Economics Paper V2 Draft

Hey everyone! We are seeking feedback regarding this initial Jackal Protocol Economics V2 draft.

Please take time to read through the paper and provide critical feedback for iterations.

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Dear team,

Thank you for the opportunity to provide feedback on the proposal to lower jackal’s inflation rate. Whileprice stability is an important consideration, I believe keeping inflation at 40% is most prudent for jackal’s long-term viability as a decentralized storage network.

Unlike traditional currencies, jackal relies on continuous token issuance to incentivize participation and secure stored data through its PoS consensus. Reducing annual inflation risks weakening these incentives over time. At 40%, validators and full nodes are adequately compensated for hosting loads of redundant data and securing the network - especially as jackal continues to grow.

Too dramatic of a cut could lead to significant drops in active validation and storage provision. With data stored in a trustless, encrypted manner across the network, redundancy is key. Fewer providers would compromise this redundancy and resilience. It also concentrates power in the hands of fewer stakeholders, weakening the decentralization jackal was designed for.

A more cautious, staged approach - such as testing reductions to 35% or 30% first - would allow any impacts on network health to be identified and addressed before going lower. This helps ensure jackal’s stored data remains just as secure, private and censorship-resistant as when users first chose the network.

While 20% inflation may stabilize price in the near term, jackal’s longevity depends more on maintaining robust security through ongoing participation incentives. I believe 40% strikes the right balance, and avoids risks to the network that could damage user confidence long-term.

For these reasons, I suggest keeping jackal’s annual inflation at 40% for now. A more measured evaluation of network health indicators could then inform any future adjustments. Maintaining security should be the top priority as adoption grows.

Please let me know if you would like to discuss this perspective further. I’m happy to elaborate on any part of the rationale.

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Hey guys it’s Saul from telegram. I wanted to share why I think we should keep inflation at 40%

Incentivizing Participation:

  • Higher inflation rate encourages active engagement from validators and stakers.

  • Stronger incentives through block subsidies and staking rewards.

  • Fosters a vibrant and active ecosystem.

  • Enhancing Network Security:

    • Attracts a greater number of validators.
    • Diversifies the validator set, reducing the risk of centralization.
    • Strengthens the network’s security posture.
  • Driving Liquidity and Token Demand:

    • Increased inflation rate stimulates demand for the “Jackal” token.
    • Investors and users are more inclined to hold and stake the token.
    • Contributes to improved token liquidity within the ecosystem.
  • Fostering Governance and Decision-making:

    • Higher inflation rate encourages token holders to actively participate in governance processes.
    • Stronger incentives for voting on proposals and shaping the network’s future.
    • Strengthens governance mechanisms and ensures a more democratic decision-making process.
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Thanks for your feedback!

Some of my own, is that this wouldn’t actually significantly lower the profitability of supplying storage for most providers, it’s primarily staking rewards that would decrease. Even the updated staking rewards will be higher than many other Cosmos chains which have shown their chains to be secure.

I am a contributor to this model, but also very strongly care about the security of both the Jackal protocol and the chain, and don’t think that these cuts could realistically put either at risk on their own.

If you are a storage provider and/or know others who believe that this will somehow price them out of contributing, I’d love to see analysis as to why/how.

Hi @Patrick :slight_smile:

This is PM from MantaDAO, love to see Jackal coming up with an upgrade to his economic model, and thanks for the opportunity to provide feedback.

I have a contrarian take to the first two comments by @Cryptodegan and @Saul, which I will explain.

I believe (i) attaching real cash flows to the token (albeit indirectly by directing 60% of revenue to POL, which is an interesting design choice) and (ii) reducing inflation, tackles the two major issues of the original economic model.

My main concern is regarding inflation, I think the current proposal doesn’t do enough to cut it and this is likely to lead to a continuation of the structural downward price pressure for JKL (net of any interim upside volatility as we have been experiencing across the entire space recently). I’ll be sharing my thinking starting with some fundamental economic principles and going into the specifics for Jackal.

On Fundamental Value

  • The fundamental value of a business/protocol/DAO is driven by its capacity to generate future cash flows for its share/token holders, and the risk perceived by the market participants vs. their expectation of future cash flows.
  • Imagine Jackal generates $100 of annual cash flows from selling storage (let’s assume no growth to keep things simple) that are 100% distributed to token holders, and the market equilibrium for the perceived level of risk is at 10% APR (i.e. investors in JKL think they are paying a fair price for JKL when they get 10% APR in real yield in return).
  • Then the implied fundamental value of Jackal Protocol would be $100/10% = $1000.
  • Now, let say the total supply of JKL was fixed at 1000 tokens, then the implied fair price per token would be $1000/1000 = $1.

On Token Inflation

  • Inflation doesn’t create any value, it just increases the denominator in the previous example, meaning that everything else being equal (in term of revenue generated by the protocol), it leads to a reduction in price per token.
  • What inflation does is redistributing the ownership of the economic pie between the various groups of token holders. In the case of Jackal, this includes: the Stakers, the Storage Providers, the Development Team, and the non-staking token holders (including the liquidty providers).
  • A bit of inflation is not necessarily a bad thing, particularly in the early days of a protocol. It allows to incentivize and subsidize certain group of participants that might be critical to the long-term success of the protocol, but have short-term cash needs (e.g. to pay for infrastructure costs) or opportunity cost (e.g. to put their resources at work somewhere else where they will get a higher payout).
  • It’s important to keep in mind that this is just a mechanism transferring value from people on the receiving hand (e.g. the Stakers) by diluting people that don’t benefit of it, or not as much (e.g. the token holders that don’t stake and the liquidity providers).
  • The higher the inflation, the higher the require cash flow growth to compensate for dilution and maintain the price per token at current level.

On Token Liquidity

  • Building strong liquidity is fundamental to support token price stability, allowing existing token holders to sell with limited price impact, and potential new investors to enter with size.
  • This is particularly important for projects that decided to use inflation to subsidize certain participants. The underlying assumption is that real revenues in the early days is not enough to make it profitable for validators and storage providers to run the necessary infrastructure to guarantee the good functioning and security of the network.
  • The only way to turn this artificial revenue into real $ that can be used to fund operations is to sell those newly issued tokens into the secondary market. Deep liquidity is essential to mitigate this continuous downward price pressure this causes.
  • The only way for token price to remain stable or increase is that the demand for JKL from investors/speculators + real usage (e.g. to pay for gas and storage fees) + liquidity providers (i.e. market makers) ≥ sale pressure from validators + storage providers + Team + Insiders (private sell participants, advisors) + Mercenary LP farming liquidity incentives + Secondary investors/speculators exiting their positions.
  • Everything else being equal, the higher the inflation, the higher the sale pressure and negative price impact, the more tokens subsidized participants will have to sell to keep their $ income constant, which create a negative feedback loop.
  • Building Protocol-Owned Liquidity (POL) is a great way to mitigate the impact of some of this sell pressure as it sustainably deepens liquidity while also reduce/remove the needs to incentivize mercenary LPs that contribute to this sell pressure.
  • POL only works if JKL are paired with quality tokens that at least retain their value in dollar terms (i.e. stablecoins) or ideally increase in value compared to the dollar in the long-term. The best-case scenario is to pair with a token whose value is appreciating faster than JKL. The worst-case scenario is to pair with a token whose value is deprecating faster than JKL and the dollar.

Reviewing Jackal Economics V2 through that lens

  • JKL current supply stands at ~132.5m; based on the proposed revised inflation schedule, it will take roughly 3 years for the supply to increase by ~50%. This means, assuming JKL is currently fairly priced in relation to its revenue, revenue will need to growth by at least 50% in the next 3 years for JKL price to stay flat despite dilution from inflation, which seems reasonable.
  • However, in reality, current valuation is factoring in a lot of growth (which makes sense given the early stage of the project). Difficult to be accurate given the lack of transparency on revenue, but back of the envelope, based on total TB of storage space purchased from the network and assuming 100% of buyers will renew their subscription at perpetuity, Jackal is currently generating ~$43.5k of recurring annual revenue. At current JKL price ($0.15 as of 18-Nov-2023), Market cap is at ~$20m, trading at 456x revenue, which is a lot. Say differently, if 100% of the revenue was distributed to toke holders, this would amount to a real yield of 0.2% APR assuming no inflation, and less once adjusted for inflation.
  • So, revenue growth expectations from market participants are already high, therefore I don’t see the need to put Jackal under pressure to have to growth by another 50% within 3 years on top of what is already baked into current valuation, just to compensate inflation.
  • The rest of the proposal look good, I like the concept of using 60% of the protocol (real) revenue to build up POL, this is a viable alternative to direct revenue distribution to stakers (particularly if you don’t intend to entirely scrap inflation one day).
  • The concept of distributing 15% of the revenue in the form of referral commissions is also great, this paves the way for the development of a truly decentralized sales force. It might take some time to start bearing fruits, but it’s a very powerful concept and makes me excited for the direction the protocol is heading towards.

Recommendations

  1. Adjust the MintDecrease parameter so that inflation in year one is halved compared to what is currently proposed (from 16.36% down to 8.16% in year 1).
  • This is definitively more of an art than a science, but high single digit territory for the first year seems high enough to attract people that just look at the headline staking APR number and don’t understand the impact of inflation on price, while also mitigating the expected downward price pressure.
  • Limiting inflation will also limit the damage (dilution) to liquidity providers, which will include Jackal Protocol itself and any partners for building up POL. The lower the inflation, the more confident POL partners can be that they won’t suffer material IL on the position.
  1. Create of a dashboard tacking monthly revenue and key KPIs; this will be critical for governance participants to track the progress of the new economic model and make informed decisions.
  2. Explore partnerships to increase POL (ongoing proposal by Shade Protocol is a good one; MantaDAO will also come with a proposal after that one, the more the better).

Hope this is helpful. I am a big fan of the Jackal vision for decentralized storage and really want to see you succeed, this is really something we need <3

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Interesting view points. Thanks for commenting and we’ll review this!

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Hey everyone, before our next iteration, I wanted to summarize and aggregate the feedback we have received from multiple channels.

  • Maintain Higher Inflation Rate : Suggestion to keeping the inflation rate at 40% to incentivize participation, ensure network security, and maintain a vibrant ecosystem.

  • Concerns About Inflation and Token Value: Advocatcy for reducing inflation, arguing that high inflation leads to downward price pressure and suggesting halving the proposed year-one inflation.

  • Emphasis on Referral Program: Recommendations focusing more on referrals, currently at 15%, as a critical driver for dynamic growth.

  • Grants Program: Suggestions for creating a separate grants category, distinct from the community pool, for high ROI and to incentivize builders.

  • Balanced Approach to POL and Staking: Questions about the high allocation to POL and staking, with a suggestion to dynamically manage POL based on market conditions.

  • Need for Transparency and Data Tracking: Recommendations for a dashboard to track revenue, key metrics, and network health for informed governance decisions.

  • Real Yield for Stakers: It would be great to see a portion of the storage module revenues going to Stakers instead of POL.

If anyone wants to add more recommendations, reply to this message!

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Our inflation is already wildly high, it needs to be reduced dramatically. This hits nobody harder then me and I am fine with it. If we don’t get a handle on it, then we will have the perfect network that nobody will use because we diluted our storage providers into obscurity and don’t have any left. If folks are supporting this network simply for the amount of money then can drain out of the system, best to clear em out now before we start to scale. The token price will take a hit as they leave but it’s taken hits before and keeps soldiering back, best to get it over with and have providers and validators who align with the network and want to see it successful.

Focus on CUSTOMERS. This should be the NUMBER 1 priority of Jackal at this point, all of the rest of this argument is academic. ‘Build it and they will come’ will not play in this market due to the amount of competition. Focus on education. Focus on ‘specials’. Focus on outreach. We have 100 validators in this set, how many active customers do we have? What is our DAU? There should be no larger priority for us at this point.

Get our validator set aligned. How can you validate a chain yet not take 5 minutes to pop into an AMA discussing the future of the chain? The progress? What is coming up? What should you plan for? There is an average of 20 people on the weekly Jackal AMA’s, and that includes the developers. For this to be successful long term, it will require maximum participation and maximum outreach from the validators that are getting paid to support it. Participation drives discussion, drives energy, gets people talking and generates CUSTOMERS. We need to lead from the front.

  • Inflation is too high, there are not enough users to support the cost
  • Focus on CUSTOMERS, all else is secondary
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A crypto project with low inflation can face a multitude of challenges and negative consequences. Firstly, network security may be compromised as a result of fewer participants willing to validate transactions, leaving the network vulnerable to potential attacks. Additionally, limited token distribution can lead to token concentration, hampering decentralization efforts and restricting access to tokens. Low inflation discourages active network participation, reducing user engagement and community involvement. Insufficient incentives for network participants can diminish their motivation to contribute resources, time, or expertise to the project. In terms of development, inadequate funding may hinder the project’s ability to innovate, improve, and scale its technology. Furthermore, with limited liquidity in the market, trading and exchanging the cryptocurrency become more challenging. Price volatility may increase due to the scarcity of tokens and susceptibility to market fluctuations and manipulations. Expanding the user base becomes difficult, as there are fewer incentives for new users to join the ecosystem. Attracting validators, who play a crucial role in network security, becomes a challenge. The lack of resources for research and development stifles innovation and prevents the project from keeping up with market demands. Reduced community engagement, centralization risks, and decreased investor interest are additional concerns. Furthermore, the project may struggle to fund marketing efforts, hindering its visibility and adoption. Governance processes may suffer from low participation, impacting the project’s ability to evolve. The competitive edge can be lost to projects with higher inflation rates that offer more attractive rewards. Limited resources for partnerships and community initiatives, along with the risk of token price manipulation, further complicate matters. Ultimately, low inflation can undermine the project’s long-term viability, sustainability, and overall success.

You don’t have to make 10 different accounts to spam the forums, especially if AI-generated text blocks.

staking apr should be as low as possible - reward the validators and stakers just enough to keep things secure. the quality of investors looking for ‘high staking rewards’ is not who you want as token holders.

if we assume usdc or other tokens will be an optional fee token for use of platform, will Jackal buy JKL with the revenues in USDC?

maybe could add a feature where JKL holders get a percentage of all JKL revenue earned?

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Agreed, we’ve been thinking about taking usdc as fees as well but the focus is mostly on taking payment in usdc as well. The pool of real yield can buy back JKL if the community votes for it. I think we’re considering adding a new route where jackal stakers get some revenue, not just holders of the token.

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I’m seeing better arguments here in favor of reducing inflation.
Had no pre-coinceived idea about this so thanks to all the participants for sharing their input.