This is the first in a series of posts about the Audius protocol architecture, detailed in our whitepaper. Stay tuned for more!
We built Audius to solve long-standing problems in the music industry, but the parallels between our design and other multi-token dApp economies made it clear that the benefits of a dual-token architecture are broader in scope. This post is the first in a series intended to add some color and commentary to our whitepaper and give the reader a sense of why we did things the way we did.
Our Motivation Was Longevity
It’s no secret that the general public views most blockchain projects with skepticism. Too often they seem to be structured for the short term. At Audius, we were motivated to create something that was far more enduring, with long-term economic incentives for all stakeholders.
A key realization here is that any lasting economy, irrespective of whether it’s based on blockchain technology or not, should generate continued value for its stakeholders. For that reason, Audius needed to separate out the two aspects that get muddled into one within many blockchain products:
- the transactional economy
- the governance, value creation, and value capture economy
When combined or conflated, these two functions can create confusion for protocol participants on whether to redeem tokens for services or use them to provide services/capture value from the protocol. Unstable value in a transactional token also makes it difficult to use as a unit of account. This realization led us to architect a protocol with two tokens.
The Audius Dual Token Economy
Let’s take a closer look at the blockchain architecture that we devised for Audius (Figure 1). It should be noted that what is shown here is a very simplified model of the total system; sufficient to convey the point without getting bogged down in details specific to Audius.
- The Loud token is used to carry out transactions within the Audius economy. The listeners purchase these and trade these with artists for the decryption keys to listen to their music. During the transaction, a fraction of the Loud tokens are “burned” or removed from the economy. We will get back to why that is so later.
- The Audius token is a governance and staking token. This means that the owners of this token get paid to provide services to the network.
Simple enough right? Well… not quite.
It’s very important that the transactional token (Loud) holds a stable value relative to the product being served to ensure that the transactors maintain confidence in the protocol. Any large changes to its value will incentivize users to use other means of exchanging value. Worse yet, they may get completely turned off by the protocol.
However, keeping the token value stable in a microeconomy is quite difficult. In the Audius protocol, this is done by automated algorithmic manipulation of the token supply. An uncensorable blockchain-based minting contract manages the supply of Loud. This system introduces Loud tokens into the economy when requested by 3rd-party arbitrageurs, who purchase the new tokens at a fixed price. Expansion of the token supply is necessary when (1) loud tokens are burned as listeners and creators transact and (2) the Audius economy expands as more listeners and musicians enter the market. More details on this mint and burn process can be found in our whitepaper.
The minting contract will use the proceeds from selling new Loud tokens for one of two things. A fraction of the proceeds will go into a reserve. This reserve will be used to automatically re-purchase Loud tokens from the economy in case of a sudden downward pressure on the price of Loud. The remaining sale proceeds will be used to purchase Audius tokens and distribute them among the existing Audius token holders.
The Impetus For The Mint And Burn Mechanics
Let’s unpack the inner mechanics behind some of these decisions. First, why burn the Loud tokens? Why not give these directly to the Audius token holders and call it a protocol fee?
This mechanism allows the system to deflate the transactional economy to maintain value stability. The problem is that the system can always mint more Loud tokens, but if there was ever a gradual contraction of the Audius economy (due to say a global recession), the reserve used for short-term spikes may not be enough to keep Loud stable long term.
Second, why have the system purchase Audius tokens to reward Audius token holders? This is architected into the protocol to increase liquidity in Audius tokens.
We’re excited by the possibilities enabled by the dual-token architecture of Audius. By separating the value transfer economy from the value capture and accrual economy, each token in Audius can better serve its users’ needs.
In our next post, we’ll discuss some of the broader implications of this architecture and how, when combined with public, permissionless blockchains, it can unlock massive efficiency in product economies like Audius. If you’re excited by working on problems like this, please reach out at firstname.lastname@example.org, we’d love to chat!
Special thanks to Roneil Rumburg, Ranidu Lankage, Christina Rowland, and Julian Baker for reading drafts and contributing to this post.