A51 Tokenomics 2.0: Voted-Escrow + FOO

Liquidity mining first came into being in the DeFi summer back in 2020/21 when projects would start incentivizing their community members to add liquidity into a DEX in exchange for the project’s native tokens. It lasted for as long as the so-called summer lasted. But once the bubble burst, it became expensive to keep giving out free tokens just to retain users. It became a zero-sum game between the projects to retain the limited capital that was available in crypto. To be fair, that’s still going on, but that’s not the topic of this article.

While the liquidity mining mechanism solved a lot of problems, it introduced a whole bunch of new ones. Such as mercenary farming, farmers dumping the tokens, and high inflation among others.

We have also flirted with liquidity mining since we started in 2021. First with the PILOT token, then incentivizing users to add liquidity into our protocol. And most recently, with the $A51 token. In 2022 through a community vote, we terminated it as it had become too expensive to keep doing. We reintroduced it when the $A51 token launched to bootstrap the initial liquidity for anyone who wanted to exit.

Ever since we started brainstorming about the v3 and what an ideal tokenomics should look like and also learning from our experience with PILOT token, we started to do in-depth research into the tokenomics of other projects, and one model caught our attention which was the ve model especially the version that LIT developed.

Here is the article written by our friends at LIT that goes into detail about how they came up with this model. They tweaked the ve tokenomics developed by Curve and added what they called FOO (Fungible Ownership Optimization). If you want to understand the rest of the article, you need to read the one written by LIT as from here on, I will be talking about how our team views this model working with the $A51 token.

Before we start, a huge disclaimer for our community. The VE + FOO tokenomics are still highly experimental, they have worked well for LIT and other projects that have adopted it, and going by our experience, we think it will work well for $A51 too, but it’s crypto and we are still at the cutting edge of what’s possible with DeFi and many things could go wrong that we don’t know about yet.

$A51 Tokenomics

Merging of $A51 Staker with $A51 LP

At the moment, we have a set of users who stake $A51 tokens to earn protocol revenue in ETH, and we have $A51 liquidity providers who add liquidity via A51 v2 to Quickswap and lock their LP tokens to start earning $A51.

We have a conflict here between these two users. LPs provide a crucial service to the protocol where they maintain liquidity for the token and they also take a lot of risk if they incur impermanent loss. While the staker earns protocol revenue, and all $A51 holders have a right to the revenue that protocol generates, they take less risk than an LP because they do not need to worry about impermanent loss. A risk that is common in both is the investment risk. As they have bought into the token, they have some financial expectations from it, and if the token project does not perform well, the token decreases in value. The $A51 LPs do not receive compensation proportional to the risks they take.

This is how we imagine the model to work if we merge the two actors:

1. First, a user adds liquidity to Balancer in an 80:20 ratio. 80% A51 and 20% ETH or MATIC (depending on the chain). Why Balancer? I will explain later in the article.
2. They lock their LP token in the protocol in VE fashion, specify the time they want to lock their tokens for and get veA51 in return.
3. veA51 holders earn protocol revenue in the same way as $A51 stakers earn today. The revenue will be distributed proportional to the share of tokens that a user has.

What is veA51 token?

Voted-escrow tokens or ve tokens represent the voting share of a user. The longer a user locks their Balancer LP tokens, the more tokens they have which means the more voting power they have.

For example, Alice has 10 BAL-LP tokens and Bob has 100 of them. Alice locks her 10 tokens for 100 days while Bob locks them for 10 days. Both of them will have the same veA51 tokens even though Bob has more BAL-LP tokens, he would receive the same voting power as Alice, and Alice is compensated for taking in more risk. Both will also receive an equal share of the protocol revenue. veA51 tokens decrease in quantity as they approach the unlock time.

What can veA51 holders vote for?

In addition to earning protocol revenue, veA51 holders will vote on which vaults the emissions go to. The A51 protocol releases 17,975 A51 tokens into circulation each month for its users. Please note that by users here, I mean the actual LPs who will take advantage of the protocol that we are building and who will provide liquidity to Uniswap or any other AMM using A51. The voting will happen in real-time with the veA51 holders having the ability to direct emissions to any vault they want.

Why Balancer?

Simply because it allows us to set arbitrary ratios between any two tokens. If you provide liquidity in a full range on Uniswap, you need to provide both tokens in a 50:50 ratio. But Balancer allows us to skew the ratio in favor of A51 which would reduce the barrier to entry for most users.

Better Risk-reward Balance

Going back to the point that I made above about the risks that both $A51 stakers and LPs take, this new model finds the best middle path for both kinds of users. With the new model, LPs now only need to risk 20% of their ETH to get access to veA51 tokens, and the staker now has to take on a bit more risk to be eligible for ETH staking rewards. Because Balancer allows to set any arbitrary ratio, we can skew the ratio in favor of $A51 because it would be safe to assume that more people would be willing to stake more of their $A51 than their ETH and we think that 80:20 ratio would achieve that.

Option Token as Reward Tokens

Instead of using A51 as reward tokens, we would be using $oA51. If you haven’t read the article about LIT tokenomics above, and you are wondering why have another token. Hold on. There is a good reason for it.

One of the core innovations of the FOO mechanism is the call option token which in our case would be $oA51. If you go back to the start of this article when I mentioned how mercenary farmers are able to abuse and dump their rewards, the FOO mechanism is able to significantly mitigate this.

The emissions that are voted on by veA51 holders go in the form of $oA51 which is a call option token that can be exercised by anyone any time to buy $A51 at a discount, and the proceeds from sales go towards buying $A51 from the market and burning them. This has a good flywheel effect.

Let’s illustrate it using an example. Let’s say the price of $A51 is $1 and a user has 10 $oA51 tokens that give the user a perpetual right to buy $A51 at a 50% discount. They convert their 10 $oA51 tokens by giving the protocol $5 in ETH (at a 50% discount). They have now converted their 10 $oA51 to 10 $A51 and the proceeds from this sale go towards buying $A51 from the market and burning them.

2.5x Boost for veA51 Holders

veA51 holders get a 2.5x boost on the protocol emissions giving them a significant advantage over ordinary LPs.

Initial Discount at 50%

We plan to start with a 50% discount, but this is something that veA51 holders would be able to vote to change in the future. Ideally, this number should approach 0%.

Monthly $oA51 Emissions

17,975 $oA51 will be emitted per month to the users of the protocol which could then be converted into $A51 tokens at a 50% discount.

Actors in the System

The whole system now has three actors:

veA51 Holder

There could be a set of users who just want to enjoy yield on their $A51 holdings and not become actual users.

They would need to:

• Add liquidity to the A51-ETH or A51-MATIC pool on Balancer.
• Lock BAL-LP tokens to get veA51 tokens proportionate to the number of LP tokens and the time locked.

They would earn

• Protocol revenue by holding veA51 tokens.

veA51 Holder + Protocol User or LP

Another set of users would also be protocol users in addition to being veA51 holders.

They would need to:

• Add liquidity to the A51-ETH or A51-MATIC pool on Balancer.
• Lock BAL-LP tokens to get veA51 tokens proportionate to the number of LP tokens and the time locked.
• Vote on A51 emissions.
• Add liquidity to A51-managed vaults or any other vault managed by an expert. For example: ETH-stETH.
• Stake LP NFT token to farm $oA51.
• Claim $oA51 tokens.
• Exercise the option to buy $A51 tokens at a 50% discount.

They would earn

• Protocol revenue by holding veA51 tokens.
• Swap fees from their liquidity position.
• Earn oA51 token emissions at 2.5x boost which in turn can be converted into $A51 tokens.

Ordinary Protocol User or LP

The third set of users would be ordinary liquidity providers who do not hold any $A51 tokens.

They would need to:

• Add liquidity to A51-managed vaults or any other vault managed by an expert. For example: ETH-stETH.
• Stake LP NFT token to farm $oA51.
• Claim $oA51 tokens.
• Exercise the option to buy $A51 tokens at a 50% discount.

They would earn

• Swap fees from their liquidity position.
• Earn oA51 token emissions which in turn can be converted into $A51 tokens.

Benefits

FOO mechanism offers a lot of benefits over standard liquidity mining:

• Mercenary farmers are discouraged from becoming part of the system.
• Perpetual $A51 token sale.
• Users who want to own more $A51 get a chance to buy the tokens at a discounted price.
• Good balance between demand and supply.
• No excessive inflation. 50% of inflation is offset by new value coming into the system in the form of $A51 sales.
• Low barrier to entry to becoming an LP leading to a significant increase in token liquidity.
• Farmers will be reluctant to sell their $A51 as they will essentially be dumping on themselves. More details on this effect are in the LIT tokenomics article.

Tokenomics Simulation

We have identified these factors that will impact the balance between demand and supply of $A51 token.

Demand Side

• Balancer Pool Ratio: The more lucrative the system is for a participant, the more tokens will be added to the liquidity pool. This will be set at 80:20 in favor of $A51.
• Protocol Revenue: The more TVL the protocol has, the more revenue is generated and given to veA51 holders creating demand for the token.
• $oA51 Revenue: The more people convert their $oA51 to $A51, the more buy pressure is created and the proceeds from the sales go towards buying $A51 from the market and burning them.

Supply Side

• Options Discount: The discount % determines how many tokens are bought back and burnt. The higher the discount, the less effect of buy-backs. This starts at 50% but can increase and decrease based on the participation of users.
• $oA51 Emissions: 17,975 new $oA51 are emitted every month for the next 5 years. This number cannot change.

Here is a working model that we have developed on how the tokenomics will function.

Core Assumptions

• TVL starts at $759,375 and increases by 50% every month.
• 50% of all $A51 tokens coverted are sold.

The simulation tries to mimic how all the factors will affect the token price namely:

• Revenue Effect: The more TVL the protocol has, the more revenue it generates, and the more is given to veA51 holders which means that more people will be willing to buy and earn a yield on their $A51.
• Buy-back Effect: Every time someone exercises the option to buy $A51, proceeds from the sale go towards buying and burning $A51 from the market incentivizing more people to hold and mint more veA51.
• Sells Effect: It’s assumed that 50% of all people who exercise the option will sell their $A51 right away. Even the 50% ratio creates a positive feedback loop.

Conclusion

As stated above, this model is experimental and our assumptions could very well turn out to be wrong. We in crypto are building an entirely new financial system and experiments like these would push our space forward. In the end, I would call on our community to give feedback and point out any obvious mistake, or if you think we should not do this model at all, let us know if you have better ideas.

Also read: A51 Finance: Empower Your Liquidity. Tailored Strategies, Total Control