Welcome anon!
Having stumbled upon this article, you are likely a rare breed: one of those dedicated alpha-hunters, always lurking in the trenches, watching the chain, searching for the next gem, something you can be early to…
Are you sure you’re early?
Navigating the crypto space can be a perilous task. Around every corner lies the chance for riches, but there’s also the reality of ruin. You’re expected to maneuver through a sea of pitfalls and adversarial entities for a shot at success, and even then, achieving success is a tall order. But why?
The game is rigged
Yes, anon, it’s a game: a zero-sum game. Your loss is someone else’s gain, and your wins are someone else’s losses. This is how crypto markets are typically viewed. While this is broadly true, the cost of participation (network fees, exchange fees, protocol fees, etc.) turns many situations into a negative-sum game. The problem is further exacerbated when you consider:
- Predatory token distribution models designed as tools for wealth extraction by insiders, seed funders, VCs, etc.
- Dubious and misrepresented APYs that lure in unsuspecting investors.
- Manufactured hype created to induce FOMO for IDOs, pre-sales, NFT mints, and the like.
- Protocol exploits, MEV sandwich bots, phishing scams, honeypots, and outright scams.
- Obscene leverage offerings that prey on people’s addictions and desperation.
There are no chairs left and the music has stopped.
So, is it all doomed to fail? In a space that’s both nascent and brimming with potential, the pace and need for innovation often outweigh one’s ability to foresee consequences. With that in mind, we set out on our journey…
Tokenomics REimagined
There are many moving parts to REdao, making the study of its game theory fascinating. The following is a deep dive that assumes the reader has at least some familiarity with the project and, ideally, has read the REdao whitepaper.
The motivation
Solana’s meteoric price rise in 2021 resulted in a surge of network activity, with nearly every metric reaching new highs. NFTs were no exception; as of August 1st, 2023, there are approximately 38 million NFTs on Solana.
The unfortunate reality is that a significant number of these NFTs exist purely as tools to siphon liquidity from the ecosystem. Investors end up holding the bag on illiquid NFTs filled with broken promises and abandoned roadmaps. However, thanks to a concept known as Rent, they aren’t truly worthless.
Incentives, incentives, incentives
In a pseudonymous, decentralized, trustless environment, incentives are among the most powerful tools to encourage cooperative behavior and deter adversarial actions. However, these incentives are frequently misaligned, leading to adversarial strategies being optimal. The starting point in addressing this issue is tokenomics.
Token distribution model
The goal of REdao’s token distribution model is to ensure an egalitarian launch. All participants begin with the same opportunities, and the tokens ultimately go to those who help bootstrap the protocol. This objective is realized in various ways:
- No exclusivity; anyone with a rugged NFT is welcome and encouraged to participate.
- Those without NFTs can join using SOL, based on the Rent Reclamation Rate (RRR). That is, 0.01 SOL = 10,000 RE.
- RE token supply starts at 1.6B which is 20% of the first Epoch supply milestone. This marks the only period during which REdao will mint tokens for early contributors, development, LP and grants. Following this, RE is minted only when SOL enters the protocol. This mechanism ensures that the supply of RE is always a function of real demand.
The result of this distribution model is that there is minimal overhanging supply. Token emissions are deterministic within Epochs and their issuance contributes to treasury growth rather than dilution through inflation.
Halvings
While RE is also inherently inflationary (since supply starts at zero, excluding vested DAO allocation), the use of halvings looks to dampen this effect. As with BTC — halvings should theoretically counteract inflation through scarcity. While BTC halvings are a function of number of blocks, RE handles this a little differently.
- RE emissions are halved at predetermined RE supply milestones; the time between these milestones are referred to as Epochs.
- The quicker the supply milestones are reached — the faster the halvings occur.
This creates a strong incentive for early participants and holders while also ensuring they are not punished by inflation.
Bonding
Bonding represents the sole mechanism by which additional tokens can be generated. The design of the bonding protocol distributes emissions over time and introduces dynamics that pave the way for interesting market strategies. It offers incentives not just for committed long term holders but also for speculators.
- Arbitrage: If market participants observe that the current price of RE is above the RRR, then they may choose to bond for a single day in hopes of “arbing” the price difference.
- Holding: If market participants believe that the future price of RE will be higher, equal or even slightly lower than the current price then they may choose to bond for the maximum period to yield extra tokens.
A combination of both types of participants allows the market to find an equilibrium between short term “arbers” and long term believers.
Bonding also presents further incentives for early participants and holders. These incentives are twofold:
- Participants secure extra tokens with time which would otherwise only be attainable with SOL through the protocol or off the open market.
- Since bonding mints extra tokens which contribute to the overall supply — it ensures that supply milestones are reached faster thus resulting in a reduction in the rate of emissions (halvings).
Floor Price
The crème de la crème which brings it all together — the Floor Price. All SOL gathered by the protocol (excluding development fund) will be sent to the REdao treasury. The treasury will support a soft floor price of RE denominated in SOL.
Here, soft means that is is not programmatically enforced and the price may dip below momentarily, at which point REdao will step in and purchase these discounted tokens. It is worth noting here that this mechanism will be upgraded to be programmatically enforced in the future. RE tokens purchased below the floor price will be burned causing a reduction in supply. REdao is able to purchase all existing RE tokens at the floor price. There are several implications which are not immediately apparent:
- Market participants who choose to sell below the floor price directly benefit those who choose to hold instead.
- Market participants selling beneath the floor price ease a burden on the treasury. This concept is more lucid with an illustration:
Let’s say participant A bonds a single NFT with the protocol, selects the 1x redemption rate, and then, for some reason, opts to sell RE below the floor price (let’s assume it’s 80% of the RRR). In this situation, the treasury’s funds grow by 0.01 SOL and subsequently decrease by approximately 0.008SOL when buying the RE below the floor price. REdao not only meets its commitment to buy RE beneath the floor price but also contributes a net 0.002SOL to the treasury permanently.
- The R:R of purchasing RE goes up significantly as the current price approaches the floor price. This in turn creates an incentive for “front-running” this event thus creating a self-fulfilling prophecy.
Three pillars
At its core, REdao revolves around three pillars: Bonding, Halvings, and the Floor Price. Together, they pave the way for a DeFi playground open to participants of all kinds.
Minimal barriers to entry ensure the tokens are equitably and effectively distributed throughout the ecosystem. Simultaneously, there are strong incentives in place for early and loyal participants who help bootstrap the protocol. Finally the price dynamics allow for short term participants to speculate and execute different market strategies, while also benefiting long term holders.
By targeting and aggregating dormant, fragmented liquidity in the form of rugged NFTs, REdao aims to catalyze a DeFi ecosystem ignited by real users — creating a positive flywheel effect. This, combined with a modest REdao allocation and value-retaining tokenomics, creates strongly aligned incentives that promote health and longevity.
Come and REwrite History, anon!
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