Author: Original content produced as BES (Blockchain Economics Studio) internal research report, by founder Jade and co-researcher, Cai Da, a close friend of BlockBeats.
BES is a small studio specializing in token economy incubation. It has initiated and participated in various projects including consensus mechanism, open source software, and virtual assets. The studio believes that virtual currency as investment product is but the tip of the iceberg, whereas the application of token economy in real scenarios will ultimately assume center stage in the future. In the nascence of the industry where basic infrastructure and technologies are yet to be perfected, the very existence of BES is an experiment. That is, the best way to predict the future is by actively shaping it.
As an open source organization, BES welcomes different contribution and participation of various nodes, BlockBeats being one of them. If you wish to offer any insights into token economy, blockchain products and technologies, please email us at hi@beslab.xyz.
Trade mining, token holder dividend, big rebate incentives, veiled ICO…do you have a sufficient understanding of FCoin’s operations?
Regarding the FCoin platform currency, FT, the founder of BES lab, Jade, will provide the reader with an in-depth discussion of the ways in which this exchange, which boasts of a daily trading volume of over 24 billion yuan, has manipulated the token web economy.
1. What is the FCoin Token model?
FCoin is not the first exchange to have created the “trading equals mining” or the “token dividend” models. However, it is the first of its kind to have realized the potential of such models. Before delving into the specifics of the FCoin platform currency FT, one must first understand its token model:
In other words, FCoin has achieved the merging of two token models: “capital burn for user rebate” and “profit repurchase.“
That is, FCoin has transformed “capital burn for user rebate,” a model with which new web industries seek to occupy online traffic, into the issuing of platform currency, ensuring larger profit and subsidy for earlier participants; FCoin has also improved upon the “profit repurchase” platform currency model employed by Binance and Huobi. Instead, FCoin offers users “revenue sharing,” which guarantees the distribution of at least 80% of the revenue to platform currency holders, and thus creates greater incentives for earlier users.
2. Why the overnight success of FT?
The Token logic of FCoin is rooted in the classic “work-in token model,” in which users are not required to purchase the currency. Rather, users obtain platform currency by taking on certain responsibilities and tasks in the ecosystem.
The core advantage of such a design lies in the fact that economic incentives could compensate early seed users for product imperfections, which expedites the transformation of “cold boot” users.
In traditional user models, user utility = application utility (that is, user participation is limited to only the level of product application). Yet for users in token economy, utility = financial utility + application utility (thus, user participation is integrated with financial factors).
Due to financial incentives of the token economy, users would tolerate various problems that the platform often faces in early stages, including low tradability and system instability.
More importantly, FCoin has a profound grasp on the central idea that
Market depth is the core of any exchange, absolute market depth means absolute value.
The obviousness of such a statement would be all the more shocking if one looked through the perspective of a project participant, an ordinary trader, or a high-volume trader.
To recognize the heart of the exchange, and to penetrate its core through 100% commitment of the token economy incentive mechanism.
100 % of Transaction fees will go to the miners in the form of FT without ceiling, which means more labor will generate more profit with no limit. Miners will thus be fully motivated and committed to the expansion of market depth. Meanwhile, “token holding bonus” is more on the side of a soft locked position, as a way for the platform to generate profit. In the initial phase, through the mechanism of invitation rebate, the rebate percentage from the platform to the inviters has dropped from the highest 50 %, to 20 %, and to the current 10%.
There is a small “trap” here. While the official statement declares that 80% of transaction fees ought to be distributed, upon close inspection of the token model mentioned in the beginning of the article, one would soon realize that, given the issuing regulations of tokens, the actual percentage the miners would only receive 80% * 51% = 40.8 %. (Currently, FCoin has announced that before liquidity reaches 3 billion FT, revenue dividend will be maintained at 100%, which means miners can temporarily receive 51% of the revenue dividend.)
The genius of such a concealed dividend strategy lies in the fact that, on the one hand, an ordinary investor will be attracted by the advertised 80% -100% dividend, and on the other hand, those in the 49% locked position will have sufficient incentive, and once unlocked, FT will have enough liquidity in secondary market.
Examined from a different angle, FT is able to penetrates into the most valuable core of the platform, that is market depth, through distribution of rewards. Then, it facilitates the locked position through future revenue such as dividend, and thus controls token price and the market.
However, worth noting is that the mining difficulty in FCoin is measured by the token price.
3. What is the nature of FCoin?
On the surface level, FCoin appears to be an exchange genuinely invested in the benefit of early users. It appears to have realized a win-win situation for users, wash-traders, private investors, and operation team.
However, should an ordinary investor participate in the FT model? If so, in what way and at what moment?
Common sense goes that a business that is forever profitable simply does not exist. Given that, we will examine this model from the perspectives of the wash-traders, dividend sharers, the platform itself, as well as that of opportunists.
From the perspective of wash-traders
As long as the rule of invitation/profit rebate stands, they could secure profit with very low risk.
For instance, FCoin has once offered 20% profit rebate. That is, wash-traders would register an account A, and then invite account B. Suppose that at moment T, account B invested in TV (traditional volume), and wash trading per 60 seconds, then the two wash trading ccounts would receive rebate at moment T+ 1 for the following amount:
The numerator is the commission cost of each exchange, and the denominator is the average price of FT at T time period.
Suppose click farmers instantaneously invest back into the market, their daily profit will be：
In conclusion, wash trading behavior hinges upon the prediction of the price of FT. Wash traders does not benefit from dividends but they could relatively avoid principal loss due to the dramatic undulation of FT prices ( wash traders could decide on their daily mining and not hold any FT assets)
When the percentage of rebate decreased to 100%, and when FT prices stabilized, wash traders would lose incentive to continue. Besides the gradual reduction of rebate percentage from 50%, 20%, 10% ,and finally to the cancellation of such mechanism, FCoin platform could also control the market by setting the upper limit of the volume of wash trading api. For example, when the percentage of wash trading reaches a certain height in the sum liquidity, FCoin could 100% monopolize such action and thus reducing the pace of issuing and circulating the tokens.
From the perspective of FT dividend holders:
For BTC, retail investors’ dividend depends on unpredictable variables such as the pace at which FT is issued and its price. Therefore we will start by looking at the simplest example:
Here the dividend ratio targeting X is calculated hourly, and more accurate calculation ought to rely on calculus concepts. Here we simplify that into discrete functions, ∆N is the ft release generated by the mining that day,
The profit rate at T + 1 (the next day) is:
Based on real data, when FT first gained momentum on June, 9th, there is 239,917,202 FT (blue line), the sum dividend equates 419 BTC (green line). A week later, on the 15th, the sum liquidity reaches 527,126,662 FT, and the dividend equates 2338 BTC. The daily profit percentage of that week hovers between 3–6%. With the steady increase in FT price, the dividend from new process fees will gradually drop under the speed of the growth of the exchange, resulting in the decrease of the profit percentage.
Suppose daily profit percentage of token-holding dividend is at 2%:
Suppose daily profit percentage of token-holding dividend is at 2%:
If FT price remains relative stable, and all the dividend will be reinvested as FT, then the payback period is approximately 35 days.
If FT price continues to rise, this period will be drastically shortened.
Conversely, if FT price drops, individual investors who entered at peak position will face the risk of a much longer payback period due to the sharp price drop.
From the perspective of the FCoin platform:
What is the nature of the platform? What are the reasons behind its specific actions in this economic model? Now let’s turn to its profit:
The main revenue of the platform comes from the 20% dividend, and the 80% dividend which corresponds to the 49% of FT which has been gradually unlocked, and which had been hitherto hidden in its white paper. (at this stage, the platform has 100% dividend of trading processing fees)
That is, the platform is running 51% ICO at half the price.
From the perspective of capital management, this is the biggest innovation of FT. Previous ICO would first offer discounts to private investors, and then obtain users through capital burn.
In contrast, the platform turns early users into early investors and shareholders. They must obtain Token through their own “labor” and discounted prices. The advantage of such a model comes from the diffusion of shareholders, and higher capital efficiency. It also creates a challenge for competing exchanges, and increases the difficulty for whale traders to control the entire exchange.
From the perspective of secondary market opportunists:
FT is like EOS, which conducts sales at both primary and secondary markets simultaneously. Investors could go to the official website of EOS to purchase tokens with ETH, and they could also trade the purchased EOS token in exchange. FT is running almost the identical operation: miners could obtain FT though trading fee mining, and the next day they could use FT to trade.
IF we are to consider the investment value of the secondary market, we must approach it from the angle of valuation. It is thus necessary to return to the token valuation model, the core of which is the DCF future cash flow formula.
Zhihu article “FCoin Token (FT) –the disruptor of digital exchange or the ruthless profiteer?,” offers the following calculation:
- Suppose the trading volume remains constant before FT mining ends (70 days, based on current unlocking speed), and the speed of mining increases daily. If the platform trading volume and BTC price remain the same, the accumulated dividend in the 70-day period will be 0.66 usd.
- After the mining is completed, if trading volume is at 1/20 of the original amount, the annual dividend will be 0.052 usd. When calculated according to 5 x PE, it will be worth 0.261 usd.
- Combining the two, FT value will be about 0.92 usd, which is higher than the current FT price.
The aforementioned calculation does not include scenarios in which FT price drops significantly due to undersell predictions.
4. Is the FCoin model sustainable?
Having examined the nature of FT, one is the most concerned with the following questions: What will happen when FT is exhausted? Will the price of FT experience a steep dive at a certain moment? What is the future of FT?
According to current data, on June, 18th ,1,661,957,392 FT (1.662%) has been unblocked and circulated in the market. There remains 834 million token currency, and the percentage of profit rebate has dropped from 150% to 110&. In the future, if the percentage dropped below 100%, wash traders would lose incentive to continue trading, trading volume would decline drastically, and FT revenue would also be reduced significantly, leading to sharp drop in its price. Because of the consensus of the miners, an “avalanche” of price drop could occur when mining reached 70–80%.
However, based on our judgment, as opposed to an anticipated avalanche, the price of FT is more likely to reach an equilibrium before the mining period ends.
That is, on the one hand, the platform could control the regulation and upper limit of wash trading API, thus reducing the percentage of wash trading activities. The platform itself would then become the biggest market maker. On the other hand, this is a market case of Nash Equilibrium. As long as trading volume and revenue remain, FT will retain its value. While those who predict a price drop might stop FT wash trading yet if everyone shared such a tendency, one could still maintain long-term revenue by obtain FT through any means.
Lastly, the platform could increasing the circulation and valuation of FT before the mining ended, through means such as token mortgage and voting rights. However, as prerequisite, the platform must have already become a powerful, top-tier exchange.
That is, the greatest value of token economy is to provide incentive for the initial internet phenomenon. Yet the issuer of such an economy must stabilize the position of the market in the middle and late stages by offering real products or service. Otherwise the value of the token will be reduced to nothing.
Not only is such a challenge applicable to token economy, but also it ought to inspire other industries on the internet. In the world of web industries, competition is predominantly characterized by continuous financing and user subsidy, until one reaches the top of the market, and manages to monopolize the entire web economic effect. Only then will the “fight” be brought to an end. Exchange, E-Commerce, social media, and consensus economy are all economic models that exemplify such internet phenomenon, which often culminates in the monopoly of one main player.
In such a process, there is considerable capital waste, in terms of not only the subsidy of early users, but also the social resources accumulated by the “999” competitors who are to be eliminated in the struggles.
Yet Token has pointed us to another direction. As the internet saying goes “sheep wool comes from pigs,” one cannot help but to wonder why sheep wool could not have come from sheep.
For any economic model that is able to create an internet effect, early users are the most valuable, because they are not only internal testers, marketers, but also those who will take the risk of initial failures. However, early users enjoy almost the same economic profit as later users. One may think of the original content broadcasters on DouYin, the first drives working for DiDi, the pioneering merchants who started to accept Wechat payment, as well as the earliest active users on the platforms, who have gradually become ordinary participants.
As an inefficient, unsustainable, and untrustworthy incentive method, cash rebate should long have been reconsidered.
Lastly, there have already been various projects that seek to copy the design of FT. However, the problem of wholesome replication is that such a model is only suitable for economic models that have robust forward cash flow, which is extremely rare in the world of blockchain. Nevertheless, Token is capable of realizing its value in different economic models and user scenarios. This is an art form which follows certain rules, yet which requires constant innovation. We hope that everyone would strive to create new token economy models from the perspective of solving actual problems.
If you wish to discuss about and/or conduct further research on Token design, please contact hi@beslab.xyz.
