demand Drivers

Demand for a token can from three sources, those being demand for the token due to its utility, demand due to a mechanism (i.e. staking) and demand due to speculation. Essentially, demand drivers refer to who is buying/holding the token and why. Read here to understand more about Token Demand Drivers.

There are multiple parties who are likely to buy the $ICHI token:

• Investors and Speculators: Individuals or entities looking to invest in the ICHI token for potential capital appreciation or trading opportunities may buy the token. These buyers often speculate on the future value of the token based on factors such as market trends, project developments, and overall sentiment.

• Liquidity Providers: Users who wish to provide liquidity to the ICHI protocol's liquidity pools may need to acquire the ICHI token to participate. Liquidity providers play a crucial role in the protocol by depositing their tokens and earning fees or rewards in return. They may purchase the ICHI token to contribute to the liquidity pools and engage in yield farming.

• Governance Participants: Individuals or entities interested in actively participating in the governance of the ICHI protocol may buy the ICHI token to acquire voting power and influence decision-making processes. These participants often have a long-term interest in shaping the direction of the protocol and ensuring its success.

Factors that influence $ICHI Demand

• Governance and Voting Power: The ICHI token holders have the ability to participate in the governance process of the protocol. The demand for the ICHI token may be driven by individuals or entities seeking to acquire voting power and influence important decisions that shape the future of the protocol.

• Staking and Incentives: The ICHI protocol offers staking opportunities or provides incentives for token holders to participate in specific activities, such as providing liquidity or locking up their tokens. These incentives can drive demand for the ICHI token as users seek to earn rewards or additional tokens by engaging with the protocol.

$ICHI Distribution & Unlocks

It’s important to understand how the supply is being split up into different allocations and how these allocations will be distributed (vested or emitted).

The 10 million supply of $ICHI which is to be distributed over four years was allocated as follows:

• 70% to community (7M $ICHI)

This allocation is intended to encourage Liquidity Providers, community participation, engagement, and ownership within the ICHI ecosystem.

• 15% to purchasers (1.5M $ICHI)

These tokens are typically distributed to those who participate in token sales at launch.

• 15% to team (1.5M $ICHI)

This allocation is meant to incentivize and reward the team members who are actively involved in the development, operation, and growth of the ICHI protocol

Currently, according to Coingecko 67% (~6.7M) of $ICHI already in circulation, the continuous emission of the token is shown in the  Distribution Schedule below.

 1–4 Year Distribution Schedule

Note: The ICHI token is 100% fair launch. There is no initial development fund, no pre-mine, and no investor allocation. The reason for this mechanism is to maximize decentralization and community participation.

Feedback Loops

A tokenomics analysis is focused on how value flows through the system and how it interacts with different users/components of the protocol. Feedback loops are relevant since they may be positive or negative and thus have an outcome on the underlying value capture (be it on the protocol or token level).

ICHI incorporates several feedback loops within its protocol to promote stability, and efficiency, and incentivize participation. These feedback loops are designed to create a self-reinforcing system that benefits participants in the ecosystem. Here are some key feedback loops in the ICHI protocol:

Liquidity Feedback Loop

As liquidity providers deposit assets into ICHI Vaults, they earn yields through trading fees and other incentives (xICHI). This encourages more liquidity providers to participate, which increases the overall liquidity in the protocol. Higher liquidity, in turn, attracts more traders, generating increased trading volume and additional fees for liquidity providers. This feedback loop helps to enhance liquidity and trading activity within the protocol. Certainly, this feedback loop within the ICHI protocol can also go the other way. As the number of liquidity providers increases, competition among them may intensify. This increased competition could lead to a reduction in the fee share and potentially lower yields for individual liquidity providers.

If the incentives offered by the protocol become less attractive over time, it may result in a decrease in liquidity providers. This reduction in liquidity providers could impact the overall liquidity within the protocol and potentially lead to lower trading volumes and fees.

Staked Tokens Feedback loop

Staked tokens often come with governance rights, allowing token holders to participate in the decision-making processes of the protocol. This includes voting on proposals, protocol upgrades, and other governance matters. Staked tokens grant holders the ability to shape the direction and policies of the ICHI protocol.

Additionally, staked tokens contribute to the overall stability and performance of the protocol by providing liquidity and ensuring sufficient resources for its operations, thus maintaining a healthy level of liquidity. Moreover, the protocol receives revenue from activities related to staking and liquidity provision, and a portion of this revenue is utilized for rebalancing the pool, Rebalancing the pool helps the protocol to maintain the price ranges of the assets within the most profitable and desirable range and also for risk management

Observations/Thoughts

Firstly, as with any DeFi protocol, there is always a risk of smart contract vulnerabilities and security breaches. It's crucial for the ICHI team to continuously conduct thorough audits, regularly update and maintain the protocol to mitigate these risks and ensure the safety of user funds.

Additionally, liquidity management in the ICHI protocol presents potential issues, such as the risk of liquidity imbalances. Insufficient liquidity can result in higher slippage and lower trading volumes, affecting the user experience, while excessive liquidity may lead to underutilized funds and suboptimal capital allocation. To address this, Continuously monitoring and rebalancing liquidity pools and vaults in ICHI protocol serves the purpose of optimizing capital allocation, maintaining stability, managing risks, maximizing efficiency, adapting to market conditions, and ensuring community engagement and satisfaction. By regularly assessing and adjusting liquidity provisions, the protocol can enhance overall performance, provide reliable services, and foster a healthy ecosystem.

Furthermore, the concentration of liquidity in Vaults exposes them to market manipulation risks, particularly in lower-liquidity markets or during periods of high volatility. Liquidity providers should carefully consider the assets they deposit, assess associated risks, and diversify their exposure to mitigate these concerns.

Summary

The native token of the protocol is $ICHI, Token holders have voting rights and can participate in the governance of the protocol. xICHI is the staked token of $ICHI which is used for governance participation

Participants in the ICHI ecosystem, including liquidity providers, stakers, and token holders, have important roles. Liquidity providers contribute assets to the Vaults, earn fees, and benefit from the protocol's liquidity and trading volume. Stakers support the protocol's security, governance, and stability while potentially receiving rewards. Token holders actively participate in governance and decision-making processes, shaping the protocol's direction.

ICHI generates revenue through protocol fees and trading volume, benefiting liquidity providers, governance participants, and ecosystem contributors. The demand for the $ICHI token comes from investors, liquidity providers, and governance participants, driven by factors such as governance power, fee-sharing mechanisms, and staking incentives.

On a final note, ICHI is a protocol that focuses on creating sustainable liquidity through its Vaults, which combine single-token deposits with concentrated liquidity. Liquidity providers (LPs) deposit assets into the Vaults and earn yields. The Vaults are actively managed by ICHI to optimize LPs' positions and maximize efficiency.

If you’re interested in the condensed, need-to-know tokenomics information for ICHI including all the resources used for this article, check out the report on Tokenomics Hub https://tokenomicshub.xyz/ichi

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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https://tokenomicshub.xyz/goracle-network

Introduction

Liquidity in DeFi is frequently mercenary, even going so far as to border on cannibalistic.

According to leading blockchain data provider Nansen, more than one-third of liquidity providers stop providing liquidity after just 5 days, and half stop after 15 days, and sell their accrued tokens from emissions to the pool on the way out.

Essentially, retaining liquidity providers have been difficult in DeFi.

Liquidity mining incentives for the protocols/DAO’s pools have, so far, been able to mainly attract temporary liquidity.

This liquidity is literally waiting for incentives to dry up and run for the exits when these incentives are no longer lucrative. 

As a result, liquidity mining programs are frequently short-lived and result in significant downward spirals for the native token of the protocol/DAO.

Over time, teams realized this and pondered, "How can we capture liquidity in a way that is sustainable over long periods of time without diluting existing token holders and sending our token price into the abyss?"

Enter the leading DEX on the Optimism network, Velodrome Finance.

The protocol has pioneered a revolution in AMM design and sustainable liquidity. It aims to solve this colossal issue in DeFi and become the liquidity base layer of the Optimism ecosystem by improving and fixing the issues with the technology put forward by Andre Cronje’s Solidly.

Tokenomics

$VELO is the Velodrome protocol’s native token that is used to incentivize liquidity provision on the platform.

This token ($VELO) can then be locked for up to 4 years (the locking mechanism is akin to $veCRV, which you can read more about here) to receive $veVELO, which is the locked version of $VELO and brings with it the right to direct (govern) $VELO emissions.

This means that $veVELO holders can direct emissions to any liquidity pool of their choice.

And since $veVELO functions akin to $veCRV, as you get closer to your unlocking date, your $veVELO governance power gradually decreases as the lock reaches the expiry date. 

So, for example, if you locked $VELO tokens for 4 years, 2 years later, the governance power would have decayed by half, and as your tokens are unlocked, you have no governance power at all.

To maintain your governance power (stop it from decreasing), you need to relock your tokens every epoch (1 week) or at any other time to maintain/get back your previous levels of governance power.

Furthermore, $veVELO holders can receive their share (pro-rata) of trading fees generated by the pool they direct $VELO emissions to.

You may be wondering why anyone in their right mind would lock $VELO, perhaps for many years, solely for governance/voting power over which liquidity pool $VELO tokens are emitted to.

Well, by locking $VELO for $veVELO, you are eligible to receive bribes from external protocols/DAOs if you direct emissions to their liquidity pools, and you will also be eligible to receive your share of trading fees generated by that pool. 

This process is elucidated in the diagram below.

And why would DAOs/protocols bribe $veVELO holders to direct emissions to their pool?

It's simple, really.

It allows DAOs/protocols to deepen their token’s liquidity on Velodrome, as more $VELO emissions to their token’s pool means more liquidity provision for it (due to a higher yield).

Do not worry if you do not yet comprehend the significance of deep liquidity; this article will provide you with the necessary knowledge.

Furthermore, by incentivizing $veVELO to vote on their pool (to direct emissions to it), DAOs/protocols are also aligning $VELO emissions with liquidity as well as fees generated from those same pools.

This way, the ‘highest bribed’ pool wouldn't always capture all the emissions.

Therefore, this fixes the broken vote-escrowed gauge system where unproductive pools frequently receive the majority of emissions; to learn more about this, we recommend reading this.

Now, back to the $VELO token.

The token follows a vote-escrowed token model that is similar to Curve’s, as we mentioned above.

There are, however, two nuances you should be aware of.

First, $veVELO is contained within an ERC-721 NFT, allowing it to trade on secondary markets like Opensea, allowing lockers of $VELO to exit their position seamlessly without selling their tokens on the open market (and, subsequently, lowering $VELO’s price), as opposed to other vote-escorwed models like $veCRV, where the $CRV locker is in it for the duration of his lock and cannot exit it in any way.

This comes with unintended consequences, namely, the token locker feeling imprisoned during the duration of his lock, which may result in the locker not participating in governance (becoming apathetic towards it), proposing aimless or futile governance proposals, and overall contributing to governance in a meaningless manner, taking away from the decentralization of the DAO.

Consequently, this can result in governance fiascos or, worse yet, the failure of many DAOs that do not have a ‘raqe quit’ option to exit locked positions like $veVELO does through a secondary marketplace.

The other (second) difference is that the NFT also receives additional locked $VELO (similar to rebases/3, 3) every 7 days, which amounts to 15-25% of the NFT’s $veVELO position.

The additional locked tokens (rebases) are added to the NFT proportionate to how much $VELO is being emitted to liquidity pools. This is so that the $VELO locker’s voting/governance power dilution is hindered. More on this aspect later in the article.

AMM Design

As you probably already know by now, AMMs are an integral part of DeFi.

Uniswap’s constant product AMM was optimized to allow for unstable/volatile cryptos to be exchanged at a low swap fee of 0.3%, while Curve’s stable invariant AMM was optimized to allow for stablecoins and other pegged assets to be exchanged at even lower 0.04% swap fees (and even lower slippage).

Velodrome Finance took the best of both of these ideas and engineered a DEX with a dual AMM design. The protocol has one automated market maker (AMM) for pairs that are correlated (stablecoin pairs such as DAI/USDC and synthetic/derivative tokens such as stETH/ETH) and the other automated market maker for pairs that are uncorrelated (pairs such as ETH/DAI or BTC/USDC), all the while achieving some of the lowest DEX fees in DeFi, ranging from 0.02-0.05% per trade/swap.

Having monumentally low fees like these can give Velodrome an edge against other DEXes, encouraging traders and market participants to route their activities through Velodrome and hence generating massive amounts of swap fee revenue for token lockers.

Distribution & Unlocks

The distribution of $VELO at inception is based on the initial supply (400 million tokens). Below is the distribution of these tokens.

60% of the community rewards are distributed as follows:

-27% to $WEVE holders
-18% to $OP network users
-15% to cross-chain DeFi users (Curve, Convex, TreasureDAO, Platypus, Redacted Cartel, and Eminence Finance users).

This allocation is akin to an airdrop.

In essence, this allocation is aimed at giving governance power over initial $VELO emissions to users familiar with ve(3,3) and some other protocols with good communities to get the Velodrome economy kick-started.

24% of the partner protocol/DAO rewards are distributed as follows:

-6% for grants to fellow protocols and DAOs in the ecosystem.
-18% for attracting and engaging 10-15 protocols most likely to contribute to Velodrome and Optimism's long-term success.

10% of the distribution is going to the Velodrome team.

5% of the distribution is going to the Optimism team.

4% of the distribution is going to liquidity providers in the $VELO/USDC pool (to deepen $VELO’s liquidity).

As for the emissions of the $VELO token to liquidity pools, we can see the ongoing emission schedule in the image above.

Weekly emissions to liquidity pools start at 15 million $VELO (3.75% of the initial supply) and decrease at a rate of 1% per week. 97% of these emissions will be going to liquidity pools (based on votes), and the other 3% will be going to the team’s wallet.

There is currently no supply cap for $VELO. This is due to the fact that trading fees, as we have learned, go directly to $VELO lockers, and the only other incentive to provide liquidity is $VELO emissions. And if these run out, liquidity on the platform will most likely be nonexistent. This aspect will be explored later in the article.

Considering 3% of ongoing emissions and 10% of the emission schedule go to the team, it is prudent that we look at the team's vesting compensation breakdown below.

-The team will lock 35% of its initial allocation in the form of $veVELO and will use their voting power to vote for $VELO liquidity pools (to deepen liquidity) in perpetuity. 

-38.8% of the team’s initial allocation has a cliff of 6 months. After that, a vest linearly for 6 months. Ex- ⅙ unlocked in January, ⅙ in February, and so on.

-18% of the team’s initial allocation has a cliff for 12 months. After that, a vest linearly for 12 months.

-8.2% of the team’s initial allocation will be unlocked from the inception of the protocol and will be added to the treasury. The use of these tokens will be specified by the core team.

Out of the 3% of ongoing emissions streaming to the team’s wallet, 0.6% will be paid to team members. The other 2.4% of ongoing emissions are to be used for discretionary purposes, such as overhead costs, other expenses, and additional locking of $VELO in perpetuity.

Overall, it looks like the team has constructed a solid distribution plan, ensuring community engagement is present and incentives between them and other projects are aligned. This will aid in the formation of connections that will be beneficial to Velodrome and the community in the long run.

The Velodrome team also has a solid runway, and a percentage of all the emissions streaming to them will ensure they are well-incentivized to grow the protocol and ship out new features and products. However, a percentage of emissions streaming to the team in perpetuity introduces a point of centralization - as these tokens do not accrue to a DAO-controlled treasury.

Another negative about the emission plan is that the emissions for liquidity providers start off very high; this, in the early stages of the protocol, can result in heavy selling pressure on the $VELO token and would require significant demand to keep emissions off the market, something we have explored earlier in the article.

Let's finish off this section by looking at the $VELO token holder segments.

Source: Optimistic Etherscan

As seen in the image above, most of the $VELO tokens are locked as $veVELO, more specifically 73% of the total $VELO tokens.

Of these $veVELO tokens (locked $VELO tokens), governance power (over $VELO emission) is sufficiently distributed over 7380 wallets, however, the top 15 $veVELO holders ($VELO lockers) control 47.52% of governance power over $VELO emissions at the time of writing, introducing risks of centralization and thus censorship resistance and possible subjection of the $VELO token to market manipulation risks and thus even being called a security by the SEC.

The data referenced above can be found here.

Value Creation

As we have already covered in the “AMM Design” section, Velodrome offers a way for traders to trade correlated tokens (like DAI/USDT) and uncorrelated token pairs (like BTC/ETH) at very low fees that range from 0.02-0.05%, and by having mechanisms in place to attract liquidity providers, low slippage for traders too. 

Additionally, Velodrome houses most of the liquidity on the Optimism chain, as seen below.

Source: DefiLlama

This coupled with the low fees and slippage offered to traders on Optimism, makes Velodrome a very attractive DEX for traders to trade on.

Apart from creating value for traders, though, Velodrome’s main goal is to create value for DAOs/protocols requiring liquidity.

But for this, Velodrome needs to be capital efficient. 

If protocols/DAOs can bribe lockers and receive more $VELO emissions in dollars than what they have paid in dollars to bribe (acquiring more capital with fewer capital costs, i.e., capital efficiency), there will be a constant desire for protocols/DAOs to bribe lockers to direct emissions to their desired pool.

The downside of this for the DAO/protocol is that they need to place bribes each week (epoch) that they need liquidity and will also not be able to accrue trading fees from their pool since they’re not directing emissions to it (they don't hold $veVELO). 

To counter this, DAOs/protocols can accumulate $VELO and lock it in perpetuity. 

This way, they’re constantly directing $VELO emissions (every week) to their respective pools - all this while receiving trading fees from their pool.

The latter (locking $VELO in perpetuity themselves) is the most optimal option for DAOs/protocols looking to acquire liquidity, as locking is a one-time cost (as opposed to bribing each week) and can thus secure emissions to their pool in perpetuity.

Furthermore, it allows the DAO/protocol to capture their share of swap fees generated by their pool, allowing them to earn a yield/passive income.

Whichever option the protocol/DAO chooses to deepen their token’s liquidity (bribing or locking themselves), $VELO lockers benefit (either from the bribes or the appreciation of the underlying $VELO tokens they locked, as the DAO/protocol has bought them off the open market).

How will Velodrome be capital efficient, though, you ask?

1) Not all $VELO will be locked for the same time period, so each locker will have sufficient governance power to be able to direct more $VELO to the desired pool than the actual locked amount they have. 

2) Not all locked $VELO will be locked in perpetuity (max locked), this further ensures capital efficiency will always be present.

3) DAOs/protocols with locked $VELO will always vote on their pools (regardless of bribes on pools and swap fees generated by them), i.e., these lockers (the DAOs and protocols) are indifferent to external factors (such as bribes and fees), further enhancing the capital-efficient nature of Velodrome.

The only exception to the aforementioned (where capital efficiency isn’t present) is when all the $VELO in circulation is locked in perpetuity and for the maximum lock time of 4 years.

In that case, $1 of bribes will result in $1 of incentives/emissions.

Even if $1 in incentives results in $1 in bribes (highly unlikely), protocols and DAOs needing liquidity will still have a turnkey solution for their needs. 

In other words, Velodrome will probably still be able to interest most liquidity providers in the Optimism ecosystem.

Since not all $VELO will be locked (or locked for the maximum duration), and some votes will be indifferent with regards to the bribes (DAOs/protocols with locked $VELO will always vote for their pool), capital efficiency will almost certainly be present.

This opens up a convenient way for DAOs/protocols to attract liquidity in a capital-efficient, sustainable way, even when the locked percentage of $VELO approaches 100%.

Source: Velodrome Finance

As you can see in the image above, capital efficiency is present to a high extent, wherein on average, DAOs/protocols bribing on Velodrome get 2.1 times more (in $VELO emissions denominated in dollars) than the bribed amount (in any token denominated in USD). 

This means that every dollar used to bribe $veVELO holders ($VELO lockers) results in 2.1 dollars in $VELO emissions received to that liquidity pool.

Talk about capital efficiency.

This is the primary reason why the Velodrome wars (akin to the Curve wars) are heating up and are currently valued at a whopping 57 million USD at the time of writing, as seen below, and why a ton of DAOs and protocols are bribing or locking $VELO tokens to drive emissions to their pools.

We will explore the details of this later in the article.

Source: Defi Wars

Value Capture

Until now, we've talked about the value created for traders and even DAOs/protocols looking to acquire or deepen their token's liquidity.

But we haven't yet looked at who captures the majority of the value from the Velodrome protocol.

Hint: you probably already know this.

Yes, it is in fact $veVELO holders ($VELO lockers).

Looking at the image below is a good way to visualize the inherent utility (direction over $VELO emissions) and the value accrual mechanism (bribes and swap fees) of the $veVELO (locked $VELO).

We can clearly see that the beneficiaries of DAOs/protocols placing bribes and traders utilizing Velodrome’s liquidity are $veVELO holders ($VELO lockers), as locking $VELO for $veVELO, as previously mentioned, grants the rights (governance) over $VELO emissions, which in itself is governance as value accrual, as this allows an opportunity to accrue your share bribes and swap fees for the liquidity pool voted on.

Another utility of the $VELO token is the ability to provide liquidity for it. 

Currently, as seen above, some $VELO liquidity pools on Velodrome pay as high as 140% APR, which is not bad at all.

The $VELO token is also integrated into many DeFi protocols such as Overnight, dHedge, Tarot, Reaper Farm, OpenX, Beefy, 1Inch, and others, unlocking a myriad of utilities for it.

As seen above, currently, on average, $veVELO holders ($VELO lockers) yield a handsome 48.64% APR, with around 82% of that yield (40% APR) being real yield (i.e., yield not denominated in $VELO; no rebases, only yield from fees and bribes).

Compared to other protocols, Velodrome has some of the highest real yields paid to token lockers in DeFi right now.

The Velodrome protocol, on the other hand, does not accrue (capture) any value directly at the time of writing.

Indirectly, however, the protocol captures some value through the $veVELO governance power amassed through treasury allocations and the team’s locked allocations, subsequently generating a yield through voting on the main $VELO liquidity pool, VELO/USDC, capturing its share of the bribes and swap fees from the pool.

Demand Drivers

The Velodrome team currently runs an incentivisation program called Tour de OP funded by Optimism ($OP) grants wherein new $VELO lockers, DAOs and protocols bribing receive rebates or additional incentives in $OP tokens, as seen below.

Source: Dune Analytics

The image below elucidates the details of this incentive program. You can read more details about the program, its implications, and its outcomes here and here.

In a nutshell, this program has been a huge success, helping drive demand for the $VELO token in the short term and subsequently emissions of the market, heavily increasing the amount of bribed pools (the red bars are after the program’s inception), as seen below.

Source: Velodrome Finance

Soon after this airdrop program halts, though, we may not see $VELO being locked at the same rate as seen below, and the forthcoming supply of $VELO would need to be met with demand for the cash flow generated by locked $VELO. 

Source: Dune Analytics

The cash flow generated would include: bribes from external protocols, swap/trading fees, and rebases.

And as we saw previously in the value capture section, these elements all come together to offer a very lucrative cash flow model to users locking $VELO – 48.64% APR at the time of writing.

One of the biggest demand drivers for the $VELO token is the sheer number of DAOs and protocols accumulating and locking it.

As seen below, there is a multitude of large DAOs and protocols such as Optimism, Beefy, Inverse, Millennium Club, Lyra, Alchemix, 200 Keys, Synthetix, Liquity, Thales, Frax, Hundred, Redacted Cartel, Perpetual Protocol, Tarot, MakerDAO, Angle, QiDAO, One Ring, and Hop currently holding/accumulating $veVELO (locking $VELO) and driving $VELO emissions to their token’s liquidity pool.

Source: Defi Wars

The crazy part?

This isn’t even the full picture of the extent to which DAOs and protocols are accumulating $veVELO (locking $VELO), as there are many more not mentioned below (the list above is only of the top accumulators/holders of $veVELO). You can find the extended list here.

It is also worth noting that many DAOs and protocols are also bribing existing $veVELO holders ($VELO lockers) on a weekly basis to drive emissions to their pools – you can find the specifics here.

Let’s also look at the traction the protocol is gaining.

Source: DefiLlama

As seen above, the Velodrome protocol has been gaining traction in terms of active users of the platforms and volume generated by trading.

Source: DefiLlama

It has also seen traction regarding new users onboarded to the Velodrome ecosystem.

As seen above, the traction the protocol is gaining is also clearly helping drive demand for the $VELO token.

Lastly, since Velodrome is deployed on Optimism, it has a direct correlation to the chain’s adoption, since after all, users on the chain need a DEX to trade on and yield farm on, and DAOs/protocols deploying on Optimism need a venue to deploy and deepen liquidity – something that we know Velodrome is very well suited to do.

Looking at the images below will give us a good understanding of Optimism’s adoption and user statistics. 

Source: Dune Analytics

As seen above, there has been an increase in the monthly usage of the network – and at its highs in May, Optimism even had more usage than Ethereum itself (for further data, refer to this).

Source: Dune Analytics

We can also look at the weekly and daily statistics in the image above, which clearly show an uptrend in the daily, weekly, and even monthly transactions on the chain.

Source: Dune Analytics

In the image above, another trend is shown, wherein Optimism and Arbitrum (the two biggest L2s on Ethereum by TVL) are starting to capture the majority of transactions as compared to the base layer, Ethereum, which further shows the adoption of Optimism and L2s, in general, are gaining – something that could be highly beneficial to the Velodrome protocol.

Furthermore, Optimism’s recent Bedrock upgrade has significantly improved the user experience on the chain, lowering the fees and deposit times on the chain – contributing to around half a million in gas costs saved post-upgrade, as seen below, which incentivizes users to bridge funds over to Optimism and interact with its ecosystem, and by extension, Velodrome.

Source: Dune Analytics

All these aforementioned factors – the Tour De OP program, the insatiable desire for DAOs and protocols to acquire capital efficient liquidity (and thus locking $VELO or bribing), the protocol’s traction, and Optimism’s adoption combined can help drive demand for the $VELO token.

Feedback Loops

We can also see the feedback loops at work that the protocol and token are subjected to.

It is important to note that both of the feedback loops analyzed below are both positive and completely hypothetical (so there is no guarantee that they will materialize).

The positive feedback loop above can materialize if the $VELO price drops substantially or incrementally over time.

A situation as seen above can be highly detrimental to the protocol and can even result in the $VELO token entering a death spiral.

For this reason, it is important that the bribe and swap fee yield be sustained or increased, something that will probably happen if Velodrome maintains its place as the biggest DEX on Velodrome.

The other feedback loop shown above is a flywheel that can affect $VELO’s price to the upside, therefore being a highly beneficial one to the protocol, as seen above.

Observations/Thoughts

1) As seen below, the amount of $VELO tokens locked for $veVELO and the amount of $veVELO relocked to maintain/increase governance power (explained at the start of the tokenomics section) is slowly decreasing with emissions; this is normal and expected (you can’t lock supply that hasn’t reached the market), but the portion of emissions being locked for $veVELO is decreasing from previous months.

Source: Dune Analytics

While the rate at which $VELO tokens are being locked for $veVELO and $veVELO tokens are being relocked is relatively good in comparison to emissions, it is significantly lower than the levels seen many months ago. 

While we cannot ascertain the cause of this, it may be attributed to the fact that external incentives (not cash flow or yield generated) to lock $VELO tokens for $veVELO, like the $OP rebates and bribe matching program, have scaled down significantly (around 65%), and the amount of $OP tokens in the treasury has been heavily depleted.

While the team is applying for another grant, the results of it cannot be predicted, and external incentives cannot fuel incentivization to lock $VELO for $veVELO and relock $veVELO forever. 

So it is indeed possible that previous levels of locking and relocking won’t be achieved again due to this, which may consequently lead to more tokens hitting the market and more downside (sell pressure) for the $VELO token. 

A lack of external incentives, however, isn’t an existential threat to the protocol, as lockers are still compensated well through the real yield generated by the protocol (fees and bribes), as mentioned previously in the article.

Further, if bribe matching (due to a depletion of $OP tokens) stops, it may decrease the capital-efficient nature of Velodrome, perhaps decreasing its attractiveness for DAOs/protocols looking to acquire capital-efficient liquidity, but it will still retain its ability to be capital efficient on average due to reasons previously explained in the Value Creation section.

It is also important to note that DAOs/protocols can always acquire capital-efficient liquidity through means other than bribing, such as locking $VELO for $veVELO themselves. 

Overall, these external incentives do not put any selling pressure on the $VELO token, only on the $OP token, and these external incentives are merely a cold start mechanism for the protocol to gain adoption without putting extra, unnecessary potential selling pressure on the native $VELO token.

2) As seen below, many of the biggest DeFi protocols hyperemit their native token in relation to the revenue they generate.

Source: TokenomicsDAO

Velodrome, on the other hand, fares well in this regard as compared to the protocols above, requiring 3.2 dollars in $VELO emitted for every dollar in revenue generated, as seen below.

Source: Levi Saur

While this is not sustainable in the long run and perhaps puts selling pressure on the $VELO token in the short run, the incentivization program running currently (Tour de OP) negates the selling pressure to an extent as it gives external incentives to lock the $VELO token.

But as we previously mentioned, the program cannot run forever, and after it comes to an end, these concerns may materialize. 

However, as most of the $VELO supply has been locked for $veVELO for a long time, it gives the protocol enough time to get back on a sustainable path before these concerns materialize.

Also, as seen in the same image above, Velodrome fares up well against Thena, a DEX with similar tokenomics but on BSC, so not exactly a competitor, in this regard, requiring fewer emissions to generate every dollar in revenue, but fares up very poorly against Equalizer (which, by the way, we did an AMA with – feel free to check that out here), also a DEX with similar tokenomics but on the Fantom chain, so again, not exactly a competitor, which is significantly better in this regard (two times better almost–needing two times fewer emissions to generate every dollar in revenue).

3) The vast majority of other DEXs and liquidity-as-a-service platforms incentivizing liquidity provision with emissions (in their native token) will fail in the long run since their emission plans have a supply cap and fees are never enough to retain liquidity providers.

This, in the long run, will prove to be the death knell of many of these projects. 

Velodrome, on the other hand, does not suffer from the same issue because of the way they structure their tokenomics. 

Apart from the demand side of things that we’ve already covered, $VELO emissions to liquidity pools decay over time but never fully run out. 

This ensures that there is always an incentive to provide liquidity on Velodrome.

But the hope is that the ever-decreasing/decaying emissions will become more valuable over time so as to not lose liquidity providers on the platform (retain them).

But this is always easier said than done, and due to unforeseeable market conditions/innovations/changes in narrative, the token price may not necessarily appreciate the decreasing emissions. 

If this concern materializes, the token price could enter a death spiral, as explained previously in the feedback loops section.

One potential mitigation of the aforementioned could be the forthcoming implementation of a “FED”, i.e., monetary policy controlled by $veVELO holders ($VELO stakers).

You can read more about this implementation here, but the gist of it is:

Changing $VELO’s monetary policies dynamically (decreasing, increasing, or maintaining current emissions) based on exogenous factors such as economic conditions or ecosystem growth while ensuring only long-term stakeholders ($VELO lockers, i.e., $veVELO holders) can have a say on the following.

4) While on the topic of new implementations, the Velodrome protocol will soon undergo a migration to a new version (v2). 

You can get into the nitty gritty of this here and here, but let me save you some time by simply summarizing the significant upgrades to the protocol.

• Better UI/UX

• Custom pool fees

• Yield optimizers for veNFTs (to generate the highest ROI through voting optimally)

• Velo FED (which we have touched on above)

• Improved governance and subsequent capabilities

These implementations/changes have the potential to better the protocol’s tokenomics and user adoption, which may consequently drive demand for the $VELO token.

5) Optimism is controlled by a 4-5 multi-sig wallet.

What does this mean for Velodrome?

Since Velodrome is deployed on Optimism, Velodrome’s treasury funds and all user funds in the protocol (locked $VELO, liquidity pool deposits, etc.) can be censored, frozen, or even taken away by any 4 people on that multi-sig. 

Even an arbitrary amount of $VELO can be minted and sold into liquidity pools, effectively destroying the protocol and the $VELO token.

While this isn’t in Optimism’s best interests, nor is it legal, it is still a possibility, but the chances of it occurring are marginal – close to zero almost.

But then again, crazier things have happened in DeFi, and centralized projects like Optimism will do anything if asked to comply with a court order.

6) As previously mentioned, $veVELO holders ($VELO lockers) get 15-25% of their position rebased, so their dilution levels are hindered by that percentage (since there are $VELO tokens hitting/emitted to liquidity pools).

While that may seem like a good mechanism to incentivize locking, there is more to it than that. 

We highly recommend giving this article a read because it explains the ramifications of such a mechanism, but we will be summarizing the important findings of the article below. 

• The mechanism centralizes voting power and doesn’t allow new participants (DAOs/protocols) to enter the economy and gather a substantial amount of voting power (as the barrier to entry is made much higher).

• The mechanism lowers aggregate demand for the token (in this case, $VELO) by eliminating the need for projects to continually accumulate more of the token as they’re protected by this mechanism.

While this analysis is subjective and these mechanisms haven’t stood the test of time, it is hard to draw conclusions as to their ineffectiveness or effectiveness.

And it’s important to note that Velodrome’s rebasing mechanism is only 15-25%, limiting the potential consequences of the aforementioned. 

Other similar protocols like Equalizer (which we’ve touched on before) and Solidly have different rebasing rates (0% and 100%, respectively), so we’ll have to wait and see to determine what works best.

Only time will tell.

Closing Thoughts/Summary

As crypto gains mainstream adoption and more TVL flows into DeFi, one of the most important things will be on-chain liquidity. 

Therefore, for a protocol/DAO, securing liquidity for its native token will be crucial. 

$veVELO is tokenizing liquidity and allows for all projects building on Optimism to have turnkey solutions to attract sustainable and capital-efficient liquidity.

The Velodrome protocol is also relatively new, so the tokenomics are novel and have not stood the test of time yet, so it is still a very speculative project.

Furthermore, the $VELO emissions to liquidity pools are still very high, and usage of the protocol is, to an extent, linked to the Tour de OP program, which cannot last forever.

So, as the program winds down, the forthcoming supply of $VELO will need to be matched with a significant incentive to lock it purely because of the value accrual mechanism for $VELO lockers. 

If the protocol can generate a similar amount of value for lockers as it does now and Optimism continues to gain adoption at the levels it is currently, I have no doubt that future emissions will be locked up for the foreseeable future and Velodrome will have a bright future.

We recently hosted an AMA with Bojan & Sam of Liquity Protocol. Liquity is a decentralized stablecoin issuer that allows users to open collateralized debt positions (CDPs) by minting $LUSD stablecoins against their $ETH collateral.

Read our tokenomics analysis here:

Introduction

For our regular readers, Andre Cronje is a familiar name, and this article aims to shed light on his notable project, Yearn Finance, particularly following the significant developments since the adoption of the YIP-65 governance proposal at the close of 2021. This article is timely in exploring the recent evolutions in the largest yield aggregator in the decentralized finance (DeFi) space. The proposal introduced veYFI, following a veToken model, a topic we've touched on previously, but the revamped tokenomics of Yearn Finance merit a deeper exploration. Before delving into those specifics, it's essential to understand what a yield aggregator is, Yearn Finance's role in this DeFi sector, and the dynamics surrounding the $YFI token.

Yearn Finance, with a total value locked (TVL) nearing $500 million according to DeFi Llama, is the leading yield aggregator in the DeFi landscape. But what exactly is a yield aggregator? Picture it as a digital financial advisor, utilizing 'vaults' filled with cryptocurrency assets to engage in lending, borrowing, and liquidity provision across various protocols, aiming to maximize investor yields. Yield aggregators, like Yearn, automate numerous yield-earning processes across different platforms, simplifying the user experience. Users only need to deposit their assets into Yearn Vaults, leaving the complex tasks to the platform.

Yearn Vaults employ advanced algorithms to optimize returns and seamlessly integrate with prominent DeFi applications such as Aave, Compound, Curve, and Uniswap. While Yearn Finance continually evolves, its pioneering approach to vaults, sophisticated yield optimization algorithms, and effortless integration with existing DeFi platforms solidify its position as a cornerstone in the DeFi ecosystem.

$YEARN Tokenomics

Vaults are a cornerstone feature of Yearn Finance, functioning as collective pools of assets that the protocol utilizes to automatically generate yields by identifying lucrative opportunities in the market. This automation allows users to gain access to high-yield opportunities passively, without requiring extensive technical knowledge.

Yearn Finance's operational framework and governance are primarily managed by the holders of its native token, $YFI. The governance process is structured in a two-step manner: initial off-chain proposals are followed by on-chain implementations, which are executed via multi-signature wallets. For Yearn Finance, a consensus of 6 out of 9 wallet signatories is necessary to enact changes within the protocol.

Returning to the topic of Yearn Vaults, which may still be a bit unclear, imagine a vault as a kind of savings account. In this account, you can deposit your cryptocurrency assets. Once deposited, these assets are strategically routed through various investment strategies within the DeFi ecosystem, all with the goal of maximizing yield. Essentially, Yearn Vaults simplify and amplify the process of earning returns on crypto assets by leveraging the diverse opportunities available in the DeFi space.

Much like traditional financial institutions, the Yearn Finance protocol charges fees for managing assets on behalf of its users. There are two primary types of fees associated with Yearn Vaults:

1. Performance Fee: This fee is only applied to the profits generated and is paid to the protocol when a strategy is successfully concluded. It's a way for Yearn to earn from the successful management of assets, aligning its interests with those of the users.

2. Management Fee: This fee is levied on the total assets deposited in the vaults over a year. It is implemented through the minting of new vault shares, which effectively results in the dilution of existing vault participants' shares.

These fees are not static and can vary over time, reflecting a dynamic fee structure. Users can always check the current fee rates at yearn.watch. While anyone can deposit into the strategies (vaults), there's a cap on the amount that can be deposited. This cap is in place to prevent over-allocation to strategies that may not yield expected returns due to excessive fund sizes, as yields can diminish with larger vaults.

Upon depositing assets in Yearn Vaults, users receive yVault tokens, representing their share in the vault. These tokens can be thought of as proof of your deposit. As the vault generates yield, the value of yVault tokens increases, reflecting the growth of the underlying assets in the vault. When users withdraw their assets, these yVault tokens are burned.

A recent addition is the "Vault Factory" feature, enabling users to create their own Yearn Vaults and yield strategies. This feature, however, is more complex and would need a detailed explanation, which users can find on the Vault Factory User Interface.

Regarding the $YFI token, its primary role is in governance. Holders of $YFI have voting rights on governance proposals, influencing the direction of the Yearn Finance platform. $YFI was initially distributed in 2020 through a fair launch, where tokens were sold to team members or investors without pre-allocations, ensuring equal purchase opportunities for the public.

With the introduction of $veYFI, governance power transitioned from $YFI to $veYFI. $veYFI, which emerged from YIP-56, includes a Buyback and Build feature. Here, users lock $YFI tokens for a certain period (1 week to 4 years) and receive $veYFI in return. This token allows users to boost vault rewards and vote on the allocation of bought-back $YFI. Thus, $YFI also functions as a Yield Boost Token. Unlike $YFI, $veYFI is non-transferable and carries governance power. While users can exit the locking period early, unlike veCRV, they must pay a penalty fee, which can be as high as 75% of the locked amount and decreases over time according to a specific Penalty Formula.

Exit penalty fees accrue over time and are distributed to the $veYFI tokens holders still within the locking terms, thus rewarding the lockers in the ecosystem.

Ecosystem Participants

The Yearn Finance ecosystem comprises three key types of participants, each playing a distinct role:

1. Yearn Users: These individuals represent the most general participant category in the Yearn ecosystem. Their primary goal is to maximize the yield on their cryptocurrency assets. These users typically interact with the protocol through Yearn Vaults by depositing their assets and in return, receiving yvTokens (Yearn version tokens). This group is primarily driven by financial incentives.

2. $veYFI Holders: This group comprises users who have staked their standard $YFI tokens. $veYFI holders represent a more specialized category of Yearn users actively participating in the protocol’s governance. They exercise their voting rights on various governance proposals. Compared to general users, $veYFI holders are often more aligned with the protocol's mission, as they have a vested interest (or "skin in the game") through their locked $YFI, which is converted into $veYFI. This commitment incentivizes them to make decisions that benefit the protocol and positively impact the $YFI price. Besides governance participation, these users are motivated by financial incentives, as locking their YFI can increase yields.

3. Yearn Treasury: The Yearn Treasury is a vital component of the protocol, acting as an active participant in the ecosystem. The Treasury is involved in active asset management, deploying assets across other protocols to optimize yield and executing buybacks in the "Buyback And Build Yearn" (BABY) program.

It's also important to highlight the evolving nature of the protocol's engagement within the DeFi space. Initially, Yearn Finance's growth was predominantly fueled by individual users. However, there's been a noticeable shift towards greater collaboration with other protocols and DeFi entities. This trend gained momentum following the introduction of the Yearn Partnership Program in 2021, signaling a strategic expansion of Yearn's interactions and collaborations within the broader DeFi community.

Protocol Components

Yearn Finance, a complex and multifaceted protocol in the DeFi space, consists of several integral components:

1. Yearn Treasury: This is the financial backbone of the protocol, providing funding for the core team's activities. The core team is responsible for contributing to Yearn Finance through open-source development and enhancements to the protocol. The Treasury's role is crucial in ensuring that the protocol continues to evolve and improve, maintaining its competitiveness and functionality in the DeFi landscape.

2. Yearn Products: These are the services and tools offered by the protocol to its users. Key elements of Yearn Products include:

   • Vaults: As previously discussed, Vaults are the central feature of Yearn Finance. They are pools where users deposit their crypto assets for yield optimization across various strategies and DeFi protocols.

   • yCRV: This is a specialized yVault dedicated to the Curve Finance (CRV) ecosystem. yCRV allows users to engage specifically with CRV-related strategies, leveraging the opportunities within the Curve Finance space.

   • yBribe: This feature enables users to monetize their governance power. Users can effectively sell their votes to the highest bidder by voting in favor of the briber’s gauge and subsequently claiming a reward. This process, often referred to as "bribing," is a unique aspect of decentralized governance, allowing users to leverage their voting power for personal gain while influencing protocol decisions.

3. Vault Gauges: In this component, users stake their yVault tokens in a gauge to earn YFI rewards. These gauges play a crucial role in determining the distribution of rewards within the Yearn ecosystem. By staking in a gauge, users vote on which vaults should receive rewards, effectively guiding the allocation of resources and incentives across different strategies. This mechanism not only incentivizes participation in the Yearn ecosystem but also fosters a dynamic and user-driven approach to reward distribution.

Each of these components plays a vital role in the functionality and success of Yearn Finance, collectively contributing to its status as a leading platform in the DeFi space. Through a combination of innovative products and governance mechanisms, Yearn Finance has established a comprehensive and user-centric ecosystem that caters to a wide range of needs and preferences in the DeFi community.

Value Creation

Yearn Finance's approach to value creation is centered around addressing the challenge of suboptimal yield aggregation in the decentralized finance (DeFi) sector. Value creation in this context is about solving specific problems for users, which in Yearn's case, is maximizing returns from yield farming.

1. Automated Yield Farming via yVaults: The primary means of value creation in Yearn Finance is through its yVaults. These are automated yield farming strategies designed to optimize returns for users. By pooling assets and employing sophisticated strategies, yVaults provide a more efficient way for users to earn yield across various asset classes and risk profiles. With over 35 yVaults in operation, Yearn offers a wide range of options for users to choose from, each tailored to different needs and investment preferences.

2. Role of Strategists: Yearn Finance employs individuals, known as "Strategists," who continually identify and implement the most profitable yield farming strategies across the DeFi landscape. These strategists propose new strategies, which are then subject to approval by veYFI holders. This ensures that the strategies align with the community's interests and the protocol's long-term goals.

3. Yearn Partnership Program: Another key aspect of value creation stems from the Yearn Partnership Program. This initiative enables Yearn Finance to collaborate with other DeFi protocols, such as Alchemix, to integrate $YFI and yVaults into their offerings. The program has attracted over 30 protocols, expanding Yearn's value proposition beyond individual users to larger, more institutional players in the DeFi market.

Through these mechanisms, Yearn Finance solves a significant problem in DeFi and creates substantial value for a diverse range of participants, from individual investors to larger institutional entities. Integrating automated strategies, community-driven governance, and strategic partnerships positions Yearn as a key player in optimizing yield aggregation in the DeFi ecosystem.

Overall Goal

The primary objective of Yearn Finance is to seek and deliver the highest possible yield from various decentralized finance (DeFi) products to its users. This goal is particularly significant for those who may not have the expertise or resources to manage multiple yield-generating strategies independently. By simplifying and automating the process of yield farming, Yearn Finance provides an accessible platform for users to optimize their earnings from DeFi investments without the need for in-depth knowledge or constant management of their assets. This approach democratizes access to advanced yield strategies, making high returns in the DeFi space more attainable for a broader range of investors.

Value Capture

This pertains to how the protocol retains the value it generates. Fundamentally, if there's value creation, it must be directed somewhere (preferably to where the protocol considers most effective). The concept of value capture can be segmented into two parts: (1) value accumulation by the protocol itself, and (2) value accumulation by the token.

Value Accrual to Protocol

The protocol accrues value through two primary methods:

Revenue from Fees: Yearn generates significant income through a 2% management fee and a 10% performance fee on the yields from its yVaults, which are directed to its treasury. This is Yearn's revenue's main source, amounting to over $65 million annually.

Buyback and Build Yearn (BABY) Strategy: A portion of the funds in Yearn's treasury is used to repurchase $YFI tokens, which are then held in the treasury. This strategy redistributes value to $YFI token holders and ensures that the treasury maintains sufficient reserves for further development.

With the implementation of YIP-56, Yearn transitioned from a staking system, where all fee revenues were distributed to stakeholders, to the aforementioned buyback system. This new system allocates a portion of the revenue to repurchase $YFI tokens.

Consequently, the treasury of Yearn now experiences growth in two ways: (1) an increase in size, as a quantity of $YFI tokens are now accumulated in the treasury, contrasting the previous practice where they were distributed to stakers, and (2) an enhancement in value, as the buyback of $YFI tokens is anticipated to lead to a rise in their market price.

Value Accrual to Token

Value accumulation for the token happens in several ways:

Buyback and Build Yearn (BABY) Strategy: As previously discussed, this strategy also benefits the token directly. By conducting buybacks, Yearn effectively reduces the circulating supply of $YFI, enhancing its value.

$veYFI Gauges: Holders of $YFI can lock their tokens in non-transferable $veYFI forms to increase yields from Yearn's yVault gauges. These enhanced yields are sourced from $YFI acquired through the BABY strategy and fees Yearn collects.

Penalties from $veYFI Early Withdrawals: If a holder decides to exit their $veYFI lock early, they face penalties as high as 75% of their locked $YFI. The penalties collected in this manner are then accrued to Yearn's treasury, contributing to its growth.

Business Model

Revenue comes from:

The business model of Yearn Finance is fundamentally based on fee generation.

Presently, the protocol levies two primary types of fees:

Management Fee: This fee is charged for using Yearn Finance's services, which are upheld by the protocol and its active community.

Performance Fee: This fee is applied to the profits earned from the various yield strategies users invest in through the platform.

After subtracting operational costs, these fees are directed into Yearn’s treasury. The treasury is then responsible for determining the best use of these accumulated funds, guided by governance proposals. In the project's initial phase, these fees were allocated towards paying dividends to $YFI token holders. However, following recent governance changes, especially the introduction of YIP-56, there has been a shift in revenue distribution strategy from rewarding token holders to implementing buybacks.

Moreover, Yearn Finance accrues additional income through one-off penalty fees. These are imposed on $veYFI holders who opt to withdraw from their locked positions prematurely. A significant portion of these penalty fees is distributed to the remaining $veYFI token holders.

Revenue is denominated in:

The revenue generated by the protocol through fees from its yVaults is denominated in the same type of asset deposited in these vaults. This includes cryptocurrencies like ETH, USDC, DAI, and others. Essentially, when users pay fees on the yields they earn from these vaults, the fees are collected in the same currency utilized in the vault.

Revenue goes to:

The fees gathered from yVaults are predominantly allocated to Yearn's treasury, utilized for several key purposes. Following the adoption of YPI-56, a significant portion of these fees is now used in the Buyback and Build Yearn (BABY) program to repurchase $YFI tokens. Besides this, the remaining funds in the treasury are strategically used to cover development costs and operating expenses and to maintain a liquidity buffer. This buffer is essential for managing market volatility and uncertainty, ensuring the protocol's stability and resilience.

Token Utility

The primary function of the YFI token is to serve as a governance token, granting $YFI holders the power to vote on governance proposals. The scope of this governance encompasses several key areas:

1. Proposing and Voting on Yearn Improvement Proposals (YIPs): These proposals are crucial in shaping the protocol's operations and modifying its tokenomics.

2. Deciding the Allocation of Fees: Holders have a say in how the fees collected by Yearn Finance from yVaults are allocated. This is done through different veYFI gauge weights, influencing how yields are distributed.

3. Authorization of Treasury Expenditure and YFI Buybacks: Token holders vote on using treasury funds, including authorizing buybacks under the BABY program.

4. Determination of yVault Parameters: This includes setting critical parameters for yVaults, such as the minimum deposit thresholds.

Beyond governance, YFI also plays a role as a Yield Boost Token. By locking YFI into $veYFI, holders can earn enhanced rewards. It's important to note that the governance influence and the yield rewards are directly proportional to the size and duration of the $veYFI lock.

$YFI Demand Drivers

The demand for the $YFI token is influenced by various stakeholders, each with distinct motivations for holding the token. Breaking down these demand drivers by stakeholder categories clarifies the diverse interests.

1. $YFI Token Holders: General users are attracted to holding $YFI primarily for the governance rights associated with the token. This is particularly relevant when $YFI is locked into $veYFI, as larger and longer locks confer greater governance power. Since governance proposals can alter key financial aspects like reward structures and fee distribution, there's a heightened interest in acquiring and holding $YFI to actively participate in governance and benefit from the protocol's earnings.

2. $veYFI Lockers: Users who lock their $YFI are motivated by the yield rewards they can earn. The locking mechanism boosts their yields and amplifies their governance influence.

3. yVault Token Holders: Those who have invested in yVaults seek to maximize their yield on these deposits. They can enhance their gauge rewards by acquiring and locking more $YFI into $veYFI, thereby increasing their overall yield.

4. Aggregators: These entities aim to acquire $YFI to create substantial $veYFI locks, enabling them to earn higher yields. Their gains are derived from yield spreads, yield farming, and bribes from third-party protocols.

5. Bribing Protocols: Protocols in this category purchase $YFI to lock into $veYFI to redirect yield allocations towards their own yVaults. This is achieved through offering bribes, which are then paid to $veYFI lockers as an incentive.

While the predominant demand drivers are financially incentivized, revolving around governance rights that dictate reward and fee distribution, it's evident how each stakeholder group views these incentives from their unique perspective. This diversity is crucial in ensuring that incentives are aligned across all participants in the ecosystem, fostering effective and functioning feedback loops.

$YFI Distribution & Unlocks

The $YFI tokens were initially released through a fair-launch process in 2020, with a strict cap set at 30,000 tokens. These tokens were made available for purchase without any vesting period, ensuring an equitable distribution. However, this cap was subsequently revised following the approval of YIP-57, titled "Funding Yearn's Future." This proposal allowed for the creation of an additional 6,666 $YFI tokens.

The distribution of these newly minted tokens was strategically planned: one-third was allocated for vesting to key contributors of the Yearn Finance ecosystem, recognizing their significant role in the protocol's development. The remaining two-thirds of the new $YFI issuance was directed to the treasury. This allocation was intended to empower governance, giving $YFI holders the authority to decide how these treasury-held tokens should be utilized and deployed. This decision aligns with Yearn Finance's ethos of decentralized decision-making and community-driven governance.

Feedback Loops

Yearn Finance's growth is propelled by a self-reinforcing feedback loop, pivotal in escalating its fee collection – the primary revenue source for the protocol. Here's a breakdown of how this feedback loop operates:

1. Growth in yVault Deposits: When there's an uptick in the amount deposited in yVaults, this naturally leads to an increase in fee revenue. This is because Yearn Finance imposes two types of fees on users – one fee when they deposit and another when they earn a profit.

2. Increased Fee Revenue Leading to More $YFI Buybacks: With more fee revenue, Yearn Finance has a larger budget for buying back $YFI tokens in the open market, adhering to its BABY program's guidelines.

3. Boost in $YFI Buybacks Enhances yVault Yields: The $YFI tokens bought back through this program are then distributed as rewards to users who lock their $YFI into $veYFI. This process effectively increases the yields offered on yVaults.

4. Higher Yields Attract More Deposits: As the yields on yVaults become more attractive, they are likely to draw increased interest from potential depositors, leading to a further increase in yVault deposits.

To encapsulate, as $YFI deposits escalate, this results in enhanced gauge boosts and subsequently higher liquid wrapper yields, which further encourages more $YFI deposits. A key aspect of this model, distinct from veToken systems based on fixed emissions where increasing Total Value Locked (TVL) can dilute yields, is that yield increases are proportionally aligned with the rising TVL is system.

Observations/Thoughts

The Feedback Loops section illustrates how Yearn Finance's model can initiate a beneficial positive feedback loop for the entire ecosystem and its stakeholders. However, it's crucial for readers to understand that this same mechanism can also operate in reverse, potentially exacerbating negative market conditions.

In scenarios where market conditions are unfavorable, this could lead to a decrease in yVault deposits. A reduced level of deposits means lower fee revenue for Yearn Finance. This, in turn, limits the protocol's ability to buy back $YFI tokens under the BABY program, subsequently reducing the yields available to $veYFI lockers. Lower yields might lead to further reduced interest in yVault deposits, creating a downward spiral.

It's also important to consider the inherent risks and limitations associated with the veToken model, initially pioneered by Curve for use in decentralized exchanges. Curve’s model was heavily focused on liquidity mining, supported by an unlimited supply of the protocol's incentive token. This contrasts significantly with Yearn Finance’s approach. Unlike Curve, Yearn is not a decentralized exchange but a yield aggregator. Moreover, Yearn's protocol token, $YFI, has a fixed hard cap supply, which fundamentally alters the dynamics of its veToken model compared to those with unlimited token supplies.

Understanding these differences and the potential risks of the veToken model is essential for anyone engaging with these protocols, as it provides insight into how market conditions and protocol-specific factors can impact the overall ecosystem.

Summary

In this article, you will gain an in-depth understanding of Yearn Finance, one of the most well-known DeFi protocols and the largest yield aggregator. The article covers the concept of Vaults, which are integral to Yearn's design, and how they are also used in other protocols with slight variations. Furthermore, you will learn how the insights gained from this piece can also help us understand similar protocols.

With big names such as Vitalik Buterin with Ethereum, Daniele Sesta with Wonderland, and Andre Cronje with Yearn associated with a project, it often generates a great deal of interest. In the case of Yearn, this resulted in $YFI's price skyrocketing past the value of 50,000 USD, effectively surpassing that of 1 BTC. However, it's important to keep in mind that while hype is temporary, the value of a solid project should be sustained over time.

Initially, Yearn failed to capture value with its token. However, after the introduction of a new, sophisticated tokenomics upgrade at the end of 2021, its tokenomics have improved significantly. A positive feedback loop has emerged, which has improved Yearn's overall performance. It's worth noting that feedback loops can also work in reverse, so only time will tell if the renewed design will ensure sustainability over the long term.

In conclusion, Yearn Protocol is a foundational pillar of DeFi, which enables users to maximize their yields on crypto assets with a simple tool. Yearn's success in the DeFi space is not just limited to the $YFI price, but it's also reflected in its utilization by users.

If you’re interested in the condensed, need-to-know tokenomics information for Yearn Finance including all the resources used for this article, check out the report on Tokenomics Hub

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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Attention fellow degens!

We are thrilled to announce that we will be hosting an exciting AMA with IPOR Protocol on our discord server!

Join us for an engaging discussion about IPOR, its features, tokenomics, and so much more!

📅 Date: 22 June, 2023

⏰ Time: 12:00 UTC

🌐 Where: Tokenomics DAO Disccord Server (RSVP here)

We will be deep diving into IPOR Protocol, exploring its use case, technology and the potential it holds for the future. Whether you are new to IPOR Protocol or already well-versed, this AMA promises to offer valuable insights and provide an opportunity to engage directly with the IPOR Protocol team.

To make the most of this event, we highly recommend reading the incredible article by prior to the AMA. It will equip you with valuable knowledge and spark interesting questions:

This is a chance to expand your understanding and get answers to any burning questions you may have.

See you there!

Introduction

I believe there is no better way to start this article than with a small meme:

Real estate has long been regarded as a lucrative investment, providing benefits like passive income, inflation protection, or the security of having a place to call home. However, for many individuals, owning property remains an elusive dream due to the substantial capital requirements and barriers to entry. Institutional investors often dominate the real estate market, leaving little room for the average person to participate.

To address this challenge, Real Estate Investment Trusts (REITs) were introduced as a means for investors to gain exposure to the financial performance of real estate companies. By investing in REITs, individuals could receive dividends from the rental income generated by these companies' properties. While REITs offered a partial solution, the accessibility to direct real estate ownership remained limited.

Enter Landshare, a platform that aims to revolutionize real estate investment by enabling fractional ownership through tokenization. Landshare empowers investors to participate in tokenized real estate with a minimum investment as low as $50. By leveraging blockchain technology, Landshare opens the doors to a wide range of DeFi opportunities, including the ability to use tokenized real estate holdings as collateral for loans.

This article delves into the integration of the $LAND token into the Landshare ecosystem, how different user groups interact with the token, and the sources of its value. It aims to provide an in-depth exploration of the $LAND token and its role within the Landshare ecosystem.

$LAND Tokenomics

Below we can see the value flow diagram for Landshare. This showcases how the system works, where the relevant sinks and faucets are, and how value flows through/around the protocol.

A zoomable version of the diagram can be found here.

If you’re interested in the condensed, need-to-know tokenomics information for Landshare, check out the report on Tokenomics Hub.

Ecosystem Participants

Landshare’s Ecosystem consists of three groups of participants with different goals and roles:

LAND Token Holders / Stakers:

This user group consists of individuals who acquire the $LAND token for various reasons. Some purchase the token for speculative purposes, anticipating potential price appreciation and capital gains. Others seek to earn passive income in the form of additional (emission-based) $LAND rewards by staking their $LAND tokens. By holding (or staking) $LAND tokens, they also receive voting rights which they can use to participate in Landshare’s governance.

Liquidity Providers (LPs):

Liquidity Providers form an important part of the Landshare ecosystem by providing liquidity to the LAND-BNB Pool on Pancakeswap to ensure a smooth trading experience for users. LPs are incentivized by receiving a portion of the transaction fees generated within the liquidity pool as a reward for their contribution. Additionally, LP tokens can be staked to earn more emission-based staking rewards as a further incentive to provide liquidity over a longer time horizon. 

Real Estate Investors & Traders:

This user group represents the primary beneficiaries of the Landshare platform, as it is specifically designed to create value for them. Real estate investors and traders acquire asset tokens from real estate offerings provided on the Landshare platform, which are essentially security tokens. These offerings are divided into two categories: 

• Rental properties: These enable investors to earn passive income over the long term.

• House flips: These provide the opportunity to make a quick yield. This group also engages in secondary market trading to buy, sell, or trade asset tokens. 

Furthermore, participants in the Landshare ecosystem can take advantage of the GameFi features, which enhance the yield potential of the rental properties they invest in, adding an additional layer of profitability and engagement to their investments. 

Due to the scope of this article, I will not dive much further into the GameFi mechanics, but if you are interested, feel free to read about it here. 

Protocol Components

Real Estate Offerings (Primary Market)

The Landshare platform provides investors with two categories of real estate investments. The first category involves purchasing asset tokens (security tokens that represent an ownership stake in the underlying property) from properties that are rented out, allowing investors to earn monthly rental income. This type of investment is ideal for those seeking a long-term investment strategy with stable returns. Those returns are distributed in $BUSD proportionally to the respective investors every month.

In addition to rental properties, Landshare offers the opportunity to participate in house flips, which are considered riskier investments but have the potential for attractive returns within a relatively short period of time. The house-flipping process usually takes between three to six months. Here, the return is paid as a lump sum in $BUSD to investors who participated in crowdfunding the respective house flip. Unlike asset tokens from rental properties, house-flipping tokens are not tradeable on the secondary market.

For those unfamiliar with house flips, it is a real estate investment strategy where properties in need of renovation are purchased, renovated, and subsequently sold at a higher price when the renovation is completed. This process usually takes between three to six months. Feel free to read more about house flips on Landshare here.

Asset Token Trading (Secondary Market)

Asset tokens from rental properties can be traded on the secondary market. Currently, this trading is facilitated through Stobox DS Swap, serving as a decentralized exchange (DEX) specifically designed for security tokens. Stobox DS Swap operates independently as a third-party platform and is not developed or maintained by Landshare.

In the future, Landshare intends to introduce over-the-counter (OTC) trading for asset tokens. This OTC option will allow investors to trade significant quantities of asset tokens without causing substantial price impacts, offering a convenient solution for executing large trades.

Asset Token Loans

Landshare will introduce the asset token loan feature, allowing asset token holders to utilize their assets as collateral and access short-term liquidity without the need to sell their asset tokens. Through this feature, holders can borrow up to 60% of the asset token's value in BUSD, providing them with immediate funds for their use.

To retrieve their asset tokens, borrowers must repay the loan in full, inclusive of the interest accrued in $LAND. By repaying the loan, borrowers regain ownership of their asset tokens.

If you're curious about how the price of the underlying asset is determined, Landshare sets the price based on the market value of the respective real estate. This approach is commonly employed for security tokens that represent illiquid assets like real estate.

GameFi Ecosystem

The GameFi Ecosystem introduces an exciting opportunity for asset token investors. To participate in this ecosystem, investors are required to own a real estate NFT. Those NFTs are granted to property investors who purchase a minimum of 5 asset tokens during the initial offering of a given property.

By staking their asset tokens on the NFT, holders can enhance their overall yield by earning additional $LAND rewards on top of the monthly $BUSD rental yield. To further maximize their $LAND rewards, investors can consider upgrading their virtual house or NFT within the ecosystem. This upgrade offers an opportunity to unlock even greater benefits and rewards within the GameFi ecosystem.

AMM (LAND/BNB)

Another component of the Landshare platform is the LAND/BNB Liquidity Pool on Pancakseswap, where users can buy and sell $LAND. Liquidity Providers are rewarded with the transaction fees that are charged for every swap and earn additional $LAND rewards by staking their LP tokens in the LAND/BNB LP Staking Vault. 

Staking Vaults

Lastly, the Landshare platform features two staking vaults where users can either stake solely their $LAND token to earn emission-based $LAND rewards or stake, as already mentioned, their LP tokens.

When a staker uses the auto-compound feature to automatically reinvest the earned $LAND rewards, Landshare charges a 2% performance fee on each compound performed, as well as a 0.1% withdrawal fee if the staked tokens are withdrawn within 72 hours.

Value Creation

Value creation refers to how the protocol is creating value and for whom. Value is created when a problem gets solved. Read here to understand more about value creation.

Problem

In the current market landscape, the dream of earning rental income or relying on it for a sustainable livelihood seems out of reach for many individuals. The exorbitant costs and capital requirements associated with real estate investments make it extremely challenging for the average person to enter the real estate market. Furthermore, the burdensome bureaucracy and complex tax structures create additional obstacles and discourage potential investors from buying and owning properties.

Overall Goal

Landshare's overall goal is to revolutionize the real estate market by making investments in this traditionally exclusive asset class accessible to the masses. Landshare aims to achieve this goal by tokenizing and fractionalizing real estate investments. Through tokenization, the division of real estate assets into smaller, more affordable units is enabled, allowing investors to purchase fractional ownership in properties that were once financially out of reach. This fractionalized approach not only lowers the barrier to entry but also increases liquidity and diversification opportunities for investors. 

Ultimately, Landshare's comprehensive solution empowers individuals to build wealth, earn rental income, and benefit from the long-term appreciation of real estate assets, thereby democratizing access to one of the most sought-after investment opportunities in the world.

Value Capture

This refers to how the protocol is capturing the value it creates. Essentially, if value is being created then it has to flow somewhere (ideally to wherever the protocol deems most viable). Value capture can be broken down into (1) value accrual to the protocol and (2) value accrual to the token. Read here to understand more about value capture.

Value Accrual to Protocol

The treasury of the Landshare DAO mints itself 2.5% of all staking rewards harvested from the staking vaults. It is not a fee to-be-paid by the one harvesting the staking reward, it can be considered as a form of dynamic release schedule in that rather than a lump sum of tokens being minted to the treasury at TGE, they are minted gradually. Additionally, 12.5% of the 2% performance fee associated with the auto-compounding feature is allocated to reward bounty claimers. 

This should ensure that the Landshare DAO has a growing pool of tokens to support its operations and initiatives.

Value Accrual to Token

On the Landshare platform, users are required to pay $LAND for various transactions, including a 10% fee to purchase asset tokens (both, house flips and rental properties) and the accumulated interest for asset token loans. 

Importantly, these platform fees are burned. This means that the fees are permanently removed from circulation, resulting in a reduced circulating supply of $LAND. Consequently, if the demand for $LAND remains steady or increases, the reduced supply can potentially contribute to an increase in the price of $LAND. 

If you are concerned about the possibility of Landshare running out of tokens as more and more tokens are burned, let me address that. Technically, it is possible, but due to the token having 18 decimals, the price would have to reach astronomically high levels for it to become impractical to pay fees with the smallest unit of the token available.

Business Model

Its important to understand the business model of the protocol since it ties into how value is flowing in the system and is relevant for the sustainability of the protocol.

Revenue comes from:

• 10% of the value from purchasing asset tokens (both, house flips and rental properties)

• Interests from asset token loans

• 2% performance fee from the auto-compound feature of the $LAND staking vault

• 2.5% of the harvested staking rewards (keep in mind that this is not a fee, but rather an additional emission-based reward that is minted to the DAO’s treasury)

• Paying to upgrade real estate NFTs

• 5% transaction fees on Landshare’s NFT marketplace

Revenue is denominated in:

• $LAND

Revenue goes to:

• Burning address

• Landshare DAO treasury (bounty claimers): Only 12.5% of the 2% performance fee from the auto-compound feature.

Token Utility

This refers to how the token is being used within the project and by whom. Essentially the token’s use case. Read here to understand more about Token Utility.

Asset Token Purchases – Fee Payment Token

$LAND is the utility token within the Landshare ecosystem. One of its key utilities is as a payment method for platform fees. Landshare requires that 10% of the value of every asset token purchase is to be paid in $LAND, which is subsequently burned. The remaining 90% is to be paid in $BUSD. This mechanism is not only a demand driver for $LAND but also reduces the supply over time, leading to increased scarcity and potential value appreciation.

Asset Token Loans – Interest Payment Token

Moreover, by utilizing asset tokens as collateral for borrowing BUSD, borrowers are required to pay the accruing interest in $LAND, which is also subsequently burned. With the loans being overcollateralized, this approach not only safeguards the lender's investment but also incentivizes borrowers to acquire and use $LAND tokens for fulfilling their interest obligations to receive their assets back.

GameFi – Yield Boost Token

In addition, $LAND plays a crucial role in the broader GameFi ecosystem offered by Landshare. Although we will not delve too deeply into it here, it's important to note that $LAND can be used as a payment token within this ecosystem. Users have the ability to purchase "Power," a resource that can be utilized to enhance the yield generated with asset tokens. This integration of $LAND within the GameFi ecosystem adds another layer of utility to the token, providing users with opportunities to optimize their investment returns and engage in a dynamic and interactive experience.

Staking & Governance

Lastly, participants have the opportunity to stake both the $LAND token and the LP token acquired through liquidity provision in the LAND/BNB Pool on Pancakeswap. This staking process enables users to earn additional rewards in $LAND, which are emission-based. 

In addition to the staking rewards that users can earn, individuals who hold or stake $LAND (including $LAND in the LP) possess the ability to exercise voting power and take part in Landshare's governance, whereby each $LAND token represents one vote. By utilizing their voting power, stakeholders can contribute to crucial determinations such as marketing events, fee structures, grants, and other platform-related matters. This approach ensures that stakeholders have a voice in shaping the future direction of Landshare, fostering a sense of community ownership and facilitating collective decision-making.

$LAND Demand Drivers

Demand for a token can from three sources, those being the demand for token due to its utility, demand for token due to a mechanism (i.e staking) and demand for a token due to speculation. Essentially, demand drivers refer to who is buying/holding the token and why. Read here to understand more about Token Demand Drivers.

The demand drivers for the Landshare token are closely tied to its utility within the ecosystem, particularly for real estate investors. These investors have a range of needs that motivate them to purchase and utilize the token within the Landshare platform.

First and foremost, the token is essential for investors to pay various platform-related fees. This includes purchasing asset tokens, which serve as the primary demand driver for $LAND. Additionally, investors utilize $LAND to cover interest payments for asset token loans and to enhance their yield by upgrading their virtual houses in the form of NFTs.

Another factor driving the demand for the token is the opportunity for investors to earn staking rewards by staking the token and participating in Landshare's governance. By holding or staking the token, investors gain the ability to influence decision-making processes within the ecosystem. Furthermore, there is a speculative element, as investors can anticipate capital gains. This is due to the fee-burning mechanism in place, which has the potential to increase the value of $LAND over time.

$LAND Distribution & Unlocks

It's important to understand how the supply is being split up into different allocations and how these allocations will be distributed (vested or emitted).

Reward Pool:

Landshare's official documentation does not provide specific details regarding the distribution of tokens within the Reward Pool. However, according to information shared by administrators in their Telegram channel, approximately 2,000 $LAND tokens are currently released per day. Based on this information, it can be estimated that the complete allocation will be distributed over a period of ca. 8 years, considering the TGE on August 2nd, 2021. 

It is important to note that the distribution within the Reward Pool is subject to potential changes through governance proposals.

Seed Round:

In July 2021, Landshare conducted a seed sale in which 1,000,000 $LAND tokens (equivalent to 10% of the maximum supply) were offered at a price of $0.3 per token. Following a lockup period of one month, these tokens were distributed linearly over a span of 10 months.

IDO Rounds:

Landshare conducted a presale on Seedify on July 21st, 2021. During this event, 187,500 $LAND tokens (equivalent to 1.875% of the maximum supply) were offered at a fixed price of $0.8 per token.

Furthermore, Landshare conducted an Initial DEX Offering (IDO) on Superlauncher on August 2nd, 2021. In this round, a total of 150,000 $LAND tokens (equivalent to 1.5% of the maximum supply) were made available at a fixed price of $1 per token.

For both the presale on Seedify and the IDO on Superlauncher, the tokens were unlocked linearly over a period of 3 months, without a vesting lockup period. This means that approximately 33% of the tokens were unlocked at the time of the Token Generation Event (TGE).

It is worth noting that the information provided in the articles regarding the IDO Rounds does not align with Landshare's tokenomics allocation, as the IDO Rounds should account for a total of 3% of the token supply. However, based on the given information, the cumulative allocation amounts to 3.375%. This is yet to be clarified by Landshare’s core team, feel free to reach out if you’re reading this.

Liquidity

Another important aspect of the token allocation is the Liquidity allocation. Based on the allocation table provided by Landshare, 75,000 $LAND tokens (equivalent to 0.75% of the maximum supply) are allocated for pairing with BNB to facilitate trading on Automated Market Makers (AMMs). It is worth noting that the pie chart indicates that the Liquidity allocation should be 1% of the maximum supply. However, this deviation can be attributed to the requirement of initial liquidity for the IDO event, which is necessary to establish the starting price.

(An interactive version of the release schedule chart can be found here)

*The Release Schedule is excluding Allocations with a non-algorithmic distribution (such as the Marketing & Partnership Allocation, which release is dependent on governance decisions)

Feedback Loops

A tokenomics analysis is focused on how value flows through the system and how it interacts with different users/components of the protocol. Feedback loops are relevant since they may be positive or negative and thus have an outcome on the underlying value capture (be it on the protocol or token level).

Landshare's tokenomics exhibit three notable feedback loops:

Real Estate Offerings and Token Burnings:

As successful real estate offerings are presented and funded on the Landshare platform, the demand for $LAND tokens increases. This rise in demand, in turn, leads to more token burnings. Token burnings occur as a result of fees (for purchasing asset tokens) being paid with $LAND tokens. Therefore, the more real estate offerings are successful and funded, the higher the demand for LAND, and consequently, the greater the number of token burnings.

Asset Token Circulation and Interest Payments:

An increase in the circulation of asset tokens on the Landshare platform contributes to a rise in interest payments (when the feature gets launched) that accrue in $LAND. More real estate investors use their asset tokens as collateral to obtain loans, resulting in increased interest payments. These interest payments have to be paid for in $LAND tokens. Thus, as more asset tokens circulate within the ecosystem, the interest payments and subsequent accumulation in $LAND also increase.

Staked Tokens and Overall APR:

When more $LAND tokens or LP (Liquidity Provider) tokens are staked within the staking vaults, the overall Annual Percentage Rate (APR) for participating stakers decreases because as more tokens are staked, the overall supply of staked tokens increases. This larger supply of staked tokens leads to a lower APR for stakers, as the rewards are distributed among a larger pool of participants.

In summary;

1. The presence of real estate offerings on the Landshare platform drives demand for $LAND tokens and results in higher fees being burned. 

2. The circulation of asset tokens leads to increased interest payments that accumulate in $LAND. 

3. The staking of LAND tokens or LP tokens affects the overall APR for stakers. 

Ultimately, the more real estate offerings on the platform, the greater the demand for $LAND tokens, leading to increased fees and burnings.

Observations/Thoughts

One concern with the current token allocation strategy employed by Landshare is the significant reliance on emission-based rewards, which constitute a minimum of 66% of the token allocation. The problem with this approach is that these rewards do not represent "real" yield. Financial rewards are created out of thin air, and token holders who do not stake their tokens end up indirectly shouldering the cost. While some users may utilize their earned $LAND tokens within the ecosystem without selling them, the majority of token holders typically engage in speculation, seeking capital gains and wanting to exchange their $LAND rewards for more established tokens like BNB, BUSD, or other.

To tackle this problem, a potential solution could involve reducing the amount of emission-based staking rewards and allocating a portion of the collected fees to reward stakers, while still burning the remaining fees to maintain the deflationary aspect. By diminishing the dependency on emission-based rewards, Landshare would be able to establish more sustainable, less inflated, tokenomics. Additionally, it may be prudent to consider the implementation of a fee distribution mechanism where stakers receive a portion of their rewards in BUSD, rather than $LAND. This adjustment would effectively reduce the selling pressure that can arise from distributing rewards solely in $LAND. Additionally, such an approach would cater to the needs of investors who are keen on diversifying their holdings and seeking a broader range of assets

Moreover, $LAND stakers already receive double rewards by design. They earn staking rewards and have the potential to benefit from price appreciation resulting from the burning mechanism, provided that demand remains stable or increases. However, there is a valid argument as to whether the burning mechanism is the most efficient way to generate value for the token. Like most utility tokens, the Landshare token is closely correlated with major cryptocurrencies such as BNB, ETH, and BTC. Consequently, price appreciation resulting from token supply reduction is influenced by this correlation. It would be advantageous for token holders to receive the "real" staking rewards directly through fee distribution rather than indirectly through token burnings. This way, they can decide for themselves whether to continue holding the tokens or sell them.

Lastly, the fee payment process for purchasing asset tokens especially can be streamlined by enabling investors to pay the full value in BUSD and automatically swapping 10% of the value into LAND within the same transaction. This approach eliminates the need for investors to hold $LAND tokens in their wallets upfront, reducing entry barriers while maintaining the desired effect. 

Summary

Landshare presents a comprehensive ecosystem for tokenized real estate investments, providing a range of features related to the buying and selling of asset tokens. At the core of this ecosystem is Landshare's native token, $LAND, which serves as a payment token for fees, with a deflationary mechanism in place through token burning. It's important to note that the deflationary aspects of $LAND are primarily realized in the long term due to the significant allocation of staking rewards based on emissions. As Landshare continues to evolve and grow, the deflationary nature of $LAND will become increasingly evident, contributing to the long-term sustainability and value proposition of the ecosystem.

As a final note, Landshare has announced plans to enhance its tokenization strategy by introducing the RWA token, which is a more scalable and DeFi-friendly solution. The RWA token serves as a fund token that consolidates all existing and future rental and flipping properties into a single token. This approach eliminates the need to create separate legal entities for each property, simplifies integration with DeFi features by requiring only one contract address, diversifies the risk, and enhances liquidity compared to the current asset tokens. Since this is yet to be launched further detail & analysis is needed to determine if this newfound service offering will effect in any way Landshares tokenomics.

If you’re interested in the condensed, need-to-know tokenomics information forLandshareincluding all the resources used for this article, check out the report on the Tokenomics Hub

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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What is IPOR?

The IPOR protocol is an interest rate and interest rate derivatives protocol. It is comprised of; 

• The IPOR benchmark index, a mid-market rate for on-chain credit

• Interest Rate Derivatives (IRD) products, currently taking the form of Interest Rate Swaps

If you’re already confused by all these TraFi-esque terms such as interest rate derivatives, swaps and indexes, have no fear, a comprehensive intro is here:

Introduction

What You Need To Know About IPOR

Credit and the Cost of Capital

Credit and the cost of capital play a crucial role in driving economic growth. When individuals or entities have surplus capital, they can lend it out (accredit) to borrowers in exchange for interest. This interest rate represents the cost of capital and influences the flow of capital within the economy. There are two types of interest rates: variable (floating) and fixed. Lenders aim to maximize their yield by charging higher interest rates, while borrowers seek lower rates. Fixed income serves as a middle ground, allowing both parties to minimise risk. 

Benchmark Index

Benchmark indices play a vital role in enabling fixed-income investments by providing a reference rate for determining interest payments on various assets. Traditional finance (Tradfi) relied on benchmarks like LIBOR and SOFR. Prior to IPOR, decentralized finance (DeFi) lacked a benchmark rate of its own, making IPOR a significant development in this regard.

Why it’s important

The introduction of a benchmark rate like IPOR in DeFi holds significant importance for several reasons. Firstly, it brings transparency to the industry, allowing participants to have a clear view of the prevailing rates. This transparency empowers individuals, including the average person, to assess whether they are being quoted at a fair and competitive rate, enabling them to make informed decisions about their investments. Moreover, having a benchmark rate promotes rate standardisation, providing a standardised reference point for determining the cost of capital. This, in turn, enhances market efficiency and facilitates more informed decision-making processes.

IPOR Index

The IPOR Index, short for Inter-Protocol Overblock Rate, serves as a benchmark interest rate specifically designed for decentralized finance (DeFi). By examining the interest rates within the DeFi credit market, particularly in money markets such as AAVE and Compound, IPOR sources and aggregates the rates on a block-by-block basis, presenting them as an index. It's important to note that IPOR reflects the market and the cost of capital rather than setting it, providing valuable insights into the prevailing interest rate environment in DeFi.

Interest Rate Derivatives (IRD)

Interest rate derivatives play a crucial role in enabling the evolution of decentralized finance (DeFi) credit markets into a robust fixed-income market. By utilizing a benchmark index as a reference, interest rate derivatives offer essential risk management tools that institutions require. To facilitate the flow of liquidity from traditional finance to the decentralized financial landscape, it is imperative for future financial markets to provide these risk management instruments. Interest rate derivatives provide stability by allowing fixed-income players to lock in borrowing rates, offering predictability and the ability to forecast income or credit costs over a desired time horizon.

What are Interest Rate Swaps (IRS)

Interest rate swaps are a type of IRD offered by IPOR and serve as the pioneering instrument that references the IPOR benchmark. These swaps are essential for risk management purposes. IPOR's unique contribution lies in its ability to complement existing spot lending platforms like AAVE and Compound by enabling users to fix their loans at a lower rate compared to current fixed-rate products. 

The rates derived from the IPOR index can be referenced by fixed-term lending markets to forecast future yield conditions, thus facilitating the creation of a DeFi yield curve.

$IPOR Tokenomics

Below we can see the token flow diagram for IPOR. This showcases how the system works, where the relevant sinks and faucets are and how value flows through/around the protocol.

A zoomable version of this diagram can be seen here.

If you’re interested in the condensed, need-to-know tokenomics information for IPOR, check out the report on Tokenomics Hub.

Ecosystem Participants

Liquidity Providers (LPs) 

Liquidity Providers (LPs) play a vital role in the IPOR ecosystem by supplying assets (currently only USDC, USDT or DAI, ETH coming soon) to the Liquidity Pool (known as Joseph) that underwrite Interest Rate Swaps taken out by borrowers and lenders. The motivation for an LP to provide assets is to earn a return on their capital.

In exchange, they earn multiple fees

• Opening swap fee
  Fee charged to the trader when opening an interest rate swap. This equates to 1% of the trader's collateral amount and is denominated in said collateral type.
  
  E.g.
  Trader deposits 1000 USDC, 10 USDC would be charged as an opening fee and distributed to all LPs pro-rata.
  

• Liquidity withdrawal fee
  Fee charged to liquidity provider when exiting the pool. This equates to 0.5% of withdrawal amount and is denominated in the same asset.
  
  E.g.
  LP decides to withdraw 10,000 USDC, 50 USDC would be charged as a withdrawal fee and distributed to all LPs pro-rata.
   

• Money market yield
  Idle capital gets deployed to money market (currently AAVE & Compound) to earn a base yield (more on this later). A percentage of said yield is distributed to all LPs pro rata.
  

• Liquidity Mining
  LPs receive pwIPOR tokens through the liquidity mining program. 

Furthermore, LPs also bear the risk of inverse PnL; when traders win, LPs lose.

Money Market Borrower & Lender

Note that these can be considered Traders

A money market lender is a user who has lent out capital via another protocol such as AAVE or Compound and as such is receiving an interest rate on their capital. On the other side of this we have the borrower, who has taken out a loan and as such is paying interest on their borrowed capital. The interest received/paid can either be a fixed or floating (variable) rate. 

The motivation for a money market lender is to hedge against low-interest-rate income and thus minimise risk of poor capital allocation. Essentially they’re looking to short the interest rate (known as Receive fixed, Pay Floating) since if it goes down they will earn less from their underlying money market position but earn from the swap.  

If they’ve lent out capital at a variable interest rate they don’t want said rate to decrease, so they look to exchange this variable interest rate income for a fixed rate income rate. 

On the other hand, the motivation for a money market borrower is to hedge against high-interest rate payments and thus minimise risk. Essentially they’re looking to long the interest rate (known as Pay fixed, Receive Floating) since if it goes up they will lose on their underlying money market position but earn from the swap.

If they’ve taken a variable interest loan they don’t want their interest rate to increase, so they look to exchange this variable interest rate for a fixed interest rate. 

Both parties can achieve this via an Interest Rate Swap. 

To do this, they deposit the necessary collateral into the Liquidity Pool and pay the required fees (as detailed above in the Liquidity Provider section), plus some additional fees that are not directed to LPs and finally a liquidation deposit which is to be returned upon contract maturity. This collateral is locked until contract maturity (currently only 28-day swap contracts are available) or the protocol closes the contract.

During this 28-day period, the IPOR Index will vary in reference to the rates locked in by borrowers and lenders and will be accounted for by the PnL of the particular swap. 

The pool is exposed to a number of swaps which in aggregate is called Sum Of All Payoffs (SOAP) which is essentially the net outcome of all swaps (you can think of it as a sort of global state of the LP).

For borrowers, if the floating rate exceeds the fixed rate, the pool (LPs) pays the borrower; if the floating rate falls below the fixed rate, the borrower pays the pool (LPs) from their collateral. 

For lenders, if the floating rate exceeds the fixed rate, the lender pays the pool (LPs), if the floating rate falls below the fixed rate, the pool (LPs) pays the lender.

Speculator

Note that these can also be considered Traders

A speculator is akin to the above description of a borrower/lender but they have not taken out a loan via another protocol, they’re simply opening an interest rate swap contract by depositing collateral to take a directional bet on interest rates, essentially going long or short. They earn from the same profit on the derivative as borrowers/lenders but since they have not engaged in taking/depositing collateral on another protocol they are not hedged in any way.

These players can also be thought of as arbitrageurs; users looking to capitalise on interest rate market inefficiencies by leveraging the IPOR index to identify and exploit these disparities. Remember, the IPOR index serves as a reflection of the cost of capital in DeFi, allowing users to identify and capitalise at varying rates, even among stablecoins like USDC, USDT, and DAI. 

$pwIPOR Holder

A user who stakes the vanilla $IPOR token receives $pwIPOR. There are two types of holders here:

1. A user who is interested in governance.

2. An LP who is interested in boosting their rewards.

We will touch upon each of these functions later on, for now however it should be noted that in order to unstake $pwIPOR and receive the vanilla $IPOR once again, users either have to wait for a 14-day cool-off period to laps or choose to unstake immediately which incurs a 50% haircut. This amount is distributed back to $pwIPOR holders pro-rata.

E.g

A $pwIPOR holder decides to unstake 100 $pwIPOR immediately and incur the 50% haircut. They would receive 50 $pwIPOR and the rest would go back to current $pwIPOR holders.

Protocol Components

IPOR Index

The IPOR Index calculates a volume-weighted mid-market rate by averaging the borrowing and lending rates from protocols such as Aave and Compound, block by block (although due to Ethereum gas cost restraints it is not published on a per-block basis). Furthermore, new protocols can be added to the index through a governance vote utilizing the $pwIPOR token, which will be discussed in more detail later. As previously mentioned, the Index is a public good and can be referenced by anyone to structure debt instruments, deals, or derivatives.

IPOR DAO

The IPOR DAO will play a pivotal role in the gradual decentralization of IPOR. It oversees the governance of the index and AMM (covered later on). Furthermore, it handles the Liquidity Mining emissions.

AMM (Milton)

The bespoke AMM known as Milton is specifically designed for interest rates. The AMM receives liquidity from both liquidity providers (LPs) and users of interest rate swaps who deposit collateral to access fixed or floating rates. Currently, Milton operates with three liquidity pools: USDC, USDT, and DAI, with plans to include ETH in the near future.

Interest Rate Swaps (IRS)

IPOR protocol’s first product is a 28 day interest rate swap. It creates these contracts by referencing the IPOR Index and by using the liquidity & pricing mechanism from the bespoke AMM. However, in v2 which was recently announced, maturity will extend to 3 months and beyond.

Asset management (Stanley)

95% of idle AMM capital gets handed off to the Asset Management known as Stanley to be deployed in various money market strategies. These low-risk strategies are exclusively selected from those included in the IPOR index, which currently comprises AAVE and Compound. By optimizing the deployment of capital, Stanley maximizes the earning potential of these idle assets held within the system.

$IPOR Token

The $IPOR token serves as the native token of the protocol. Holders of $IPOR have the option to stake their tokens in exchange for $pwIPOR tokens. 

These $pwIPOR tokens can then be delegated to various modules independently. This means that token holders can actively participate in the governance via delegating to the governance module and/or receive boost on their yield via the liquidity mining module. It should be noted that, at the present time, these are the only two modules available but future modules could be added due to the flexibility of the power token architecture.

Value Creation

Value creation refers to how the protocol is creating value and for whom. Value is created when a problem gets solved. Read here to understand more about value creation.

IPOR Index

The IPOR Index is a public good that addresses a market gap in DeFi by providing a benchmark interest rate and enabling derivatives products to be built on top (i.e IPOR protocol’s own Interest Rate Swaps are the first product that references the index). For example, a new money market is looking to establish interest rates. They could offer the IPOR rate on their credit market, using a smart contract to smart contract call to the on-chain Index. The goal is for this to eventually lead to the possibility of a fixed income market. 

Currently, there is no prominent protocol in DeFi that fulfils this role. The absence of a benchmark rate hinders the onboarding of traditional fixed-income markets to DeFi. IPOR's solution, the IPOR Index, offers a benchmark interest rate that allows users to better understand and manage risk in the industry. It provides various opportunities for market participants, including hedging rate exposure, leveraging swaps for cost control, arbitraging interest rate disparities, capitalising on market inefficiencies, and speculating on rate changes. Moreover, IPOR acts as a conduit for institutional capital and fixed-income players to enter the DeFi space. Looking ahead, IPOR aims to expand its offerings by introducing an IPOR Index for ETH, longer maturity interest rate swaps, an enhanced request-for-quote AMM, and increased capital efficiency through higher utilisation of liquidity. These developments will pave the way for more complex debt products and greater flexibility in leveraging traders' collateral for increased fees and leveraged yield.

Interest Rate Swaps (IRS)

Interest rate swaps play a crucial role in providing stability for fixed-income participants, enabling them to effectively manage their interest rate risk. These derivatives offer the flexibility to convert fixed-rate debt into floating-rate and vice versa. By utilising interest rate derivatives, the ecosystem aims to converge current fixed interest rates across markets. 

Standardisation is vital as fragmented rates can lead to fragmented liquidity in derivatives, resulting in increased market risk and volatility. Harmonising interest rate swaps across different stablecoin pairs, such as DAI, USDC, and USDT, ensures liquidity is not dispersed, allowing for more efficient capital allocation.

Aggregated liquidity that underwrites multiple derivates is much more attractive over the alternative which would essentially be a fragmented, liquidity pool per instrument setup resulting in greater slippage and less capital efficiency for LPs.

pwTOKENS

The pwToken model is a new tokenomic primitive created by IPOR. It too is a public good and has its first implementation with IPOR itself.

Overall Goal

The overarching goal of IPOR is to bring standardisation to the industry by providing a benchmark instrument for pegging other financial instruments. It aims to enable the use of derivative instruments for arbitrage opportunities and to bring balance to the market. A crucial aspect is the establishment of a yield curve and a standardised index that indicates the expected interest rate for various loan durations. 

Currently, IPOR rates represent spot rates, reflecting the cost of capital today. However, future iterations will look to introduce rates for different time periods, such as the IPOR USDT 1-month rate, 3-month rate, 6-month rate, and so on. 

The yield curve signifies the cost of capital at different points in time. Given that the TradFi fixed income market is valued at ~$450 trillion, the importance of achieving these goals for the future of DeFi cannot be overstated.

Value Capture

Value capture refers to how the protocol is capturing the value it creates. Essentially, if value is being created then it has to flow somewhere (ideally to wherever the protocol deems most viable). Value capture can be broken down into (1) value accrual to the protocol and (2) value accrual to the token. Read here to understand more about value capture.

Value Accrual to Protocol

IPOR is currently constructed in such a way that the value captured at the protocol level benefits liquidity providers (LPs) rather than the protocol itself (i.e treasury inflow). Essentially, at this point in time all fees and revenue generated go back to LPs (there is however active proposals for treasury inflow and $pwIPOR distribution). Furthermore, as public goods, the IPOR Index and pwToken model do not directly benefit IPOR value accrual.

While the IPOR Index, derivatives instruments and pwToken model are highly valuable, mass adoption of these has no direct effect on value accrual since they’re public goods and as such there is no inflow to the protocol's treasury. 

It should be noted that an indirect form of value accrual to the protocol here is the mindshare it will garner if these public goods become industry standard. The same way that Curve is known for the veToken model.

Value Accrual to Token

The pwToken system enables users to engage with various modules offered by the protocol, such as governance and liquidity mining. To participate, users need to stake their IPOR tokens, which allows them to receive pwIPOR tokens. These pwIPOR tokens can then be delegated to the desired modules within the protocol.

The staking of IPOR removes it from supply and thus has a positive impact on price. The extent to which users will stake is directly related to the usecase of the staked token, $pwIPOR. We will touch upon these points in the Demand Driver section.

Business Model

It's important to understand the business model of the protocol since it ties into how value is flowing in the system and is relevant to the sustainability of the protocol.

Revenue comes from:

• Fee that is taken from borrower/lender to open a swap

• Fee from other LPs withdrawing liquidity (0,5% withdrawal fee)

• Net PnL: net outcome of swap

• Percentage of money market fee since 95% of idle collateral in AMM is deployed and generates yield

Revenue is denominated in:

• USDC, USDT, DAI on all fees and yield

Revenue goes to:

• LPs: who earn all fees and liquidity mining incentives ($pwIPOR)

• SOAP: if traders win LPs lose, if traders lose LPs win.

Token Utility

Token utility refers to how the token is being used within the project and by whom. Essentially the token’s use case. Read here to understand more about Token Utility.

$IPOR itself has little use outside of being an investment vehicle. However, its staked counterpart known as $pwIPOR plays a vital role in the protocol. Primarily in:

• Governance over the Index and AMM parameters –here its utility is that of a governance token 

• Directing liquidity mining emissions –here its utility is that of a bootstrapping token.

It should be noted that there could be future use cases which would have to be proposed through an open governance procedure.

$IPOR Demand Drivers

Demand for a token can from three sources, those being demand for the token due to its utility, demand due to a mechanism (i.e staking) and demand due to speculation. Essentially, demand drivers refer to who is buying/holding the token and why. Read here to understand more about Token Demand Drivers.

There are multiple parties who are likely to buy the token:

• Money markets

• Other blockchains other than Ethereum

• Asset issuers: stablecoin issuers, Liquid Staking Token (LSTs) issuers such as Lido & Rocket pool

• DAOs

• LPs

• Speculators/Users

In terms of value accrual to the $IPOR token, its increase in value is solely tied to the performance of IPOR derivatives products, specifically an increase in Interest Rate Swaps (IRS) leads to an increase in token value. The usage of the protocol or the IPOR index does not directly contribute to the value of the token as mentioned earlier.

Governance Module

In IPOR protocol, governance has three distinct areas of use;

1) Governance around the IPOR index
The index references multiple money markets, currently AAVE and Compound. Via governance new protocols can be included. Parties who are likely to be interested in this governance power include:

• Money markets:
  Idle AMM assets are handed off to the Asset Management system to then be deployed into the money markets that the IPOR index uses as input, any money market has an incentive to acquire governance power in order to be included in the index since it would mean that they would receive a portion of said assets and thus improve their liquidity.
  

• Asset issuers:
  Currently, there only exists IPOR indices for USDT, USDC and DAI. Any form of asset issuer such as the many stablecoin and LST issuers have an incentive to acquire governance power in order to get an indices created for their asset since it means that borrowing and lending would become more widespread for their asset.
  

• Other blockchains:
  The IPOR index is currently Ethereum native, but there is the possibility of it being launched for other chains in the future. Any chain looking to have an IPOR index launched on their chain natively has the incentive to acquire governance power.  

It should be noted that, in the case of money markets, token demand is likely only a consideration once the capital that can be directed there is of a sufficient size. Maybe once the liquidity that the Asset Management system directs to said money market is above a certain percentage of the money market’s TVL? It would be interesting to see an analysis on this. Another article at some point 👀

2) Governance around the derivatve instruments
Governance has the ability to adjust certain parameters regarding current interest rate swaps such as the fixed or floating swap rate. Furthermore, AMM parameters such as the amount of risk is the pool is able to take on via said swaps (pool liquidity is used to underwrite swaps). Parties who are likely to be interested in this governance power include:

• DAOs:
  Currently, 80% of pool liquidity can be to underwrite swaps, but there is the possibility of greater capital efficiency since in essence the pool is both long and short interest rates (fixed rate payer and fixed rate receiver), meaning that if balanced properly they cancel out, thus being able to tune the AMM accordingly can result in greater capital efficiency. Any DAO looking to leverage IPORs interest rate swaps has the incentive to acquire governance power.

Governance is normally a low-demand driver since users have a weak feedback loop to their underlying motivation and needs, thus resulting in voter apathy (which is a problem) and people not being very motivated by control over a protocol. However, in the case of IPOR, the parties involved have a stronger incentive to participate due to the reasons stated above.

The pwToken system helps to achieve this in some indirect manner since it deters voter apathy due to its design. In many cases a token serves dual purposes, say acting as an incentive token that must be locked yet at the same time as governance power, these utilities are baked into the token architecture itself meaning that users get both by force. If Alice is interested in the token as an incentive but doesn’t care for governance she will likely become apathetic towards governance and thus be misaligned. In the pwToken system, these functions can be separated, or delegated. Resulting in better alignment and thus a healthier voter group which in turn motivates new participants to be involved in governance. 

3) Governance over DAO token decisions
Governance has the ability to decide what happens with regard to DAO token management which encompasses a range of aspects, including liquidity mining use cases, distribution methods and parameters. Additionally, the DAO is responsible for making decisions regarding the operational fund, which includes protocol development and the allocation of liquidity owned by the protocol for exchanges. Furthermore, the DAO holds governance authority over the treasury, ensuring its management and appropriate utilization. Any party interested in the aforementioned parameters has the incentive to acquire governance power.

Liquidity Mining Module (LM)

It should be obvious by now that liquidity is important to IPOR. Being able to acquire and maintain liquidity is the name of the game in DeFi. IPOR understands this and thus has implemented the Liquidity Mining module. The goal is to bootstrap enough liquidity.

Via the pwToken system, $IPOR can be locked and delegated to different pools in the Liquidity Mining module. In doing so, users receive rewards in the form of $pwIPOR. Additionally there is a multiplier involved which takes into account the user’s staked ipToken balance (USDC, USDT or DAI) and their pwIPOR balance delegated to a particular asset, thus determining the proportion of rewards they will receive.

Interestingly, the rewards function follows a log curve. Meaning that there is an equilibrium point between the amount of ipToken balance and $pwIPOR balance.

This means that LPs have a direct incentive to acquire $IPOR and use it to boost their yield. The interesting result of the log based reward function is that it deters users to simply buy a bunch of $IPOR, stake & delegate it increase their multiplier since at some point along the curve it makes more sense to direct that capital to the liquidity pool (i.e deposit more ipTokens) since it will result in a better multiplier. Read here for latest on boost vs liquidity parameters.

This dynamic can be said to garner less direct demand for $IPOR itself but we need to recall here what IPOR is trying to achieve; liquidity. Having a high percentage of $IPOR staked at the expense of liquidity would go against their underlying goal. Furthermore, this feels like a much more healthy and fair system. Only time will tell. 

$pwIPOR Holders

Whenever a $pwIPOR holder wished to unstake and receive the underlying $IPOR they have two ways of doing so, either by (1) waiting for a 14 day cooldown period or by (2) unstaking immediately and thus undergoing a 50% haircut (known as diamond hand bonus for pwIPOR holders). 

Essentially, if you stake longer than your peers and choose to undergo the haircut, you benefit. This can act as a very weak form of $IPOR token demand since in essence, it’s a form of yield. As mentioned, this is close to negligible.

$IPOR Distribution & Unlocks

It’s important to understand how the supply is being split up into different allocations and how these allocations will be distributed (vested or emitted).

• 30.00% DAO Treasury
  Vesting is governed by DAO. In essence, the funds can be utilised to finance any project, whether suggested from within the organization or externally, as long as it aligns with IPOR's vision and is deemed beneficial.
  

• 25.00% Liquidity Mining
  LM incentives do not follow a status emission schedule but rather are adjusted dynamically by the DAO. The latest information on the current state of LM emissions can be seen here.
  

• 12.76% DAO Operations
  This allocation is used:
  
  (1) As operational funds for various marketing initiatives, including trading competitions, Citizen tasks like video timestamping and flagging quotable content, and collaborations with external marketing firms.
  
  (2) To support protocol operations, such as payments for services like IPORIAN basic income (IBI), DAO collaborations, and special projects.
  
  (3) In Protocol Owned Liquidity (PoL), visible here.
  

• 20.00% Core Team
  Linear vesting over 3 years with no cliff.
  

• 11.85% Investors
  Linear vesting over 3 years with no cliff.

Feedback Loops

A tokenomics analysis is focused on how value flows through the system and how it interacts with different users/components of the protocol. Feedback loops are relevant since they may be positive or negative and thus have an outcome on the underlying value capture (be it on the protocol or token level).

IPOR Index

As IPOR Index usage increases, increase in protocols referencing it, reinforcing index, resulting in a more efficient market. Note that this feedback loop has minimal value accrual to IPOR protocol as mentioned earlier.

Interest Rate Swaps

An increase in usage of IPOR’s Interest Rate Swaps results in increase in liquidity in AMM, thus greater earning power for LPs, leading to more LPs due to better yield and increase in usage of IPOR IRS

Governance

Moreover, an increase in AMM liquidity means more attractive governance power for money markets since 95% of idle capital is directed to them and thus an increase in token demand which results in more staked IPOR and finally a better price. Although not a feedback loop per se, it’s still noteworthy.

It should be noted that this depends on the amount of liquidity available in the AMM to be directed. Thus we can assume that this will be negligible until the amount of liquidity to be directed is of a comparable size to that of the money market.

Liquidity Mining Module Reward Function

The potential for better yield results in increased $pwIPOR demand (i.e users would have to acquire $IPOR and stake it to receive $pwIPOR) and an increase in liquidity pool deposits until equilibrium is reached which depends on the rewards function.

pwTOKEN Primitive

The more protocol’s that use the pwToken system the more flexibility they will have in creating sustainable systems and thus a better tokenomics landscape can be brought about. The only feedback that this has to IPOR protocol itself is in the mindshare that it may garner

.

Observations/Thoughts

Bootstrapping Token To Revenue Share Token

LP’s yield can be broken down into (1) opening fee, (2) liquidity withdrawal fee, (3) money market yield and (4) liquidity mining (LM) incentives. By delegating $pwIPOR LPs can boost their yield due to increased $pwIPOR rewards from the LM part of said yield, aka (4).

This makes sense in the early stages of IPOR's growth since the token is essentially acting as a liquidity bootstrapping mechanism. However these emissions will one day end, hopefully, IPOR will have found product market fit by then, but this in turn results in demand for $IPOR coming only from governance. A possible tweak that could be made (economic analysis should be applied to evaluate viability) is that of the boost component affecting not only LM incentives, i.e (4) –since, as mentioned, these will cease in the future, but the fees (1 through 3) that make up the rest of the yield earned by LPs. Essentially, delegating $pwIPOR could have a weighted effect on how much one earns from the aggregate yield generated by all LPs in the same asset. This would shift the utility from bootstrapping to revenue share at a later stage in the token’s life.

$pwIPOR Governance Power Fee Market

Currently, $pwIPOR holders can delegate their tokens to two available modules, those being (1) governance module which entitles them to voting power and (2) liquidity mining module which entitles them to boosted yield. These are mutually exclusive, meaning that users can delegate to both modules independently. However this brings up the question; If a user is not interested in the governance power that their $pwIPOR has and are simply focused on the liquidity mining module, would they sell their voting power to someone who is interested in using it? Thus a fee market for $pwIPOR could be born.

This could lead to a new avenue of token utility within the $pwIPOR system (it should be noted that this would have to be passed through the DAO via a governance vote).

Summary

IPOR is tackling a gap, that is certain. Their solution has solid ground in the DeFi landscape and it seems to be aligned with the parties that it aims at (LPs, money market participants, $pwIPOR holders and speculators). However, the goal of onboarding TradFi fixed income players is yet speculative.

IPOR protocol offers a rather enticing business model for LPs, it remains to be seen how much of the value it creates actually maps onto $IPOR. The efficacy of this depends on the underlying demand for governance over the IPOR Index and derivative instrument parameters, which in turn depends on the success of the IPOR Index and size of liquidity pool within the AMM. 

$IPOR is cemented within the protocol as a governance token and in the short to medium term as a liquidity bootstrapping token. It remains to be seen how efficient their bootstrapping will be in terms of liquidity acquisition,this depends on the strategy implemented by the IPOR DAO.

If you’re interested in the condensed, need-to-know tokenomics information for IPOR including all the resources used for this article, check out the report on Tokenomics Hub.

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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Interested in having your protocol reviewed by Tokenomics DAO or want to collaborate on an article? Feel free to reach out via email here. Feel free to join the Tokenomics DAO discord if you want to learn more about tokenomics.

You’d be surprised at how often the above situation happens. In this piece, we’ll go over how we approach the question of token demand.

Why Demand?

Tokens in web3 can be traded in a permissionless manner (unlike their web2 counterparts) between users via protocols such as Uniswap or Open Sea. If something is tradeable it means that it must have a price (i.e. an agreed-upon exchange between the two parties performing the trade) thus tokens are subject to the laws of supply and demand and price is the intercept of supply and demand on a graph.

The supply/demand dynamic is simply the relationship between supply and demand. As the above image depicts, as more supply hits the market it needs to be compensated with equivalent demand in order to maintain a steady price. 

This means that we cannot simply dole out tokens without having sufficient demand to absorb them and thus maintain a somewhat steady price. Creating demand for a token is the key to balancing the supply/demand dynamic. 

Sinks and Sources

It can be hard to think about demand since it can mean someone (1) buying and holding (e.g. validators) or (2) buying and spending (e.g medium of exchange token). There has to be a balance between holdability and spendability (i.e token velocity) in order to achieve a steady price. For the scope of this article, we can simply think of supply and demand in terms of sinks and faucets.

A source is an increase in the circulating supply of tokens –more tokens hit the market.

A sink is a decrease in the circulating supply of tokens – the removal of tokens from the circulating supply

Why Is Token Price Important?

I know what you’re thinking;

The fact of the matter though is: price is important.

The reason is that, unlike traditional stonks, which are primarily used as an investment vehicle or compensation plan by 99% of those who hold them and can have voting rights, tokens are multifaceted. 

Aside from acting as an investment vehicle, tokens can be used:

• As an incentive: Token is used to bootstrap

• Secure a network: Token used as anti sybil mechanism (i.e PoW & PoS)

• Governance: Token used to govern protocol

• Collateral: Token used as a form of collateral. Also applicable to insurance use cases.

There are likely more use cases, but for the purpose of this article, we don’t need to list them all. Note that these use cases are closely related to what we call Token Utility. 

Let’s take a look at the importance of price in each of the above token use cases.

Token as an Incentive

Here a token is used to incentivise certain actions. It is used as a form of compensation. If the token has no monetary value due to a poor supply/demand dynamic then users will not be incentivised to perform the desired task. Users may receive many tokens but they will have little underlying value. Thus the protocol is left with a hollow or ineffective incentive mechanism and no means of growing in value (or in some cases even functioning).

Token in PoS/PoW Syetems

First, let’s get something straight, mechanisms such as PoW & PoS are not consensus mechanisms but rather sybil resistance mechanisms.

Here a token is used as a requirement to participate as a node in the network. Having a low token price relates to the economic security of the chain. Simply put, if it's cheap to acquire tokens then chain security can become an issue since a single person can spin up multiple nodes and thus reduce decentralisation possibly leading to chain corruption.

Token as a Means to Governance

Here a token is used to allow people to participate in the governance of a protocol. Similar to the above PoS/PoW scenario, if a token is too cheap and a majority can be acquired by a single actor it can lead to the protocol being governed by a small group of people. 

Token as Collateral

Normally employed by money markets such as AAVE,  this is slightly different than other scenarios detailed above since price is important not because of its number value but rather its stability. If a token is used as a collateral type it should ideally be as stable as possible, large swings in price will likely end in liquidations if health factors are not managed properly. In turn, price is important but in reality, the market cap of the token is what is the underlying factor to monitor here. Since a low market cap means that it will be easier to manipulate token price and thus impair the tokens' collateral quality.

I hope it's evident now that price is important and although every protocol is unique, generally speaking, the goal is to have a stable or slowly increasing price which comes from a balanced supply and demand dynamic.

Where Does Token Demand Come From?

A simple way to think about it is:

Someone buying your token for some reason

Thus, it’s important to know:

1. Who that someone is 

2. What task they will perform

3. Their motivation (meta demand) 

4. Their reason for buying the token

Note that motivation and reason are not the same things here.

Motivation relates to the users underlying goal/desire for using the protocol and Reason relates to why they’re buying the token.

E.g Alice wants to participate in Ethereum’s chain security and earn a yield (motivation). To do this, she has to acquire $ETH to create a validator (reason).

Thus, Motivation can be thought of as meta-demand, the thing that users are ultimately trying to get. Whereas Reason can be thought of as a hoop (buy the token) through which users have to pass to achieve their underlying goal.

Motivation

Motivation falls into the realm of behavioural economics. A behavioural analysis of a protocol’s user base is very valuable since it can help to get a better understanding of what this part of the demand may look like and thus better align incentives. However, it must be employed at certain stages. In the early stages of trying to estimate demand applying all the bells and whistles will introduce many variables upon which assumptions have to be made that, later on, will likely result to be far from the truth.

Reason

That leaves us with the other side of demand: the reason, which is much more tangible and easier to think about.

We can break this down into three sources; 

1. Utility: The user has to buy the token because they need to use it within the protocol.
   E.g.: stake to create a validator, governance power, membership access, etc

2. Demand Mechanism: The user is incentivised to buy the token because it is required to achieve a certain goal within the protocol, this is closely linked to Utility but does not always mirror it.
   E.g.: lock a token to gain yield boost or governance rights

3. Speculation: The user buys the token because (1) they believe it will appreciate in price or (2) due to brand/loyalty. 

Notably, these are ordered with respect to how much control the protocol has over each type of demand source, from most control to least. –the protocol has the most control over its token utility which is linked to usage. It has control over any demand mechanisms that it puts in place, but less so than demand from utility. It has little to no control over speculative demand since this encompasses many aspects that are out of the control of the protocol.

The aforementioned fall under what we call demand drivers, i.e. something that drives demand (buy pressure or holdability) to your token.

Quantifying Demand

Well, that’s good and all, but how do you quantify this demand?

Essentially, how do you put a number to your framework? 

That young degen, we will discover in the next piece. For now, find comfort in the aforementioned framework and may the demand be with you ✊.