1. On Inflation and Ecosystem Evolvement
1.1 Inflation As Equity Private Placement For Service Providers
As the first and the only successful 4-year-halving cryptocurrency, Bitcoin, together with its founder Satoshi Nakamoto, was always surrounded by stories and rumors. Comparing to earlier approaches like B-Money (1998) and Hash Cash(2002), Bitcoin is not the first peer-to-peer electronic cash system, but its occurrence in 2009 made it the most timely one: The network communication, GPGPU for PoW (Proof of Work) system, and Web2.0 ( user-generated-content era) were well developed in a wide range of the world between 2000–2015, removing obstacles for people to understand Bitcoin. With almost zero cost of running a full node, and a reasonable private placement cost of coin minting — a combination between semiconductors ( CPU to GPGPU and now ASICs) and electricity (~0.03USD in the Middle East, and 0.2~0.5USD in other areas in the world), Bitcoins are minted in a fair way to global users. And its safety and 6 tps money transferring is a sound replacement for systems like VISA payment or PayPal services — Happy to know that PayPal supports cryptocurrencies transferring and payment in late 2020.
BTC mining, as a continuous private placement according to system maintainers’ contribution, is the only way to mine BTC. Back in 2009, the system mint 50 BTC per block (around 10 minutes), in which the transfer fee is very close to zero. According to data at the end of 2020, the system mint 6.25 BTC with about 0.6 BTC as fees to reward miners. Mine & Sell strategy is very different from Mine & Hold strategy: Unless miners have a consensus on that the ecosystems are going to evolve to many times larger than the status quo, they will not hold the coins, and they will become the major power of selling these coins. Many PoW coins suffered from Mine & Sell strategy in the first several months until some of them become major coins like Ethereum or Monero.
Talking about the price of BTC, we need to form a basic idea: Given the 4-year halving distribution curve, why BTC price increased from 0.1 USD to 20000 USD in its first 9 years since it was created, but only refresh its All-Time-High to 42000 USD in the recent 3 years? One possible answer that xDeFiLabs gave out is: The speed of the ecosystem evolving versus its inflation rate. The entire human society’s perception of the peer-to-peer cash system is close to zero and the time it penetrates about 1% (70 million users) coincides with the period of Bitcoin development. The 4-year halving is like the first two expectations conveyed to investors. The halving is a little more than 100,000 times longer, but ATH only increased by 2.1 times in 18–21, and any other parody of Bitcoin’s four-year halving has never been successful. Starting in 2019, the additional issuance of ERC-20 USDT has reached 6 times. The participation of Ethereum assets in De-Fi alone has risen from US$590 million to US$16.556 billion. Ethereum, with the nominal inflation rate three times higher than Bitcoin (5% per year), kept a more aggressive growth rate comparable to Bitcoin. As long as inflation remains slightly below the rate of ecological development, the growing trend of Ethereum will be stable.
1.2 Systematic Inflation In De-Fi Tokenomics
Inflation: The increase of the quantity of money faster than the actual goods and services that can be provided in the economic system, which leads to a general increase in prices and fall in the purchasing value of money.
The 100 billion unicorns listed on the Hong Kong stock market this year, and Bubble Mart, which introduced the Japanese Gatcha culture to a broader market in Mainland China, is an extreme example of non-directional placement during the development cycle. The early investors of Bubble Mart once said that the introduction of any subsequent investor would dilute the earlier investors‘ shares in an unfavorable way.
Another cryptocurrency ecosystem called EOS, a project initiated by Dan Larimer who finally gave up to lead, with the same low inflation (1%) in a long period (2018–2020) also holds the same view. This system focus more on how to redistribute most of the power to its original EOS holders ( staking ), very few to the newcomers (new projects, new developers) since it’s a DPoS system. Regardless of the basic project management, this involves a reasonable choice for inflation as directed private placement.
When the team has the ability to independently lead the project to victory, low inflation might be a critical key to unite the core beneficiary groups, but this is not a good idea for those projects which fall into local optimal decisions or even quagmire.
Back to any system with additional issuance mechanism: No matter it is PoW type — BTC, ETH, XMR, or with PoS model — Atom, EOS, Polkadot, or even De-Fi Farming type — UNI, Sushi, 1inch, they all faced the same problem in certain periods: Growth. In the context of reliable growth, inflation of shares (capital increase w/ share expansion as private placement) is acceptable. The APY (annual percentage yields) range of ETH graphics card mining in the second half of 2020 is 80–120%, which is much higher than the 30–60% of many De-Fi Farming pools, and again much higher than the 1–14% of PoS Staking. This shows that APY rewards are based on the quality of services:
A. The service provider of PoW to maintain the stability of the network is the miner group (who organizes transactions to form information in one block). Given the success of any single De-Fi project cannot be guaranteed in advance, the PoW service is in demand in first hand. The Ethereum network hash power has increased from 170TH/s to 350TH/s in the latest 6 months. Rather than De-Fi projects, Ethereum itself is in short supply for triggering any De-Fi smart contract. This fact makes ETH mining profitable — APY about 80–120%.
B. The provision of liquidity services, namely farming, is the second important service 2020. Given the huge amount of the projects shares are tokenized, token swap are still in strong demand, (Note: the price is formed through a swap, it does not decide how tokens should be swapped) Providing liquidity means to take price risk (buy when others want to sell, sell when others want to buy). SushiSwap, converting liquidity service fee (Uniswap’s 0.3% transaction fee is directly rewarded to LP) into a unified token (Sushiswap) is a bold move, and another more well-designed system ( architectures, tokenomics, technical tricks, and operation details) is given by 1inch.exchange
-Regarding a system without growth, Staking is more like a stock split. In the stock market, share splits cannot be counted as dividends. It is a means to increase liquidity (such as reducing the minimum transaction amount). This has no meaning for Cryptos, which naturally has a decimal format as the minimum trading amount.
The xDeFiLabs team chose an inflation rate of 19% after 4 times of halving. Introducing a permissionless design, 19% is much lower than the speed of growth rate in the cold-start period, and in long term much lower than 70% — average CAGR of crypto market capitalization in recent 5 years. An extremely low inflation rate will upset most newcomers to participate in certain projects: YFI is an example with zero inflation in the past several months, and its team and community are discussing a ~11.1% inflation plan, which increases YFI’s token amount from 30K to 33333.
2. On Service Providing Eigenperiods And Vesting
Duration: The weighted average term to maturity of the cash flows, which is also the sensitivity of PV of cash flows according to the yield rate (risk-free rate, or internal rate of return, or opportunity cost).
Since 2017, the tokenization of basic service providing was expanded from simple money transferring (Bitcoin) to smart contract execution (Ethereum), data storage (Filecoin), AMM Liquidity Services (SushiSwap).
Different service types have their own eigenperiods. Ethereum miners (utilizing their semiconductor rigs) provide PoW services and on the go. This service is completed instantaneously, while Filecoin as a file storage service must convince its end users that “the total system must have enough vault tolerance to ensure that any single file can exist long enough at a certain probability, say like 1–10^-12. Therefore, miners who enter or exit this mining system, with poor service quality will not be guaranteed to be rewarded in full. Filecoin has an instantaneous unlock rate of 25%, the remaining will be linearly unlocked in 6 months, so a mining rig that provide the first-class service quality will be rewarded with duration = 2.25 months ( 6*0.5*0.75+0*0.25).
SushiSwap chose “2/3 of the mining reward vested after 6 months”, so the duration of SushiSwap farming is 4 months (6*2/3+0*1/3). User groups that are loyal to SushiSwap don’t see this as a serious problem, while which is the reward for mining when the opportunity cost is as high as 30–100%. Choosing a 4-month duration relatively increased the loyalty of Sushi miners, but weakened the enthusiasm of user groups who “do not want to be loyal”. Some Onsen Set LP in SushiSwap can earn up to 100% APY. Considering that vesting and high-speed growth are still plausible, 33% out of 100% APY is still acceptable for users who are loyal to SushiSwap, while others are considering that LP reward in the pool is their better choice — LP reward in Uniswap is 25% APY in average, and this process has nothing to do with UNI token. Uniswap V2 still have 20x more DAU than SushiSwap, we can simply draw a conclusion that vesting is very helpful to establish a short term faith for a token price, but 4 months vesting duration is too long for an AMM DEX to incentivize LP.
3. Valuation model and token empowerment match — DCF Model, PE, PEG
Value investing: An investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Intrinsic value is from the ability to generate persistent (or growing) cash flows in goods and services. Book value is mainly from assets that can be put back into manufacturing.
The discounted cash flow model (DCF) is often used for asset valuation and is closely related to PE (Price/Earnings per share) and PEG (Price/Earnings-to-Growth per share).
For a considerable number of DEX tokens (and even CEX with repurchase mechanism), the valuation model contains several key indicators:
- TVL: Total value locked in this Protocol
- Liquidity efficiency (Turnover Ratio): Average daily transaction volume/TVL
- Fees: Trading Cost/Trading Volume
- Average Profitability: TVL* Liquidity Efficiency * Fees
- Mktcap/TVL: Market value relative to TVL
- P/E = Mktcap/Earnings = Mktcap/TVL / average daily turnover rate / rate
For projects such as Uni, Sushi, Hegic, etc., Mktcap/TVL is usually 0.2–0.5. Some newly tokenized projects, investors tend to use free-to-trade value instead of FDV(fully diluted value) as Mktcap.
4. How xDeFiLabs designed the XDEX token economic model
4.1 Balance Benefits Between Several Groups
-75M tokens for early-stage LP incentivization
38.4M for Farming
36.6M for Airdropping to users and LPs
- 5M for DAO and Community contributors
- 5M for professionals in multiple domains as new partners
- 5M for investors
- 10M for the original team
- 19% inflation
4.2 Choose Different Duration For Different User Groups
For the xDeFi project, the cash flow duration provided by XDEX’s batch unlocking adopts the design of 6 days in the ordinary pool, 60 days in the voting pool, 135 days in the investor pool, and 540 days in the core founder, which means that as long as As the period increases, certain groups need to make corresponding service cycle commitments to obtain stable cash flow income**. Compared to the delayed unlocking design of Sushi and Filecoin, the XDEX unlocking cycle is much faster.
In order to faithfully comply with the agreement, XDEX designed xHalfLife to enable miners. The unlockable upper limit of investors and teams has always been controlled by smart contracts and has been put into specific use.
4.3 On Fairness
XDEX:ETH:DAI has 9x higher returns but takes 9x time longer when unlocking.
The longer you participate in LP (rather than short term bribery) the more voting power you have, in order to decide which tokens are eligible or ineligible for farming.
Smaller pools are more incentivized.
DEX tokens, NFT tokens, tokens of projects which has cash flow are most possible to be eligible in farming XDEX.
4.4 XDEX Valuation
- Optimizes liquidity efficiency mathematically
- Set fee to 0.25% for most influential pools
- Consider TVL as one of the most important indicators when performing go-to-market strategies.
The xDeFiLabs team has reason to believe that Mktcap/TVL is very reasonable in the 0.4–0.6 range, slightly higher than 0.5 but lower than 1.
The xDeFiLabs team also found that Mktcap/TVL exceeded 1 in certain stages of certain projects. This is due to rapid expansion or development, which makes users unwilling to sell tokens. For the researchers of the XDEX team, if Mktcap/TVL exceeds 1, the best way is to sell a portion of the project’s tokens (which depresses Mktcap slightly), balance these assets to a portfolio in order to participate in mining, which increases TVL, and make the key indicator of Mktcap /TVL goes down to a reasonable range. This strategy is effective for most projects, and also Mktcap/TVL indicator can effectively judge whether the project is overestimated.
To sum up, the xDeFilabs team carefully pick parameters for XDEX tokenomics, to cold start its product — xDEX, yet another DEX comprised of automated market-making multi-asset pools.