Tokenomics 101: The Graph
A decentralised marketplace for blockchain data queries
TLDR: read the summary on the Tokenomics Hub
Introduction
Blockchains contain information about transactions and other state changes. The challenge is in analyzing this data. For instance, it may be difficult to analyze transactions of wallets and their addresses, or details of previous NFT owners. Although blockchain data is public, it can be challenging to access.
One solution could be to use an ingestion and processing data service. However, this solution is not scalable since it requires a lot of resources. Additionally, developers may need to query the blockchain occasionally.
Another alternative is to rely on a third party to provide this data. This approach, however, requires trust in the third party, and many third parties are centralized, going against the crypto ethos.
The Graph is a decentralized protocol that efficiently indexes and queries blockchain data. Developers can organize blockchain data without relying on centralized data services. It works like an index in a book or Google search, helping users find specific information efficiently, saving them time and effort.
The Graph indexes blockchain data, making it easier for developers and applications to find, query and use the desired information. The data is organized in open APIs called “subgraphs” that define which blockchain data will be indexed and how it will be stored. Indexers run the hardware that does the computational work of indexing data.
Subgraphs can be explored via Graph Explorer. Below is an example:
A DeFi user may not be aware that The Graph powers the dApps they interact with. For instance, Uniswap or Pancakeswap use The Graph to provide token price information.
Tokenomics
Overview
The Graph is a data indexing protocol that enables consumers to query subgraph data. These consumers include dApp developers who integrate subgraphs into their user interface (UI), as well as the end-users who access data through that UI. Curators select which subgraph will be indexed, after which Indexers begin to index the data.
Initially, The Graph's hosted service was created by the team behind the protocol, Edge & Node. It consists of a large indexing node that processes billions of queries each month for data such as token prices, trade volumes, and liquidity. However, The Graph is now migrating subgraphs to a decentralized service in order to create an open marketplace of Indexers, Curators, and Delegators that work together to efficiently index and serve data in a decentralized way. This will allow apps to become serverless and not require servers to access blockchain data, instead using the public Graph protocol.
To ensure the protocol runs efficiently, The Graph Network incentivizes several key roles, including Curators, Indexers, and Delegators. These roles are crucial for the protocol to function effectively. The Graph launched GRT, an ERC-20 token that runs on the Ethereum blockchain, to achieve the goal of decentralization. GRT is a utility token used to allocate resources on the network, and active participants can earn income based on the amount of work they perform.
Participants of the network
In The Graph Network, there are four key roles: Curators, Indexers, Delegators, and Consumers.
Curators create subgraphs and determine if they are valuable and should be indexed by Indexers. They use GRT (Graph Tokens) to signal their interest in quality subgraphs and attract Indexers. To do this, Curators deposit GRT into a bonding curve and mint GCS (Graph Curation Shares). The price of GCS increases as more Curators mint new shares, incentivizing early participation. Curators also receive 10% of all query fees generated on the subgraph and a 1% tax upon initial curation, which is burned.
Indexers are node operators that provide indexing and querying services for the signalled subgraphs. They must stake a minimum of 100K GRT to provide these services and earn query fees and Indexer rewards. Indexers set the price of queries in the query marketplace based on the cost to index the subgraph, demand, curation signal, and the market rate for blockchain queries.
Delegators contribute to the network by delegating GRT to Indexers and earn a portion of query fees and Indexer rewards. They select Indexers based on their performance, reputation, activity level, and other parameters. Rewards for Delegators are specified by each Indexer based on the reward cut and fee cut percentages. There is a 0.5% delegation tax that is burned.
Consumers are the end-users of The Graph. They query subgraphs and pay query fees to the Indexers, Curators, and Delegators. Users can set a max query budget in their subgraph, but they need to take into account that setting a low budget may exclude Indexers, potentially leading to poor quality service. Query fees are routed to Indexers based on price, performance, and security.
The Rebate Pool rewards network participants based on their contributions to The Graph Network. A portion of query fees is distributed as rebate rewards using a function of contributions to the pool and their allocated stake on a subgraph where the query fees were generated. The optimal allocation is when Indexers allocate stakes in proportion to their share of the contribution of fees to the rebate pool and receive back 100% of their contributed fees.
New issuance of GRT is set at 3% annually (measured as a percent of the total token supply). New token issuance is used to pay Indexer Rewards that are distributed to Indexers and Delegators proportional to the Curator signal and allocated stake.
Governance
At the bottom of the diagram, we can see the governance process and the treasury. Community members have the ability to vote on the Graph Improvement Proposal (GIP) process, which is responsible for implementing protocol upgrades. The GIP supporters first share their ideas on The Graph Forum, where they can receive feedback and engage in discussions. They can then use tools like Snapshot Voting to advance to the candidate stage. If the GIP is deemed suitable, The Graph Council may choose to vote on its inclusion into the protocol.
The governance of the protocol and The Graph Foundation's treasury is under the control of The Graph Council, which receives support from the core contributors, the community, and The Graph Foundation. The Council represents the interests of the five core ecosystem participants, including Indexers, users, technical domain experts, initial team, and active GRT holders. The council follows a governance process and votes on Graph Improvement Proposals (GIPs), which include technical upgrades and the core development roadmap.
The community DAO known as The Graph AdvocatesDAO oversees the membership and contributions of the Graph Advocates Program and community grants. The Graph Foundation supports the core contributors, enables community development, distributes grants, and leads decentralization efforts.
Distribution and Unlocks
At launch, on December 17th, 2020, a total of 10 billion GRT tokens were minted. The Graph's public token sale was conducted in October 2020, with the aim of distributing tokens to community members who intended to participate in the network as Indexers, Curators, or Delegators. The initial sale was successfully registered by 14,000 individuals, resulting in a wide distribution of tokens, similar to other big projects on web3.
Source: https://thegraph.academy/ecosystem/graph-token-economics/
Network participants will receive vested tokens at different times over the next three years.
Source: https://thegraph.academy/ecosystem/graph-token-economics/
Source: https://thegraph.academy/ecosystem/graph-token-economics/
The Graph doesn't have a maximum supply limit. At any given time, the total supply of GRT is calculated by adding the 10 billion minted tokens to the new issuance and subtracting the burned tokens.
GRT tokens are burned whenever a query fee is generated or a tax is incurred. The network imposes the following taxes:
• A delegation tax of 0.5%
• A curation tax of 1%
• A subgraph upgrade tax of 1%
• A burn of all generated query fees of 1%
Currently, more than 70% of the GRT supply is in circulation, which amounts to 7,400,273,157 GRT. The biggest challenge going forward is to find demand drivers for the remaining tokens.
Value creation and value capture
The Graph is a decentralized protocol that enables dApps to search and access the blockchain without relying on proprietary indexing services. The Graph is expected to become the biggest data collector in the Web3 ecosystem by indexing an increasing number of subgraphs. Subgraphs can be built by anyone, making data easily accessible to all. The Graph powers many of the most-used dApps and DeFi protocols by providing a decentralized protocol for querying data off blockchains and storage networks.
One of the most innovative features of Web3 infrastructure protocols is the ability to incentivize key contributors with rewards for value-added roles. The GRT token helps to align incentives among network participants. Indexers, curators, and delegators must stake GRT to perform work for the network. They are supply-side participants holding GRT to provide indexing and query processing services.
Demand Drivers
The hosted service will be stopped soon. More subgraphs will be moved to the decentralized network, resulting in a higher percentage of query fees paid to the participants. Subgraphs that are deployed on the decentralized network, along with the ecosystem-staked Indexers, Delegators, and Curators, continue to grow each quarter. At present, there are 2.9 billion GRT staked, and Delegators are receiving annual returns of about 8-10%. The majority of these returns come from the 3% token issuance, rather than query fees. This presents a significant opportunity for Indexers to benefit from the growth of the query fees.
Source: https://graphscan.io/#indexers
Observations/Thoughts
As the Web3 ecosystem continues to grow, more decentralized applications (dApps) will need to access blockchain data through robust infrastructure protocols. In order to create and capture value, well-designed tokenomics are crucial. The Graph has been successful in this regard, and the ecosystem is becoming more mature as network usage increases. An important part of The Graph's development is the ongoing decentralization of core ecosystem initiatives. With the launch of Graph AdvocatesDAO, the community is taking an exciting step towards decentralizing ecosystem efforts and grants. The Graph is blockchain-agnostic and committed to bringing the Web3 ecosystem together.
Summary
The Graph is a decentralised web3 indexing protocol that aims to provide value in a censorship-resistant environment. Unlike other tokens, GRT is a utility token that incentivises network participants to act efficiently and rationally. This token has real utility, as it is used to drive demand and has seen growth due to the increasing number of subgraphs being developed. Protocols are designed to be stored and processed on open networks with verifiable integrity, which makes data queries fast, reliable, and secure. Although there is no centralized organization running it, The Graph is a big mission that has the potential to attract more participants to the protocol as the volume increases and the hosted service sunset.
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