Zero to One in DeFi Tokenomics: Top 7 Innovative Tokens
There are 430 DeFi tokens listed on Coingecko. But more than 350 of them usually have less than $1M in 24h trading volume. The bear market is harsh.
Currently the Coingecko DeFi section is a cemetery of forked, highly inflationary and ‘valueless’ governance tokens.
Yet from the ashes a phoenix will appear.
Once in a while a token appears that is so unique and different, that it changes the trajectory of the industry. The originality of tokenomics can push the industry forward and jump-start a new bull market.
Being early at finding an ingenious Zero to One token will leave you perplexed at first, but can bring considerable financial gains if you act on it early.
In this post though, I want to reflect on the past bull market most innovative tokens. The innovation of the last bull run serves as a lesson for the next one to come.
These are my top 7 most innovative DeFi tokens of the last bull market.
Ampleforth (AMPL)
AMPL is an elastic supply token for which the circulating supply is algorithmically adjusted daily.
It has a Target Price: 2019 purchasing power of the USD as represented by CPI. It currently stands at $1.124USD
If the demand (buying pressure) for AMPL increases and the price is above the Target Price, then the protocol ‘airdrops’ new AMPL tokens proportionally to your ethereum address to restore the Target Price.
The so-called ‘rebase’ works like magic: every 24h the amount of AMPL balance changes, while the price always rebalances to ~$1 USD.
Yet while the token supply increases, your token holdings proportion is never diluted. You always hold the same % of the total supply.
Sounds complicated?
That’s the point of it!
AMPL plays with the human psychology and has changed the game theory of speculating in crypto. Many trading strategies have been shared on Medium and Twitter.
Should you sell before the rebase? Or better to buy just after it, when people sell their newly ‘airdropped’ tokens?
Olympus DAO
Olympus’ is on a mission to become the reserve currency for DeFi.
Olympus flipped the liquidity mining game by selling OHM token for various Liquidity Provision (LP) or single asset tokens at a discount via ‘bonding’. Bonded OHM is locked for a few days.
This way Olympus owns the liquidity, which serves as a floor price for OHM, so it doesn’t need to worry about liquidity leaving the protocol.
If OHM market cap is above the market value of its backed assets, Olympus mints and sells new OHM, increasing supply. If MC is lower, then OHM is bought back and burnt.
As OHM market cap was way above the backed asset's value, users were attracted by high APY on OHM staking. They were incentivized to ‘bond’ by selling assets to the treasury and receive discounted OHM and restake rewards periodically for compounding interest.
Owning your own liquidity was considered so revolutionary, that a DeFi 2.0 term was coined for it.
Additionally, Olympus’ bonding and restake Game Theory became a popular (3,3) meme on Crypto Twitter.
OHM innovation attracted tens of forks. Just check the ‘OHM fork’ category on Coingecko.
Compound Finance (COMP)
It’s hard to find anything particularly revolutionary about COMP token itself. COMP is just a governance token and a collateral asset in some protocols.
COMP’s true innovation comes from the way it was distributed.
Compound Finance launched COMP on June 16, 2020 via liquidity mining. Everyone lending or borrowing assets on Compound Finance, received free COMP tokens.
It just a week after COMP launched, TVL in Compound increased from $90M to $600M USD. COMP token itself became the highest DeFi token traded.
Although not the first project to launch LM, Compound’s success might have started the DeFi summer. Many more protocols launched their tokens via liquidity mining: Balancer’s BAL, Uniswap’s UNI, Curve’s CRV, etc.
Curve Finance (CRV)
Soon after COMP token launched, the disadvantages of liquidity mining became obvious.
The Game Theory of COMP yield farming was to claim and sell COMP periodically for compounded returns.
This puts pressure on the token price, the price decreases and APY goes down as well, leading to exodus of TVL.
When Curve launched CRV token, it approached liquidity mining differently:
- First, to earn higher rewards, LPs need to lock CRV for up to 4 years. The longer you lock, the more vote-escrowed CRV (veCRV) you get.
- Secondly, locking is irreversible and tokens are not transferable.
- Third, CRV lockers earn part of the protocol revenue.
The result: Curve’s lock ups and vesting buys time to grow the protocol, adoption and revenue. Succeeding means that the value proposition for CRV should be attractive enough so after unlocks CRV wouldn’t be sold at all.
Curve veTokenomics changed the liquidity mining game theory and many more projects migrated to veToken model: Balancer, Frax, Yearn Finance, Platypus Finance and many more.
I covered veTokenomics and veProjects in detail here:
Yearn Finance (YFI)
YFI started a ‘fair launch’ and ‘valueless governance token’ trends in DeFi.
Launched by Andre Cronje, all initial 30,000 YFI tokens were distributed to users via liquidity mining in just a few days.
There was no VC token sale, no team or advisory allocation. 100% of YFI issued directly to the community.
“In further efforts to give up this protocol (mostly because we are lazy and don’t want to do it), we have released YFI, a completely valueless 0 supply token. We re-iterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on Uniswap, no, there won’t be an auction. We don’t have any of it.” — said Andre Cronje.
The hope was to align incentives of both the users and developers, where users would care to participate in building the protocol.
But the YFI ‘valueless’ token became the 2nd largest DeFi token by the market cap in 2021.
YFI success led to tens of YFI forks in addition to dozens of protocols launching under the ‘fair launch’ trend.
Later on Andre Cronje admitted that giving tokens away was a mistake.
Don’t give away your tokens, this one is less general, and more of a lesson learned by me specifically. When I decided to distribute YFI 100% it was because I believed it would allow me to exit to the community. However, I am still blamed if the price goes down, I am still constantly plagued by “when next release”, “when update”, etc messages. I still have all the responsibility and expectation, except I have 0 of the reward or upside. Don’t do this, I was an idiot. — Andre on ‘Building in defi sucks (part 2).
Fair launch trend is also losing steam. With projects having hard time raising from the community, VCs once again take leading role in providing cash.
Nexus’ NXM
Choosing NXM for this list is controversial.
Nexus mutual is on-chain insurance protocol, and its NXM token serves as a tokenized membership.
When Nexus members contribute ETH into the pool and all members share the risks with each other. If insurance payout needs to be covered, the ETH capital pool in the capital decreases together with the decrease in NXM price.
However, the Capital Pool should increase together with price in the long term as more insurance covers are bought. Insurance can be bought in ETH, or in NXM itself. In this case 90% of NXM used to purchase cover is burned.
The protocol and tokenomics are complicated, but the reason NXM made to the list is the Nexus membership.
To become a member, users need to pass Know-Your-Customer (KYC) on Nexus platform and only they can buy NXM. What’s more the token cannot be traded on Uniswap or any other exchange.
Instead, Nexus ‘community’ issued a wrapped version of NXM with a WNXM ticker, which can be traded publicly.
It’s possible that more protocols could opt out for KYC token model if regulatory environment in DeFi deteriorates.
Synthetix’s SNX
Synthetix is a protocol enabling issuance of synthetic assets, such as synthetic gold, cryptocurrencies or inverse synthetic cryptocurrencies, as well as, synthetic fiat currency sUSD.
Unlike centralized stablecoins USDT, USDC or BUSD, sUSD is only backed by Synthetix’s own governance SNX.
The innovation is managing to keep sUSD peg to USD dollar, while sUSD is backed by highly volatile SNX collateral. So how does Synthetix do it?
SNX holders incentivized to stake SNX and mint sUSD and always maintain the Collateralisation Ratio (C-Ratio) at the 400%.
Every week stakers receive extra SNX rewards and protocol fees, but the rewards can only be claimed if C-Ratio is at 400% or above.
What’s more, SNX stakers incur a ‘debt’ when they mint sUSD. As sUSD is used to trade other synthetic assets and their price increases or decreases, the shared debt also changes. This means that SNX stakers take on the risk of the overall debt in the system.
What would you put on the most innovative token list?
These are the tokens that I find the most innovative of the last bull market, but your list might be different.
For example, we could add Maker’s DAI for inventing the first successful over-collateralized stablecoin. Or Frax for its fractional-algorithmic stablecoin.
So, which tokens do you think are the most innovative?
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