A Contributor-Owned Enterprise
Written by Trigs
How it Works
Kleomedes is designed to be a contributor-owned enterprise. The tokenomics are specifically designed to reward those who contribute the most to the project in ways that build revenue for everyone. This is a surprisingly uncommon approach when dealing with tokenomics construction in web3 right now.
The free-for-all of buying governance tokens on open markets created a specific end result for governance tokens: plutocracy. Which makes sense when your ‘governance’ token is actually a fund-raise tool.
In short: those who contribute the most financially see the most financial reward potential from long-term price appreciation.
Those who contribute the actual work to get the project done receive their compensation in a more direct way: the project tokens are sold against investor buy-pressure to pay contributors a wage.
Contributors are less exposed to the price-action of the open market this way. They are either paid in a stable currency from funds generated by selling shares, or as is seen in web3 more often, they are paid in project tokens they themselves can liquidate immediately. Which anyone smart does, otherwise your paycheck could get eaten by the next whale dump. It sounds good on paper, and has worked tremendously well in tradfi markets with stocks and the limited access to market trading through regulations.
Addressing Problems
Crypto is different in that it provides far more retail access, speed, & convenience for trading with fewer restrictions. Crypto investors also tend to believe that their token ownership actually gives them a say in how the project is run compared to the attitude of most retail stock holders. That’s the narrative being sold to them, so why wouldn’t they? This creates added complications for project teams, however.
Stocks are relatively stable because they are mostly traded by large institutions with long-term strategies. Very few retail stock-holders actually attend board meetings or vote with their stock weight. This makes stocks more resilient to short-term market sentiment, and centralized teams have more freedom to do what they feel is best. With crypto, however, the volatility is maximized to the utmost extreme due to the transparency between token-holder and the actors responsible for executing the protocol activities.
This volatility attracts traders, and it enhances another dynamic in the mix: PvP. The zero-sum-game of trading combined with the accessibility of web3 interfaces maximizes the PvP element. That means player-vs-player for the non-gamers out there. The point of all this is this:
The exposure of your governance token to open markets dictates the vulnerability of your protocol to monetary capture.
If your liquidity is deep enough, those willing to play the right strategies can utilize market fluctuations to initiate governance capture by acquiring majority tokens during a low price event. This form of capture is more attractive as resources controlled by on-chain governance grows. See the BeanStalk Farms stablecoin exploit for a big example of governance capture, although this one was driven by actual exploitation of code. AQUA is another project that experienced monetary capture when someone realized how little it would cost to acquire majority ownership simply by buying a few hundred dollars of tokens, which they then used with on-chain governance to issue themselves more tokens much like the Bean exploit and drain the value of all liquidity pools.
Kleomedes Has a Plan
Kleomedes actively works to prevent this possibility by keeping liquidity low to match our true mcap growth. We are non-inflationary, so it is a fairly straightforward calculation to track how large our LP should be to prevent affordable market capture. Slippage acts as our security against capture. The more our revenue increases the higher it will drive price, allowing us to have deeper liquidity without compromising governance security.
But how to grow the investor base with such a structure? If people can’t buy-in to the token, how do they make a serious investment in the project?
Great question. This is important: Kleomedes isn’t a deFi protocol. It isn’t designed to simply be an investment vehicle. This is a Decentralized Enterprise. That means it’s a business operating for profit, securing work from a decentralized community of contributors that are being rewarded with governance ownership and revenue share from Enterprise activities.
Just like any business, Kleomedes needs financial investors. But there are limited opportunities for direct financial investment, as most of what Kleomedes needs is actual contribution of time and skills to build deliverables that increase our market exposure. Kleomedes already has a method of generating funds: Validating Blockchains.
Let me repeat that:
If we unpack that and look at Kleomedes in this light, we see the formation of a Product Market Fit: Kleomedes is able to take the contribution of time and skill from a community of active participants and convert that into revenue that gets paid back to the contributors in a fair and transparent manner.
So, with that in mind, let’s take a deeper look into the stages of growth for Kleomedes, and shed some light on how interested parties can participate and eventually partake in the rewards that Kleomedes will generate.
Direct Fundraise for Investment Opportunities
There are always opportunities to issue $Kleo OTC as a fundraise activity. This is your classic “bonding” from the (3,3) days to build treasury funds. But instead of ponzi-inflation driven Protocol-Owned-Liquidity strategies, these would be purpose-driven fundraises.
That means having a full cost-benefit analysis and an action plan for exactly how the funds will be spent to justify the expenditure of $Kleo tokens.
This could mean raising funds to buy our way into self-funding on a new chain. For example, we have an Ethereum node running, unfunded. We could raise the money to buy 32 $Eth to fund that node, and then use the revenue, now that staking rewards can be claimed on Ethereum, to fund revenue share to $Kleo on Cosmos. This would be a really interesting investment, as it would bring TVL from Ethereum into Cosmos directly.
We have to be really careful with these kinds of fund-raises, however. As long as our existing chains we validate continue to do well, $Kleo price will continue to rise over time. All investments funded by $Kleo expenditure have to rise in-step with this tide or become an anchor.
Eg:
We spend 10m $kleo to fundraise $3000 USD to get on boogerchain.
- This earns us $100/month in revenue based on value of $boogers
- Takes 30 months to pay off that investment, no other factors considered
Other chains pumping do better than boogerchain, drives up $Kleo 10x.
- Now that $3000 we raised actually cost us $30 000 in $kleo, based on new market value from overall revenue growth
- If $booger revenue is the same still, that 30 months is now 300 months to pay off investment in terms of $kleo dilution to existing stakers.
— That means existing stakers are the ones who feel the impact of this, which makes sense, they are the ones that voted to approve the spending in the first place
— People who acquired $Kleo in the bonding event are the ones that profit most for getting far more $Kleo for their dollar than they should have, which you could say makes sense as they are the ones that took on the most opportunity cost for the new investment
So you can see how, as holders of $Kleo, it’s up to you to make sure additional $Kleo is spent on something that will increase revenue more than our current revenue streams will grow on their own. If you take a risk on a new revenue stream that doesn’t pay off, you’re the one that feels that impact the most. The more $Kleo is worth, the less dilution risk there is for issuing it directly in this way, however. This is assuming revenue growth is logarithmic vs exponential on a long enough timeline.
Early on the direct investment strategy should be very minimal. Later on, this strategy becomes far more attractive because of the reduced dilution risk.
For a contributor owned Enterprise, this puts the risk/reward in proper balance when used judiciously. No longer are market investors able to hold compensation hostage through plutocracy so they can extract value from the project first and foremost. Contributors who put in the most work and stake their earnings get to have the most say in how future $Kleo is spent. This gives them the reins on potential dilution of their value. Power in the hands of those who contribute the most!
If contributors or founders choose to sell their earned $Kleo back into the LP for short-term gain, it creates more opportunity for investors to buy it up and gain governance power and revenue offered up on discount by those who earned it. This gives everyone the freedom to come and go as they please, and ensures that Kleomedes will always be governed by those who are willing to contribute what is needed the most to help the project succeed. Sometimes buying up a dip is the most helpful thing someone can do for the Enterprise! As long as we are always being as transparent as possible with the operations of the Enterprise, investors should have a good idea when $Kleo is on discount.
Delegation Stage
So if direct-funding isn’t the most viable option at lower $Kleo valuations, what is the best way to get investors and build our revenue stream to incentivize contributors to build out the Enterprise?
The answer is simple right now: Delegators.
This is why the very first thing $Kleo spent a significant amount of tokens on was early delegators. As we established earlier, delegation revenue is how we raise funds to pay for the growth of this Enterprise. The more delegators we have the more revenue our Enterprise makes.
This creates value-alignment between us and the chains we validate.
The most important thing anyone can do to support Kleomedes is to delegate their native Cosmos Tokens to the validators we operate. This is our foundation! This is also why we have the buyback system in place to incentivize contributors to remain delegated once they’ve started with us. Ongoing delegations on profitable chains will continue to receive additional $Kleo for delegating during this stage of our growth.
This kickstarts the flywheel effect:
- Delegating to Kleomedes increases Enterprise revenue
— This drives up APR and thus $Kleo price - Staking $Kleo increases your share of Revenue
- Increased revenue gives Stakers more native rewards from revenue share.
— Taking profits here doesn’t affect $Kleo price negatively.
— Compounding here feeds back to 1 for the flywheel effect. - Increased Revenue drives larger buybacks, resulting in more $Kleo to distribute to delegators
— Incentivizes the Compounding option from 3
— Incentivizes more stickiness in 1
— Additional flywheel effect for new delegators in 1
— Taking profits here doesn’t negatively affect net $Kleo price, as the rewards were funded with market buys instead of inflation.
So there are multiple compounding effects happening here that maximize the investors’ increase of total ownership of not only Kleomedes but also the chains we validate. There are also multiple steps in the process where profits can be taken without negatively impacting project tokenomics, whether selling native chain tokens or $Kleo.
There’s also this unique aspect of Kleomedes tokenomics for investors to consider:
If you delegate to Kleomedes and earn $Kleo as a reward and you stake that reward, but then later decide to sell the native token after undelegating… you can keep your $Kleo staked and retain upside exposure to that chain via $Kleo staking rewards. True, you also maintain exposure to downside in the same regard. But it’s a low opportunity cost since you received that $Kleo for free essentially, since we don’t charge a higher fee to delegate to us than any other competitive validator.
Contributor Stage
We could stop at the Delegator stage if we wanted, and not build anything further for the project. We could minimize overhead, strip down any unnecessary expenses, automate everything, and just trust in revenue share to drive growth for our project. This wouldn’t, however, be a very diverse investment. We’d be fully at the mercy of delegators and the cost of securing the chains we validate on, which is our only source of income at this time.
Single points of failure are the reason entire industries are looking to decentralize. To drive further decentralization we need to incentivize contributors to always be building new value. This will not only bring us more delegators to get in on the action, but it will create opportunities to diversify our revenue streams into new and exciting directions. It is the entire foundation of this Enterprise and its PMF.
So with this in mind, our tokenomics are designed such that contributor allocations will eventually outstrip not only our early founders allocations, but eventually also our considerable early delegator allocations.
We claw-back any unclaimed airdrop tokens each month. Based on our current rate of claw-back, we estimate we should see the community pool resting with almost 60% of supply in the end. As airdrop recipients inevitably slowly sell-off their $Kleo over time, the protocol and continuing investors can capture that value at discount, reclaiming value for the Enterprise by distributing the tokens to higher value contributors and investors.
Those who have put in the time, blood, sweat, and tears to build this project are going to be the most likely to hold their $Kleo and keep it staked. By focusing our $Kleo into the strongest hands possible, we further ensure the security of our Governance against monetary capture.
If existing holders decide the governance of the Enterprise is going in a direction they don’t support they can liquidate their tokens and create a buying opportunity for those interested in taking the project a different direction.
This creates an incentive structure that naturally attracts the highest quality of contributors. In extractive tokenomic designs, those that are attracted most are those most able to extract value. With this structure, however, those who are able to contribute the most value are most rewarded. There will still be those who strive to manipulate the system to extract value, but we will continually work at tweaking our structures and processes to minimize the impact of this behavior to overall Enterprise health.
This also benefits direct-investors and delegators as well, as high quality contributors should drive far more protocol growth and will open the doors for more revenue generation opportunities than simply relying on revenue from incentivized delegators. Diversifying revenue streams is the most important hedge against loss of revenue from delegations to our validators.
Validation revenue is currently funded entirely by the need for security by most chains at this time. As interchain security becomes more efficient and affordable, validator revenue from chain inflation to fund security will reduce.
Losing inflationary revenue as a validator is an extrinsic risk we cannot control. The goal is that volume of traffic will drive enough fees to reward validators as inflation reduces. That’s something we can intrinsically influence through promoting chain usage and onboarding new users. But if promising new interchain security protocols make security more capital efficient over time, there could be an overall trimming of incentives pushed towards validators as a whole. This would impact operations like Kleomedes, if our revenue streams were limited to high-inflation chains on the Cosmos.
As we grow our organizational structure, however, we will build new and exciting revenue generation opportunities. Validating on Cosmos chains is just the starting point for Kleomedes! The opportunities are endless, limited only by the values and motivations of our top contributors Anyone can come to Kleomedes with an idea of what could generate our Enterprise more revenue, and if they can convince enough key stakeholders, Kleomedes could pivot that direction!
Long Term Sustainability
Now that we understand the tokenomic structure of Kleomedes a little bit better, and we’ve examined some of the risks for $Kleo holders, I am hoping that there is a stronger sense of respect for the importance of evaluating all $Kleo expenditures carefully. There are 2 important characteristics to keep in mind:
- As our Enterprise grows, the value of $Kleo needs to grow as well to continue fractionalizing our treasury supply (since we have fixed max supply).
- Every investment we spend $Kleo on needs to grow along with the rest of the Enterprise to prevent dilution to early stakers.
These characteristics point out our greatest risks:
- If $Kleo price doesn’t go up fast enough, we may spend too much treasury supply too fast and run out of runway.
- If investments we fund by spending $Kleo fail, stakers carry that cost permanently in the form of dilution. This may create sell-pressure down the road, even from our most loyal hodlers.
To combat these problems, we have our buyback program. If we keep aggressively funding buybacks we will create a stream of $Kleo back into the project. We can disperse those $Kleo to delegators like we currently do, or sometimes we can perform buybacks that are kept in the treasury for funding contributor activity. It’s up to the community. Anytime someone sells enough $Kleo on the market, however, there is an opportunity for the treasury or the community to snatch up that discounted $Kleo and return that value to the protocol. This is essential for a fixed supply token to keep reclaiming tokens to fund protocol value & security.
To further address these problems, we have to be judicious about approving expenditures. We are utilizing on-chain tracking tools like WonderVerse to create a clear demonstration of value created by contributors. We will continue working with their team to mold this tool into the perfect contributor tracking tool to make sure all contributor expenses are creating value. Retroactive funding is a great way to approach this, and something we hope to utilize more heavily in the future when we have the data to support it.
We also have to carefully examine chains we validate for and determine if giving out $Kleo to supporting delegator growth on these chains is a worthwhile expenditure. There may be some chains we validate on that we don’t enable revenue share or buyback distributions because they are too low-performing. We can, however, choose to invest in these chains by helping them demonstrate or create value. That is the strength of a contributor-driven Enterprise. We incentivize our contributors to actively improve the profitability of our revenue streams by actively creating more value directly for the chains themselves.
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I hope that this deep dive into our tokenomics has helped shed more light on the complexities of operating a Contributor-Owned Enterprise!
If you have thoughts, questions, or suggestions please pop in our discord and share with us!
