There’s no doubt the vast majority of readers know exactly what happened to Terra back in May. Whether you believe it was a deliberate attack or just a perfect storm of external conditions, UST depegged and the existing supply contraction mechanisms were not enough to fix the situation. This led to the large-scale and permanent depeg, sending both Luna and UST both to near-zero. This massive $35 billion dollar collapse further led to the continued declines in an already hurting crypto and global asset market. Though many had denied it before, the majority began to universally agree that markets were in true bear territory only after the collapse of Terra, even though it realistically was made official closer to January.

As is tradition in bear markets, organizations and projects with too much crypto exposure will become insolvent. Celsius, a popular centralized crypto lending service is essentially insolvent as they lack the liquidity to pay back depositors, partially due to overleveraging into staked ether. Three Arrows Capital, abbreviated as 3AC, also recently declared bankruptcy. It’s no question that the collapse of 3AC was partially due to their massive involvement in Terra, causing them to lose nearly $200 million in the collapse.

Similarly to insolvent organizations, many defi projects that depend on external cash flowing in to remain alive will go to zero, and eventually fade out of existence. Though many will be inclined to quickly call these pyramid schemes (and many actually are), sometimes they are simply due to tokenomics failures that cannot accommodate the lack of new capital, or even accommodate capital flight. One such example of this type of project is Bancor.

Primer on Bancor

Bancor is a decentralized exchange, or DEX, where users can swap between various tokens. Even after losing 70% of its TVL over the last month, it ranks as the 5th largest DEX on Ethereum according to Defi Llama, and the 20th largest DEX overall. What differentiates Bancor from regular DEXs is its “impermanent loss protection”.

Impermanent loss (IL) refers to the diminished gains or amplified losses relative to dollar value an LP will experience when the ratio of prices change from when they put the tokens in. Simply put, when providing liquidity to a pool, if the prices of those assets change relative to each other, losses caused by an asset depreciating are amplified, and gains caused by an asset appreciating are diminished.

Bancor seeks to protect its users from impermanent loss through the minting of its native token, BNT. Any IL that Bancor is unable to compensate for with accumulated swap fees are compensated for with minted BNT. Bancor also differentiates itself by allowing single-sided staking. While this is typically impossible when LPing, Bancor enables this by pairing deposits with minted BNT under the hood, and burns this BNT (minus whatever is paid out as IL protection) when the user withdraws.

This IL protection payout is added to the circulating supply, and frequently sold off immediately by the recipient for their original deposited asset.

Primer on Terra and Death Spirals

Terra UST was an algorithmic stablecoin, pegged to the US Dollar, that was minted by burning $1 of Luna at the current market rate. For example, when Luna was trading at $0.50, it would require burning 2 Luna to create 1 UST. When Luna was trading at $100, that same UST would only cost 0.01 Luna to mint. The burning mechanism also worked in reverse. 1 UST could be burnt for $1’s worth of newly minted Luna. This mechanism is what kept the peg of UST. When UST went under peg, it could be purchased for $0.99, be burnt for $1 of Luna, and that Luna sold for a profit of 1 cent. Over peg, and $1 of Luna could be minted for a $1.01 UST and sold for a 1 cent profit.

The collapse of Terra was due to many external factors, but those are outside of the scope of this discussion. For an in-depth look at the exact timeline of all the action surrounding the UST collapse, see this excellent piece by Coincu. Mechanism-wise, the collapse of Terra was due to the infamous “death spiral”. The death spiral is a term coined for describing the phenomenon that all algorithmic stablecoins seem to face. The death spiral can be summarized as such:

1. UST is below its $1.00 peg.

2. Scared UST holders begin to sell UST

3. UST does not regain its peg due to the selling

4. UST is burned to mint more Luna

5. The price of Luna falls

6. Scared Luna holders begin to sell Luna

7. The price of Luna falls more

Luna holders will sell their volatile asset because they are not willing to take the financial loss caused by the minting of more Luna. This means that not only is Luna, the supposed backing asset of UST, depreciating because of inflation, it’s also depreciating because its own holders are selling it off. This dual effect means that there is not enough value held in Luna to restore the peg of UST back to $1, causing more UST to be dumped, causing exponentially more Luna to be minted, sending the whole system to zero. Luna went from a supply of ~700 million to a supply of 6.5 trillion. After reaching this supply, long after the price of Luna was essentially zero, the burning mechanism for Luna and UST were paused.

Collapse of Bancor?

On June 19th, 2022, Bancor paused its impermanent loss protection, similar to the pausing of Luna and UST burning and minting. This was due to the adverse market conditions caused by the massive and quick selloff in crypto assets. June 2022 was the worst month BTC has ever had, losing 38% of its value in the span of 30 days. This of course led other crypto assets such as ETH and BNT to suffer the same fate if not worse, stress testing many systems across defi, including Bancor’s IL protection.

Ironically, this devaluation of crypto meant that the IL protection was paused when it was needed the most. The reason that the protection had to be paused was because BNT was ultimately vulnerable to the same death spiral that Luna and UST were.

Specifically, the fact that IL protection was paid out in newly minted tokens is analogous to the redemption of UST for Luna. The similarities are specifically in the fact that holders of the “asset” token (BNT or Luna) are meant to take losses when it comes time to pay back the debt (Impermanent loss or UST redemption). This system works well as long as both systems are expanding and debt claiming remains small. After all, Luna’s UST worked perfectly fine during periods of expansion and minor contraction, and only could not keep up when a massive contraction occurred in a short period of time.

Similarly, IL compensation worked since its inception because BNT had inflows to match or exceed the losses caused by inflationary payouts to LPs. Once the crypto market began to sharply decline, though, more and more rapid withdrawals put stress on BNT’s price due to the increasingly large IL protection payouts. The recipients of these payments would sell their BNT for their original deposited asset, be it ETH, BTC, or otherwise. This dropped the price of BNT, meaning the next IL protection payout would require even more BNT to be minted and ultimately sold, thus creating a cycle, a death spiral. Because depositors would only deposit 1 asset and have their deposits paired with BNT, dropping the price of BNT led to even more impermanent loss, requiring even more minting of BNT to make up for such loss.

1. Depositor withdraws from Bancor pool, receives minted BNT to cover impermanent loss

2. They sell BNT, dropping the price and increasing the impermanent loss for all other depositors.

3. Other depositors withdraw from Bancor pool, receiving even more BNT to cover even more impermanent loss.

4. They sell BNT, dropping the price further, causing even further IL for remaining depositors.

The effect of this death spiral can be seen on the price chart compared to other major DEX tokens on Ethereum. When mass withdrawals started occurring from Bancor’s LP pools, impermanent loss payouts ramped up as well. These minted BNT tokens were sold, causing further minting to increase, resulting in the sustained price drop of BNT up until the moment IL protection was paused.

Root Cause of Death Spiral Vulnerability

The core reason that both Luna and Bancor were both vulnerable to the death spiral is ultimately simple. Both protocols had a representation of an asset and a representation of a liability or debt. For Bancor the debt was the IL protection payout, and for Luna it was the redemption of UST. Both protocols incentivized their debt to grow, hoping debt redemptions would never happen en masse. When it came time to repay that debt, those who held the assets, Luna or BNT, were not willing to pay up. After all, it wasn’t necessarily their debt, and they could easily sell off the responsibility of payment to someone else. Given circumstances like that, it was no surprise that both Luna and BNT holders no longer wanted to hold their tokens given the astronomical amount of debt that was rapidly being claimed all at once.

While the debt could mostly only shrink by being paid off in full, the asset could also shrink by the simple realization that repayment of debt was approaching. Having debt is fine, but if all your money begins to run away after discovering your credit card bill is due next week, it’s inevitable that there won’t be enough to pay off the bill even if the actual amount is small. Unlike a simple bill though, a death spiral means that a little bit of debt payment cascades into a lot of debt payment until it’s too much for the system to handle, sending all assets straight to zero. This happens because once debt holders get the idea that there won’t be enough assets to claim their debt, they all rush to claim at once, exacerbating the small problem into a protocol-killing one.

Tokenomics-wise, ultimately it’s impossible to rely on holders of a token as assets to pay back debt. Anyone that buys a token is doing so in anticipation of it appreciating. Once conditions change and that token is essentially guaranteed to depreciate, a protocol no longer has a holder, it has a seller pushing down the price. Holder of a token are not martyrs for the protocol, and cannot be trusted to, nor should they be responsible for carrying the burden of financial loss in times of protocol need. Any mechanism that relies on market cap or a specific minimum token price will be highly vulnerable to dying by that very mechanism, because the closer the token is to that line, the faster sellers will push it across that barrier.

For Luna, this barrier took the form of Luna’s price and market cap always being high enough to absorb the redemptions of UST. As soon as Luna was too cheap to handle UST redemptions, it collapsed. For Bancor, the price of BNT needed to be high enough to support the redemption of IL protection. As soon as BNT was not able to handle the selling pressure from payouts, IL protection was paused. This is a lesson in game theory as well as tokenomics. Rational actors and investors will sell their tokens once they are given a high probability that the price will decline. Once the population of investors convinced of the decline reaches a critical mass, a bank run is triggered.

Future Moves for Bancor and Death Spiral Discussion

The collapse of Bancor was unexpected to most, given that it has been a blue-chip DEX on the Ethereum network for a very long time. In only April, it was still a top 30 protocol with over $1 billion in TVL despite the declining defi market. Through all the turmoil, it’s lost nearly 90% of its TVL, and many depositors are ‘stuck’ until impermanent loss coverage is re-enabled. These depositors are experiencing more and more loss each day, as the price of BNT decays along with the trust in Bancor in general. In my personal opinion, I don’t believe the IL protection will be re-enabled. Given the loss of trust, should it be re-enabled more deposits will leave Bancor than would’ve even before the disable. This would cause the death spiral to resume as it would’ve before.

At best, Bancor will likely modify the mechanism to protect only until a certain amount, such as mint a certain amount of BNT per dollar value in LP, or something similar. Regardless, Bancor cannot re-enable IL protection as it was without intensifying the death spiral they sought to stop before.

In the future, anything with an elastic supply should give cause for concern. Algorithmic stablecoins are well known for having an elastic supply based on demand, but evidently such mechanisms can hide themselves in more obscure ways as well. Though some great minds may have seen this vulnerability from far away, it wasn’t nearly as obvious or publicized as Luna’s. Thinking of such mechanisms as assets and debt, it’s impossible for protocols to rely on their own holders as assets, because token holders are in it to make money and not be sacrificed for the debt of others.

As it relates to using a protocol’s “community” as a fallback plan to pay off protocol debt, it simply won’t happen. Once token holders have highly likely assurance that the price will decline, they will sell it off.

Herein lies the core tokenomics lesson from both Bancor and Terra. On top of the flawed nature of elastic supplies, protocol must own the assets to repay debts.** **Users of a protocol or its token holders cannot be trusted the bear the burden of financial loss. Very few people will hold onto rapidly depreciating assets “for the cause” or for the protection of the protocol. People are rational actors, and especially so when it comes to money. Provided they are aware their asset will depreciate in order to pay back debt that isn’t necessarily theirs, they will sell the asset and consider buying it back later. That is, if it doesn’t spiral to zero.

NOTE AND CONTEXT: This is a piece I wrote as part of an interview process. This work showcases my analytical skills and research quality. I had never heard of this game prior to the interview. I am posting for posterity, as it makes for a nice addition to my writing and research portfolio.

Thetan Arena — Introduction

Thetan Arena is a gamefi, play-to-earn protocol on the Binance Smart Chain. Thetan Arena is a simplified version of a MOBA game, similar to that of League of Legends or Dota 2, both massively successful among mainstream audiences. The game comes with multiple pieces and systems that make up the game’s economy. This includes a two-token system that aligns different users with different incentives. The core pieces of Thetan Arena are, broadly:

Thetan Coin (THC): Thetan Coin is the reward token granted to players for completing various activities. Normal gameplay grants THC, such as completing battles, leveling up heroes, or completing quests. THC is then used to purchase further ingame items. Because of this, it’s highly inflationary in nature and has no maximum supply.

Thetan Gem (THG): Thetan Gem is the investor’s way of participating in Thetan Arena. It has a maximum supply, as well as benefits such as staking and earning protocol revenue. Though the supply does increase as the protocol emits THG, it stops after year 3. While THC is meant to be an inflationary reward, THG is meant to appreciate in value as the protocol does.

Heroes: Heroes are used as the primary way of playing the game, they are the player character. They are divided into three classes: Tank, Marksman, Assassin. These three classes have a rock-paper-scissors relationship, each being weak against one and strong versus another. Heroes come with different innate rarities, different equippable skins, also of varying rarity, as well as Trophy Levels representing time investment.

Thetan Boxes: Thetan Boxes are Thetan Arena’s implementation of the popular loot box mechanism from across many games. They can be purchased with either THG or THC, depending on the tier. These boxes contain random heroes outfitted with a random skin, based on the tier of the box. Coming soon is a box with exclusively cosmetics.

Overview of THC and THG

Both THG and THC have their uses in the ecosystem. As mentioned earlier, the primary use of THC is to purchase heroes, either indirectly through Thetan Boxes, or directly through the Marketplace. It also has monetary value, but this can be expected to reduce over time as THC is given out in unlimited quantities as rewards, such as winning games. This creates the core gameplay loop that forms the basis of Thetan Arena:

1. Buy a hero

2. Play games to earn gTHC and gTHG

3. Claim, then use earned THC to buy better heroes or buy Thetan Boxes

There are a few variations on this cycle, such as exchanging THC to THG through a DEX for the upper tier Thetan Box, or simply cash out to another crypto asset or USD. Additionally, the entirety of the loop can be of course circumvented by simply buying a higher tier hero outright with cash.

Because THC is inflationary and has no option for staking, users are incentivised to use or sell the token as quickly as possible.

Fees accrued in THC by means of Marketplace transaction fees, Thetan Box purchases, claiming gTHC, etc, are split between the treasury owned by the Thetan Arena DAO, and the company developing Thetan Arena.

THG is also inflationary as it is still in its early distribution stages, though this is offset by staking options, of which there are multiple. THG is able to be staked either with no lockup, called Flexible Staking, offering 42% APR at the time of writing, or alternatively can be staked in Thetan Arena’s High Rewards Staking. With this option, tokens can be locked for 6 or 12 months, earning 84% and 127% APR respectively. An additional benefit of High Rewards staking is the accumulation of Private Tickets, which allow users to gain allocations to invest in other projects’ private sales. One final important note about High Rewards Staking is that it burns heroes. In order to stake THG in the High Rewards Staking, a user must burn one hero per 100 THG staked, regardless of rarity.

While there are some additional mechanics such as renting heroes at the cost of THC, this overview covers the most important and impactful ones as it relates to tokens and ecosystem specifically, and not the gameplay itself.

Tokenomics and Ecosystem Positives

Thetan Arena certainly has improvements that can be made, but it also does certain things very well. For one thing, the design direction of the game is visually appealing. The game looks good, and has character designs that are sure to be popular with the target audience, mostly mobile gamers, though desktop apps are available too. The overall quality and feel of the game are those of traditional mobile games as opposed to the lower effort blockchain games we have seen in prior iterations of the trend. Even outside of a defi product, Thetan Arena feels like a complete game with high production value.

This extends to its website as well. The website feels very modern, and has attractive graphic design that does a good job at enticing the player to play the game, as well as keeps the information simple and easily digestible. The theme of the website meshes very well with the theme of the game, and the stylistic continuity contributes to the overall good appearance of Thetan Arena.

Players also find the game fun. From cursory reviews on various social media platforms, in general the players enjoy the game enough to play it outside of a play-to-earn game or solely as an avenue to earn money. This alone is an accomplishment over other blockchain games.

Additionally, the dual token model as a whole is smart. A common issue in defi as a whole is aligning various parties with various goals as it relates to DAOs and tokens. For example, stableswap giant Curve has a difficult time aligning both governance-oriented participants and yield farmers with the goals of their CRV token, and needed third-party help from Convex to fix this. Thetan Arena is partially able to avoid similar conflicts by using two separate tokens from the beginning, one representing ownership and the other representing unlimited-supply, rapidly depreciating rewards.

Tokenomics and Ecosystem Criticisms

Despite the quality-feeling game, the tokenomics of Thetan Arena leave much to be desired, as is made clear by both of its tokens declining sharply in price since shortly after their inception. As of the time of writing, both THC and THG are down over 99% from their all-time highs. Though this alone isn’t saying much as the project has had development updates as recently as June 6th, as well as the all-time highs corresponding with the general downturn of the broader market in November of 2021. Still, a near total loss still obviously carries many lessons with it, and many of these lessons are found in the economic systems that Thetan Arena implemented or failed to mediate.

Token Distribution and Inflation — Problems

Below are the various allocations of the Thetan Gem, the investor token of Thetan Arena, and its release schedule over 3 years. These images are from their documentation.

Thetan Gem allocations and distribution schedule, Sep 16, 2021 to Sep 16, 2024

For starters, the distribution schedule for THG is far too inflationary and short-lived. At token genesis there are a mere 25M tokens in circulation, and only a year later in September of 2022, there are estimated to be 255M tokens, representing over 1000% inflation in a single year. This number may not be exactly accurate, though, as the specifics of how certain allocations are to be used are not very clear, such as DAO funds that are vested but do not immediately enter circulation. Regardless, even if only half the vested tokens enter circulation, that still represents an astonishing 500% inflation. Even DEXs, whose entire business models comprise of strategic, year over year emissions typically do not require such high inflation.

The second issue with the distribution schedule is its short runtime of only three years. There is little incentive to have a distribution schedule as short as three years, as emissions and rewards are what keep interest in the protocol, especially protocols in the play-to-earn space. The lifecycle of a game in general as well is typically longer than three years, with many non-blockchain games standing over a decade strong. More locally in the defi and gamefi space, Defi Kingdoms has a distribution schedule of over five years, and STEPN’s GMX has a schedule of over eight years. Long distribution schedules not only give more runway and longevity to the game, but can help curb inflation by means of drawing out token releases, as well as align developers and other contributors to work towards the sustainability of the game.

Ultimately the lasting consequence of this rapid distribution schedule and high inflation means that the Thetan Gem, the token representing the investor’s side of the protocol, is a nearly uninvestible asset. Typically with inflationary tokens, staking rewards are equal to or above inflation so that early holders are not rapidly diluted as the protocol broadens its holder base. With THG, the inflation at 1000% means that not even the boosted rewards of the High Rewards Staking offering 127% APR is enough to keep up with new token emissions, let alone turn a profit over the 12 month lock duration.

Token Distribution and Inflation — Solutions

There are a variety of solutions that would alleviate the distribution issues. Inflation is a primary mechanism in most cryptocurrencies, but even still it must be managed responsibly if a project is to have a chance at longevity and appreciation. One potential solution to this would be to significantly increase the project’s distribution schedule from 3 years. Realistically a timeframe of 6–8 years would be reasonable, though there is no reason that lengthy schedules of 10 or more years couldn’t be used. This alone would reduce emissions per year by a factor of 3, and could be further reduced by adjusting the individual curves and inflation rates by year.

Changing the schedule also gives the opportunity to reduce the 21% staking rewards allocation, since less inflationary staking rewards are required to keep up with other distributions. However, this is not entirely necessary if we change how these staking rewards are handed out, such as LP rewards. Currently staking serves no benefit to the protocol, only forcing emissions. While this alone is good for holders, it would be better for the protocol to receive benefits for those emissions.

One possible way of doing this would be to incentivise LPing. There are currently no THG/THC rewards for LPing outside of the CAKE supplied by PancakeSwap. Using staking rewards for LP incentives would give the protocol a way to benefit from THG emissions. Additionally, THC incentives could be provided since the token is already inflationary and meant to reward behavior. This would provide highly attractive triple rewards, and a large amount of liquidity for THG.

In addition to the staking rewards, the gaming issuance section could also be reduced or stretched out by a factor of 2 or more. THG rewards are valuable and should be far more premium than THC emissions, since THG is limited and cannot be issued once the supply runs out. One issue with having such high THG issuance is that the players and investors are not aligned with the goals of the token. Ignoring the inevitable price erosion of THG through inflation, players will likely sell any THG they can get, since they are already incentivised to to sell the other counterpart of their rewards. Investors on the other hand, are paying real money for THG instead of playing the game, so of course will not sell off the token so easily. This misalignment of incentives could be creatively avoided entirely with, for example, a built in DEX that has a THG/THC swap pair, but even as it stands could be minimized with more conservative THG gaming issuance.

All tokens saved from reducing the staking and gaming issuances could be added to the DAO or community fund, increasing the governance value of THG.

Creative Ideas to Reduce Thetan Gem Inflation

Because Thetan Arena is still under development, new ways to remove tokens from circulation can be developed, and adding burn mechanisms to existing facets of the game are still possible. For existing mechanisms, special game queues can be added with higher potential rewards. These queues can cost entry fees paid in THC or THG, which are then distributed between the burn address, the company, and the DAO. This could be mathematically tweaked to have an expected value that leans towards burning THC instead of minting it. However this solution can only be pursued when there are enough players to support multiple queues. A common issue in games is to have too many queues, splitting an already small player base into multiple queues which leads to long waiting times.

Thetan Arena already has special rotating events, and more can be added. An event could be added on a rare basis, say once a month, that costs an entry fee or can be bet on. This would not require a new queue to be added, but achieves the same effect. The special event can even simply be a “boosted” version of existing events, requiring minimal work on the developer side.

There is also a lack of breadth in skins. Many games in the traditional gaming space are fully monetized by skins, so supporting only 3 skins per character seems like wasted potential. These skins boost stats as well, so offering variations of such stats could lead to repeat purchases even for those who do not care about visual aspects. Portions of these marketplace fees for skins would be burned.

Mechanisms — Problems and Solutions

There are a few mechanisms within Thetan Arena that present economic problems. One example of such a problem is the gTHC and gTHG mechanisms, or gTokens for short. Essentially, gTokens are earned through game activity instead of THC or THG directly, and after a certain amount of time as well as a minimum claimable amount, the gTokens can be claimed for their real counterparts. This mechanism seems to serve no purpose, posing as an accessibility barrier. Though this does allow a claim tax to be implemented for delaying selling, this is not a strong enough case to complicate the claiming mechanic. A simple fix for this would be to allow claiming of regular tokens instead of gTokens, then mint allocations to the treasury and company wallets proportional to the amount claimed.

Another issue that may not only be an economic issue, but potentially a trust/security issue is the way with which the treasury funds are managed. The aforementioned claim tax on gTokens are directed towards the company/DAO according to the documentation, at which point the company is free to do whatever they want with the funds. They have chosen to do monthly burns, which is a good idea, but with inflationary tokens such as THC, burns should be built into the protocol itself rather than trusting a third party to execute them. Part of any THC collected by the protocol, not just the claim tax, should go directly towards burning instead of the intermediary step of going to the company or DAO. As demonstration of why this is important, the company has not burned THC tokens as routinely as they have promised, stating burns would occur monthly, but has only occurred once after committing to monthly burns in January.

Importantly, however, it should be noted that the company states they have burned 40% of total THC emissions, which is no small feat. Regardless, burns should occur directly in the smart contracts or through governance vote, as relying on the good-will of the company to burn instead of sell can become an issue over time.

Conclusions and Closing Thoughts

As mentioned previously, the team has a strong platform in that their game is fun and design is very well done, but their tokenomics failures make THG a completely uninvestible asset. THG simply has too much inflation to be able to sustain any upwards price movement for an extended amount of time, and this shows on not only the obvious price chart, but as well with social metrics such as content produced, daily active players, social media interactions, and so on. Strictly upwards price action is not a requirement to keep engagement, but exponential decay of price loses trust of players even if the team continues to develop.

However, this type of action is not strictly limited to Thetan Arena. The blockchain game space is very young, and has yet to experience any protocol able to achieve massive success. Among mainstream audiences, these projects are regarded as simply money-making opportunities as opposed to fun games, which Thetan Arena improves on. Among advanced audiences such as defi experts, these projects are usually thought of as short-lived projects meant to attract novice investors into losing money, as well as very unfun in general.

This industry has yet to achieve any meaningful staying power, with the vast majority of blockchain games subjectively failing in less than 6 months, sometimes even weeks. Many talented teams approach the space with the intent of creating a lucrative crypto protocol, failing to understand that these types of projects must be games first, and interact conservatively with money as a secondary. The core gameplay must be fun, and there must be many avenues with which to retain players.

While Thetan Arena does have a fun base game, there are not many ways players can express themselves either in skill or cosmetics. This leads to a phenomenon where players have little to work towards, especially those who can afford to outright purchase the most expensive hero, and can then play the game in its fully completed state from the beginning. More customization options are needed, as well as more in-depth systems that can retain player attention for a long time. Once great game systems are established from lessons in traditional gaming, then finance elements can be added. The blockchain game space is, again, a very young field, and there are many lessons to be learned before a thriving, play-to-earn economy can be created. While Thetan Arena can fix this along with other various mechanism issues, undoing the flooding of the market with tokens leading to the loss of player and investor trust is not an issue that can be easily fixed, given the nature of crypto.

Disclaimer: I received compensation for writing this article. While the explanations are hopefully objective, it’s important to note for transparency.

Buffer Finance’s Dynamic Decentralized Option Vaults (DDOVs) have launched on Aurora! These vaults are their way of improving upon existing DeFi option vault technology. Option vaults tap into a billion-dollar DeFi market as well as a trillion-dollar Traditional Finance market, and bring *sustainable *yield to your favorite crypto assets.

The core improvements of their options vaults get at the major pain points associated with traditional options vaults. Namely, giving users the ability to deposit at any time during the lifecycle of the option and begin earning yield immediately. This is the “dynamic” part of the DDOV.

Whereas traditional options vaults only put capital to work at the beginning of a cycle, Buffer Finance’s vaults can sell options on newly added capital at any point during the expiry cycle. This allows traders to choose their timeframe and window of exposure, as well as capitalize on various market conditions.

In order to understand the improvements Buffer brings to the table, it’s important to understand traditional Decentralized Options Vaults (DOVs).

What are regular DOVs?

Decentralized Option Vaults (DOVs) are the current widespread technology, prior to Buffer Finance revamping them to be more investor-friendly as well as profitable.

DOVs create a market in which asset holders can earn yield on their assets while maintaining price exposure, while also hedging slightly against the downside. This is done by selling out of the money call options. In simple terms, providing liquidity with crypto assets in a DOV means that you agree to sell at a predetermined price, above the current market rate, at a date in the future.

Example of a DOV position

If wNEAR is trading at $6 today, you may choose to add liquidity to the DOV selling wNEAR for $7 at the end of the week. This $7 price is called the “strike price”, and is the agreed upon price of sale.

For providing this liquidity, option buyers on the opposite end of the trade will pay you an upfront cost. This payment is called the “premium”. The premium is paid when you agree to sell your wNEAR at the end of the week for $7, using it as collateral for the options contract.

Come next week when the option expires on the “expiry date”, if the price is below $7, you keep all your wNEAR as well as the premium paid to you, netting you pure profit. Selling options every week means that you can get paid on your crypto assets 52 times a year, all without losing them if the price does not appreciate too quickly.

On the other side, if you think the price of wNEAR will be above the strike price at the expiry date of the option, then you can instead choose to buy the option instead, paying a premium for it.

Assuming the price is above the strike price at expiry, when the option expires you as the option buyer will purchase wNEAR from the vault at $7 regardless of the current market price. Even if wNEAR now trades at $50, you will purchase it at $7 due to your option. If the price is below the strike, the option expires worthless and no assets are transferred. The buyer’s only loss is the initial premium paid.

The drawbacks of DOVs, and how Buffer fixes them

While DOVs have been highly influential in exploring the derivatives market in DeFi, they have shortcomings that make them undesirable for typical users, and even more so for advanced options users coming from the traditional markets.

The biggest issue is the lack of deposit capability during the lifecycle of an option. Traditional DOV deposits will only go into effect when the next batch of options is sold, which can be 1–2 weeks away from the deposit date, sometimes more. This means capital is idle and not earning yield for 2+ weeks, but is still locked in the vault the whole time.

Traditional DOVs also give liquidity providers no choice in how long they want to be in the contract for. With ordinary options vaults, you’re either in for the entire lifetime of the option (1–2 weeks), or you’re out. This can be quite a commitment for liquidity providers, as sometimes they may be bearish for a short period of time to collect yield in, but are not willing to speculate for the entirety of the life cycle. If you’re an advanced trader, you may wish to only sell the option when IV (implied volatility) is high to maximize premium, or when time is short for minimal risk. This is not possible with traditional DOVs.

Buffer Finance’s DDOVs solve all these issues. These improved vaults allow you to deposit at any time during the lifecycle of the option, as well as putting your capital to work immediately without waiting for the next cycle. If a savvy trader sees higher premiums, they may choose a strategically timed deposit when premiums are higher to maximize their APY.

Additionally, on top of being able to put assets to work immediately, any-time deposits enable traders to choose their exposure window. Instead of locking your assets for the entire lifetime of the option, liquidity providers can choose to deposit at any point before the expiry for a reduced risk of their asset being sold in exchange for a reduced premium.

Sounds good, but where’s the risk?

Here’s the best part: Selling call options means the most you miss out on is profit on the upside. Compared to ordinary holding, you cannot lose additional money by selling call options.

How is that possible? If the price of your asset goes down, you of course will lose money by depreciation. This depreciation is no more than you would’ve experienced by simply holding the asset. In fact, you would lose less than holding, because you still pocket the premium that the option buyer paid. Even if the price stays the same or goes up slightly, so long as the price does not exceed the strike, you keep all your assets and the premium.

The only ‘loss’ incurred by DDOVs is if your asset exceeds the strike price at expiry. Think back to the previous example, where wNEAR trades today at $6 and your option’s strike is at $7. Then assume that at expiry, wNEAR trades at $10. What happens then is that you are paid $7 for your wNear, netting you $1 in profit in addition to the premium paid. Though you *did *lose out on $3 of upside from $7 to $10, you still made a profit by selling your wNEAR at a higher price to the option buyer, along with keeping their up front premium payment.

In short: If your asset price goes down, you lose the same amount of money as holding, but get to keep the premium paid to compensate. If the asset price goes up, you will sell at the higher strike price, but will miss out on further upside potential past the strike.

To Summarize

Buffer Finance DDOVs present fantastic opportunities to grow your assets during bearish periods by collecting premiums and compounding into more of your favorite asset. During bull runs, they also provide great ways to to take profits on assets, by selling your crypto at prices higher than today’s.

DDOV yield is sustainable, because it is based on the facilitation of real trade between option buyers and sellers, as opposed to inflationary incentives or otherwise subsidized yield.

Lastly, Buffer Finance DDOVs also encourage composability, by providing you tokenized access to the liquidity providing position, serving as a yield-bearing token. If you purchase an option, the position is minted as an NFT which you can then sell on the secondary market should you choose.

Taking advantage of Buffer Finance’s DDOVs can help boost your returns on crypto assets you already hold, and enable you to participate in an ever-expanding, cutting edge derivatives market in a simplified way.

A recent thread by @TheDefiEdge on Twitter went over the basics of Tokenomics, as it relates to Defi in general. The thread is a great read and very informational as all material by @TheDefiEdge is. He details tokenomics concepts and pointers, as well as a few examples of projects that implement them.

To piggyback on his thread, provide further reach for his ideas, as well as provide some more specific insight from my own experience, I want to analyze his tokenomics thread as it relates to specific projects on Terra. I won’t be covering twice what he already did, so I’d recommend you read his thread first.

Of course, none of this is investment advice, and I’m not telling you to buy or sell any of these tokens.

Supply and Market Cap

TheDefiEdge tells us important metrics for supply. These metrics include Circulating supply, Max supply, and Market Cap. Market Cap determines the current and reasonably attainable future prices. For example, you wouldn’t bet on ANC becoming a $50 token, because then it’s market cap would be around 14B, which is not realistic at least in the short term. Keeping in mind market cap, we can make fair price projections by comparing Terra projects to similar success stories on other chains.For example:

Astroport currently sits at $3.38 with a market cap of 415M. If you believe Luna will experience the same success as Ethereum, and Astroport will become as widespread as Uniswap (accuracy of these assumptions up for debate), you can compare ASTRO to UNI with a 10B market cap on Ethereum. This gives you:(Astroport Market Cap/Uniswap Market Cap) * Current ASTRO price

Which gives us a value of $38.12 per ASTRO, a fantastic upside potential. Given the same demand for ASTRO as UNI, we come up with an upside of over 10x.

However, there is a huge catch.

This is an unfair comparison, because we do not take into account the FDV, or fully diluted market value. This means the value of all tokens, both circulating and uncirculating. This is especially important for Astroport, because DEXs have lots of emissions over their lifetime. Looking at Astroport’s supply, we see that only 12% of its supply is circulating, compared to UNI’s 45%. Taking this into account, we get a potential upside of 3x. Still great, but not the 10x we ran earlier.

This highlights the importance of the cross section of supply and demand. In the thread it reads, “Besides token supply, make sure you consider the emissions rate.” Sure, if Astro never emitted another token and yet demand went up that of UNI’s, it would 10x. Astroport as a DEX *must *emit though, and this slows its price growth even if the money flowing into the token is increasing.

Other Examples

Other Terra altcoins where supply must be watched is upcoming projects Kinetic Money, and newer project Prism Protocol. Prism’s token has performed phenomenally since it’s inception, but this is in part attributed to the fact that they have not had any emissions yet. Any demand was directly translated to price, because no token emissions were weighing price down. With the launch of the Prism farm, emissions have begun for Prism. While I believe the team will *easily *be able to create demand to outweigh the slow burn of emissions over the next year, it is still something to take mental note of. Prism has mechanisms to prevent excess supply, and otherwise prevent dumping. Read more about the demand Prism creates in my other article. In short, the current circulating supply of Prism is less than 10%, so (in a total nightmare scenario) should the demand fail to increase and Prism for some reason drops every last token onto the market tomorrow, the price would be 10% of what it is today.

Obviously Prism is not going to dump every possible token, and they will gradually increase token supply only as demand increases, in fact they aren’t even doing Liquidity Incentives yet. this is just a way you should include Circulating vs Total supply in your evaluations of a token. As a disclaimer, I own a substantial amount of xPrism for reasons detailed in my article on xPrism.

Kinetic Money is also following a similar launch, where a fraction of token supply is reserved for their lockdrop, and the large majority released later. This means initial pricing could be different from pricing once more of the supply is circulating.

What this means is that if you believe in projects that emit like Astroport, you should be earning yield on their token through (typically) governance staking or LPing, because a certain amount of yield is required to simply “keep up” with emissions. If a project increases supply at 10% a year, earning 10% APY is necessary just to keep the same relative token count.

**This is why newer projects will offer high APYs on governance staking fueled by emissions. **Because incentives will force out protocol emissions, early token buyers and believers need a big emissions share to balance out those farming rewards and dumping.

Demand

Demand is the counter to supply. At the intersection of both, we find price. Demand is defined as “The factors that drive the desire for people to buy, and the price they’re willing to pay”. It’s made of 3 main categories:• Utility• Value Accrual• The Memes and Narratives

Utility

The thread divides utility into three uses, gas fees, fun, and adoption. I would also add in a fourth category, which is platform/meta use. Looking at **Luna **itself, we of course see how gas fees come into play, since Luna is used as gas along with UST primarily. This results in increasing demand, because of course every transaction on the network incurs a gas fee, so Luna/UST will be purchased, held, then spent for transacting, creating natural and sustained buy pressure. Adoption is also in play with Luna, because UST is minted from Luna, and UST is gaining cross-chain adoption. This kind of adoption fuels demand, as the asset becomes necessary to transact on other protocols. Luna especially serves a unique position, because UST demand lowers Luna supply, raising price even if demand stays identical.

Another example of adoption on the Terra network would be Anchor’s aUST. While aUST cannot be analyzed like a typical token since it doesn’t have a fluctuating market price, aUST can show us what widespread adoption on the Terra ecosystem can look like. aUST represents a growing UST amount. To name a few examples of where it’s been adopted, it can be used as collateral on Edge protocol to borrow against, it can be used on Mirror to mint mAssets against, and it’ll be able to be used on Kinetic Money to take self-repaying loans against. Should an ordinary platform token achieve use like this, you can be assured the demand and price would rise alongside it’s use cases.

Given Luna and it’s derivative stables are the only gas token, and GameFi has yet to completely materialize on Terra, we can skip straight to my fourth category, platform use, meaning uses of the token on the same it came from. The most obvious example of this across Terra and Defi in general is governance. Most tokens can be used to control voting power on their respective platforms, giving the token value by means of having power over a given protocol.

Other examples on Terra of platform use is xPrism, where you can pledge your xPrism to a vault to boost your farming yields. Similarly, the upcoming veAstro will allow you to lock xAstro to get extra voting power and LP yields. Collateralization is also a form of utility, since it allows you to borrow assets against your token without selling. Platforms can also get creative with their meta use, such as requiring you to pay their token in order to enter a vault, for example. Most platforms also allow you to stake their token on their platforms, earning yield in the form of emissions(!) and/or protocol revenue, we see this with Anchor’s ANC, White Whale’s WHALE, Prism’s xPRISM, etc. This leads us into our next form of utility.

Value Accrual

TheDefiEdge says that Value Accrual is essentially how a protocol translates its own success to the success of its investors. In my opinion, this is the most crucial aspect of tokenomics, only second to making sure the protocol is not printing away its price with rapid emissions. The first and most direct way to accrue value for investors is through buybacks on the open market. This means taking protocol profits, buying the protocol token off the market, and gifting existing investors their share of the purchase. We see this in Anchor, Prism, and Astroport, where Anchor uses a share of the borrow proceeds, and Prism/Astroport use generated fees to purchase their tokens off the market and give it to investors.

Another more rare way of providing value accrual is indirectly, through a treasury. Instead of distributing funds to stakers, the revenue is kept in the protocol’s treasury, and the token ‘controls’ its share of that treasury. In theory, should the protocol treasury increase by 50%, so should the token’s price. Though this does not always happen in practice, since nothing is enforcing such a peg. **ApolloDAO and White Whale **have some aspects of this, though ApolloDAO’s platform does a lot more with its treasury than back a token.

Though I am hesitant to speak negatively about a project whose team works hard, I feel that an example helps illustrate exactly the necessity to analyze value accrual. An example of a project not quite being able to translate it’s success to it’s investors is White Whale’s token. White Whale provides arbitrage vaults for UST, scanning across all Terra DEXs for arbitrage opportunities, and returning those UST profits back to vault stakers. In terms of TVL and function, the protocol has been a massive success, housing over 30M in UST and performing arbitrage multiple times a day, albeit having quite miniscule returns. Unfortunately, the protocol has no way of passing this success back to holders of its WHALE token. This, combined with the emissions from governance staking, means the token’s price has been on a slow decline since it’s inception. The token representing a share of the treasury has not helped it retain its value either. Granted the project is still fairly young, so things may change for them in the near future.

Memes and Narratives

Terra is still a young environment, but memes and narratives have still taken hold on occasion to boost hype. The strongest narrative itself is for Luna, where the widespread adoption of UST fuels hype as Luna keeps burning, making everyone believe in the narrative of exponentially increasing Luna scarcity. Another powerful narrative has been with Anchor. The drive to promote sustainability has previously led to serious spikes in ANC price, because governance control over Anchor has major implications given it’s astonishing TVL in the billions.

Newly forming narratives like Astroport’s equivalent of the Curve Wars also fuel price to rise like it is right now, given it’s newfound partnership with Retrograde money. The hype and stories behind a protocol can sometimes be stronger than any value accrual or utility. However, it’s important to note that these narratives cannot last forever, and hype needs to, at some point, be backed with tangible products and utility.

Conclusion

TheDefiEdge’s view on Tokenomics are very in touch with real economics, as well as how Defi tokens in particular function. Learning from his thread allows us to make conclusions of our own, and analyze projects with new lenses beyond that of just hype and FOMO. Hopefully this deep dive into the tokenonomics of Terra’s platforms helps you understand the investment expectations of projects, as well as how to analyze any new projects in the future. The Terra network has some wonderful projects with amazing potential, but finding pitfalls and strengths in their particular tokens can help determine how you can expect a given token to perform relative to its platform.

My Twitter: https://twitter.com/defi_dm TheDefiEdge’s Twitter: https://twitter.com/thedefiedge

To begin, I’ve made a thread with most of this information on Twitter already, but wanted to write an article so I could add in a lot more detail, as well as use the long-form format of a document. See that thread here, and feel free to send me ideas or feedback for what you’d like to see explored or explained.

How Astroport’s vxAstro works

Astroport has announced that in the near future, they will be implementing a veToken model for staked Astro, or xAstro. Astro is their reward token given to farmers, and staking Astro grants xAstro, which is the governance/revenue accruing token.

Switching to a veToken model means that users will be able to lock their xAstro for a selected amount of time and receive vxAstro. vxAstro boosts LP yield, and gives more voting power. Importantly, vxAstro is non-transferrable, and non-redeemable. In other words, once you lock your xAstro, you cannot do anything with it until your time lock expires.

The amount of vxAstro a user gets increases with how long they lock the xAstro. Locking your xAstro for 4 years gives exponentially more than 3 months. This means users are incentivized to lock for as long as possible to get the most rewards.

This is identical to how Curve works on Ethereum.

The Problem for LPs

Locking xAstro is undesirable for your average farmer and retail LP. Because defi moves so quickly and DEX tokens can lose their value quickly due to emissions, most LPs are scared of committing their funds to xAstro for months, let alone the 4+ years required for maximum LP rewards/voting power. They would rather sell their Astro to get more LP. Many farmers could also not care less about voting rights, as they are in the farms to get paid, not have influence.

Even if a retail LP was totally willing to lock their Astro for 4 years, it’s unlikely they would even have the right amount of Astro to achieve the maximum boost attainable for their LP. This gives retail LPs another reason to just dump their Astro instead of locking it, since they cannot realistically achieve all the benefit associated with the risk of locking.

The Problem for Protocols

Another major issue with the veToken model is for protocols. Protocols want Astro emissions on their own pools when they launch their tokens. This helps people buy into their coin to provide liquidity. LPs want a chunk of Astro emissions on top of the regular swap fees and incentives, because Dual Rewards pools attract major liquidity as well as buying pressure. This then allows for traders to swap in with low slippage.

If a protocol wants to direct Astro emissions to their new project’s pool, they have to somehow convince vxAstro holders to vote for them week after week. Most people don’t even vote in their national elections once a year, how can you convince defi users to vote once a week?

The alternative route is to shell out millions of dollars to buy and lock enough xAstro to direct emissions to their own project’s pool.

Both these options suck for new projects, as they don’t have anywhere near the budget to buy enough Astro to get emissions on their pool through voting, or convince users to vote.

So, how do we solve all these issues at once? Introducing Retrograde Money. The geniuses over at Retrograde have already setup the system for everyone, including themselves, to win.

Here comes…Retrograde!

First off, Retrograde aims to stack as much xAstro as possible, and lock it for as long as Astroport will let them.This gives Retrograde:1.) Maximum LP earnings2.) Maximum voting power

Obviously the xAstro isn’t free, so how will they secure it?

Retrograde will promise LPs boosted yields using their vxAstro pool, since they’ll always have more xAstro than any individual, allowing for more boost than the average user will be able to get for themselves. Users will get this boosted yield while having no exposure to Astro itself

In addition to compensate, Retrograde will give the user a wrapper token that represents the underlying locked xAstro. This token will be called retroAstro. The retroAstro represents the underlying locked xAstro, but can be traded freely. If Convex is any indicator, retroAstro will trade almost 1:1 to xAstro itself. They will also get paid in Retro’s own token.

Retail LPs can now deposit their LP tokens along with any Astro they have into Retrograde, and receive the boosted yield with no additional risk of locked tokens or Astro exposure. The protocol retains and locks the Astro they earn, but pays the user in retroAstro instead.

Both LPs and Retrograde win using this model.

But what about other protocols who want Astro emissions? Here’s where it gets cool.

With Retrograde, protocols can leverage their funds by bribing Retrograde to use their vast amounts of vxAstro to vote for their project to receive emissions.

Instead of needing to buy 10m in xAstro, just pay Retrograde a fraction to vote for emissions for your pool for the week. Because LPs forfeit their xAstro to Retrograde for the increased yield, Retrograde has full discretion to use its voting power on whatever pools they are “bribed” to vote for.

With this, every party involved truly wins.

Retrograde: keeps a share of the vxAstro rewards to distribute to its stakers. Also gets the bribe money from protocols to distribute as well. Retail LPs: get boosted emissions at no cost. Give up the voting rights they weren’t going to use in order to get higher yield.Protocols: can vote without needing to buy costly amounts of xAstro. Astroport: has a reliable blackhole, since Retro never sells or dumps xAstro back onto the market.

Here is a graphic with an overview made by one of Retro’s team members, DetectiveGrover:

Conclusion

Retrograde is providing a valuable middle ground between Astroport’s vxAstro and all the users that interact with it. They essentially strip the voting rights from those who don’t care for them, and leverage them for those that do. This aligns the xAstro token with the interests of both parties, without wasting utility on those that don’t want it.

Hopefully this article helps you understand the value proposition that Retrograde is bringing to Astroport and Terra as a whole! Feel free to give me any feedback and especially let me know what you want to see articles on, whether it be protocols, mechanisms, or general defi concepts. I’m trying to share my Terra and defi knowledge with all my fellow Lunatics.

P.S. Some Potential Prism/Retrograde Alpha

Prism Protocol also has a similar mechanism as vxAstro. Pledging xPrism in their AMPs vault provides boosted yield the longer AMPs are allowed to accrue. The team has said that AMPs will also allows increased governance power whenever their governance system rolls around.

As I covered in my last article on the Future Revenue Streams of xPrism, LPs on the Prism Swap are not incentivized with additional tokens. Incentives will be added in the future, but they are not needed for now according to the Prism team. These yields will be boosted by AMPs as mentioned by a core team member during an AMA earlier this week.

When Prism adds LP incentives, Retrograde could easily swoop in and start locking up xPrism forever to boost yields for all our LP friends. Nothing like this has been announced yet, but given the similar nature of xAstro and xPrism, this is not far fetched at all.

Feel free to follow me here on Medium or on my Twitter if you want more of my content.

Many of us have already seen the threads and videos about Prism, and are familiar with how it works. For those who need a primer, check out @pLunaDAO’s thread on Twitter here. A quick recap, however:

Prism Protocol allows you to refract, or split, assets into their principle (called the pToken) and yield-bearing (yToken) components. For example, think of splitting Luna into 2 tokens, one is only it’s price exposure, and the other is only it’s staking yield. Now you can sell off the piece you don’t want, and get bonus exposure to which one you do want. Leveraged staking yield with reduced price exposure? Yes please! In the future, which we will discuss, refracting will be coming to other tokens with staking yield, as well as interest bearing tokens such as LP positions.

Current State

With a basic understanding of Prism, we can now discuss the protocol’s current state. At the moment, Prism is in its infancy. The only asset available to refract is Luna. Still, Prism has 4.5M Luna refracted, representing nearly half a billion dollars of value. This tells us that protocol interest is massive, even before the majority of its core features are developed. With this much TVL from a simple first stage product, just how much TVL can be achieved when ETH holders can refract, and expiry p/y assets are in wide use? More TVL means substantially more profit for xPrism holders, which we will get into.

For the moment, users can stake their yLuna in the regular staking vault for ~9% APR. This is a decent bump compared to what regular Luna staking’s 6%, because yLuna is cheaper than Luna, but gets all of Luna’s staking yield. Selling off pLuna to get more yLuna gives even more APR compared to ordinary Luna.

Additionally, and the main attraction at the moment, is the Prism farm. With the Prism farm, yLuna stakers can opt instead to stake here to earn Prism tokens instead of Luna. I’ll say it outright — this is by far the best opportunity on all of Terra right now. The Prism farm, paying out an attractive yield of 32%, is about 4x higher than most other Luna-only opportunities like regular staking (6%) or using Nexus’s vault (8%). This yield can be boosted even higher using Prism’s AMPs mechanism. Read more about that here.

pLuna, the sister token of yLuna, has comparatively less opportunities at the moment. For now, you can provide it on Edge Protocol for others to borrow, or LP with it on Loop Finance or on Prism’s own DEX. You can also simply hold it, since yLuna stakers will be forced to pry it out of your cold hands if they ever want to get back to unrefracted Luna. More uses will be coming in the future, however, so feel free to speculate on it’s future value.

Prism distribution

The first thing we need to understand is the tokenomics and revenue sources of xPrism. The most important aspect of distribution is that Prism has no liquidity incentives. What does this mean? It means that Liquidity providers are all doing it for only swap fees. Because all LP pairs are Prism on one side, this inherently means they believe in the future of the token, and are likely to be more loyal to the token (read: won’t pump and dump). Many protocols that fuel their initial liquidity with endless emissions skyrocket as people FOMO into the farm, then dump 50–75% in a week as emissions outpace demand.

This is not an issue Prism faces, because their emissions are already under tight control. Initial token buyers during the public Lockdrop did not get their tokens for free, so any initial buyers won’t be dumping below their cost basis. yLuna stakers in the Prism farm are not really getting their tokens for free. The emissions are a slow burn over a whole year, and very importantly, all the yLuna yield in that farm is going to the protocol’s treasury to cover protocol activities and operating cost. PRISM farmers are paying with their staking yield. How much revenue is this? About 18.7 million dollars assuming no more yLuna joins the Prism farm (bold assumption). This gives Prism plenty of margin to operate. This means partnerships, marketing, and quality developers.

All this is to say that Prism doesn’t hand out tokens to just anybody. There are no free Prism tokens, meaning there are no mercenary yield farmers earning free rewards and dumping on our faces. The methods of token distribution are high quality, and means that Prism is not your average DEX or farm token, emitting until it hits zero. Prism’s investor base paid good money for their tokens, and they sure aren’t going to sell at a loss.

Prism is a high quality token with a selective investor base.

Income sources for xPrism holders

Understanding the methods of distribution, we can talk about the exciting part, sources of revenue. As of right now, xPrism holders already accrue a significant amount of revenue even with the project not having a fraction of it’s core features. Despite this, the APR for xPrism holders has remained consistently high for single-sided staking, despite having a massive 85% of total supply staked.

As mentioned before, there are no Prism emissions, so all the yield earned by xPrism stakers is 100% protocol revenue.

This protocol revenue/APR is driven by a few things right now. From the docs, these are:

1. **10% of the yield of yASSETs bonded in PRISM
   **This means any yLuna in the yLuna staking still has 10% of it’s staking yield directed to xPrism stakers. Currently, this is about $0.76M per year, more when the Prism farm ends.

2. **100% of the yield of unbonded assets **Any yLuna that is being used to provide LP, or is otherwise not in the yLuna staking gives up 100% of its yield to xPrism holders. About another $1M per year, excluding the PRISM farm.

3. 0.1% of the value of all swaps generated in PRISM Swap Any trade executed on the PRISM swap has 0.1% of it’s value redirected to xPrism holders. More volume = more revenue.

4. **0.3% of the value of all limit orders successfully executed in PRISM **Limit orders are the next major feature coming to Prism. They allow for users to set a price to purchase an asset, and then automatically have the protocol buy it for them once that price is reached. 0.3% of the value of this swap will be granted to xPrism holders.

Overall, these revenue sources are simple. However, they are powerful. Sources one and two mean that even should the Prism DEX experience low usage (highly unlikely.), xPrism holders still collect revenue from Luna’s own staking yield, meaning the success and income of xPrism is inherently linked to the success and income of Luna, which everyone reading this article should be bullish on.

The future of protocol revenue

Here’s the long awaited kicker. A bit further down the pipeline, Prism will be introducing y/p assets with expiry dates. This means that when refracted for a predetermined amount of time, the yAsset will give out all the yield over that period, and at the end, the pAsset can be redeemed for a regular unit of the underlying. More clearly: Refracting Luna with a 6 month expiry will give you a yLuna that pays staking yield for the next 6 months, and a pLuna that will be redeemable for Luna after 6 months have passed.

This expiry model opens up all sorts of amazing opportunities for everyone involved.

Want free yield with no price exposure? Pick up $1000 of cash flow over the next 6 months at only $500 right now.

Are you a long term Luna investor looking to stack at a discount? Buy some 12-month expiry pLuna at a 10% discount, get a full Luna after the year is up.

Already stacked? Refract and sell your yLuna over and over again to rack up that precious Luna or UST.

Just a humble xPrism holder? Collect 10% of that yield regardless.

Expiry assets also open up massive opportunities for ecosystem integration. Imagine selling your yLuna to a protocol at a discount, and getting the full cash value of it up front. The protocol stakes and chills, ultimately coming out ahead over the long run.

Another hypothetical protocol could offer a Luna vault that automagically stacks pLuna, getting smooth returns for users as each pLuna matures into a full Luna.

Additionally, Prism is not stopping at Luna. In the very near future, Prism will allow refracting to yEth and pEth. This essentially doubles xPrism revenue overnight, as more assets means more yield collected by xPrism stakers. In the future, LP tokens will also be refractable. Sell off the principle component of your LP, sit back, and enjoy the yield without price exposure. Eventually, we may even see Solana, Atom, Polkadot, and other staking-enabled tokens.

All in all, xPrism is a value accrual monster, whether new investors buy in or not. The longer you hold xPrism, the more Prism you’re gifted, all paid for by the protocol, never free or from emissions.

xPrism already has a fantastic loyal investor base, as demonstrated by it’s deep liquidity in unincentivized LP pools. We could discuss the genius mechanisms the developers have implemented such as AMPs, or the upcoming partnerships like Edge, but those are for another article.

To understate: xPrism earns a ton of revenue already, and that income is only going up. An investment in xPrism is an investment in all yield-bearing assets, and yield is not going away any time soon.

Links: Prism Protocol: https://prismprotocol.app/ Prism docs: https://docs.prismprotocol.app/ My Twitter: https://twitter.com/defi_dm Prism Discord (I’m dm#0477): https://discord.gg/wvfJGMrexN Prism Telegram: https://t.me/Prism_Protocol