Cobie's Interpretation: How Bad Is ApeCoin's Staking Proposal?
Compilation of the original text: The Way of DeFi
Compilation of the original text: The Way of DeFi
I was recently contacted by a member of the ApeCoin Board of Directors who asked me to provide some feedback on some proposals, and I presented my ideas on the phone.
I want to discuss them openly because I think they are interesting topics.
Before I start, I want to clarify: I do not hold any ApeCoin, I am not shorting ApeCoin, I have owned BAYC in the past, but now I have no long-term or short-term exposure to anything related to the Yuga Labs ecology. I am not a financial advisor and in fact have long been rumored in the industry to be an idiot.
The death of staking
Staking has had some meaning in the past. I think Peercoin was the first protocol to introduce the proof-of-stake (PoS) mechanism, about ten years ago. Since then, the PoS mechanism has become more and more popular in new blockchains, and all newer ecosystems are built on PoS blockchains.
For Peercoin and later PoS networks, staking has a purpose. Owners will provide their tokens as collateral for a chance to validate blocks, for which they will be rewarded. Staking thus rewards users for risking their collateral and working: a function necessary to participate in the continued functioning of the network or protocol.
But somehow, over time, the term staking has been redefined. Staking now seems to mean that if you don't sell the tokens you currently hold, we will reward you with more tokens, rather than rewarding you for contributing to the security of the blockchain. Earn rewards.
These modern staking mechanisms have no function in the ecosystem they belong to. They don't do anything in a practical or technical sense, they don't make the ecosystem stronger, they're just shell games that use the names of different things to obscure their actual purpose, which is to encourage less dumping.
When PoS protocols issue rewards to stakers, they are buying the security of the blockchain. When DeFi projects offer liquidity mining programs, they are buying growth and TVL. It seems worthwhile to trade something in order to make the protocol more sustainable, larger, or more secure.
But these new “staking” mechanisms gain nothing but reduced liquidity for potential sellers.
If you don't stake, your share of the network or protocol is diluted by new emissions. Plus, new stakes are risk-free! You don't lose your tokens because staking does nothing! So, lock up your tokens! Move them off the market instantly...in fact, we'll pay you!
Simply using rewards to incentivize users not to sell, paid in the same asset that users choose not to sell, seems to be the way to go in the late stages of Ponzi game creation.
ApeCoin
Alright, so here's a quick look at what's going on with ApeCoin.
It has a total supply of 1 billion, it does not mint or burn new tokens, so the total supply will always be 1 billion APE.
The token ownership distribution of ApeCoin is as follows:
47% belong to ApeCoin DAO "Ecological Fund"
15% for community airdrops
15% belongs to Yuga Labs
14% belong to "launch contributors" (investors?)
8% belongs to the founders
1% goes to charity
In terms of unlocking, it looks like Yuga Labs, founders, and investors are all locked up for a year, but there seem to be exceptions, some coins are unlocked immediately, and some are unlocked after 6 months.
The remaining unlock timeline seems to be in the range of 1-3 years, with the entire supply 100% unlocked in 4 years.
Anyway, back to the topic.
Staking of ApeCoin
Currently there is an ApeCoinStaking Plan Proposal, which was written by Animoca, which appears to be a crypto game VC software hybrid company whose founder is on the board of ApeCoin.
In the words of the proposal author, the goal of this proposal is to make ApeCoin the preferred token for web3 by incentivizing early NFT adopters and existing and potential ecosystem participants to participate in activities that benefit the APE ecosystem.
The proposal itself seems complicated, but I can summarize it for you, it basically says:
We should pay people who hold ApeCoin 17.5% of the total ApeCoin supply over the next three years, and we should give them a different rate of return if they also hold BAYC/MAYC/BAKC.
It's unclear to me how issuing APE tokens to those who already hold APE "incentivizes early NFT adopters and existing and potential ecosystem participants to participate in activities that benefit the APE ecosystem."
Isn't this just paying ApeCoin to those who hold ApeCoin?
In fact, if we're really being honest about this proposal, what it's really saying is "let's pay some token rewards to holders who don't sell when the founders/investors/contributors unlock it, so we It’s possible to fake some utility before actually building it.”
$2.6 billion in staking rewards, all for air
ApeCoin's overall valuation is currently around $15 billion, which means its DAO treasury holds about $7 billion in tokens.
Animoca's proposal proposes giving away $2.6 billion worth of tokens (approximately 37% of the DAO's remaining tokens) for free to APE holders over the next three years.
Since this staking doesn't actually do anything practically or technically, you can simply think of it as a means of bribing users not to sell. The proposal reads:"If you don't sell your APE or BAYC, we will give you more APE tokens!"
The DAO spends the remaining 37% of its tokens on bribes, so it has to take bribes into account.
Considering that these tokens can be spent on a lot of things, they are currently worth $2.6 billion after all! They can create a lot of value for ApeCoin, build a sustainable ecosystem and attract new external capital.
From an outside perspective, it appears that the DAO spent more than 1/3 of its remaining tokens to bribe people not to sell when early contributors passed the early unlock phase.
But when you consider the supply and demand dynamics that this staking program will bring about, it seems more like a conspiracy than an actual malicious tactic.
There is currently about 15% of the circulating supply of ApeCoin tokens in the market, this inflation/emission plan will increase the supply in the market by about 75% in the first year only, but I don't believe this will increase the demand for ApeCoin by 75%, Therefore, siled staking schemes may harm the economic interests of locked-in token holders.
However, ApeCoin does have a real problem: how does it provide additional supply to the market so that incoming founders and investors will not become the lion's share of the liquid supply when unlocked?
Personally, I think it's good to spend this earmarked money, but that money should be spent on growth purposes and moving towards their original stated goal: becoming the currency of web3. These tokens should not be used to reward those who already hold tokens.
ApeCoin DAO
The remaining assets of ApeCoin DAO should focus on solving practical problems for users.
I don't know what it means to achieve the mission of "becoming the main currency of web3", but I know that there is "user demand" in the NFT ecosystem, which can be funded or built by ApeCoin DAO.
Why is OpenSea the main trading place for Boring Apes? Last year, BAYC and MAYC traders spent about 20,000 ETH on OpenSea, which means that $60 million is leaving the ecosystem every year.
BAYC holders, or NFT holders in general, may wish to receive NFT credits while retaining ownership. Could ApeCoin DAO Create a Major NFT Lending Market?
Why do Bored Ape users keep getting hacked? What educational resources are needed to help people self-custody their assets more effectively? Can ApeCoin DAO launch an attractive custody service?
etc. I'm sure the community will come up with some better ideas.
DAO should be committed to creating new value for APE ecological users and potential users, and it should solve the practical problems of users in the NFT community.
These funds are used to acquire and incubate utilities, establish revenue streams, and create sustainable DAOs.
Should a staking program exist?
I have a legitimate reason to think that 15% "retail" ownership share is too little, and a staking program for the first year or so (while the only token supply eligible for staking comes from retail investors) could raise it to something more meaningful level.
I can also see an argument for a 10-15 year emission plan: APE tokens have no minting function and cannot increase their own supply. If the DAO burns all the APE tokens in the first few years, it will have no more firepower to incentivize activity or capture future value. Also, over time, you'll achieve a wider, more desirable distribution by extending the amount of time someone has to be an ecosystem participant.
I can see an argument for why BAYC NFTs should be staked: so that users don't have to choose between joining the community by buying BAYC or buying ApeCoin. Additionally, newcomers are more likely to enter the APE community through NFTs rather than fungible tokens, as this is how everyone in the current APE community works.
I can also see an argument for why BAYC NFTs shouldn't be staked: ApeCoin is a brand new entity that was founded by the BAYC community but is not actually directly affiliated with NFTs anymore.
In reality, these arguments don't have much basis in reality, because it's hard to say: what's the point of this staking pledge program? What is the program trying to achieve?
This proposal says some nonsense about "incentivizing participants to do things in the APE ecosystem", but the staking proposal itself seems disconnected from that goal.
If the goal of the ApeCoin DAO's staking program is to acquire new members for the DAO, a credible staking program could include ongoing rewards for NFT holders within the APE ecosystem. The APE ecosystem may even acquire other collections of NFTs and issue APE tokens to these community members.
If the goal of the Staking pledge program is to support the liquidity of the BAYC ecosystem, then APE token emissions should be provided to LPs in the APE/WETH market, as well as those who provide liquidity to pools such as NFTX.
If the goal of a staking program is simply to drive up prices, then it needs to lock up assets and provide higher returns for longer lockups and stifle supply outside the market for as long as possible.
Without stated goals about the purpose of a staking program, it is difficult to design a staking program that achieves those goals. Getting more supply into the market, bribing users not to sell, or providing "fake utility" are not credible goals of a staking scheme.
Personally, I would design a small program to incentivize the introduction of more and more new people into the Ape ecosystem over the next ten years, and I would reward existing holders for continued participation in the ecosystem. My personal opinion is that new users will join the NFT community, not the fungible assets, and therefore, the holders of the NFT assets should be paid, not the holders of these tokens.
governance
governance
ApeCoin is now a multi-billion dollar organization, and it needs a long-term plan that is long enough. There should be a good answer to this question: How do we turn this $7 billion in APE treasury assets into $100 billion over the next decade or two?
However, crypto investors don't always have very long time horizons, and on average, I imagine they don't care too much about what their token projects will do in 2 months, let alone 10-year plans.
So if you tell the community, "hey, we've decided there won't be a staking program, and we're going to invest in growth by paying builders to contribute to the ApeCoin DAO ecosystem," they're probably going to be very upset.
“I don’t get any tokens for free anymore? And outsiders get tokens worth millions of dollars? Just to build a lending market? What the hell is this?”
Retail investors are unlikely to seriously consider the impact of "OHM-style supply inflation" on existing holders, nor do they consider the knock-on effects of falling price charts.
The governance of complex and multifaceted analytical problems is thus an odd environment in which it quickly finds its way into the realm of politics.
I hardly believe that token voting by retail investors will give the best mid-term outcome, in fact they are more likely to vote for a disruptive mid-term outcome.
Summarize
Summarize
Staking mechanisms should be designed to support ecological goals, and they should be used to incentivize parts of a product, community, or network that require people to work or take risks.
The ApeCoin DAO currently has $7 billion in funds that it should use to incentivize people to take risks, work, and grow the community, rather than giving it to existing holders as an interest rate bribe to reward them for not selling.
With no utility or value capture, spending 37% of fiscal pool spending on emissions is not only worthless, but may actually be damaging to the long-term prospects of the APE ecosystem.
We should have resisted changing the meaning of the word "staking," but it may be too late now. The term is now inherently misleading, and can mean several different things.
I really hope we don't live in a world where the main currency of the internet is called "ApeCoin", but I do hope to try to avoid this obvious bias in this article, which is the same as any DAO that finds itself in a similar situation related.
How bad is ApeCoin's staking proposal
The Bored Ape community is known in the crypto space for its repeated failures of self-custody.
In response, the ApeCoin committee suggested that the BAYC NFT would actually "contain" your APE tokens.
How Staking Works for NFT Holders
If an NFT holder in the BAYC ecosystem wants to stake in Pool 2, 3, or 4 (depending on the NFT), they will pair the NFT with their ApeCoin to enter the relevant staking pool. The NFT itself is not pledged, it just acts as the key to the "vault" holding the pledged ApeCoin. NFT holders still retain the ability to sell their NFTs. By default, if you sell an NFT that is actively staking ApeCoin, you are also selling the key to access the associated staking ApeCoin.
And if only NFT is to be sold without selling the pledged ApeCoin, the NFT seller will release the pledged ApeCoin before listing the NFT.
This means, if you lose your BAYC, you also lose your APE tokens!
You can't split your NFT and your APE tokens into different wallets, which means if someone steals your BAYC, they don't need to do anything extra to take your APE tokens. By default, APE and BAYC are used together! marvelous!
The design seems intentionally convoluted and produces more bad results than good ones. Even forgetting that you staked APE behind a particular NFT could be a huge financial mistake, really bad design.
The ApeCoin Board of Directors also issued the following statement:
"Why can't I just pledge a BAYC ecological NFT?
We believe that everyone in web3 should have control over their own assets, and in order to provide this right to NFT owners, the NFT itself will not be staked into a staking pool. In addition, by staking ApeCoin instead of NFT, ApeCoin DAO incentivizes and promotes the long-term development of the community of ApeCoin holders. "
This seems like a straightforward pun. Everyone should control their own assets, so you can't put these assets in the contract. But you can put other assets into the contract!
This doesn't really make sense, I can only conclude that they are taking users for idiots.
Anyway, what happens after three years of staking?
"What happens at the end of the three-year pledge period?
A new AIP needs to be drafted and voted on to determine the future staking mechanism, and then put that decision in the hands of the community. Ideally, at the end of the 3-year staking period, the DAO would have ongoing revenue to continue incentivizing staking and rewarding ecosystem participants.
”
"Ideally"? So, wouldn't it be better to determine the income plan before the pledge plan? What if a solid income plan took 5 years instead of 3? It also seems crazy to devise a staking program with no knowledge of the product and revenue plan that is initially only being used for subsidies.
Anyway, it doesn't really matter because staking doesn't serve any purpose in this case, it's just for bribing people to remain community members.
Oh, and the current staking proposal also includes $1.3 billion in token emissions over the next year (at current market prices). Assuming all holders are in a reasonably "Western" high tax regime environment, this alone would generate $700 million in selling pressure. That's cool.
After writing here, I don't want to write any more.
