AIP1 - Tokenomics

[FelixOHartmann]

Auctus Improvement Proposal

• AIP: 1
• Title: Auctus Tokenomics Proposal
• Authors: Felix Hartmann, Hartmann Ventures LLC
• Status: Draft
• Type: AIP
• Created: 10/16/2020

Abstract

In this proposal we will address the unsubsidized incentive structures and token economy of the Auctus Protocol. In a second proposal we will address potential long and short term incentive usages of the reserve pool. However, understanding that the reserve pool is limited, it is important to first set timeless frameworks that will allow the project to run regardless of whether or not the reserve is full or depleted. This proposal will use mechanisms including supply sinks, buy and burn, and earnings to tie token value accrual to the usage of its on-chain options protocol.

To learn more about why we believe Auctus fits a unique market need, read our memo here.

Background

As token economy is an often misunderstood field of study, the basic premise that must be respected is this: Incentives must be aligned to maximize utility, fiscal safety, and innovation of the network.

Many networks have printed unfathomable amounts of tokens to maximize utility, at the cost of fiscal safety. A project whose token diminishes in value will soon lose its power to incentivize participants. Therefore, a healthy and growing network is generally one that sees its underlying token appreciate in value as well. Equally, to stay competitive, there should be the option for reinvestment in the network’s infrastructure.

To align incentives, we first must identify the ‘jobs’ that need to be done to make the Auctus network function:

• Liquidity Providers/Makers
• Users/Takers
• Developers

Finally, Auctus started with a hard-capped supply, and should remain this way. Therefore this proposal will not focus on issuance, but rather token flows based on usage.

Auctus Tokenomics Overview:

1. To incentivize liquidity providers to support the fiscal safety of the network, we will double their claim to the trading fee pool, if they hold AUC.

This will be determined by the staking factor. The staking factor is a variable adjustable by the governing body on a monthly basis reflecting a percentage of the liquidity they provide. A staking factor of 1% would mean that a liquidity provider providing $100,000, would need to stake $1,000 worth of AUC to double his earnings on trading fees.

Here are three examples we find could function as a good starting point. The horizontal axis reflects price of AUC, the vertical axis reflects liquidity provided. The grid highlights what percentage of the total fully diluted supply would be staked just by LPs. Dark green highlights the combinations where there is more natural demand than available supply and price has no other way to go but up.

This way, AUC will have organic demand backed by real unsubsidized earnings.

2. To incentivize users to support the fiscal safety of the network, users will receive discounts on their trading for holding AUC.

This will be determined by the discount stake. The discount factor is a variable adjustable by the governing body on a monthly basis. A discount stake of $500 would mean that a user would need to hold $500 worth of AUC in their wallet used for trading to receive a discount on their fees. This number would be AUC denominated on a monthly basis for simplicity.

Here are three examples we find could be effective to start with. The horizontal axis reflects price of AUC, the vertical axis reflects active users holding AUC. The grid highlights what percentage of the total fully diluted supply would be staked just by users. Dark green highlights the combinations where there is more natural demand than available supply and price has no other way to go but up.

Keep in mind that one can buy options without AUC. In such a scenario the buyer would pay higher fees. Higher fees in turn result in more incentive for liquidity providers to provide options liquidity and stake AUC. One user's choice to not support the network therefore, incentivizes another user to support the network even more.

3. Finally we propose diverting 10% of fees collected into a quarterly pool that token holders can allocate to development or burn.

This quarterly pool can either be used to fund development, whether that is to accelerate growth when resources are plenty or fund development in a future where the finite reserve is running low. Alternatively should token holders choose not to allocate funds to a quarterly development project, the collected pool will be used to buy and burn AUC tokens.

This ensures that token holders have the ability to choose between improving the technology or strengthening the hardness of AUC tokens. Here’s an overview of what such a burn could look like. To ensure LPs are rewarded properly for making the platform work, we suggest a .03% fee on notional volume with a $5 minimum order fee, as known from traditional markets.

This gives an overview how many tokens may be burnt on a quarterly basis based on notional volume or number of trades. Dark green highlights the combinations where there is more natural demand than available supply and price has no other way to go but up.

These are our recommendations to create a self-sustaining, long term oriented token economic system that will encourage a positive feedback loop of security, growth and usage.

We look forward to your feedback!

In the coming weeks and months upon passing this proposal we will look towards the next steps:

1. Allocation of reserve pool to accelerate short and mid term growth
2. Decentralization of governance

DISCLAIMER:

This model is not a solicitation to buy or sell any security or token. It is strictly informational to understand the levers within Auctus Project’s token economic structure. The creators of this model hold AUC at time of sharing. This model is a proposition, and is not a current implementation at time of publication.

[FelixOHartmann]

Token Model V2:

After collecting some feedback from community members we received a lot of positive feedback. We also received 3 key critiques:

1. A reduction in fees is not desired enough to be implemented as a feature.
2. Talking with the devs we found that staking AUC for increased options writing trading fee reward was technically complicated and could create friction from user perspective.
3. The token model was a bit dated, resembling CEX models (which given BNBs performance we don’t consider to be a bad thing… but we hear you!)

We took some time to re-envision and optimize token flows, with a simpler model that yet remains multi-purpose for the long term visions of the project.

Here is a second separate and competing token model we came up with. This one is rather unique as at its core it creates a supply blackhole while also creating ever deepening AUC order books and hard money fundamentals, enabling future features such as AUC as collateral for option writing.

AUC Black Hole Liquidity Token Model:

All Trading Fees (ETH) generated from Auctus’ suite of on-chain options products (Dex, AMM, Vaults…), are sent to the blackhole address governed by the future DAO.

Tokens in the blackhole may not be spent, nor are they burned. Instead the tokens in the blackhole will be used to provide liquidity to top decentralized exchanges with a 50/50 split.

This blackhole liquidity provider becomes the backbone of token liquidity:

• No need for long term incentives to provide liquidity, meaning no need for inflation
• Permanently deepening books on both supply and demand side
• Token holders know that there is ALWAYS a buyer of last resort
• Blackhole ETH balance becomes a tangible and exitable minimum network value that is ever expanding
• Less price manipulation as traders are not at whim of liquidity providers
• AUC becomes harder (supply side sink), and more liquid (order book depth), allowing it to adapt store of value characteristics, enabling AUC to start being used as a collateral asset for options in coming years which would multiply its utility and value multi-fold.
• Since half the trading fees will be turned into AUC, there is a constant buying pressure on AUC every time transactions are made on Auctus options products.

This simple, yet elegant solution will increase liquidity, increase holder confidence due to the permanent demand side, and makes AUC a hard enough asset to be used as collateral down the road.

While staking for rewards is popular, it does not increase price for holders, but merely creates a taxable event. Since none of the world’s biggest tech firms offer dividends, we choose to exclude staking in this model. We could pass a portion of the fees to stakers, but it would slow the growth of the blackhole and thereby postpone a future where AUC can serve as collateral.

Here’s a visualization of this Blackhole in action:

AUC Buy Wall inside Blackhole

AUC Supply Sink inside Blackhole

Up next we’ll continue to hear out feedback from team and community members, upon which we will either:

1. Present a new third model
2. Present an adaptation to model 1 or 2
3. Aid the team in the implementation of model 1 or 2

All the best,
Felix Hartmann