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Proposed Changes to ALEX Tokenomics

November 26, 2022

On November 11, 2022, the ALEX Lab Foundation, in collaboration with MattySTX, Tokenomics Resident at the Stacks Foundation, presented the ALEX community with a series of proposals to redesign ALEX Bitcoin DeFi tokenomics, available here. After a two week period of community discussion, the formal proposal is presented below. The procedure for the vote and possible implementation of changes is outlined here.

Summary of Proposed Changes

The goal of the new tokenomics proposals is to 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.

Make use of ALEX protocol revenues

A decentralized community governance vote could elect to distribute protocol revenues to ALEX platform users (similar to how the Curve protocol’s governance vote elected to distribute protocol revenues to CRV token holders)
Community feedback is encouraged

2. Reduce ALEX emission rate and align them with protocol growth rate

The rate of ALEX emissions is not very transparent and is net dilutive since it continues at the same rate even when the protocol does not grow
ALEX token emissions should be a transparent function of AMM trading volumes, so that if protocol growth slows down, emissions also slow down.
– Staking emissions rate: based on total AMM trading volume across all LP pools.
– LP emissions rate: based on AMM trading volume for that specific LP pool
Based on ALEX’s average trading volume, this can be configured to result in an expected reduction in emissions compared to the current rate, and allow for emissions to dynamically reduce even further when trading volumes slow

3. Add additional utility to ALEX (and a source of token burns)

Currently, traders pay 0.30% fees to trade in LP pools
An additional utility for the ALEX token would be to allow traders to pay part of the fee in ALEX tokens (which are burned in the process), in order to pay an overall discounted trading fee

4. Simplify staking

The existence of both discrete staked ALEX and continuously staked (atALEX) adds unnecessary complication for users and promotes mercenary capital dumping their rewards each staking cycle
Moving to an only continuous staking model keeps the best of both worlds: user simplicity and aligned incentives for holders

5. Escrow ALEX emissions

Currently ALEX rewards are emitted as liquid tokens, rewarding mercenary capital to dump tokens each staking cycle
Emitting ALEX rewards in the form of non-liquid escrowed tokens (esALEX), aligns the long term incentives of ALEX token holders and the protocol, and helps purge undesirable yield mercenaries

New Tokenomics Proposals in Greater Detail

Protocol Revenues

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:

The current fee is 0.30% ($3.00), paid as:
– $3.00
– 0 ALEX burned
Instead, using ALEX, a trader could pay a reduced fee of 0.25% ($2.50), paid as:
–$2.00
– ~26.6 ALEX burned in the trade (the equivalent of $0.50 worth of ALEX at the time this was written)

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)

Not tradeable, not transferable
Can be staked to earn rewards (unless locked in “unescrow” process)
Can be “unescrowed” (converted into ALEX) by locking up for a set time
Eligible to earn higher rewards than an equivalent amount of staked ALEX

ALEX (non-escrowed ALEX)

Tradeable and transferable
Can be staked to earn rewards (even when locked in “unescrow process”)
Can instantly be escrowed (converted into esALEX) at any time
May earn lower rewards than an equivalent amount of staked esALEX

Unescrowing Tokens (Converting esALEX -> ALEX)

Lock up X esALEX with the same number of ALEX tokens for 1 year
Ex. lock up 10esALEX with 10 ALEX
esALEX “unescrows” by converting into ALEX each block, linearly at a 1:1 conversion rate
esALEX locked up in this process is not eligible for staking rewards, but the ALEX tokens used in the process can be staked ALEX

Escrowing Tokens (Converting ALEX -> esALEX)

ALEX can be instantly escrowed (converted into esALEX) at any time at a 1:1 conversion rate

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.