Sustainable Token Incentives
Token incentives are the central force for crypto communities to coordinate and work towards their goals. Staking Options (SOs) issued through Dual Finance sustainably amplify those functions by better aligning communities around a long-term concerted vision. Specifically this can be achieved by embedding Staking Options in governance participation and liquidity provisioning. Users who hold tokens to vote or provide liquidity, now may be incentivized economically through these sustainable incentive structures using products designed on Dual Finance’s Staking Option Studio (SOS). The SOS’s job is to interact and partner with projects to save them from the inflationary death spiral so frequently experienced by paying communities in tokens. Dual Finance is changing that paradigm through the simple, yet elegant idea of offering option rewards on tokens. Let’s examine through case studies how Staking Options can be deployed in practice for the benefit of projects and their community.
Case Study: Governance
The main form in which protocols are implementing governance is through voting escrow which locks up liquid protocol tokens and mints a “ve” token. Now Users that lockup liquid tokens can be eligible for Staking Option rewards allocated by a protocol’s treasury and designed in the SOS. In many cases, Voting Escrow is also leveraged as a means of allocating future token incentives between different Liquidity Pools. This process known as Gauge Weight Voting creates competition between community members to get the most token rewards for the pools they participate in and thereby increase demand for the governance token. The byproduct of this Gauge Weight Voting creates a subset of participants most inclined to dump the governance token so they can monetize their hard earned rewards. By introducing Staking Options to this equation you extract out the good bits around creating token demand through voting escrow, but mitigate the dump likelihood significantly. Sub-communities of specific LP pools now will receive options on the governance token, typically struck above the current price. Therefore, supply will not automatically unlock, rather new token supply is only issued by exercising the Staking Option. In effect, token supply only unlocks when the price supports it.
Another main criticism of governance today is that it doesn’t do much to encourage small holders to lock up tokens to vote on proposals and, or gauges. Rather small holders are dominated by whales or treasuries who hold vast amounts more and are willing to lock them up for longer. By issuing Staking Options for governance lockups you can bring back the minnows into the fold. They now can experience a direct economic benefit from locking up their liquid tokens and effectively receive leverage and additional upside via SOs. The issuance functions of Staking Options are also configurable. For example, issuance doesn’t have to be purely pro-rata, communities can enforce account maximums or incentivize fresh lock-ups versus existing. The design space is broad and more configurable than simplistic token per time accruals since communities can now consider increasing and decreasing strikes and times until maturity.
Case Study: Liquidity Mining
Liquidity is king in crypto markets. Projects who can properly incentivize it on their dApps and underlying tokens are best positioned to flourish by minimizing the friction of market participants entering and exiting positions and managing risk. Currently, projects pay fixed token emissions for both LP token reward schemes and more nuanced liquidity scoring methodologies. Staking Options can revitalize community interest in both designs. Any programs where one token was issued before for providing liquidity, can now offer a multiple of that in SOs. By adding upside-only leverage to the system the project benefits by avoiding the mercenary liquidity mining which leads to tokens immediately being dumped at any price to monetize the earned rewards. Now tokens are only sold and supply unlocked if the price is greater than the strike. Additionally, the treasury gets paid that exercise amount in stablecoins. The driving force behind offering multiples of SOs per 1 token previously emitted is the relationship of Delta. If a project is issuing SOs with an average delta of 33, effectively that means that 33% or 1 out of 3 SOs are expected to be exercised over the long run. This permits leverage to be added to the possible payouts that liquidity providers receive.
Another critical improvement to the old token emission system is by issuing SOs the community is getting long the option greek known as Gamma. Price goes up there are natural sellers; price goes down there are natural buyers. If an LP is long gamma, it actually serves to reduce their impermanent loss (IL). This requires a separate deep dive, but providing liquidity to Constant Function Markets creates short gamma positions. Therefore, by providing an SO reward that mitigates the negative risk of LPing, in aggregate you encourage more liquidity in the system and reduce User IL risk.
Complexity
Dual Finance acknowledges and is prepared to address the complexity that SO introduces versus their simplistic token emission cousins. We are aware that not everyone is option literate and rewards that require exercise to monetize may not suit the busy lives of crypto community members. Delivering Staking Options to the world will take a leap of faith to a degree for many projects, but we can ensure it is a priority on our roadmap to make these rewards digestible and friendly to their communities. A main pathway to deliver this is via our Staking Options Marketplace (SOM), which will encourage market makers and other professional traders to provide price discovery for these more complex rewards. It is a place where Users will be able to immediately cash out their accrued SO rewards for stablecoins. We further intend to emphasize and provide resources for User education and will have dedicated team members focused on this crucial aspect of our mission.
Partnerships
Dual Finance aims to partner with projects ready to incentivize their communities in a more responsible, long lasting manner. To that end, closely partnering with DAOs is required. Any current DAO that can snapshot current active governance or voting escrowed tokens can leverage Staking Options via an airdrop and subsequent accruals for continued participation. Separately any current liquidity mining scheme that emits tokens can plug in SOs as an improvement.
All that is required to issue Staking Options is collateral supplied from a project’s treasury to fully back the potential exercise of the SOs. Both outcomes, whether Users exercise the Staking Options or not, have favorable outcomes. Specifically, if Users do exercise that means the price has appreciated and the treasury will be paid the exercise settlement amount in stablecoins. Separately, if Staking Options go unexercised the tokens remain with the treasury available for future incentives and no supply is unnecessarily unlocked to inflate the token value away.
A more broad background on the unique benefits of Staking Options can be found in the Dual Finance medium “Applications of Staking Options in Decentralized Finance” https://medium.com/@dualfinance/applications-of-staking-options-in-decentralized-finance-b588893fec92
Next Steps
Dual Finance intends to proactively reach out and present governance proposals to communities within the Solana ecosystem first to offer this product to the crypto world, but do not hesitate to get in touch if you think your project and/or DAO could use a dose of rejuvenated incentives via Staking Options. To encourage the usage of Staking Options through Dual Finance, early partner projects will be eligible to receive DUAL option grants.
Follow us on Twitter (https://twitter.com/DualFinance) and hop in our Discord (http://discord.gg/P3uH9AvEp5) to share ideas on how you think this concept can be applied to a project you’re involved in!
