This week’s article will cover the emergence of token models with productive assets. This means that users can stake capital in the form of the protocol’s native token and earn exogenous rewards like ETH, BTC or DAI for the work they contributed to the ecosystem.
In short, what we’ve found is:
Native inflation = good for bootstrapping and incentivizing network participation
Exogenous rewards = good for establishing clear-cut value accrual mechanisms, limiting sell-side pressure of the native token, and allows for easily abstracting the need of a native token for the end-users.
The combination of these two mechanisms creates a powerful dynamic for a valuable token economic design.
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One of the more novel aspects of projects with a native token is the ability to incentivize key contributors with rewards for value-added role(s) in any given ecosystem.
In one of our recent articles, we foreshadowed what’s likely to be a year of staking — where many of the industry’s well-known projects transition to (or improve upon) schemas which grants users rewards for staking capital in order to be granted the right to provide some form of work within the respective ecosystem.
From a high level, staking can be thought of as a simple form of “skin in the game” where users pool capital to aid in the security, collateralization, and distribution of various economic systems.
With permissionless contracts allowing anyone to partake in value-adding roles, we can envision companies that allow their users to capture significantly more upside as the product or service scales.
In this article, we want to highlight an emerging trend within stake-based ecosystems — specifically those which leverage “productive assets” by issuing rewards in exogenous assets.
Productive Staking Models
While staking models has become quite commonplace in many crypto-economic systems, almost all of them rely on the notion of issuing rewards in the protocol’s native asset.
This inherently limits value-accrual narratives as parties such as validators will ultimately need to liquidate their rewards to cover expenses at some point in time, creating an immense amount of sell pressure within largely illiquid assets and nascent ecosystems.
Instead, let’s consider schemas which:
- Offer rewards in an exogenous asset (ETH, BTC, DAI, etc.)
- Are not reliant on the native asset for rewarding work
- Establish clear-cut value accrual mechanisms to mitigate sell pressure
When we use the term “exogenous”, we’re referring to an asset that’s unrelated to the token’s native system. As it relates to stake-based systems, we can reference models (described below) that issue rewards in exogeneous assets like Ether, Bitcoin or Dai while staking the system’s native token, like ZRX or LPT.
In doing so, ecosystem participants can be confident that their rewards will have long-term value due to the exogenous asset’s liquidity, use-cases, and diverse influences.
With productive staking models, ecosystem actors can capture rewards that no longer entirely rely on the long-term success of the underlying project.
While there is somewhat of a “reliance” on the exogenous asset being used, it’s safe to assume that the reward token has a much stronger foundation than that of the project itself.
By decoupling reliance from native asset growth, ecosystem actors *should* be more motivated to contribute as participation doesn’t force them to go “all-in” on a niche project.
With new staking models, projects are able to employ clear-cut frameworks which entitle ecosystem actors (commonly established by providing capital) to a pro-rata portion of fees.
Theoretically speaking, the more fees the project collects, the more value stands to be captured by token holders staking the native asset(s).
What’s unique about this approach is that by issuing rewards in an exogenous asset, the need to liquidate the native asset is drastically reduced. By lowering token velocity through these staking mechanisms, we can assume that native assets are able to increase in demand while simultaneously reducing circulating supply (assuming new token holders are staking to capture fees), thus driving price upwards.
With all of that in mind, let’s take a look at a few projects utilizing these concepts.
Projects with Productive Assets
With 0x’s v3 launch on Ethereum main net in early January 2020, the decentralized liquidity protocol features a small fee for takers on each trade. Market makers (MMs) receive a liquidity reward in the form of ETH proportional to the protocol fees generated from their orders and the amount of ZRX tokens staked.
Similar to PoolTogether’s sponsored Dai, the 0x team is subsidizing the liquidity rewards pool with $5,000 worth of ETH for the next few epochs to test out the new economic model. The 0x team will continue to add $5,000 into the liquidity pool every epoch as an incentive to encourage early beta testers with the last subsidized liquidity rewards pool ending with Epoch 9 and a total of $25,000.
The current epoch ending on February 7th has over 10.67M ZRX staked, competing for a reward pool of 31.06 ETH (valued at ~$5,200). This represents a claim of 0.0000029 ETH per staked ZRX token or a 0.20% return for liquidity providers per epoch.
While the new changes create a tangible model for value accrual, 0x will have to now shift its focus on garnering more traction and increasing the total amount of volume traded through the protocol. Luckily for us, 0x just announced the launch of a liquidity aggregator for the protocol, allowing anyone to purchase tokens from any major DEX through a single API.
Looking forward, it will be interesting to see how much adoption the DEX aggregator receives and how that will affect protocol fees generated for ZRX liquidity providers.
Ren Protocol is a cross-chain DEX which provides a private and interoperable liquidity layer for DeFi. The protocol has implemented dynamic fees, where users must pay a minimum of 0.1% when moving tokens across blockchains with the option to increase the fee in increments of 0.01% to encourage darknodes to prioritize their transactions.
Ren’s integration of a dynamic model where all fees are paid in the form of the transferred token (BTC, ZEC, BCH or DAI) makes the protocol’s native token a productive asset for pooling liquidity. Ren token holders can stake REN and earn a plethora of exogenous assets rather than the native asset, limiting the sell pressure from reward earnings.
REN is still in the early phases of development, recently launching ChaosNet in late 2019 — a pre-production, unaudited version of the RenVM used to battle-test the new virtual machine. With that, the protocol has seen nearly 60 registered darknodes (min. 10,000 REN bond) with only a few dollars in value of exogenous asset rewards.
REN exogenous asset rewards for the most recent Epoch
Ren has a fairly exciting year up ahead with the RenVM Mainnet SubZero and Zero versions slated for sometime later this year. It will be important to see how adoption of this privacy-based VM will perform as newer, more secure versions of the DEX are released in tandem with any potential shifts in the incentive models.
The Graph establishes a mechanism for querying blockchain data on a decentralized network, starting with Ethereum. With the Graph, dApp teams are no longer required to run and operate centralized servers for data queries and instead can use trustless public infrastructure to easily access and query blockchain-specific data.
The protocol’s native token, GRT, is relatively under-the-radar from the broader crypto community, however, it offers a sound token economic model for value accrual while heavily abstracting away the need for the native token from the end-user.
Users pay fees to query data in the form of ETH or DAI while validators receive upside by staking GRT and earning an exogenous asset for running the infrastructure. In parallel, Graph indexers will earn inflation rewards in GRT.
Livepeer, the decentralized live video streaming platform built on Ethereum, allows anyone to become an orchestrator and perform video broadcasting work on the network, or delegate LPT tokens with an orchestrator to perform work on the token holder’s behalf.
Orchestrators and their delegates earn newly minted LPT through the protocol’s native inflation as well as earning broadcaster fees in the form of ETH or DAI. When a broadcaster pays fees into the network, both the orchestrators and the delegators earn a portion of those fees as a reward for ensuring a high-quality and secure network.
Livepeer’s staking rewards are some of the highest in the industry, offering an adjusted return of 18.60%. The protocol recently implemented its Streamflow upgrade as well as launched the token holder site.
Unfortunately, we’ve been unable to find any data surrounding the number of exogenous fees generated by the platform to date. If you have a source, feel free to reach out to us as we’d be happy to do a follow-up post!
Augur is a permissionless, decentralized prediction market platform built on Ethereum. The outcomes of these prediction markets are chosen by Augur’s REP token holders, who stake their tokens based on the observed outcome and earn a fee for doing so.
Augur is one of the original token economies to provide exogenous rewards for its token holders. With Augur v1, REP token holders have the ability to arbitrate prediction markets and earn ETH fees for honest reporting on outcomes. However, with the upcoming upgrade to Augur v2, the plan is to integrate DAI as the primary asset for betting on prediction markets.
Therefore, REP token holders will be able to earn DAI-based fees for staking their observed outcomes on the plethora of prediction markets on the platform. While Augur’s prediction markets are struggling to gain any traction as of today, largely due to their oracle problem, the upgrade to Augur v2 should streamline the token economics with a tangible mechanism for value accrual while also decentralizing the protocol’s oracles, creating much more secure data feeds for the prediction markets.
Kyber Network — a sector leading decentralized exchange — recently introduced a new suite of use-cases for its native token — Kyber Network Crystals (KNC).
“Kyber will introduce a new staking mechanism to the token model. This new model will allow KNC holders to receive part of the network fees by staking KNC and participating in the KyberDAO.”
While there hasn’t been a direct mention of fees being aggregated in an exogenous asset like ETH, we highly expect that with the launch of KyberDAO, this model will come to fruition.
We recognize that these models have some fine lines that need to be considered. Most importantly, by decoupling rewards, projects are highly motivated to create models that capture fees with clear value in exogenous asset terms.
What’s most appealing about non-productive staking models is that projects didn’t have to expend capital to collect exogenous assets to be distributed as rewards. In many founder’s eyes, it was much easier to distribute tokens they minted rather than having to introduce mechanisms to capture value in more established tokens like ETH, BTC or DAI.
Secondly, we’re seeing native inflation as a great way to keep native token prices balanced. While we all want to see 1000x returns, slow and steady growth is much more viable in the long-term. With this in mind, introducing issuance schedules can be a great way to offset small circulating supplies resulting from strong staking incentives (think Synthetix).
If one thing is for certain, the examples depicted above are showing that token economies are continuing to improve. While many of the value-added actions we covered are currently limited to technical users, we have no doubts that over time these roles will be abstracted to the point where they can be enjoyed by non-technical users at large.
Taking this a step further, we want to vocalize how important it is to plan for value accrual from the start. While many projects like to think that their native token is the central fuel for their ecosystem, we’d like to highlight that it doesn’t have to be the end all be all.
In an ecosystem like Ethereum in which so many projects are doing unique things (think DeFi + DAOs), it can be extremely beneficial to piggy-back off an existing protocol’s success.
If you or your project are interested in exploring a productive asset economy, give us a shout!
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Fitzner Blockchain Consulting is a leading management consulting firm that specializes in blockchain-based systems and their design