It’s time to announce the eagerly awaited Phase 2 tokenomics plan for PAPA DAO!
We’re developing a sequence of updates that will provide PAPA DAO with an infinite runway and remove damaging dilution from the system.
This is a follow up to the post “The Truth About Rebase Tokens.” The exponential effect of the APY is crippling most rebase token projects in this current market. With this in mind, we’ve been working on our tokenomics in order to lay a foundation that is not only sustainable, it’s controlled, calibrated and “programmed” to ensure growth!
The changes suggested here are major, in that we would move away from seeing PAPA as a “reserve currency,” which is burdened with dilution, to a “utility token” and our phrasing and docs would be updated to match. While some elements may be controversial, we believe that this update presents some incredible marketing opportunities due to the unique approach.
As token holders ourselves, the devs feel that the best thing for the token price would be to reduce APY and eventually limit the supply of the PAPA token. This will commence with the removal of the damaging APY, however we will also include some discussion regarding the other potential options we have in the future, because that is where the discussion gets interesting.
PAPA may become the first OHM fork to transition to a truly limited supply.
To be clear, this plan is a proposal, to be voted on with the newly established DAO on snapshot.org please vote here after reading this discussion post!
Inflation vs Deflation
We would all love to see high APY numbers continued long into the future, if they were real, but the exponential dilution causes a lot of damage to the token price. The token price and the chart are often the first considerations for a potential investor. Having a price that is constantly driven down by APY-induced dilution causes damage to the protocol in the long term.
Increasing Supply: When the APY is exponentially compounding, extreme dilution is expected by the market. We believe the negativity created by an exponentially-increasing supply is part of the reason why PAPA would only trade below the backing.
Decreasing Supply: On the contrary to this, creating a model that reduces the supply will have the opposite effect. The model we’re outlining here can potentially create exponentially-scaling scarcity of supply, which will only be intensified in future.
We want to create a long-term project, which means we need to generate immediate income in order to do this.
Escaping the $1 floor
Firstly, let’s talk about the $1 floor. If we don’t change course immediately, we’re going to reach that floor. It should also be mentioned that there is no attractive option here.
All rebasing token projects will have to deal with the crippling effect of an APY that is unsustainable and solving this problem is not possible without actually printing money for holders. It’s a situation where “something has to give.”
The fundamental solution would be to immediately stop or significantly reduce the APY, so that we can see the real valuation flow through the price of the token. A lot of investors say “if the price just stayed here for x weeks, months or years,” but maintaining the price through inflation is impossible without market cap growth.
At the same time, we understand that a lot of our investors found this project based on the APY and we appreciate and understand that some may experience short term frustration. To understand this solution simply means understanding that the APY dilutes holders and has a negative impact long term.
In any rebase token, if we were to maintain a 2,000% APY while the market cap remained unchanged, within a year you would expect the price to fall by 95%. Even if the market cap was growing 10x each year, which would be phenomenal growth, the price would still fall by 50% each year.
The problem is that any realistic APY (100–200%) is not competitive in comparison to other rebase token projects… because their numbers are made up. We want to show realistic returns to holders.
We want to remove the dilutionary effect of the APY and replace it with real price appreciation.
This will give us a true indication what our tokens are worth, without having to calculate how much we have gained from rebases, because that is often overlooked. We think that this outcome is much more positive for the mindset of the investor and positive for the token price as well.
So, considering these challenges, we do want to remove the APY from the model completely, but we also feel that there is some benefit to doing this in a managed and controlled way, where expectations are set for investors. And we won’t make the change if the community doesn’t support it!
Most users should understand that it’s not the number of the tokens, but their relative value based on the percentage of the market cap — the share of the pie they own.
Option 1. Reduce and remove the APY over 20 days, without consolidation:
If we were to reduce the APY over 20 days on a predictable schedule, it alleviates the need to issue a v2 token and we can focus on investments and projects immediately, which is our intention with the PAPA Workshop initiatives. There would be no change to the token supply.
Without consolidation we expect the price to remain more stable. There may be some benefits to appearing cheap — some people look at the price rather than market cap. Most importantly, this option provides the least dilution.
Option 2. Reduce and remove the APY over 100 days, with a 100-to-1 token consolidation:
If we were to perform a 100-to-1 consolidation it would give us a longer runway, so we would estimate around 100 days for the APY reduction in this case. For every 100 tokens held currently, you would be given 1 of the v2 tokens.
While this option does provide more time to digest the APY reduction, it does result in a large amount of price volatility. Just as an example, from a $2 price (pre-consolidation), you could estimate that the price would be around $200 after consolidation and then the value would decrease with the APY over those 100 days. Because we know the APY is primarily dilutionary, we would be expecting the token price to decrease back to around $50 with a 4x index after the 100 days.
These large price movements are based on the market cap remaining unchanged and just for illustration purposes. We also have to consider that some other rebase tokens have not performed well after consolidation.
Option 3. Keep the ongoing APY at higher levels, without consolidation:
This option is not possible, because we are already so close to the $1 floor. In rebase tokens there are only 2 controllable forces — token price through consolidation and the APY percentage.
There is a third force, which is how low we want to let the token price fall, but due to the contracts, we cannot continue paying a high APY if the price was to fall below $1. So this option is not technically possible.
We have looked at every option. To leave everything as it is, the current runaway is under 40 days. The only way to increase it and avoid consolidation would be a very large price increase and bond sales.
Option 4. Keep the ongoing APY at higher levels, with a 100-to-1 token consolidation:
We can continue to keep paying a high APY if we consolidate, but the APY will continue to cause issues in future. We can be assured that the token price will continue to fall, in the long term.
The consolidation would work in the same way as option 2. For every 100 tokens currently held, you would receive 1 of the v2 tokens. If we went with this option the team would need to reduce the APY to more “sustainable levels,” however a genuinely sustainable APY would not be competitive with other projects, so it is likely to exceed the real gains and we would find ourselves back in this same position in future.
These are the main options we need to consider. Options 1 + 2 will both count towards removing the APY, 3 + 4 will count towards keeping it.
Investment Growth
The whole purpose of this exercise is to give us enough time to replace the APY with investment-based income and build core features in the protocol. So, let’s explain exactly how the investment income flows back to holders.
The buyback and burn events we have seen to date have been forced by the price action. Let’s call these Forced Buybacks. These buybacks have made sense, because when the token price has fallen far enough below backing, the buyback creates value for token holders. [I will explain this fully in a further article]
With the treasury investments, the income will feed into additional buybacks, which we will call Investment Buybacks. These buybacks will occur regardless of the token price and on a given schedule. These will become major buyback events, which occur monthly or quarterly depending on the vesting period, which will be explained in the DAO vote when the investment is initially made.
These Investment Buybacks will also result in token burns, like the ones we have seen in the past. But the fact that they occur at any price, will mean that they genuinely add value to holders and decrease the circulating supply.
If option 1 or 2 is taken, we expect the price action to look similar to this graph below. There will continue to be some increase in the circulating tokens, until the APY is removed, at which time we expect the investment buybacks to start creating positive price action.
Investing the treasury will become our main priority with the launch of Phase 2.
Within a week, we want to have our first investment proposal posted on snapshot.org. This will involve stablecoin farms, given the current market, but we are also reviewing multiple proposals from small metaverse and gaming projects and we will have some of these projects presenting directly to our community on our next Demo Day!
PAPA Workshop
We will be running a PAPA “Demo Day” event, which will occur about once a month. This will involve us showcasing small metaverse and gaming projects on our Discord and holding AMAs with the founders. This will allow them to demo their projects to us for early access investment and provide us with cross-promotion opportunities. We are currently in discussions to have presentations from 3 new projects, which are in their pre-launch or alpha stage of development.
During Demo Day, we’ll also be crowdsourcing investment ideas on Discord and focused on creating activity in the new investment suggestions channel. All suggestions will be thoroughly reviewed and analyzed by our team. If there’s overwhelming support from the community for any particular investment, it’ll be included as an option to vote on via snapshot.org.
We’re mentioning this here because these activities will directly feed into the tokenomics. It’s critical that users who are staking PAPA and supporting these startup projects feel some return from them. Initially, we will be able to allow users to vote with sPAPA on those pre-launch projects, which will result in small investments from the treasury.
It has always been our plan to supplement the APY decrease with content drops through our PAPA Projects team. We already have well-developed plans to use our PAPA Projects team for random airdrops of NFTs, game and metaverse content based on PAPA Ranks.
The NFT drop has been brought forward in the roadmap and this was part of the reason for PAPA Ranks being established. The ranks will form the cut-off points for our genesis NFT, which is looking very exciting. Check out the teaser posted on Twitter and Discord if you haven’t already!
If consolidation is required, PAPA Ranks will be updated to match the consolidated token numbers eg. Private — 1–4, Scout 5–24, Agent 25–99, Hero 100+.
In the longer term, once the PAPA Launchpad is established, if a project is fully incubated by PAPA, we will be able to offer token drops for those that are holding sPAPA tokens.
This will result in additional support for the sPAPA token. Not only will we have access to pre-sale discounts on speculative metaverse and gaming investments, but we will also incubate the projects directly. Additional token drops would be a speculative addition, which may not feed into the buyback and burn directly, but it is an added benefit for holding sPAPA in the absence of APY.
The sPAPA token will gain utility and value from it’s fundamental investment backing, the buy-pressure from investment buybacks, function in governance, the eligibility for exclusive PAPA Projects content drops and access to token drops in PAPA Launchpad projects.
These launchpad rewards will be occasional but run alongside the PAPA Projects team in providing consistent, alternative benefits to APY for sPAPA token holders. The primary reward will be the price appreciation as these tokens become more limited in supply and continue to be backed by a stable or increasing pool of assets.
Summary
Please submit your vote on PIP-001 now on snapshot.org. The decision will remain open for 48 hours. Here is the link to it https://snapshot.org/#/papavote.eth/proposal/0xee708c43db9d7871a787cc75aecfe16d184dc1324f933b8635ab4b47e69afc1a
While the team is recommending option 1, we need to highlight that this is a community decision and we will move forward with that decision, regardless of the outcome.
We’re going to post a follow up to this article… “The Effect of Compounding Scarcity” which will highlight the power of structured buybacks where there is genuine growth in the underlying assets.
This will be largely hypothetical, so we don’t want it to influence this decision too heavily, but it’s important to understand how much buy-side pressure can be created by investment buybacks. There is a lot to be excited about with our Revised Tokenomics Plan and this is only the first step!
Our links:
Website: https://papadao.co/
Twitter: https://twitter.com/PapaDAOofficial
Discord: https://discord.gg/NP3HYDkUWe
Telegram: https://t.me/papadaoofficial
Youtube: https://www.youtube.com/channel/UCQX4wyQDQufuM7QjEMHJY9A