There seems to be some restlessness among some SOV holders who are itching to do things with their SOV other than staking, voting, and providing liquidity in the SOV/RBTC AMM pool (see this thread, for example). While I am myself content with the current use of SOV as an incentive alignment and coordination token, I do have an idea that I think can add even more “utility” to this use case for SOV.
Rather than have one token that governs every aspect of Sovryn, instead we can start to think of each piece of the system as a distinct “subprotocol” that has its own token and Bitocracy system. The twist is that each “subtoken” is a continuous token minted using a bonding curve with SOV as the reserve asset. This is a spin on ideas originally proposed by my former Aragon colleague Luke Duncan while I was still working on that project. (And if you are not familiar with continuous tokens, this post should get you up to speed.) Edit: This work is also building on earlier work by Simon de la Rouviere on continuous TCRs.
The bonding curve creates an economic link between SOV and the subprotocol, because as the subprotocol gains value against SOV, SOV gets pulled into the bonding curve to arbitrage the price back to equilibrium (and vice versa). We want this economic link since it is SOV holders who via Bitocracy are supporting the development of these subprotocols. However the incentives of the subprotocol are still isolated in a way as well, since total failure could lead to ruin for the subtoken holders. This uniquely incentivizes them to take actions that increase the subprotocol’s chance of success, which would not be the case if the token was SOV since the value of SOV isn’t dependent on any single part of the total system. I emphasize that this is a great feature to have – we want tokenholders to receive strong signals if the protocol they are responsible for isn’t doing well, rather than have those signals diluted because of a link to unrelated efforts.
You might say, well light doesn’t this contradict what you said about not using SOV as a currency? There is a key difference here that makes this kind of usage exceptional: the SOV used to mint subtokens is locked in the bonding curve. The SOV is not released back into circulation until the subtoken is sent back into the bonding curve and removed from circulation. This means that as the subtoken supply inflates, SOV supply deflates. This is not the case if SOV is used to simply purchase a token in a crowdsale. The purpose of using SOV this way is not to raise funds as a substitute for another currency asset, it’s to create an economic link between two cryptoeconomic protocols. And for this purpose, I think this is a powerful tool for the job.
There is an alternative to using a bonding curve that could achieve the same goals of creating both an economic link and incentive isolation. This is to create a new token for the subprotocol, without a bonding curve, and then split any fees earned by the subprotocol with the Sovryn Treasury. I think this could work just fine. However if the new token takes on a source of value accrual separate from fees somehow (for example, if the new token is used as a reserve asset to back a subtoken) then there would be no way for SOV holders to benefit from that without also holding the new token.
The continuous token model is a different way to share value accrual: rather than having to hold SOV and a new token, SOV holders can simply hold SOV and benefit from the deflationary effect as SOV gets pulled into the subprotocol bonding curve.
Edit: Pros/cons summary
Taken (and lightly edited for clarity) from this reply.
Here are the options as I see them, with pros/cons summary:
Subprotocols governed by SOV stakers.
- Pros: Simple. SOV holders get full and direct financial exposure to all subprotocols via all sources of potential value accrual.
- Cons: There is no incentive isolation here, no specialization of labor, no deference to local knowledge. Relatively weak incentive alignment between subprotocol governors and users; failure of a subprotocol could hurt SOV value but depending on its importance overall, maybe not much. So SOV stakers have a weaker incentive to show the care and attention needed by all subprotocols. “Tragedy of the commons” for SOV stakers’ attention.
Independent tokens for subprotocols, sharing revenue with SOV stakers.
- Pros: Also relatively simple. Isolates incentives and creates some economic link to SOV.
- Cons: Does not share value from non-revenue sources of value accrual with SOV stakers.
Continuous tokens for subprotocols, backed by SOV.
- Pros: Incentive isolation and economic link to SOV. SOV holders share in all potential value accrued to (and lost by) subprotocol/subtoken, but subtoken holders see the most benefit/loss. More scalable governance as subprotocol decisions can be made by subtoken stakers instead of SOV stakers (saving SOV stakers from having to inform themselves and vote on every proposal related to every subprotocol).
- Cons: Relatively complex to understand compared to the other options.