Understand the main token models of DeFi in the early stage: fee type, governance type, re-mortgage guarantee type
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Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, written by: dYdX team, compiled by: Leo Young, published with permission.
DeFi tokens are without a doubt the best-performing asset in the cryptocurrency market recently, and the main reason can be attributed to one factor: value accumulation.
Most of the DeFi token model is that the income obtained by token holders is directly proportional to the use and growth of the network. In fact, many successful ones resemble traditional securities. Holders value assets based on fees earned in the network and governance capabilities. DeFi tokens are also combined with an incentive design scheme to ensure that the interests of the network are consistent with the interests of long-term holders.
Staking is a common pattern. Although DeFi tokens have passed the initial value capture test, many models still need to be improved. In the future, under the inspiration of more experiments, we will find the best value capture mode to realize the decentralized financial network through tokens.
The idea of using tokens to incentivize the growth of decentralized networks is not new. Fred Ehrsam blogged early on about decentralized business models and explained how tokens can be used to solve the chicken-and-egg problem faced by networks and markets. The problem with this approach is that it is impossible to distinguish between long-term investors or users committed to the development of the network, and speculators. This problem was especially evident in the ICO bubble of 2017. Tokens are sold to speculators, who quickly sell at a profit, completely ignoring actual network development.
This is when the industry begins experimenting with token models designed to create polymorphic networks that attract long-term participants. In particular, DeFi has become a breeding ground for such experiments. Because the general functions in the fields of pledge and lending require users to join the network, this becomes a large sample for testing the incentives of these tokens. Experimental results show that three types of unique token models emerge, and functional mixing is also common.
Governance tokens (governance rights)
Many of the most successful tokens gradually incorporate both functions. Many tokens start out as governance tokens and later hope to add some type of fee capture functionality, as long as token holders vote for permission. This also shows that many of these tokens have governance functions. Essentially we want network participants to drive more value capture.
Token Classification
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DeFi tokens on the market now
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Tokens that are generated on the DeFi protocol and can be verified by cryptography as fees are called fee tokens. Fees are specific to accessing and using DeFi protocols — similar to transaction fees charged by traditional financial service providers. These fees are sent directly to the Ethereum address holding the underlying fee token, or to an integrated wallet. Fees have so far been issued in stablecoins, the underlying network token, or in ETH.
In some instances, token holders vote on how accumulated fees are spent. Taking the Kyber network as an example, token holders can use their own funds to repurchase KNC in the open market, and then burn it from the total amount. "Buy and burn" is commonly used to add value to deflationary DeFi tokens.
Fee-based tokens are a big step forward in the DeFi token model because they can be valued based on cash flow. Compared with Bitcoin, Monero and other assets that use intangible parameters to value hard-cap fixed issuance assets, this model is easier for investors to value. Tokens can now be valued based on future cash flows, comparing similar projects with each other to determine value deviations.
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Tokens that empower token holders to vote on the functionality of a project's underlying smart contract are called governance tokens. Underpinning the value of governance tokens is the fact that a fully decentralized protocol should not be controlled by anyone. Token holders jointly control a set of contracts and decide on future protocol changes.
Governance DeFi tokens have so far been used to vote on proposals to decide which assets should be backed, the level of collateralization of certain assets, and how protocol fees should be spent. For example, Compound recently has many new proposals to determine the loan value of certain assets.
Governance will gradually shift to decide how smart contracts are upgraded. This can be done programmatically: votes are confirmed and smart contracts can be adjusted without human intervention. To do this, developers need to put the proposal into the final code. This way, the smart contract automatically integrates the proposals once the voting is complete.
Final Judgment Guaranteed Tokens
Tokens that maintain price anchor support for DeFi protocols are called final-approval guaranteed tokens. For protocols that create synthetic assets, there will be situations where there is not enough external collateral to anchor the synthetic asset. In this case, the base network token can be used as a liquidity resource, and buying and selling needs to restore any anchored assets. Tokens are used to support the protocol. In exchange, holders of guaranteed tokens usually get a certain share of network transaction fees.
Two of the most famous examples are MKR and MTA. MKR is the first token model to support the final guarantee function. If for any reason the system were to uncollateralize MKR, MKR would be sold on the open market to support the Dai supply. In MTA, if any stable currency in a basket of assets deviates from the anchor value, the MTA will be sold to ensure that stable currency depositors will not suffer losses.
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Staking and Inflation
There are two elements in many DeFi model deployments: staking and inflation.
Staking is used to allow token holders to support the long-term interests of the agreement. Through pledge, token holders lock assets for future use, effectively reducing circulation and reducing market selling pressure. More importantly, users can usually stake to obtain the power to provide services to other holders of the network. In return for providing services and making the network more valuable, stakers are often rewarded with inflation.
The inflation financing model has been proven, and the liquidity launch in the early stage of the agreement has been very successful. For example, Synthetix uses inflation to motivate pledgers to create synthetic assets, which are then placed on Uniswap to generate liquidity in the secondary market. Until the sETH pool became one of the most liquid pools for trading ETH on Uniswap, this approach caused an upsurge.
Staking also has special effects on the market structure, and it is debatable whether this approach is beneficial. Generally speaking, staking income, especially high staking income, puts pressure on liquidity and makes it difficult for buyers and sellers, so it will not have a big impact on prices.
Staking inhibits liquidity for two reasons:
Low liquidity creates high volatility. For many high-potential DeFi tokens, causing upward price momentum. DeFi tokens that really capture value almost always have a bullish structure because there are very few sellers. This has caused DeFi tokens to have a strong upward momentum. The best example of this is SNX.
value capture
value capture
The most novel function that the DeFi token model brings to the field of encrypted assets is that tokens generate intrinsic value.
Before DeFi tokens, few tokens could be quantified for valuation. First-generation encrypted assets generally cannot be valued. Assets get priced, and market participants primarily respond to market structures and narratives. This fundamental void of intrinsic value is the root cause of the highly speculative and volatile cryptoasset market. After it was widely discovered that these assets can only increase in value through steadfast holders, the exchange issued a stock-like platform currency, and the proceeds were used to repurchase and burn tokens, effectively imitating the stock dividend mechanism. One of the shortcomings of the platform currency is that the repurchase and burning process is opaque. It is not clear to the holders whether there is a front run on the repo, or if the repurchase is actually happening. At present, the platform currency is only expected to increase in value.
The value capture of pure governance DeFi tokens is slightly different. According to the rationale, the value of the governance token is equivalent to the marginal cost of forking the network. The difference of the DeFi network is that the forked code cannot take away all the liquidity at the same time, which is the moat of DeFi. In view of this, the market may place a premium on governance rights, as is the case with Yearn Finance, a fully community-run project. Yearn launched its own network and performed better than the other two most important governance tokens COMP and BAL.
Source: coingecko.com
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Source: coingecko.com
Liquidity mining cold start
Even though liquidity mining is a brand-new model, it has been considered a success based on the scale of early start-up. After Compound launched COMP liquidity mining, the increase in deposits was huge, and the transaction depth reached 400%. Similarly, after Balancer announced BAL mining, the number of active users increased dramatically. The focus of the cryptoasset market in recent weeks has been the huge increase in the total value of Yearn Finance users and the total value of mortgage lock-ups issued by YFI tokens. In a week, the total locked value of Yearn contract increased from less than 10 million US dollars to 300 million US dollars.
Second, since many liquidity mining opportunities are denominated in stablecoins, users pay interest using leverage and certain rewards. Essentially, it is a cost-effective transaction, but there are also many risks associated with it. The problem is that when the market is volatile, DeFi will be very fragile, and the leverage will collapse very quickly. Unfortunately, liquidity mining may increase leverage within the system. Therefore, it is important to recognize and avoid risks before allocating funds to liquidity mining.
in conclusion
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