Improving Tokenomics Part I: Protocol Owned Liquidity

Improving Tokenomics

Part I: Protocol Owned Liquidity

For a few weeks now, I have been spending my free time trying to better understand jackal and how to build a sustainable economic system. While I don’t usually concern myself much with the price of a token, $JKL has fallen so hard that it is becoming dangerous for the project. Validators cost money, storage providers cost money, and the development of the chain and new dApps cost lots of money as well. Since most of the current and long-term payments are made with $JKL tokens, this massively restricts the possibilities and leads to the risk that the project will have to be discontinued at some point. A higher token price is the basis for further success in the medium and longterm.

Current Situation:
While the project does (at least to me) look outstanding from a technical POV, it is tremendously lacking from an economical point of view. The tokenomics never made sense in the first place and there is a lot of work to do here. It was a nice attempt to involve the community in the process to overhaul the tokenomics, but there are two main challenges: 1) the current community (partly due to poor PA) is very small, so the potential to get valuable feedback is limited and 2) the available information is very scarce and it is close to impossible to create a meaningful economic model with that input.

To create optimal tokenomics, you would need to create a business model first. A tool like the business model canvas could be helpful already, if you take a day to really think about the links between each block. After the business model is created, you can then start to recreate your tokenomics. Many decisions are set in stone now, but you can at least make the necessary changes for the future. The role of the tokenomics is to support your business model, therefore the tokenomics necessarily need to be unique. Right now, your business model is still unclear for me (I couldn’t fill out a business model canvas for jackal) and your tokenomics are actually a hindrance for your project.

Taking into account the current bear market (or at least non-bull market) and the storage providers who exploited your system, even very good tokenomics probably wouldn’t have rescued your token. But still, this has to be improved so the token can actually regain some value so the protocol can thrive.

Protocol Owned Liquidity
Why do I start with Protocol Owned Liquidity instead of talking about the business model?
Answer: It is much less work and much more fun to talk about. I do love DeFi, although I still work in TradFi :slight_smile:

General thoughts about DEX’s:
I do think in the future, there is only room for about 2 or 3 large DEX’s in the cosmos ecosystem, where you can trade L1 tokens from other Cosmos L1 or tokens beyond the Cosmos. On the one hand liquidity is costly and on the other hand users will flock to the DEXs they know and aren’t likely to switch. Osmosis will probably still be around in 5 years and Kujiras Fin looks promising as well. But the DEXs on Terra, Juno, and other L1 will most likely always be minor exchanges, which is not necessarily bad. I do think a DEX on Jackal itself, as it has been mentioned already in the whitepaper, would be good as well. Not as a DEX with the mission to attract liquidity from other L1 like $OSMO, $ATOM, etc. but as a place to incubate and launch projects which build on Jackal. Their tokens could be paired with $JKL on a native exchange. But that’s something for later.

Current Situation:
Osmosis: 284k Liquidity - Current APR: 40% APR from JKL incentives + 7% from trading fees
Crescent: 73k Liquidity - Current APR: 45% APR from bCRE incentives

These two exchanges currently have the most liquidity and the APR is very similar, so liquidity providers expect an APR of 45%. That’s a lot, but of course understable given the recent volatility of JKL. And as there is no volume on crescent, the rewards from their team will probably expire and the liquidity will fade away there. Therefore, the Jackal community does need to ask itself the question whether it wants to spend 3,000,000 $JKL per year (based on current daily emissions) on mercenary capital or if it wants to start to build their own Protocol Owned Liquidity, which would be available on selected DEXs and would only require an investment from our side with no ongoing costs (excluding the risk of IL).

According to the distribution table, 15.000.000 $JKL are reserved to incentivize LPs. I would rather use these tokens to create Protocol Owned Liquidity. This way we would stop spending $JKL and instead we would invest our $JKL and afterwards provide the necessary liquidity ourselves. This is by far the better alternative and if we keep spending the incentives at the current pace, we would be running out of our budget after five years? If we simply stopped paying the liquidity providers, the liquidity would dry out, so incentivizing liquidity isn’t sustainable in the first place.

How to build PoL?
The most straight forward way would be to sell $JKL on the Osmosis pool. This probably wouldn’t look good, as we currently pay people to provide liquidity and many of them already suffered from the heavy price depreciation and afterwards we would start selling $JKL into this pool. Therefore we should get a little more creative.

A way to acquire another token without selling $JKL are treasury swaps. It’s unclear, if we could convince the Osmosis community to swap for example 50k $ worth of OSMO with us, because $JKL has been down only so far and right now we attract liquidity for their DEX and demand for their token by spending $JKL. They don’t have much to gain from this deal. On the other hand, Kujiras Fin is one of the more exciting exchanges in the cosmos ecosystem and they are quickly building PoL (although still much smaller than Osmosis) without spending heavily on incentives. Manta DAO, which was airdropped to $KUJI stakers is building PoL for the Kujira ecosystem by selling $MNTA for other tokens (like wBTC, wstETH,…) and by doing treasury swaps (SHD, STARS,…). $MNTA itself is not inflationary and the majority of it is spent to acquire other tokens. So the value of $MNTA itself is mostly determined by their treasury and less volatile compared to other projects (think of it as a crypto ETF). They could be open to a treasury swap, as they are keen on building PoL for FIN and $JKL liquidity is 0 on kujira atm. If we explain to them what lead to the heavy price decrease so far and where we are going from here on out, we could convince them to do such a treasury swap. Let’s say we exchange 50k $ worth of $JKL with $MNTA, then both sides could supply 100k of liquidity on Kujiras exchange and we would end up with a liquidity pool of $200k on Kujira - almost the same level as what we have on Osmosis right now, without the need to spend millions of $JKL per year.

Current overview of Manta DAO treasury

Nevertheless, we cannot ignore Osmosis as it is the leading exchange in Cosmos right now. To acquire liquidity for Osmosis, I would like to sell $JKL from the same origin as previously explained (tokens earmarked for liquidity incentives) but with significant vesting agreements. Shade Bonds could theoretically be used for this, where we offer $JKL at a discount in return for a vesting agreement of 6 months or even up to a year. I already tested the waters there and asked if it is generally possible, that third parties use their platform to sell bonds, but they seemed hesitant to whatever reason. Other platforms in the cosmos could be explored though as the needed platform wouldn’t be any different from your typical IDO platform (with the exception that vesting is a necessity).

A hindrance to these plans is, that the discount you need to give to potential buyers doesn’t only need to take into account the uncertainty of future PA, but additionaly you need to compensate them for the missed APR from staking. So you need to add an extra discount of approximately 25% p.a. (depending on vesting duration) on the current price, only to compensate for the missed staking rewards. So what we need to sell is not $JKL, but a liquid staked derivative of $JKL. Liquid staking derivative suppliers are currently facing high competition and all of them are looking for an edge over the competitors and TVL. I already asked Philipp from Eris Protocol how long it would take to launch a new ampToken (Eris Protocols derivatives are called ampLUNA, ampKUJI, ampWHALE,…) and he replied, that chains built with the cosmos SDK can be onboarded in a day (if audits are needed etc. it can take significantly longer of course). Opposed to most of their competitors, Eris Protocol doesn’t have a token nor do they have their own chain. Therefore, they are hosting the smart contracts on the chain of the LSD derivative (in this case Jackal), which gives us more control over it. Furthermore they cannot incentivize liquidity and are therefore dependant on the collaboration of the host chain to build TVL for their LSD and subsequently earn from their product. This is a good thing for Jackal, as I suspect that the larger LSD providers like STRIDE woud not prioritize the development of a LSD for Jackal.

Despite the fact, that a LSD for Jackal would make it possible to build POL more efficiently, it will increase the efficiency of our liquidity pools as well and increase the share of bonded tokens as well. In a perfect world the final outcome would look like this:

Project Timeline:

  1. Get in contact with Eris Protocol (Philipp is their BD guy) and strike a deal to get $ampJKL (liquid staking derivative) on our mainnet. A deal would probably include the share of the staking rewards which would go to Eris and a commitment to build TVL for the token (which is the goal anyway).
  2. Talk to Shade Protocol regarding the use of their bonds and scan the cosmos ecosystem for other possible launchpads with the ability of using vesting contracts
  3. Fork an AMM and launch it on our mainnet. Now launch a single LP: $JKL - $ampJKL and seed it with a significant amount of tokens.
  4. Talk to MantaDAO and negotiate a treasury swap. $ampJKL-$MNTA. Afterwards deploy the liquidity on Fin via Bow. Result: 200k liquidity on Kujira
  5. Sell $ampJKL on the IDO platform or via Shade bonds to acquire $ATOM. The $ampJKL is vested over different durations, preferably 6 months to 1 year and buyers automatically get their staking rewards, because they bought a LSD
  6. Create and seed a liquidity pool on Osmosis for $ATOM-$ampJKL.
  7. Stop worrying over liquidity and people dumping liquidity incentives. Happy end.

Maybe you might be wondering, why there is a need for a DEX on Jackal. Long-term it is needed to help projects building on Jackal launch and in the short term there needs to be a place for people to sell their liquid staking derivative back to Jackal. This economic activity could be captured by our chain. All in all this setup is highly efficient and by using several chains and talking to several protocols and people we can raise attention for jackal. If you do not see how this is a much better system than the one which is currently in place, you can see it as a big marketing effort in the cosmos ecosystem.

Looking forward to hear your responses or questions

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Update - New Protocol in the Cosmos Ecosystem - Bonds:

In my last post, I proposed the usage of bonds to build POL for the protocol and to deploy it on several DEXs. The main advantage would be less spending of $JKL to attract mercenary liquidity, while at the same time having sufficient liquidity so people can acquire the token and use it to purchase storage space on Jackal.

After a short talk with someone from Shade, they said, that it would be possible to make changes to their smart contracts to allow other protocols to sell bonds there. But they didn’t really seem keen to do that and Secret Network, while it offers general privacy, has a rather bad UX and it would be an obstacle to attract as many people as possible.

Fortunately, Fuzion is close to launch a new protocol on the Kujira Blockchain.

Bonds by Fuzion - Kujira Blockchain (Cosmos) (<-- Medium Article is linked)

Bonds provide the bond Maker with several mechanisms to structure the deal to suit their strategy and needs. In addition, they provide Takers with liquidity in the form of a receipt token (called a bTOKEN) while they wait for the bond to mature.

Hey fam, love the post and idea! Let me add some more context and opportunities as we brainstorm the future of Jackal economics.

  1. Jackal liquidity incentives

Yes, we’ve been spending way too much. We ( encouraged Jackal to stop paying for it in a way where LPs were selling a ton of JKL per month for OSMO. Yes we need liquidity… but there are better ways and options, as we’ve since provided. I AM interested in a supercharged stable pool on Osmosis, but still skeptical.

  1. Protocol Owned Liquidity

This is absolutely something worth pursuing! Bonds are one way, I’m more of a fan of Protocol EARNED Liquidity however. Something I’ve been doing a bit more in my consulting is single side LP through rewards. If Jackal were to accept USDC as payment for storage, it can use that USDC against the JKL currently slated for incentives, OR… it can have half of the USDC purchase JKL, and then LP it together, building USDC liquidity against JKL over time while consistently adding buy-pressure. It’s less buy-pressure than a buyback and burn, and less volatility, but builds up POL, which removes the need for incentives over time.

In general, if there’s permanent inflation I prefer buyback/burn, if there’s a max supply or tail inflation (as is currently planned here) I lean towards ‘single side LP’, but any kind of mix is worth exploring.

  1. Treasury Swaps

I could definitely set this up with Astrovault, and could likely get something working with Archway, maybe some others. I still prefer not doing treasury swaps though, they’re odd. Use Astrovault as a means of no-risk treasury diversification. Deploy Community Pool or Ecosystem funds to the JKL-xJKL stable pool with zero risk of IL, earn AXV, and stake it to earn ATOM, ARCH, or whatever other Cosmos L1. Sell it for more USDC. Whatever you want to do. But it’s a vehicle for sustained liquidity and treasury diversification that doesn’t require weird trades with questionable legality, and also enables the community or ecosystem funds to earn where it’s usually idle.

  1. USDC payrail integration

We need to get to a point where users can buy storage with just their credit card. I’m working on some similar integrations with some other projects right now, but basically it’ll make it WAY easier, finally practical even, for most end users to purchase JKL storage. We need to figure out how to handle the financing then behind the scenes. Something like a Circle account, minting the USDC corresponding to the purchases, and then handling the buyback/LP type stuff would be great. The purpose of requiring the JKL token to purchase storage is to ensure value for the token, but this still works that way but more efficiently. What matters most is sales, and making that as easy, fast, and seamless as possible.

@Cristiano I’ve appreciated reading your consistent thoughts and care about these matters! Keep it up, you’re really adding value! I’ll be around a bit more and would love to help/contribute towards JKL sustainability!