Weekly Gauge 49 : Tokenomic Efficiency
match the emission design to your product flywheel
The year is 2020, DeFi summer just started and the concept of liquidity mining was freshly introduced by Compound Finance to properly compensate users for Impermanent Loss as well as attracting new users with an enhanced yield structure. However mercenary farm & dump behaviors quickly led to the conclusion that recipients don’t retain any economic interest in the underlying protocol.
A bull market later, DeFi aficionados got so accustomed to protocols treating emissions like a magical money printer that they started to prefer when protocols instead don’t even offer a token. No reward token, no operating loss, no dilution. But it is undeniable that a carefully gamified and well-balanced token economy can create lightning in a bottle.
In this article we will explore various native emissions designs - that were largely reproduced by protocols surfing narratives without clear understanding of the flywheel it serves -, with the goal of identifying which tokenomic corresponds to which type of protocol.
veTokenomic
Driven by the idea of aligning protocol users and token holders, the veTokenomic introduces the ability for long term committed holders -through a locking system of the native token- to control the distribution of future emissions. The necessity to compound those rewards into more locked tokens to counter the dilution of future rewards allows to significantly reduce the circulating supply, thus the potential selling pressure.
However, in order to maximize the real yield component and platform revenues through volume and fees, a DEX should harness its native token liquidity and encourage users to trade it and contribute to its depth with major assets such as ETH or stablecoins.
This is the reason why Balancer’s iteration of veTokenomic using LP tokens of the BAL-ETH pool instead of single sided BAL is a game changer by creating smooth and continuous activity on the pair, generating fees for the protocol.
ve(3;3) iteration of the design focuses on incentivizing volume instead of TVL growth, by rewarding voters (token holders) with a revenue sharing mechanism distributing fees from the specific gauges they voted for, thus encouraging arbitrage between vote incentives and fees redistribution values.
oTokenomic
When designing a lending protocol tokenomic, several key factors should be considered. First, leveraging the native token to enhance yield can be a strategic approach, incentivizing users to participate in lending activities by offering attractive returns while lowering interest rates for borrowers.
Secondly, retaining liquidity and TVL becomes crucial for increasing the debt ceiling, allowing the protocol to accommodate larger borrowing capacities and facilitate growth. However it is important to exclude native liquidity from lending to prevent potential security issues, as was highlighted with the Mango exploit for example.
To ensure long-term alignment and bolster protocol reserves, native emissions in the form of call option tokens can be introduced. This type of emission not only incentivizes users to hold during downtrend market conditions but also provide them with discounted rewards. By incorporating these lending-focused elements into the tokenomic, this strategy encourages users to contribute to the protocol’s reserves while maintaining a limited selling pressure.
A novel mechanism to encourage long term commitment and reduce rewards’ selling pressure can be seen as an evolution of Bonding where projects are just selling tokens at a discount compared to a spot market price without any stop gap.
Tapioca DAO case study (courtesy of @filbef) :
$TAP is the backbone of the Tapioca DAO token economy. Unlike tokens from other protocols, TAP cannot be issued for nothing; there are no liquidity mining programs. The only way to receive TAP is by exercising oTAP call options received from the DSO (DAO Share Option) Incentive Program at a discount compared to TAP actual value.
The size of the discount is based on lock time duration thanks to twAML (Time Weighted Average Magnitude Log) - in the context of oTKNS it's a novel approach to determining how much discount each individual receives when they decide to lock their lent liquidity. This is also the main difference with Timeless Bunni oLIT.
The more and longer users lock their Liquidity, the bigger their oTAP allocations until it gets to a point where they feel the size (discounts) of the allocations aren't worth the length of time needed to receive it. By this point, people will generally stop locking (more than they used to at the beginning) and the AML starts decaying which means, it begins to offer interesting 'deals' (reduced locking time for high oTAP allocation at better discounts) all over again, users will get attracted and start locking.
The main advantage of such a system is that the liquidity provider has no reason to dump the price below the discounted value. This creates a virtual price floor. Unlike the usual Liquidity Mining programs, where your goal is to dump tokens as quickly as possible and so on until price is 0.
Early adopters will benefit the most since there isn’t a lot of competition & it is easy to get in.
Tokenomics for Liquid Staking Derivatives (LSDs)
As LSD assets are becoming more widely paired over native ETH across numerous ecosystems - including Layer1s, sidechains, Cosmos appchains, and beyond - their native token economies are confronted with challenges that need to support this expansion. These challenges consist of balancing the value of LSD with chain security, incentivizing appchains’ validators, and establishing a robust on-chain voting system for governance.
The native token of an LSD protocol should bear the responsibility of capturing value alongside the growth of their own liquid staking wrapper, and revolves around a deep understanding of the PoS mechanism.
A recent proposal on Stafi governance forum introduces the project’s Tokenomic V2 and describes with great precision the various requirements of such product/services.
In conclusion, tokenomic choices should flywheel with project’s product or services, e.g DEX LPers are not driven by the same costs and opportunities as lenders, differences of products and user base are to be considered when choosing native token emissions parameters to protect the sustainability and security of its native assets as well as harness the liquidity that can be created from it.
