Today, Infra <> App incentives are broken.

For an infrastructure project to prosper, it needs to have a booming ecosystem. Typically, this is aided through token incentives, either programmatically (e.g. DEX liquidity incentives, airdrops), or by manual distribution (e.g. grant programs).

However, recipients of these incentives are often mercenary. They typically sell the tokens as soon as possible, and leave whenever the incentives stop or are no longer attractive enough (caused and worsened by sell pressure). And even if native and loyal applications emerge, once they grow to a sufficient size, they may also leave to form an application-specific chain/ roll-up. Hence, infrastructure tokens often rely on narrative and inflated metrics to justify value, as they experience the reverse of Web2 platform risk.

We need clear and concrete value alignment between infrastructure and applications. Infrastructure projects cannot be purely giving away ownership without receiving a fair commitment in return. Of course, the mechanism needs to also be fair to applications, and set up to be mutually beneficial, by incentivising mutual success.

We propose a novel Value Alignment Program, where infrastructure projects may offer ownership in exchange for an equivalent pledge of ownership or revenue from applications. From the infrastructure project’s perspective, the mechanism to distribute tokens may be the same as before, via both programmatic and manual distribution. However, to qualify for these incentives an application would need to pledge a portion of their ownership (e.g. tokens, NFTs), or revenue (e.g. fees encoded in smart contracts, proceeds from NFT sales). Additionally, the tokens received may be pledged for any utility (e.g. staking, governance, liquidity provision, collateral).

Enforcement of the pledge can be accomplished via social and financial pull factors. Applications who take up the pledge are minted an SBT for on-chain social provenance. From a social standpoint, SBTs can have amplified governance power, qualify for premium governance rights (e.g. nominating other projects for the Value Alignment Program), and receive preferential exposure in curation mechanisms/ offline events. From a financial standpoint, once enough pledges and assets are accumulated into the infrastructure DAO treasury, the infrastructure token morphs into a pseudo index of all the applications using the underlying infrastructure. Hence, applications/ token holders are incentivised to support the success of the entire ecosystem.

Value alignment mechanisms can be used to attract both early stage and growth stage applications, with differentiated offerings. For early stage projects, the infrastructure project can guide them towards high potential primitives/ verticals for product-market fit. For growth stage projects, the infrastructure project can help grow adoption and find synergies within their ecosystem. In return, the infrastructure project benefits from the upside of early-stage applications, and the brand/ users of growth-stage applications.

• Goals: Get funding, launch product, find initial product market fit

• Status: Pre-product and pre-token

• What they can offer: Upside from token ownership, new user segments

• Goals: Accelerate adoption, improve product, capture value

• Status: Live product and a live token

• What they can offer: Diversification from token ownership, branding/ legitimacy, import existing users from other ecosystems

While there are no standards for value alignment at the time of writing, we can refer to token swaps as precedents for inspiration, which are usually between growth stage projects. The pledge or swap amount should be significant enough to matter, while maintaining a diversified ownership. That is usually 5-10% for early stage projects, or 0.1-5% for growth stage projects.

• Price: For liquid token, TWAP/VWAP of 20-90 days, or agreed number of tokens; For pre-token, valued at previous funding round, or agreed valuation (possibly represented by SBT)

• Lock-up/ vesting: Promise to mutually hold/ stake for 12-48 months

• Amount: 0.1%-10% of tokens, worth ~$100k-$10m, depending on project stage

• Use of tokens: Can be used for staking, governance, or in-app e.g. collateral, liquidity provision

• Non-token pledge: For early stage projects which are pre-token, or have alternative value capture mechanisms, ~1%-10% pledge of revenue, NFT supply, or even tokenised equity could be considered

• Neutron <> Astroport

• Balancer <> Gnosis

• Balancer <> Aave 

• Balancer <> Fei

• Alchemix <> Saddle

• GMX <> GammaSwap

• GMX <> STFX

Governance for the Value Alignment Program may initially look similar to a grants program stewarded by the infrastructure project’s core team, then transition towards an open system similar to public goods funding led by the community.

• Timing: Cadence of once a quarter, 2 month application period, 1 month selection period

• Application: Initially permissioned by a Grants Committee/ DAO, transition to nomination with staking/ SBT, eventually scale up with subDAOs/ sub-verticals each with its own mechanism

• Voting: Initially simple token voting, transition to quadratic voting weighted by SBTs or on-chain identity

• Gitcoin Passport, Aqueduct, and Grants Protocol

• Uniswap Grants Program 

• NounsDAO Funding Proposals and Prop Houses

For L1s specifically (or any infrastructure with fees in its native token), additional economic alignment can be considered, via fee rebates and inflation. Here we take inspiration from existing L1s who already offer such incentives, but without capturing value in return via ownership alignment.

• Rewards allocation: 20-30% of gas fees collected, 15-25% of inflation

• Qualified apps to receive rewards: Token swap recipients who stake L1 token

• Rewards split: Initially weighted by gas fee contribution, transition to include multiplier from quadratic voting weighted by SBTs or on-chain identity

• Metis Builder Mining (30% of gas fees)

• Canto Contract Secured Revenue (20% of gas fees by contract deployer)

• Astar Dapp Staking (15% inflation, split by staking weight from nominators)

• Archway Rewards (50% of gas fees, 25% of inflation, split by gas fees of contract deployer)

• Cosmos Interchain Security (25% of gas fees to Hub, 75% to consumer chain)

Today, most Web3 communities rely on rough off-chain social consensus for coordination. Value alignment through mutual ownership brings those relationships on-chain, forming the basis of a Decentralised Society. Here we can learn from the social alignment found in criteria for airdrops and curating index tokens.

• Mission alignment: Token swaps create a win-win scenario as the infrastructure is not seen as extracting value from the ecosystem apps or competing, rather taking a community-first approach by investing at the early stage, and adding value at the growth stage.

• Social provenance: Token swap recipients have both a formal ownership/ voting stake, as well as informal social validation from the community. Community projects without such validation, while able to build in a permissionless manner, may be less socially aligned and therefore see less support from the ecosystem/ investors/ builders. This social graph is also useful to ecosystem applications as a basis for curation/ prioritisation of their own governance and composability.

• Implied treasury value: Infrastructure projects that perform token swaps with a diverse set of innovative applications, form a pseudo “index fund” of the ecosystem. The perceived value could drive token utility or value. It also gives protocol governance more weight, as allocating tokens for incentives/ swaps is seen as giving indirect value to recipients, possibly leading to more demand in a flywheel effect.

References:

• Vitalik’s vision for a Soulbound, Decentralized Society

• Cosmos Hub ATOM stakers get airdrops from appchains as the norm

• Bankless tokensets for DeFi sector

The Web3 dark forest is littered with stories of incentives gone wrong, and mechanisms with unexpected outcomes. All we can do is predict, mitigate, and iterate.

• Legal considerations: Token swaps may be seen as an “investment-like” activity. This could be mitigated by a clear mandate/ constitution for the swap program, including conditions for liquidating/ distributing the accumulated assets (not legal advice).

• Implied vs actual value: On the flipside, if value is not clearly captured by the token (e.g. with buybacks), implied value may not translate into perceived value from holders. This will require social coordination and memes, as we have done with narratives like “ultrasound money”.

• Off-chain value capture: Apps that rely on more traditional business models may capture value in equity, or collect fees in fiat. Mechanisms need to be designed to reflect that on-chain so that the alignment can be continuously validated, while keeping in mind legal considerations for this as well.

Web3 is a living tapestry that we jointly weave. I hope that this piece serves as inspiration for us to craft a more aligned Web3, and welcome feedback as we push towards new norms.

In the meantime, here are a few more areas where there could be many more permutations, details, and implications. I plan to update this piece whenever significant developments occur.

• Setup of SBTs as a prerequisite, or incorporating existing social graphs

• Edge use cases of tokens by the infrastructure project, including dividends or possible exits

• Innovative use cases of tokens by the applications to boost TVL (e.g. as LP or isolated lending pair for their own token)

• Standardising and scaling non-financial support after value alignment (e.g. marketing, mentorship)

Happy VAPing.

** **

Today, Infra <> App incentives are broken.

For an infrastructure project to prosper, it needs to have a booming ecosystem. Typically, this is aided through token incentives, either programmatically (e.g. DEX liquidity incentives, airdrops), or by manual distribution (e.g. grant programs).

However, recipients of these incentives are often mercenary. They typically sell the tokens as soon as possible, and leave whenever the incentives stop or are no longer attractive enough (caused and worsened by sell pressure). And even if native and loyal applications emerge, once they grow to a sufficient size, they may also leave to form an application-specific chain/ roll-up. Hence, infrastructure tokens often rely on narrative and inflated metrics to justify value, as they experience the reverse of Web2 platform risk.

We need clear and concrete value alignment between infrastructure and applications. Infrastructure projects cannot be purely giving away ownership without receiving a fair commitment in return. Of course, the mechanism needs to also be fair to applications, and set up to be mutually beneficial, by incentivising mutual success.

We propose a novel Value Alignment Program, where infrastructure projects may offer ownership in exchange for an equivalent pledge of ownership or revenue from applications. From the infrastructure project’s perspective, the mechanism to distribute tokens may be the same as before, via both programmatic and manual distribution. However, to qualify for these incentives an application would need to pledge a portion of their ownership (e.g. tokens, NFTs), or revenue (e.g. fees encoded in smart contracts, proceeds from NFT sales). Additionally, the tokens received may be pledged for any utility (e.g. staking, governance, liquidity provision, collateral).

Enforcement of the pledge can be accomplished via social and financial pull factors. Applications who take up the pledge are minted an SBT for on-chain social provenance. From a social standpoint, SBTs can have amplified governance power, qualify for premium governance rights (e.g. nominating other projects for the Value Alignment Program), and receive preferential exposure in curation mechanisms/ offline events. From a financial standpoint, once enough pledges and assets are accumulated into the infrastructure DAO treasury, the infrastructure token morphs into a pseudo index of all the applications using the underlying infrastructure. Hence, applications/ token holders are incentivised to support the success of the entire ecosystem.

Value alignment mechanisms can be used to attract both early stage and growth stage applications, with differentiated offerings. For early stage projects, the infrastructure project can guide them towards high potential primitives/ verticals for product-market fit. For growth stage projects, the infrastructure project can help grow adoption and find synergies within their ecosystem. In return, the infrastructure project benefits from the upside of early-stage applications, and the brand/ users of growth-stage applications.

• Goals: Get funding, launch product, find initial product market fit

• Status: Pre-product and pre-token

• What they can offer: Upside from token ownership, new user segments

• Goals: Accelerate adoption, improve product, capture value

• Status: Live product and a live token

• What they can offer: Diversification from token ownership, branding/ legitimacy, import existing users from other ecosystems

While there are no standards for value alignment at the time of writing, we can refer to token swaps as precedents for inspiration, which are usually between growth stage projects. The pledge or swap amount should be significant enough to matter, while maintaining a diversified ownership. That is usually 5-10% for early stage projects, or 0.1-5% for growth stage projects.

• Price: For liquid token, TWAP/VWAP of 20-90 days, or agreed number of tokens; For pre-token, valued at previous funding round, or agreed valuation (possibly represented by SBT)

• Lock-up/ vesting: Promise to mutually hold/ stake for 12-48 months

• Amount: 0.1%-10% of tokens, worth ~$100k-$10m, depending on project stage

• Use of tokens: Can be used for staking, governance, or in-app e.g. collateral, liquidity provision

• Non-token pledge: For early stage projects which are pre-token, or have alternative value capture mechanisms, ~1%-10% pledge of revenue, NFT supply, or even tokenised equity could be considered

• Neutron <> Astroport

• Balancer <> Gnosis

• Balancer <> Aave 

• Balancer <> Fei

• Alchemix <> Saddle

• GMX <> GammaSwap

• GMX <> STFX

Governance for the Value Alignment Program may initially look similar to a grants program stewarded by the infrastructure project’s core team, then transition towards an open system similar to public goods funding led by the community.

• Timing: Cadence of once a quarter, 2 month application period, 1 month selection period

• Application: Initially permissioned by a Grants Committee/ DAO, transition to nomination with staking/ SBT, eventually scale up with subDAOs/ sub-verticals each with its own mechanism

• Voting: Initially simple token voting, transition to quadratic voting weighted by SBTs or on-chain identity

• Gitcoin Passport, Aqueduct, and Grants Protocol

• Uniswap Grants Program 

• NounsDAO Funding Proposals and Prop Houses

For L1s specifically (or any infrastructure with fees in its native token), additional economic alignment can be considered, via fee rebates and inflation. Here we take inspiration from existing L1s who already offer such incentives, but without capturing value in return via ownership alignment.

• Rewards allocation: 20-30% of gas fees collected, 15-25% of inflation

• Qualified apps to receive rewards: Token swap recipients who stake L1 token

• Rewards split: Initially weighted by gas fee contribution, transition to include multiplier from quadratic voting weighted by SBTs or on-chain identity

• Metis Builder Mining (30% of gas fees)

• Canto Contract Secured Revenue (20% of gas fees by contract deployer)

• Astar Dapp Staking (15% inflation, split by staking weight from nominators)

• Archway Rewards (50% of gas fees, 25% of inflation, split by gas fees of contract deployer)

• Cosmos Interchain Security (25% of gas fees to Hub, 75% to consumer chain)

Today, most Web3 communities rely on rough off-chain social consensus for coordination. Value alignment through mutual ownership brings those relationships on-chain, forming the basis of a Decentralised Society. Here we can learn from the social alignment found in criteria for airdrops and curating index tokens.

• Mission alignment: Token swaps create a win-win scenario as the infrastructure is not seen as extracting value from the ecosystem apps or competing, rather taking a community-first approach by investing at the early stage, and adding value at the growth stage.

• Social provenance: Token swap recipients have both a formal ownership/ voting stake, as well as informal social validation from the community. Community projects without such validation, while able to build in a permissionless manner, may be less socially aligned and therefore see less support from the ecosystem/ investors/ builders. This social graph is also useful to ecosystem applications as a basis for curation/ prioritisation of their own governance and composability.

• Implied treasury value: Infrastructure projects that perform token swaps with a diverse set of innovative applications, form a pseudo “index fund” of the ecosystem. The perceived value could drive token utility or value. It also gives protocol governance more weight, as allocating tokens for incentives/ swaps is seen as giving indirect value to recipients, possibly leading to more demand in a flywheel effect.

References:

• Vitalik’s vision for a Soulbound, Decentralized Society

• Cosmos Hub ATOM stakers get airdrops from appchains as the norm

• Bankless tokensets for DeFi sector

The Web3 dark forest is littered with stories of incentives gone wrong, and mechanisms with unexpected outcomes. All we can do is predict, mitigate, and iterate.

• Legal considerations: Token swaps may be seen as an “investment-like” activity. This could be mitigated by a clear mandate/ constitution for the swap program, including conditions for liquidating/ distributing the accumulated assets (not legal advice).

• Implied vs actual value: On the flipside, if value is not clearly captured by the token (e.g. with buybacks), implied value may not translate into perceived value from holders. This will require social coordination and memes, as we have done with narratives like “ultrasound money”.

• Off-chain value capture: Apps that rely on more traditional business models may capture value in equity, or collect fees in fiat. Mechanisms need to be designed to reflect that on-chain so that the alignment can be continuously validated, while keeping in mind legal considerations for this as well.

Web3 is a living tapestry that we jointly weave. I hope that this piece serves as inspiration for us to craft a more aligned Web3, and welcome feedback as we push towards new norms.

In the meantime, here are a few more areas where there could be many more permutations, details, and implications. I plan to update this piece whenever significant developments occur.

• Setup of SBTs as a prerequisite, or incorporating existing social graphs

• Edge use cases of tokens by the infrastructure project, including dividends or possible exits

• Innovative use cases of tokens by the applications to boost TVL (e.g. as LP or isolated lending pair for their own token)

• Standardising and scaling non-financial support after value alignment (e.g. marketing, mentorship)

Happy VAPing.

** **