In our previous educational posts, we have outlined the basic economics of a Fluid Asset, from preventing cyclical transaction attacks to how the protocol distributes yield through Utility Mining. In this article we want to show how it all comes together in our Governance, the FLUID token, and how the Fluidity Wars will shape Utility in Crypto as a whole and steer the “invisible hand”, through what we call the Incentive Layer.
Governance and veFLUID
Fluidity’s Governance has its foundations in the vote-escrow (ve) Model pioneered by Curve, in which users lock up a protocol’s governance Token for a specified amount of time in return for a veToken. This veToken grants the user rights to participate in the protocols governance, and the voting power they receive is directly proportional to the lockup time of the underlying Token.
Building on top of this, veFLUID has a few distinct functionalities that differ from the Curve model. One of the main differences is that the veFLUID and FLUID token are always pegged 1:1 in economic value, and the voting power is calculated as a “governance multiplier” attached to each veFLUID. This means that the total number of veFLUID a user receives is independent of the lockup time, while the multiplier depends on it. As the multiplier decays over time and goes to zero, the veFLUID will be converted back to FLUID.
Another distinction is that in the standard model employed by Curve, veCRV cannot be transferred or sold. veFLUID on the other hand are neither fully liquid, nor fully illiquid, as they can be sold back to the protocol in accordance with Fluidity’s buyback mechanism. The reasons for these design choices will be explained in a later section.
The main use cases for governance in the Fluidity DAO are creating and voting on proposals and delegating voting power to Utility Gauges through veFLUID. These proposals can be executable code or suggestions for the team to implement. Examples of what users are able to vote on include changing values in the TRF, new support for underlying assets, whitelisting of protocols and more. The life of a Fluidity DAO proposal is similar to that of Compound’s governance, where the timelock is replaced by a multisig wallet with the signers being composed of the core team and outside advisors.
Apart from being able to participate in governance, veFLUID tokens are yield bearing tokens, where the yield is directly tied to utility, as the holders of these tokens earn dividends every time a payout happens through a fluid transaction.
Initially we are building our governance app on Tribeca, later on we will be developing a cross chain governance app together with Portal. We will talk about this more in a later blogpost.
FLUID Inflation
In accordance with our tokenomics, 25% of all FLUID tokens are reserved for the distribution of tokens to the community through Utility Mining. The vesting for these tokens follows the law of diminishing returns, but rather than being continuous, it is discretely defined by a piecewise function. If you’ve ever played any Souls games (including the newly released Elden Ring), this is how their stats system works when you level up at bonfires (or a grace).
According to this schedule, 12 months post TGE (Token Generation Event), or after 1 mining epoch, roughly half of the community tokens will have been distributed, after 24 months three-quarters of the tokens and so on. Theoretically, all tokens will have been mined at t -> infinity, however in reality the emissions will eventually stop due to the fixed number of decimal points in the token, making it indivisible at some point in the future.
One benefit of this is that in the beginning, there will be a relatively great amount of tokens and yield distributed to the community in order to bootstrap the protocol and create a more balanced token distribution. The community will hold the majority of the tokens from the start. However, even beyond that kickstart period usable yield will be mined for a long time, way past the vesting of the other token portions. This inflation will be distributed to the users of Fluidity through Utility Mining according to measurements taken by the Utility Gauges.
Reflexive Emissions and veREV
As we have mentioned in a previous blogpost, a lot of projects don’t put a lot of thought into their token distribution and how important it is in order to create a sustainable community. Most of the time they simply resort to “throwing” their tokens out there, in hopes of attracting users through these incentives, while in reality they don’t create any stickiness and only attract mercenary capital. No one knows what the optimal emission rates for tokens should be, and these protocols end up paying large fees and giving away free money to rent liquidity from LPs.
We have come up with a model that aims to fix these issues, called Reflexive Emissions. In a nutshell, it is an algorithm that determines the inflation rate for the FLUID governance token as a function of the protocol’s usage. If the protocol’s TVL (Total Value Locked) remains constant or increases over time, the emissions follow an auction curve that gradually decreases the inflation rate of the token, since those incentives are not needed for the growth of the protocol. On the other hand, if the pools are losing liquidity, the emissions increase proportionally with the decrease of the TVL, with the goal of re-incentivising users to provide liquidity.
This shares a lot of similarities with a Copper Launch Liquidity Bootstrapping Pool (LBP), and Reflexive Emissions can essentially be seen as a type of auction where renting liquidity becomes cheaper as more liquidity accumulates in the pools.
In addition to Reflexive Emissions, we plan to use UXD’s veREV as our token buyback mechanism. If you haven’t heard of it yet, we highly recommend reading their post on it. It essentially works like this: Whenever the protocol generates profit, it distributes the equivalent amount of veFLUID to its users through Utility Mining. Immediately after, the protocol holds a reverse dutch auction, offering to buy back those locked tokens and enabling users to sell them. If the order isn’t filled, the protocol buys back the remaining tokens on the open market.
With this, the buyback mechanism directly rewards those aligned with the protocol, since the only way of acquiring these tokens apart from buying them on the open market is through Utility Mining. It is also beneficial for the price of the underlying token, as the protocol burns the tokens after acquiring them through the auction and decreases the total supply. We combine veREV with Reflexive Emissions for determining the inflation rate (and the buyback rate), and Utility Mining for the distribution of veFLUID.
Utility Gauges and the ESC
So far we have talked about our governance, token inflation and buyback mechanism from the perspective of the protocol. Now we transition to how the user interacts with these mechanisms and talk about how this leads to the Fluidity Wars.
The inflation of FLUID tokens is directed to users through Utility Mining, measured via Utility Gauge contracts. These are similar to CRV Liquidity Gauges in the sense that users are able to dedicate their voting power to these gauges to determine the flow of inflation through incentive mechanisms. A whitelisted protocol will be able to take control of these gauges and steer the flow of inflation to themselves or someone they have received bribes from. Utility gauges will control the emissions for protocols (DEXs, marketplaces) as well as the underlying currencies (e.g. USDC, DAI) to Fluid Assets.
As an example, suppose protocol A and protocol B have the exact same offering. Protocol A dedicated the majority of their voting power to a Utility Gauge in order to control the flow of FLUID inflation to themselves. This means that every time somebody uses Fluid Assets on protocol A, they will be rewarded with more FLUID tokens through Utility Mining than someone who performs the same transaction on protocol B, since B has a lower display value in the gauge. Users in turn will be more likely to use protocol A as it provides more value than B for the same offering.
Additionally to Utility Gauges, users will be able to individually boost their Utility Mining token rewards through the Elastic Sigmoid Curve (ESC) and maximize their yield. It is a function of the individual and the total voting power and the number of participants in governance and aims to reward users aligned with the protocol and incentivise participation in the DAO. There will be up to a 2.5x boost on individual Utility Mining token rewards through the ESC.
Fluidity Wars
Continuing with our above example, we envision a constant competition between protocols to gain control of Utility Gauges and steer the token emissions in their own interest. This will attract more users to these protocols and capture their liquidity as well as other benefits they bring with them. Bribes will be paid, cartels will form and protocols will consolidate.
Contrary to Curve Wars, which only affects liquidity on specific trading pairs, the outcome of Fluidity Wars can have wide ranging effects for all of DeFi, as it affects DEXs, marketplaces and even specific stablecoins. Because Utility Mining requires active participation to receive yield, it has a greater effect on how users interact with these protocols. They will aim towards maximizing their yield from participating in the Fluidity Ecosystem, and as a consequence this may cause protocols to lose or gain users, revenue, liquidity and network effects.
Protocols controlling Fluidity governance will steer the “invisible hand” of the market and direct cash flow in their own interest. We believe that this competitive landscape will be beneficial for the adoption of Fluidity and for building out its ecosystem in creating the Incentive Layer.
The Incentive Layer
With all of this at hand, we now introduce the Incentive Layer. When we talk about layers in Blockchain, we usually mean the three main layers: Layer 1, 2 and the application layer. Layer 1 describes the base technology layer, e.g. Ethereum as a protocol. The 2nd layer is reserved for solving scaling problems in Layer 1, an example for these would be optimistic or zk-rollups on top of Ethereum. Above Layer 2 we have the application layer, it entails decentralised apps (dApps) that are built on top of Layers 1 and 2. An example for this would be Compound on Ethereum.
Now, where do we fit into this? We think that Fluidity and its ecosystem are creating a whole new layer above the application layer, called the Incentive Layer. Fluidity builds on top of existing protocols and dApps and wraps existing tokens from other layers in order to incentivise utility of these tokens. It will facilitate the creation of a broad ecosystem with various and completely new DeFi applications based on Fluidity and its use cases. Imagine a DEX that gives you yield for every swap you do, or an NFT marketplace that rewards its users every time they make a purchase. Imagine participating in a microeconomy in the metaverse that rewards users every time they spend, trade, or interact with anything or anyone.
All of this will be possible in the Incentive Layer, and we hope that it will become the most widely adopted real world use case for interacting with crypto.
If you’ve made it all the way to the end, you probably have a lot of questions now. We’re always available on our social media channels and discord, feel free to drop by and ask us anything.
Fluidity’s mechanisms are complex and built on top of existing complex mechanisms, and they are all still likely to change. We hope you don’t feel discouraged by the complexity of these designs, as we think it is important to address them in order to stimulate discussions and improve on them. As we transition to a more decentralised form of governance, we want Fluidity to be a product built by the community for the community and increase the pace of innovation in DeFi again.
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