“The measure of intelligence is the ability to change”
- Albert Einstein
The ALEX Lab Foundation, in collaboration with MattySTX, Tokenomics Resident at the Stacks Foundation, is proud to present the ALEX community with a series of proposals to redesign ALEX Bitcoin DeFi tokenomics.
The final decision to adopt or reject the proposed changes will be determined through the governance vote of the ALEX community.
Our current tokenomics were written in a very different market environment. Our emissions levels were designed to be competitive with other DeFi platforms at the end of 2021, near Bitcoin’s all time highs.
Hindsight is 20/20 and though it’s now clear that the emission levels were too high, had they been drastically lower at the time it’s unclear if ALEX would have been able to bootstrap sufficient liquidity from LPs to efficiently operate.
The emissions levels were fixed under the assumption that as the protocol grew in TVL, the APRs of staking and farming pools would proportionately decrease. This assumption didn’t take into account the crypto winter that would begin in the spring of 2022, and how hard crypto and DeFi in particular would be impacted.
The subsequent drop in our protocol token price is not unique to ALEX, but is nearly universal across DeFi protocols that have launched in the past two years.
As capital was withdrawn from riskier assets such as DeFi tokens, a cycle of decreasing liquidity, continuous high emissions and selling pressure took hold. Although our team has continued building and consistently delivered on our roadmap, the dilutive effect of the emissions has been greater than the value accrued to the ALEX token.
It is our goal that through new tokenomics we can begin reversing this trend by reducing dilution, adding utility and better enabling protocol value to accrue onto ALEX.
Nearly a year after our launch, a different market environment requires that we adapt and our goal is to do so through the decentralized consensus of the ALEX community.
At present ALEX is on the cusp of its next iteration with several significant new functionalities currently completing Testnet:
By revising our tokenomics subject to community governance voting, we want to ensure that as we ship “ALEX2” the value created is accrued to the ALEX token.
The ALEX Lab Foundation will work closely with the ALEX community on a series of discussions and votes regarding the new tokenomics. APower will be the only token necessary for voting.
Among the tokenomics decisions to be decided by our community will be:
Each of these proposals is described in detail in the following letter by MattySTX:
I’d like to share some thoughts on an ALEX tokenomics governance proposal for community discussion and consideration. Nothing in this article is written in stone, and its purpose is to initiate a healthy conversion, not to dictate what will or must happen. At the end of the day, the ALEX community decides and calls the shots.
For those of you who don’t know me, I am MattySTX, tokenomics resident at the Stacks foundation. In the Stacks ecosystem, I publish the quarterly STX mining report, mentor teams at the Stacks pre-accelerator, and authored the first community contributed governance proposal for Arkadiko, the second largest DeFi protocol on Stacks.
ALEX continues to build in the bear market — as progress continues, the ALEX community has the opportunity to optimize ALEX’s tokenomics and further strengthen the product in 2023.
The ALEX token is emitted to stakers of ALEX tokens, as well as to liquidity providers in the various AMM liquidity pools. APOWER, a non-transferrable governance token, is also earned from these same sources.
Traders in ALEX’s AMM pools currently pay a 0.30% fee, of which half (0.15%) half is paid to that pool’s liquidity providers, and half is kept by the protocol’s smart contract as revenue.
ALEX emissions to stakers and liquidity providers continue at the same rate, regardless of trading activities. This means that even in periods of slower growth or less activity, token holders are diluted at a constant rate while the protocol does not grow at a commensurate rate (net dilution).
Staking for ALEX currently takes two forms. ALEX can be staked either for discrete periods of time (ie. 2 cycles), or it can be staked with continuous compounding, becoming “atALEX”. The ALEX token, in the form of atALEX, has existing utility as collateral to mint assets Arkadiko’s USDA stablecoin. However additional forms of utility would make the ALEX token even stronger.
Based on the ALEX token’s analytics, it has been subject to farming by mercenary capital. This is to some extent an expected outcome of the current tokenomics, as rewards are paid as liquid ALEX, meaning long term supporters of the ALEX protocol earn liquid tokens they hold anyway, while mercenary capital is incentivized to dump.
Before getting into specifics, here is a high level summary of potential changes to ALEX tokenomics to consider, developed in collaboration with ALEX community leaders and members of ALEX Lab Foundation.
2. Reduce ALEX emission rate and align them with protocol growth rate
3. Add additional utility to ALEX (and a source of token burns)
4. Simplify staking
5. Escrow ALEX emissions
The combined effect of these changes could introduce additional utility and demand for ALEX, reduce emissions, increase token burns, purge mercenary capital behavior, and align community incentives with long term protocol growth.
The decentralized ALEX community ultimately dictates how the protocol’s smart contract revenues are put to use. There are many options that the community can elect via a governance vote. A few, non-exhaustive examples include electing to follow Curve’s model and distribute protocol revenues to ALEX platform users, deploy revenues to AMM pools to increase platform liquidity, acquire protocol assets in other denominations, or other options.
Make your voice heard by participating in community discussions as well as any upcoming governance votes to decide how protocol revenues are put to use.
2. ALEX Emissions
Tying ALEX emissions to AMM trading volumes ensures that emissions are not only more transparent, but also that they are less dilutive when there are periods of less platform usage. Reducing the average emission rate, combined with additional utility for the ALEX token, promotes healthier supply and demand dynamics, by scaling supply growth down during periods of naturally lower demand growth.
For example, the current average daily trading volumes on the ALEX platform are about $200,000 and the current daily emissions rate of ALEX tokens is about 290,000 tokens per day, meaning that currently about 1.45 ALEX tokens are emitted per every $1 of trading volume. If trading volume declines though, this rate of ALEX emissions per $1 of trading volume would increase, since emissions are not currently tied to platform usage.
By setting the emissions rate to 1 ALEX token per every $1 of trading volume, the current overall emissions rate of ALEX will be significantly reduced and emissions rates will automatically further reduce if trading volumes reduce.
3. Discounted Trading Fee Utility
Allowing traders to pay a discounted trading fee partially in ALEX (which is burned in the process), helps increase demand for ALEX, reduce supply via burns, and retain fee income for LP providers and the ALEX protocol.
For example, on a $1,000 trade:
4. Simplified Staking
Currently stakers have the option of staking ALEX for a discrete number of cycles (ie 2 cycles) or to stake in continuous compounding via atALEX.
This has several drawbacks.
First, discrete staking provides mercenary capital frequent reminders to liquidate their staking rewards every cycle.
Second, having both discrete and continuous staking makes unstaking atALEX a non-straightforward process that incurs trading fees. Maintaining an ALEX<>atALEX liquidity pool to facilitate this is also an unnecessary and inefficient usage of ALEX emissions.
Lastly, having both staked ALEX and atALEX adds complexity — complexity that would be made only worse upon introducing escrowed ALEX rewards (which we discuss next).
All these drawbacks can be addressed by moving to only continuous staking and removing discrete staking.
In practice, this would involve converting all existing staked ALEX (including discrete staked ALEX and staked atALEX) into continuously compounding ALEX that can be unstaked or restaked whenever users wish. This would effectively remove the “atALEX” token in name, while making all staked ALEX naturally function as what is currently called “atALEX”. It would also remove the additional complication of discrete “cycles”, since rewards would be compounded continuously (each block) and users could stake or unstake whenever they like.
5. Escrowed Emissions
Though you may not have heard it before, escrowed emissions is not a new or radical concept — it draws inspiration from GMX’s tokenomics where escrowed emissions are successfully used. In essence, rather than paying rewards to stakers and liquidity providers in liquid, transferable ALEX tokens, emissions are paid in escrowed tokens — “esALEX”.
Like GMX’s escrowed tokens called “esGMX”, esALEX tokens can be staked to earn rewards, but are not tradeable or transferable without “unescrowing” them by converting them to ALEX tokens. This is done by locking up esALEX tokens 1:1 with ALEX tokens for a fixed period of time determined by governance vote (such as 1 year). esALEX tokens convert linearly over that period of time.
For example, if a user has 10 esALEX tokens, converting those esALEX into ALEX requires locking up 10esALEX and 10 ALEX tokens for one year. At the end of one year, the user will have 0 esALEX and 20 ALEX tokens. If the user stops the process halfway through the year, they will have 5 esALEX and 15 ALEX tokens.
Though both esALEX and ALEX tokens can be staked to earn staking rewards, esALEX locked up in the process of “unescrowing” tokens can not be staked to earn staking rewards.
esALEX (escrowed ALEX)
ALEX (non-escrowed ALEX)
Unescrowing Tokens (Converting esALEX -> ALEX)
Escrowing Tokens (Converting ALEX -> esALEX)
Emitting tokens in escrowed esALEX form does not change that users still earn both ALEX (as esALEX) and APOWER from staking and farming. There are two primary benefits to distributing ALEX emissions in the form of escrowed esALEX tokens.
Firstly, escrowed rewards are less valuable to short term focused mercenary capital, discouraging mercenary capital farming to earn and dump emissions. Less mercenary capital activity means more esALEX and APOWER rewards distributed to long term community members, and less to mercenary capital.
Secondly, esALEX emissions reward long term focused community members by distributing higher staking rewards than an equivalent number of non-escrowed ALEX tokens. This means esALEX stakers can earn both more ALEX (as esALEX) and APOWER than non-escrowed ALEX stakers.
How do esALEX tokens earn higher staking rewards than ALEX?
Because staking rewards are more heavily weighted to esALEX tokens than ALEX tokens. The degree of weight is in inverse proportion to the relative supply of tokens that are escrowed.
Said differently — the more rare esALEX is, the more esALEX is rewarded. The reward schedule is designed such that esALEX tokens earn higher and higher rewards the smaller the portion of total circulating supply that is escrowed.
If that sounds confusing, that’s ok. Let’s look at a simple example.
Suppose the total circulating supply of all tokens (both escrowed and non-escrowed) is 100 tokens. Naturally, if all 100 tokens are escrowed as esALEX, then 100% of total staking rewards will go to staked esALEX tokens, and 0% to staked ALEX tokens.
However if 40% of tokens are escrowed as esALEX (and 60% not escrowed), instead of distributing just 40% of total staking rewards to staked esALEX, a larger portion of rewards are emitted to staked esALEX. In this particular case, each 1 staked esALEX token would earn the same staking rewards as 1.68 staked ALEX tokens. In other words, a staker of ALEX tokens could earn 68% more esALEX and APOWER in staking rewards by escrowing their staked ALEX (by instantly converting to staked esALEX).
If only 30% of tokens are escrowed as esALEX (70% not escrowed), then staked esALEX would earn even more rewards relative to staked ALEX. Each 1 staked esALEX would earn the same staking rewards as 2.09 staked ALEX tokens.
This fact that staked esALEX earns higher rewards as it gets more rare is a key point.
Picture the case of mercenary capital converting a high portion of their tokens to liquid, non-escrowed ALEX tokens to dump them. This is exactly when a counter balancing reduction in liquid supply would be most impactful. This counter balance is achieved by making esALEX tokens more rewarding precisely as the supply of liquid tokens grows relative to escrowed esALEX tokens.
The net effect of escrowed emissions is that long term community members earn a larger share of esALEX and APOWER rewards, while mercenary capital that dumps each reward cycle is discouraged. Furthermore, the amount of liquid circulating ALEX supply is counterbalanced with demand for escrowing tokens to earn higher rewards precisely when this counterbalance is most impactful.
In conclusion, we’ve discussed the current state of ALEX tokenomics, as well as a few potential changes, covering a high level summary, and more detailed explanation of each. This article is meant to initiate community discussion. At the end of the day, the ALEX community decides and calls the shots.
This article should not be construed as legal advice, or financial advice, technical advice, investment advice, or representations in any way regarding any legal, technical, financial, or investment matters by the author. It is not a recommendation or endorsement to purchase any specific token or investment, including any tokens or investments specifically mentioned.
Step One: From the publication of this article until Nov 25, 11PM EST, we will provide over a week for our community to discuss and comment here on our Discourse Forum: https://gov.alexlab.co/. Make sure your voice is heard by sharing your thoughts!
Step Two: Once the ALEX community has shared their feedback, a more formal proposal will incorporate this feedback, and will be shared for discussion in Twitter Spaces and Discord AMA events before voting starts. Details and dates for these events will be shared via Twitter, Discord and our Newsletter.
Step Three: At a specific block height, which will be communicated through all of our social channels several days prior to the vote, the community will formally be invited to vote on the proposal on Ballot.gg
The “APower” token will be the only token required for this vote, ensuring existing ALEX community members are fairly represented. At a certain pre-set block height, which will also be announced prior to the vote opening, the vote will end, and the ALEX community will have spoken! An announcement of community chosen results and next steps will shortly follow.
It’s important that your voice is heard! To reiterate: