$MINomics Research Part 1: Exploring Tokenomic Models and Revenue Sources
This article is the first of a series of articles where we will explore different tokenomic concepts and ideas for Minswap related to the $MIN Token. In Part 1, we lay a foundation on tokenomics as well as the different revenue sources of the Minswap DEX.
The aim of this article is to present the Minswap community with fundamental tokenomics concepts, and gauge opinions before any significant changes to the $MIN token mechanics are implemented. As such, this article is purely educational/investigative in its intention and the reader should not assume that all the concepts put forward here will come to fruition.
The article is structured in 3 main topics: first, we discuss the current Token Types that different DEXs across different chains have implemented; secondly, we evaluate both Staking and Bonding in the context of DEX tokens; and thirdly, we explore the different Revenue Sources of the Minswap DEX. At the end, we link a Post in the Minswap Forum, for the Minswap community to discuss views on tokenomics and the future role of the $MIN Token.
Background — Token Types
Generally speaking, when talking about token types in DeFi, and more concretely when it comes to DEXs, we can distinguish 3 types of tokens:
- Governance Token: this type of token is purely a governance token, it is meant to give the holders the right to propose changes as well as to vote on Proposals to implement (or not) changes to the DEX. The token does not accrue any sort of fees, so one could say its exclusive utility is Governance. The best example for this type of token is Uniswap’s $UNI token.
- Revenue Sharing Token: this type of token accrues fees from the users swapping on the DEX. The revenue sharing works in the following way: for every swap on the DEX, traders pay a fee (normally, like in Minswap, it’s a 0.3% fee). A percentage of these fees (in Sushiswap’s case, half of the 0.3%, so 0.15%) gets redirected and instead of going to the Liquidity Providers, it goes to a Smart Contract.
This Smart Contract sells the tokens received from the fees swappers pay, and uses that capital to consistently buy back the DEX’s token on the open market, which is then redistributed to token holders. This is what is known as “staking”. For example, in Sushiswap’s case, users will stake their $SUSHI token, and receive in exchange in a 1:1 proportion the revenue generating token (xSUSHI), which accrues more $SUSHI passively by using a percentage of swapper fees for buy-backs.
- Voting Escrow (“ve”) Token: pioneered by Stableswap Curve ($CRV), veTokens grant increased rewards and governance powers in the DEX to those who are willing to lock their tokens. Users lock their $CRV for veCRV, and the longer they lock their $CRV for, the more voting power they have and the bigger boost on LP Fees and $CRV Farming rewards they can reach. This incentivizes Liquidity Providers to become long-term stakeholders in the DEX protocol. The veToken Economics are a complex topic that would deserve a prolonged article of its own, but here is a great resource from Delphi Digital on that topic.
Evaluating — Staking & Bonding
Each of the above token models have different drawbacks and advantages. Given their popularity, we would like to focus on the Staking of revenue generating DEX tokens. In particular, we find that staking in the context of revenue generating DEX tokens has the following problems:
- The staking doesn’t have any real purpose. The term staking originates from Proof-of-Stake networks where owners that stake their coins participate in functions necessary to the continued operation of the network, such as the validation of blocks. This is the case for instance for the staking of $ADA on Cardano. However, in the case of DEX tokens where one can stake to get more of the DEX token, the staking does not have any necessary function in the protocol. While by using Liquidity Mining programs, DEXs are essentially buying growth and TVL, by offering staking tokens, they do not benefit in any way, they are plainly paying holders for not selling their tokens in the short term, which is not an efficient or sustainable use of capital long term.
- The idea that fees collected from swappers are used to buy the DEX token on the open market to increase the buying pressure and then given to stakers, is usually counterproductive. Because this means that for stakers, there’s no way to take profits from staking the DEX token except to just sell it. So, what happens is that once people start selling the DEX tokens obtained from staking for profits, sell pressure actually overtakes the buy pressure created by the buybacks.
Therefore, we should ask: what does the staking of a revenue generating DEX token look like where the staking plays a necessary function in the protocol, and where people do not have to sell the DEX token obtained to take profits? Before we try to answer this question in the next articles of the $MINomics Series, we would like the input of the community. We have set up this Forum Proposal with a series of key topics and questions to do just that.
A relevant concept to perhaps start thinking about the question, is the one of Bonding (sometimes also known as Liquidity Bonding). The concept is simple, through Bonding, the Protocol in question offers users a way to buy discounted DEX tokens in exchange for LP Tokens.
Let’s walk through an example of Bonding. In essence, by allowing Bonding, DEX “XYZ” would offer their token ($XYZ) at a discount from the market, in exchange for $ADA/$XYZ LP Tokens. For our example, we assume $XYZ is trading at 1 $XYZ = 5 $ADA on the DEX, which means that with 100 $ADA, you would be able to buy 20 $XYZ tokens. If the bonding discount was, let’s say 10%, instead of market buying $XYZ, you could take LP Tokens worth 100 $ADA (so, LP Tokens of 10 $XYZ and 50 $ADA), and through bonding buy 22.22 $XYZ instead of 20 $XYZ for the same capital essentially (100 $ADA).
Because of that, bonding is a very interesting alternative (or complement!) to yield farming. Instead of renting liquidity through yield farming initiatives, which, although they help DEXs grow in TVL and users, are constantly expanding supply, with bonding, DEXs can buy their own liquidity, building up a long-lasting pool that can also generate revenue for the protocol. There are several intricacies with bonding though, for instance, some argue that bonding with LP Tokens is inefficient, since DEXs already own a lot of their own native token, and protocols should instead just bond for the other token of the Pair (so bond for $ADA exclusively, not $ADA/$XYZ LP Tokens). You can read more about DeFi 2.0, Bonding and Protocol Owned Liquidity in this great article by Chainlink.
Exploring — Minswap Revenue Generation Sources
Now, sometimes, protocols get lost in the weeds thinking about tokenomics, without focusing on the real objective: to gain users and increase revenue. As the former CTO of Sushiswap wrote, if a reward token is necessary for a protocol to function, that means the protocol is not revenue generating. So, is Minswap a revenue generating protocol? What are the potential revenue sources that could be tapped into, were Minswap to introduce a revenue sharing token?
Some potential Revenue Generation Sources we have identified are:
- LP Fees: currently, Protocol Fees are set at 0.3% for swapping on all Liquidity Pools. Profit Sharing could be turned on, which would mean 0.05% of swapping fees paid on the DEX would go to a profit sharing treasury, and the remaining 0.25% would go to LPs. The question is, once those tokens are in the profit sharing treasury, what should be done with them, and how should they be redistributed?
- Batcher Fee: for every swap on the Minswap DEX, users pay a fixed fee of 2 $ADA. This $ADA is used fully to cover for the costs of running a relay network to enable the DEX to function. That being said, some efficiencies could be added, turning some of this operating cost into revenue, and redirecting a percentage of the $ADA obtained as revenue. An additional idea that has been proposed to add utility to the $MIN token, is to allow the use of $MIN to pay for the batcher fees, or give a discount on fees if you own a certain amount of $MIN.
- Farming rewards from POL: currently, Minswap owns around 34.78% of the $MIN/$ADA Pool (6.7M $ADA and 94M $MIN), which is not being farmed. This Protocol Owned Liquidity (POL), could start farming, and all $MIN generated from it redirected as revenue. In addition, a recent focus of Minswap has been the Launch Bowl initiatives. With these initiatives, Minswap obtains a percentage of the resulting Liquidity Pool as a Fee, which increases and diversifies Minswap’s POL. For instance, after conducting a Liquidity Bootstrapping Event as a Service (LBEaaS) with “Project ABC” (ticker: $ABC), Minswap would obtain a percentage of the resulting $ABC/$ADA LP as a Fee, and could Farm both $MIN and $ABC as a result and redirect those rewards.
- $ADA staking rewards: currently, all $ADA in the Minswap Liquidity Pools is staked in the Minswap (MIN) Private Pool, with the $ADA rewards going to the DAO treasury, as was voted here. However, the capability to redirect $ADA staking rewards to $ADA Liquidity Providers could be implemented. That being said, one could argue that even though $ADA staking rewards come from $ADA staked by LPs, these LPs get compensated in $MIN tokens, and thus a % of their ADA staking rewards could be distributed as revenue as well.
Summary & Steps Forward
We hope this article gives an overview of some of the research the Minswap Team has been conducting so far with regards to tokenomics. In order to devise a model that solves for the pain points mentioned above, we would like the Minswap Community to answer some Key Questions in the following Forum Proposal and weigh in on the Utility and Role of the $MIN token going forward.
We need as many insights and perspectives as possible, so the ball (of wool) is in your court now! 😼🧶