With tokenomics, you need to meet the winning trifecta:
- A tokenomic model that offers unique opportunities to investors (SUSHI, CRV)
- A protocol that offers something of value and has synergies with other protocols (BUNNY + CAKE, CRV + CVX, BAL + AURA, etc)
- More than speculative value (CRV = CRV emissions value, OHM = Treasury Holdings, etc)
Aligning long-term usage with a token requires complex understanding. Besides the technical, you have to be a game theorist and know how to anticipate the reactions to a given set of rules. Liquidity mining programs only attract mercenary (“pay me or I’m gone”) capital and should only be used to attract participants to a protocol, not perpetuate it. The mechanics of a token are the gameplay of the project. Curve’s CRV model is a perfect example- the Curve Wars described in the prior article have proven CRV to be the flag bearer behind game theory in DeFi tokenomics. While it doesn’t include all the elements to win the game (many ve based protocols have found this out the hard way), it lays the groundwork for extremely synergistic token economies.
Starting the Loop
The very first thing to flywheel tokenomics is starting the movement of the wheel so it can loop. To do this, you must attract initial token holders. With Tapioca’s Sushiswap MISO IDO, and its subsequent airdrop to incentivize participants to invest early into the IDO, Tapioca is put in front of a large audience of potential investors who can start the loop of the flywheel.
Looping the Wheel
Tapioca’s liquidity providers are incentivized to provide liquidity in order to earn TAP, but are incentivized to stake TAP in order to boost their yield, bribe the Tapioca gauges to earn more yield for their preferred asset(s), as well as to earn a share of protocol revenue. This model aligns the interests of TAP holders and Tapioca liquidity providers.
Protocols are also incentivized to participate in the TAP token economy. By controlling veTAP, protocols are able to boost the yield of their own tokens, and direct Tapioca’s unused liquidity.
To infinity! (Governance Extracted Value)
Enter infTAP. infTAP is like a built-in Convex/Curve-style system that is infinitely locked veTAP. The TAP generated from protocol revenue market buying TAP that is normally distributed to veTAP holders is instead relocked with infTAP, and is constantly relocked for the maximum lock period of 4 years. The benefit of infTAP over veTAP for protocols is it constantly grows control over Tapioca’s governance systems instead of linearly decreasing over time like veTAP.
Example (protocol) use-case:
- Yield farm “X-Farm” wants to lend USDT on Tapioca to earn yield for its users.
- X-Farm lends USDT to Tapioca and earns TAP.
- The TAP earned is staked for infTAP.
- infTAP is used to boost their yield (max boost to individual holders of 2.5X).
- X-Farm’s infTAP grows non-linearly.
Curve has achieved huge success with a thriving ecosystem almost bigger than then the networks it’s on, all built around their ve tokenomics. It has become common for DAOs to purchase CRV at market value to play a part in the Curve Wars. By using (and iterating) the ve staking mechanism, Tapioca makes it trivial for other protocols to join the Tapioca ecosystem. By having protocols aligned with Tapioca, Tapioca’s utility and usage- and thus TAPs value- will increase as well.
The “ve problem”
Many ve solutions suffer from a lack of liquidity which results in high slippage for traders. Relying on the initial supply of liquidity and then liquidity providers to continue supplying LP to governance tokens has proven to be unsuccessful in keeping your token highly liquid.
When staking TAP for veTAP, users will actually lock an 80% TAP / 20% ETH Balancer Pool Tokens (BPT). Stakers then will not only earn protocol revenue, but also LP fees. Locking up tokens means users can’t sell the tokens, and selling tokens into a deep liquidity pool doesn’t move the price much. Tapioca’s ve0 model caters to both of these prongs simultaneously- incentivizing liquidity providers and holders to lock-up tokens and making as large of a cushion as possible in liquidity to soften token sales.
This model contributes long-term liquidity to the TAP token, keeping both sides- valuation & liquidity- in an infinite flywheel.