The Circle of Tokens is making its second proposal to continue optimizing Sovryn tokenomics and emissions. Read the first proposal, to reduce liquidity mining rewards for several pools.
Tokenomics is an important matter in any project. It can make a well-thought-out project fail and a bad token succeed (economically speaking). Our goal is to use tokenomics to make sure our well-thought-out project succeeds!
In economic terms, it’s pretty simple. When supply exceeds demand for any asset, prices fall. When demand exceeds supply, prices rise. A good tokenomics plan will help balance out supply and demand, leading to healthy price action for the project’s token(s).
Good tokenomics tries to project demand in the near future, to adapt the supply accordingly. Even with fundamentally sound projections, external factors can negatively impact demand. Tokenomics cannot completely control the price. But a good tokenomics strategy can apply measures to reduce circulating supply and consequently make price action for SOV more attractive.
In Circle of Tokens, we methodically analyze blockchain information to identify where our supply is leaking, without the expected increase in TVL. This kind of unproductive supply will ultimately result in unnecessary token inflation that won’t bring wealth to any of us.
Outlined below, is what we believe to be our next major problem: SIP-24 liquid staking rewards and XUSD lending pool rewards.
SIP-24 (“liquid staking rewards”) was introduced almost a year ago with the intent of rewarding early stakers and bootstrapping Bitocracy by providing liquid SOV rewards to stakers. Read the initial post on SIP-24.
The primary issue with SIP-24 is that all new stakes become up to three-year future liabilities and commitments to the treasury. The most recent analysis shows pending liabilities at nearly 1,400,000 SOV and growing. All these tokens will inevitably move into circulation and will negatively impact SOV price.
We propose to end liquid SOV rewards for new stakers beginning no later than June 30, 2022.
By suspending future SIP-24 liabilities we can achieve the following:
Read the forum discussion and analysis of SIP-24.
Because SIP-24 is an Exchequer-operated program, ending the program does not require a new SIP vote to be passed (although community acceptance is very much desired). The proposed timeline to end SIP-24 is June 30, 2022. However, Exchequer may shut down the rewards prior to June 30th if we begin to see the amount of SOV staked begin to grow exponentially and thus perpetuate the problem.
Specifically, our current outstanding SOV commitments are approximately 1,400,000 SOV over the next three years. If we see this figure increase to more than 1,750,000 SOV, then we will look to preemptively end the program prior to June 30, 2022.
Please note that any current and active stakes would continue to receive the full SIP-24 liquid staking rewards as originally proposed. After the program is shut down, staking would continue as always to receive voting power as well as fee revenue.
Decreasing XUSD Lending Rewards
We have a further opportunity to reduce token emissions and preserve the Sovryn treasury and reduce future SOV supply. We propose to lower the SOV weekly rewards in the XUSD lending pool from 15,000 SOV to 2,500 SOV. In the long term, we expect the lending pool to self-regulate based on interest rates. This pool also does not incur Impermanent Loss (“IL”); thus the need to subsidize with SOV rewards is not as compelling. Lastly, we hope this reduced subsidy will divert more liquidity into our XUSD/RBTC AMM pool.
For now, no other changes are being considered. However, we are investigating several other items, and active community members should be made aware so they can prepare.
We could look to introduce a SIP-24 2.0 with staking rewards that are more aligned with real token inflation. This, however, is not as simple as it sounds, and we have to first find out what the real token inflation is, and second, find a way to document this automatically in real time.
Real-time token accounting could also benefit us in other ways, since our project could be indexed better by Messari and other DeFi indexers. This would make Sovryn more visible to new investors who are looking into the tokenomics of the project. All in all, we want to leave open the option to re-implement staking rewards with new mechanics, but we have no immediate expectation to do so.