(The following emerged out of a discussion on the trading channel on Discord. I received comments and DMs urging me to put it here, so here goes. After posting, I noticed a closely related discussion).
Tokenomics Status Quo: The Way of the Governance Token
Currently SOV is built as a governance token. It has value to those who want to shape the direction of SOV. This, I claim, is only valuable to a very small group. It is not valuable for the masses.
That is totally fine, one might think. The masses do not need to find SOV valuable, they just have to use Sovryn. I think this is a mistake. The point is precisely that voting power is not valuable (enough) to the masses and hence there is no good reason for them to come into the platform.
The objection to this will be that Sovryn the platform (instead of SOV the token) offers value to the average user: it is easy to use, secured by Bitcoin, offers these amazing features. I think this is naïve. I grant that this might work if there is no competition on the offered features and one is the first mover, but none of these special circumstances apply. These features are not enough to gain adoption.
One objection I sometimes see is that: ‘when trading volume is up, financial incentives will be fine’. This is question begging. The claim is that one needs the financial incentives to be there before the trading volume, in order to draw in users, that will eventually drive trading volume up.
The way of the governance token represents a naïve hope of somehow “drawing in masses” and gaining critical mass without there being enough to draw them in.
Contrast: the Way of the Utility Token
The first aim is to draw in ‘DeFi investors’, those interested in providing liquidity for rewards, to lend out for rewards, and so on. These rewards are SOV. So the average DeFi investor should have an interest in obtaining SOV. The average DeFi investor is however not interested in obtaining voting power. They have an interest in obtaining SOV when there is a promise of the steady increase of SOV’s value. These DeFi investors are not just enablers of the offered services (by providing liquidity, lending out, etc.), they are also the first users. And so one grows a user base. (That in turn creates some volume, making it interesting for exchanges to list, drawing in further users, and so gets the ball rolling).
Two clarifications. (1) I’m talking value, not price. I’m not denying that voting power can be valuable to some, I’m only claiming that it is valuable to very few. I’m also assuming that the utility of a token and strong tokenomics translates to the value of that token. If I’m right in these two assumptions, DeFi investors need to see utility and tokenomics that drives up value. (2) The point here is first of all about adoption, not price. The big worry about the way of the governance token is that it seriously stifles adoption and thereby impact. Gaining adoption and having impact should be things that we all want.
What is currently in place is an amazing platform, but the value of the platform doesn’t translate to the value of the SOV token. This means that the platform doesn’t translate to increased incentive for people to get the SOV token and hence to come into the platform. Without utility attaching to the SOV token and, hence, without drawing in DeFi investors, Sovryn is like spinning a wheel in the air. It’s spinning fast and beautifully, but it doesn’t generate traction or movement. Go the way of the utility token, change the tokenomics, put the wheel on the ground and we will be off to destroy the fiat world.
Some simple ideas for going the way of the utility token
Going the way of the utility token doesn’t mean that one will need SOV to use the Sovryn platform. The basic principle is as follows:
Any use of any feature on SOV should add value to the SOV token.
This creates virtuous circles. When use of a feature creates value, this, in turn, makes the support of these features, such as providing liquidity or lending out, more attractive. This in turn makes the pools stronger, lending rates lower, and hence makes the feature more attractive to use. More usage creates more value for the SOV. And so we go. You need these financial virtuous circles.
More concrete changes to change paths (borrowed shamelessly from what they do at other platforms), some of which are already suggested or even implement:
- Initially have liquidity pools always pair with SOV. This means that the SOV that flows into the market gets distributed to people who took SOV out of the market. This requires building composite swaps (a swap from rBTC to ETH, goes via SOV in the background). Result: now you need SOV in all cases to provide liquidity to pools and earn SOV.
- Distribution of block rewards need to change so that fixed rates go the liquidity pools. As a DeFI investor you make long term plans. APR is calculated for the year, not weeks. You don’t want to rely on loot drops. That requires trust. You need it to be written in the protocol itself that certain block rewards go to liquidity pools so that you don’t have to trust a team to get the APR one wants. Result: a stable and attractive APR draws people in and, together with the previous point (1), requires them to get SOV to get a share of the APR.
- Stop locking the SOV gained as rewards [edit: this is now implemented for staking, through SIP-24]. This creates an incentive for people to lock them up freely. Currently one needs a high trust in the long term future of Sovryn, this again narrows down the people willing to provide liquidity. Result: earned SOVs feel as real rewards, and one needs not be convinced for the long term to come in and give it a shot. Typically in platforms, people compound rewards.
- A substantive percentage of SOV should be required as collateral when lending. Result: you need SOV in order to engage in lending (this is already being discussed and something in line with the way of utility).
- Although fees can be paid in any token, like rBTC for example, this should be used to buy SOV off the market and burn it. Result: any trading volume now drives SOV supply down, making it scarcer and hence more valuable. Still, one needs no SOV to use the platform, yet usage of the DEX adds value to SOV.
These are just examples, there many others. They may seem like cheap ways of driving up the price of SOV. Perhaps. Some care about price, others care less. We all care about Sovryn having an impact on the world. This is one tried and tested route to gaining users and having an impact. I do not see the other route.
For discussion, it would be good to distinguish two points:
(A) Your views on a general change in direction to the way of the utility token, regardless of the precise details of how best to do this.
(B) Your views on the concrete proposals.
I’m convinced that we can go the way of the utility token and yet stay Sovryn!