In the wolf’s den: The next path for BAO
This article is being written as my personal thoughts, both as a galaxy member and also as a community member.
The last week following Baoman’s proposal for the next path for BAO led to tens of comments, both on the governance board and into Discord. Some were positive, some negatives. People are questioning the models, ideas, purposes and that’s OK!
But after reading a lot of comments, I think people forgot to look at the whole proposal by instead looking at it piece by piece.
When judging a tokenomic overhaul, we need to read and understand each part carefully. To retrieve, alter, or add a part of it may unbalance the proposal or even defeat its purpose. The big picture and the objective proposed are worth considering.
The summary of the proposal can be resumed as
A tokenomic overhaul to control the distribution while still giving value and recognition to those who risked the most in the project, aka the first week’s farmers.
The proposal aims to tone down the future dilution of the farming locked tokens distribution by;
- Ending the current farming rewards, thus saving more BAO under the hard cap for future incentives and stop the unnecessary dilution at this point.
- Having a dynamic unlocking range period based on the current utilization of our future products. Don’t let you fool by the number “50”, it’s a starting example that changes rapidly.
- Bringing a staking option, both for unlocked BAO and locked BAO where long-term supporters of the project could have a share of the BAO community owned franchise governance tokens and future rewards
- A new governance model where the power of the governance vote and rewards distribution would be a combination of many factors like locked BAO and personal achievements in the projects.
Let’s talk about dilution
Why is controlling dilution important?
People are seeing mostly the farming of the governance token through an “APR” perspective. Even if they were told this is not an investment product or that there was a risk in this project. APR was calculated at the time of farming with the price of the governance token at that time.
By having 750M BAO released daily over three years, there would be a lot of governance tokens on the market. There would be for sure some of them staked in the staking mechanism proposed, but it is safe to assume that a great portion of that would be sold on the market.
With current liquidity provided in some markets, we could see a negative price impact from 6% to 12% daily. This would mean that within 30 days, the market could become illiquid. The APR a lot of farmers thought they would have would melt faster than snow under warm weather.
APR and ROI are what a singular person is thinking first. The issue if we look at the big picture is that if the market price collapses, the DAO is economically unsafe. If BAO drops massively in price then it’s easy for a large whale to buy up a majority of governance tokens essentially hijacking the protocol. That is why dilution matters so much.
Is 50 years an “insane” amount of time? Yes, it is!
But the number of years is the only variable that we can work with to adjust the unlocking rate of the governance token. The proposal aims to start really slow but to further adjust the rate based on the utilization of BAO products and possibly the burning and deflationary trend that could occur.
Here is an example over 10 years in a successful Bao product utilization, where the first year only drip 2% of the unlocked BAO and the last year almost 25%.
By controlling dilution over time, adjusting his rate based on adoption and uses for the governance token, there will be a counter effect to the dilution that would be both profitable to a singular person and to the entire protocol.
This is also why the rewards should actually stop. The current number of governance tokens being distributed is insignificant compared to what has been already distributed. This also contributes to more dilution and doesn’t match the objective wished.
veBAO, more interesting than it may look
We are now controlling the dilution with the protocol usage over time. But by doing this, liquidity farmers who are vesting their governance token cannot use their tokens at the same rate as initially planned.
veBAO is a concept borrowed from Curve finance (veCRV) where the token is what I could call a “meta token”. The number of tokens you hold is illiquid and cannot be bought in the market. The balance showed is in fact a calculation of many factors like staked BAO, locked BAO, and so on.
Governance should shift to this model and it will be a single-stop shop for voting power, but also for reward distributions.
Locked Bao will have its use while they are still vesting. There were no clear guidelines on how the franchise governance tokens held by the BAO community would be distributed and veBAO is a fair solution to this subject.
Also, we could see upon more concepts and governance votes a rewarding system or fee captures (like tBAO or BAMBOO) that could be redirected to veBAO holders (implementation to be defined of course !)
So while the parameters of veBAO are yet to be decided, the system itself is interesting because it will reward supporters of the project, active contributors, early adopters while keeping their vested BAO for the time being.
From an “investor” perspective, the APR will come from 2 different places. One that continues to accrue franchise governance tokens and rewards and the other are the locked BAO itself that may continue to hold his value through the longer vesting period.
What we should also care about
In this mega bill, there are a few topics that are eclipsed by the tokenomic overhaul. For BAO to succeed, we need a product. We need adoption.
Easy enough? Not quite!
BAO came to life with the idea of creating a multichain synthetic assets protocol that believes any trustless data could have its uses. Not only financial data but also different metrics, data brought on-chain like weather or even balanced scorecards (Remember the mayor scenario).
Baoman is sharing a new route for the DAO. A route that would lead us to provide a toolset for other teams to create and manage synthetic assets instead of creating a market for them. As I believe this is also a good proposal, I am surprised no one is questioning the direction we would take.
I mean, we can talk all day long about tokenomic, BAO dilution, staking, but at the end of the day, it’s what we are building that is important!
This is why the hard synths should be the current focus of the different galaxies moving forward.
Speaking of this, a last franchise would also see life in this proposal in joint collaboration with another team. This would mean that our last lego will be in place to test the delivery of tools and framework to other teams, aligned with the change of destination Baoman has proposed.
If you care about this project as I do, please share your opinion on that also! This should be the #1 topic that supersedes everything.
My personal adjustments or observations to the concept
Here is a list of things I would like to point in this proposal. I understand the “how” is not defined in most of the text, especially for the veBAO calculation, but I am writing them for transparency and for the benefit of everyone
A clear objective for the BIP
When moving this concept to BIP, the sought objective should be clear. Ex: This proposal seeks to reach agreements with the community on the direction the project should take in the next year. Individuals proposals would be held afterward so we can agree on the specific parameters and tokenomic.
A little difference in the unlock schedule for xDai users
We all know Bao Coupons are bad. This is a harsh lesson learned while undergoing our xDai journey. As we cannot bridge native xDai tokens to main net and that on-chain data cannot look at contracts from different L2 solutions, it would be extremely difficult to bring Bao.cx locked amount to the veBAO power calculation.
xDai users can only exchange their BAO coupons to BAO and bridge them back to main net in order to stake them, to be considered in the veBAO calculation
My suggestion would be that xDai Bao unlocks rate be always 50% faster than main net unlock rate to account for this problematic.This would give the opportunity to xDai users to stake their unlocked BAO at a faster rate on main net to be able to profit from veBAO. Locked BAO coupons could also be added as part of the voting strategy on Snapshot.
Beware of accumulating bonuses
% Bonuses shouldn’t be too high, especially if they are compounding.
Open question : Shall we continue to give incentives to Bao liquidity pool ?
I am concerned about BAO liquidity if there are no incentives for months on BAO/ETH pools. Having UNI and Sushi pools as the only ones still giving BAO rewards could be considered, or those pools be integrated into other protocols or the possible new franchise proposed.
