This is a thought piece that we can eventually incorporate in the vote flywheel if we deem it worthy.
I’ve been working on top of tokenomics for close to 4 years now and here are a few observations worth to make:
- A token is a separate product as a whole, not enough projects spend the required time for it to be public-market worthy;
- Attention is all that matters, sharing yield -unless in the 3 digits range- is likely to have very little impact on its price action;
- Revenue sharing is a ridiculous concept for high growth type projects unless the rev. Share is strictly embedded into either growth or constant stakeholder redistribution;
- The market is strangely rational around circulating market cap over time, hence, emissions can be deadly if used excessively and without corresponding growth;
We are fortunate to have built an ecosystem that rakes in sufficient revenue for us to ask ourselves what is the best way to use it outside of pure development. The current solution of the Vote Flywheel offers a partial answer where we use emissions to reduce cost of use for large stakeholders and make our product more competitive without impacting the fees.
In such system there are however 2 problems:
- Emissions are finite since we have a limited supply of tokens with no ways to mint more;
- If emissions are superior to the buying pressure then price action is very likely going to decrease over time;
Essentially, to create a good equilibrium, you’d want a constant source of buying pressure at least as strong as emissions. Such setup would create positive price action over time as it is impossible for current stakeholders to sell permanently, considering their holdings are finite.
Instead of distributing some excess revenue in the flywheel as wETH, we could see a world where we use this excess revenue for buybacks. There are school of thought that believe buybacks should then be burned. This seems short sighted to me as it limits available resources for growth. Placeholder.vc has a great article on the drawbacks of such model and the advantages of instead providing liquidity with the proceeds. Paladin owns close to 18% of the circulating supply as Protocol Owned Liquidity and we likely do not need more. Distributing it through growth strategies rewarding live users makes more sense.
This is where a reservoir type model comes into play. The idea would be to have a dedicated part of the supply for emissions (already the case, with 7,800,000 PAL allocated over 3 years for the voteflywheel) but instead of have a linear (like ours - 50,000 PAL per week) the system would drip a fixed percentage of the total reserve every cycle.
Example for 1% drip
The trick is that since we’re buying back tokens weekly, we can put those back in the reservoir thus creating an evergreen flywheel where as long as the protocol makes revenue it is able to provide emissions.
I believe this to be important not just as a competitive edge but also because it creates a permanent way of redistributing tokens to active holders. Since we own most of the liquidity, mercenaries can sell for a profit, paying the DAO a tax (the swap fee on DEX, which is currently 1%) while aligned stakeholders can accumulate a position and become relevant actors of our community.
An interesting phenomenon in such a system is the creation of an equilibrium point for emissions: the more revenue the protocol makes, the higher the buying pressure, increasing both token price and emissions, until an inflexion point is reached if revenue doesn’t grow at the same rate. This is when emissions become too strong compared to the buybacks and sell pressure takes over.
This inflexion point is when protocol buybacks = emissions
The Reservoir system makes your price action reflexive around organic growth of protocol revenue and vice versa. Additionally it smoothens the pain of low growth periods over longer duration while providing a much stronger reflexivity when revenue grows explosively. I find this system elegant for Paladin, but I think it is an even more powerful flywheel for projects that are closer to public goods as it can be executed fully autonomously.
Looking forward to everyone’s feedback on the design!
Recap for the lazy:
