Original title: "The Pillars of Tokenomics & The ve Token Model"
Original author: Captain BTC
Original compilation: 0xzshanzhan, Deep Tide TechFlow
Designing a token economic model is difficult
For the project, the design of Token's economic model is very important, and it is also one of the most difficult things in the project. Because this is essentially creating an entire economic system from scratch, and without any real-world experience to back it up. A slight mistake in the design of the Token model may affect the entire project, even if the other designs of the project are good, the immutability of the smart contract further emphasizes the importance of the initial Token design. Once the contract is released, a fork is required to update the protocol.
As complex as token economics is, it is still subject to the fundamental laws of economics, supply and demand. To put it simply, the design of the Token economic model is designed to affect short-term and long-term supply and demand. Ideally, the best design would reduce supply while encouraging demand, but this is easier said than done.
four pillars
This article will introduce the basics of token economics before diving into the intricacies of "ve" token design. In my opinion, every cryptocurrency has four fundamental token economics pillars, which are the first things investors should analyze before delving into token economics. Any design flaws on the pillars are hidden dangers for the token economic model in the future. If the flaws are serious, they may cause the entire economic model to collapse, or cause the project to slowly bleed, like an abandoned building rusting.
supply
There is nothing more fundamental and important than token quantity management. Part of token quantity management is supply. We can divide the supply into:
Circulating supply:
The number of Tokens circulating in the market
Maximum supply:
Theoretically the maximum number of tokens that can be generated by the protocol
Total supply:
The number of Tokens issued. This includes burned and locked tokens. Even if these Tokens are not part of the circulating supply.
The higher the supply, the lower the price. I'm sure you've often seen statements like "Look at ADA, it's only $1, imagine how much money I'd make if it was only 50% of Bitcoin's price!" Because they don't realize that ADA has a supply of 45 billion while Bitcoin has a supply of 21 million. This is why market cap is a more accurate indicator than just looking at token prices, as it affects both price and supply.
Comparing the circulating supply with the total supply and the maximum supply reveals something interesting. For example, if the circulating supply is low and the total supply and maximum supply are high, this is a huge red flag, because the value of your Token will be diluted, as shown below:
The circulating supply of this Token is about 133M, and the maximum supply is 10B. There's roughly an 8x dilution risk for your token, which is a major problem. If all tokens are released tomorrow, your token value will be 1/8 of what it was yesterday. Assuming you buy today with a market value of 305 million, it is expected to reach 100 times in 5 years. That would put the market cap at 30B (pretty high, but not uncommon in crypto), but a fully diluted valuation of 2.3T (higher than today's crypto market cap).
Additionally, regular issuance of these tokens will increase the circulating supply, which will put downward pressure on prices, even as the market cap increases. That's not to say everything is bad with this token, and they might even have a way to offset supply pressure, but it's a risk factor that long-term investors should be aware of. Short-term investors are less worried about the maximum supply, because they may have already run away by the time the token is unlocked.
distribution
distribution
The distribution of tokens is the pillar of the next token economic system that investors should pay attention to, and it is a very simple pillar. Distribution refers to the distribution of the percentage of each wallet holding a specific Token. Would you want 1 person to hold 70% of the token supply? If you think about it, then that project will be very centralized, and he can dump tokens endlessly, making us retail investors poorer, and destroying the future of the project.
A good distribution design is to distribute tokens to as many people as possible.That way, if someone wants to get out, their selling won't have much impact on the price. The best way to check the token distribution is to look at the token distribution chart in their white paper and check the wallet distribution on the blockchain explorer.
Monetary Policy
Monetary policy determines whether Token is an inflation or deflation model, and also determines the degree of inflation/deflation and the overall consensus mechanism of the project. As mentioned earlier, high inflation causes asset prices to fall over time. Low inflation combined with POW (like Bitcoin) can be a good thing as it creates productivity in the ecosystem. Ethereum 2.0 and EIP 1559 allow ETH to be burned with every transaction, which should theoretically make Ethereum deflationary.
This leads to my next thought, which is how to analyze the four pillars of token economics together and how they interact. Let's go back to the highly diluted token example in the supply section of this article. Although it has a high FDV, assuming its monetary policy is to consume 7% of the circulating supply per year and release the token 5% per year, so even if 7/8 of the supply is locked and there is inflationary pressure, this leads to The deflation rate fell by 2% year-on-year. Under this monetary policy, tokens would not face any locked-in inflationary pressures, but in reality, there would be negative supply pressures due to the reduction in circulating supply.
value capture
value capture
The final pillar is how much value is captured by the protocol and how that value should be distributed. In Web 2, all the value gained goes back to companies like Facebook, Google, and Twitter. They make billions of dollars from users' data and social media interactions, and users get zero dollars in return. Users will get at most a blue check mark. Web 3 turns this on its head as protocols capture the value they provide and distribute it to token holders. You can become a user of the protocol and get rewarded at the same time.
Not all protocols can effectively capture value, and I think a lot of research and experimentation is still needed before we have a token architecture that can capture 100% of the value provided by the protocol.
The easiest comparison example is the 2020 Uniswap vs Sushiswap battle. Uniswap released their AMM (automatic market maker), but did not release Token. Sure, they provide innovative products with a lot of value, but they capture 0% of the value for network participants. Then Sushiswap forked Uniswap and created SUSHI Token accordingly.
SUSHI holders can vote on governance issues, stake their SUSHI as xSUSHI, and earn transaction fees generated by the protocol. While this model is far from perfect, having Token holders share revenue captures far more value than Uniswap's model. If Uniswap launches a token that can capture value when the AMM is released, it will be more difficult for Sushiswap to acquire new users.
VeToken Economic Model
The above is the basic knowledge, so what is Ve?
Ve is "voter escrowed", and has quickly become a popular Token economics model since it was proposed, adopting newer DeFi protocols. Interestingly, the ve model was invented by Curve Finance, which is "DeFi 1.0".
It works by locking up your CRV tokens, which are then converted into veCRV with protocol governance. The lock-up period is not fixed, Token holders can decide how long they want to lock their CRV, up to 4 years.
Over time, the amount of veCRV held by a holder decays linearly during its lockup period. This incentivizes holders to periodically re-lock their CRV for veCRV to maximize governance and rewards. The main innovation is how to create weighted votes and weighted rewards. Also, once you convert CRV to veCRV, you are locked in for a specified period of time. The lock cannot be released early like other protocols.
Suppose Bill and Alice each have 100 CRVs. Bill decides to lock his CRV for 2 years and Alice locks hers for 4 years. Even though they start with the same amount of CRV, Alice will get twice as much veCRV as Bill, which means she will get twice as many governance votes and rewards as him.
Effect of VeToken Economic Model
One of the main problems solved by the veToken economic model is the problem of 1 token = 1 vote. Under the non-ve model, big whales can buy a large number of tokens for short-term governance and get rewards without taking any risks in the game except for short-term prices. So a peer protocol could buy millions of dollars of tokens from a competitor protocol and vote for bad proposals, then dump the tokens.
This type of manipulation by whales is much less effective under the VE model because their votes will not be as valuable as long-term holders.If one protocol or whale wants to have significant influence over another, they will have to lock up their tokens for a period of time.This creates an incentive to act in the protocol's best interest once their tokens are locked. CRV War is the best example.
Also, die-hard supporters of the protocol that chooses the longest lockup period will have a bigger say than they would under the 1 token = 1 vote model. These die-hard backers earn more yield and passive income than short-term speculators. As long as the protocols move forward, stakers will understand that they will earn passive income for the foreseeable future, rather than jumping from protocol to protocol in uncertainty.
Finally, the ve model has a direct impact on 3 of the 4 pillars, with distribution being the only pillar with a weaker relationship to the ve model.
The Ve model affects the supply through the long-term lock of Token.Holders are incentivized to lock up their tokens long-term to maximize influence and yield. When these tokens are locked, they are taken out of the market for a long period of time, reducing selling pressure. With less supply, this should organically lead to higher prices over time. This circulating supply performs very well compared to the 1 token = 1 vote model.
VeToken holders are the ones who decide the monetary policy of the protocol, just like under the 1 token = 1 vote model. The difference is that the veToken model is an upgrade in that it aligns the protocol's long-term incentives with those of stakers. As mentioned earlier, this incentivizes holders with the most vested interests to vote for favorable monetary policies of the protocol, rather than allowing potentially malicious third parties or third parties only thinking of their own interests to support policies that harm the protocol.
innovation
innovation
Many protocols in the DeFi space are working hard to implement the veToken economic model, which is great! This is an improvement over traditional token economic models, but veTokenomics will not be the pinnacle of token design. This section will introduce some of the innovative designs that projects are building on using the veToken economic model as a foundation. (Note, I'm not talking about putting your entire net worth into the tokens I discuss below, I'm just talking about innovations in the veToken economic model they're working on, and it's still an unknown experiment.)
Cartel is currently creating a ve version of their BTRFLY token with a twist. Instead of veBTRFLY, they plan to issue blBTRFLY and dlBTRFLY, which stand for Bribe Lock and DAO Lock BTRFLY respectively. blBTRFLY is a retail-oriented token that maximizes returns for holders, while dlBTRFLY focuses on DAOs and protocols that want to maximize their DeFi governance. Simplified understanding:
blBTRFLY = higher yield
dlBTRFLY = higher DeFi governance rights
This is an interesting design based on the veToken economic model, and I will focus on how it works in practice.
The next innovative protocol is Trader Joe's. They released a new Token economics model and introduced three Joe derivatives to replace xJOE, namely:rJoe, sJoe, veJoe。
Pledging JOE for rJOE allows rJOE holders to participate in the launch of the project in the JOE ecosystem. (Rocket Joe is more subtle than this, but that's beyond the scope of this article)
Staking JOE for sJOE allows sJOE holders to get a share of the revenue paid by the platform. This income is paid in the form of stablecoins, which allows users to earn passive income.
Staking JOE for veJOE allows veJOE holders to obtain higher rewards and governance rights in Joe Farm.
in conclusion
in conclusion
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