Limbo brings EYE to life
If you’re not new to Behodler, you’ll know the economic value of Scarcity: in short it’s the liquidity token for the AMM with a supply that grows slower than liquidity. The more widespread its adoption, the more it burns like a star flaring into existence.
And of course PyroTokens have an obvious appeal as the value accrual mechanism for trading fees on Behodler. When Flan’s price converges on Dai, PyroFlan will converge on becoming a thriftcoin, that is a stablecoin with yield. And the existence of Flan will signal an end to the typical chicken-and-egg liquidity problem facing all AMMs which means SCX will enter a new phase of growth. And with SCX growing in potency, Flan naturally becomes more liquid.
But what about EYE? Why hold EYE? If Flan and SCX resemble binary neutron stars spinning ever faster around a common centre of gravity, through the mutually complementary effects of Limbo and Behodler, have we forgotten all about EYE? Has EYE been left out in the cold? Is there no point in holding EYE? Not exactly…
This article finally reveals the cryptoeconomic firepower of EYE. The downside of reading this article is that if you’re an SCX maximalist, you may be left wondering whether you should start leaning more towards EYE.
At a glance: a birds EYE view
EYE is the universal governance token for all the DAOs that will ever exist within the Behodler ecosystem. As the depth of each dapp and the breath of the ecosystem DAOs increase, the ever increasing demand for EYE will be spread over a declining (mostly circulating) supply of just less than 10 million. Limbo represents the first application of EYE as a voting token. EYE (and select EYE LP tokens) staked in LimboDAO indirectly generate a non transferable voting point called Fate which can be spent on governance decisions. If you wish to bypass the wait and make big impact decisions immediately, EYE can also be burnt in return for large quantities of Fate. So from a bird’s EYE view, the tokenomics of holding EYE is already quite sound. However the existence of Limbo and LimboDAO as competing destinations for EYE staking creates a tension that needs resolving. For instance, suppose Limbo offers an APY on SCX/EYE LP token in order to encourage SCX burning. Holders of the LP who may have opted to earn Fate in LimboDAO now implicitly lose out on yield they could have earned by staking it in Limbo. The rest of the article outlines these tensions and their implications for governance and then provides an effective, simple solution that should boost the demand, the trading volume and the liquidity of EYE dramatically. It’s one of those happy solutions where everything falls into place in just the right way.
Warning: reading this article may cause feelings of anxiety in those not already holding EYE.
Problem 1: Centralizing Incentives
One of the tensions created by Limbo for EYE is the opportunity cost it creates for those wishing to stake in LimboDAO. Suppose you hold the Uniswap V2 EYE/SCX LP token. If you stake it in Limbo, you earn 15% APY in the form of Flan (all numbers here are fictitious). You could instead, stake it in LimboDAO to earn Fate. Fate cannot be sold on an open market and so it has no direct monetizable valuable. But it can be spent on governance decisions such as submitting and voting on proposals. For those wishing to see a particular token listed on Limbo and for that token to pay a decent Flan per second, this option is enticing. If you’re a VC who wishes to see a project you’ve invested in listed on Behodler and for a suite of PyroTokens to be created from the token and it’s corresponding LP tokens then it may certainly be worth more than 15% APY for you. In other words, for an interested party such as a VC, governance of Limbo makes more sense financially and you’ll stake your SCX/EYE in the DAO and forgo the Flan payout from Limbo.
However, this option is not very enticing to the small holder. They are unlikely to be able to put their Fate to work as strategically as a big holder and so will likely opt for the Flan payout on Limbo. A small holder will tend to want their governance power put towards the general good of Limbo, rather than chasing specific project listings. The net result here is that only those who wish to govern Limbo to pursue their narrow objectives will be driving the DAO rather than those who wish to see the whole ecosystem flourish. Governance will centralize into the hands of disinterested financial elites which is not what we’re going for, to put it mildly.
Problem 2: Ring-fenced Options
The danger of having an open listing process where democratic votes can decide the tokens listed in Behodler is that a malicious whale entity can push a malicious token with admin mint powers to Behodler which then drains all of the liquidity. There are two solutions to this, a proxy wrapper contract that insulates Behodler from sudden surges of supply (topic for upcoming article) and a whitelist of safe tokens maintained by MorgothDAO. The proxy solution allows the field to open up as it automatically protects Behodler from evil tokens. This means that tokens wrapped as proxies on Limbo do not need the consent of Morgoth. For perpetual tokens, no such constraints exist. By definition, perpetual pools on Limbo do not threaten Behodler. The only risk to listing too many tokens or tokens with Flan payouts too high is the risk of hyperinflation of Flan. So with careful consideration paid to proxy design (protect Behodler) and Flan minting rates (protect Flan), the field can be opened up again, thereby increasing the demand for EYE as a way to govern Limbo and get the tokens you like listed. However, this doesn’t reduce the centralization risk (problem 1). A common way to reduce the centralization risk is by allowing markets for governance to exist. DAOs such as Curve achieve this through the delegation mechanism. Essentially, you sell your voting power to the highest bidder. This powerful incentive structure is what allows CRV to be perpetually inflationary without experiencing a price decline.
Solution 1: Fate to Flan conversion
In order to eliminate the financial opportunity cost suffered by stakers in LimboDAO, a mechanism was created for converting fate into Flan at a fixed exchange rate. Through a proposal, the community could vote to both enable/disable this mechanism and to set the fixed exchange rate. This would bring EYE holders back into the governance fold and help decentralize governance a bit more.
Solution 2: Many Fate to Flan conversion alternatives
However it soon became clear that many preferable alternatives to simply converting Fate to Flan exist. One such alternative is being able to buy options or discounts. For instance, you can convert your Fate to a 50% discount on Flan. So in this scenario, suppose Flan is trading at $1. You convert 120 Fate to 120 discount points and can now purchase up to 120 Flan for 50c each.
At this point, it became clear that rather than having 1 way to convert Flan, it would make sense to have a means to plug in any approach that does the job. So the new solution is have a list of contracts that have the ability to spend fate, the FateSpenders mapping. This list is maintained through governance (proposals) and stored as a mapping structure on LimboDAO. In this way, the community can propose ever new and better ways to monetize Fate in the future and it can vote to end the existence of outdated or failed modes.
An example of a Fate spender is a contract which is given the right to mint Flan. This spender then simply pays you, say 1 Flan for every Fate you hand over. It then reduces your Fate balance accordingly. So we’ve recreated the Fate to Flan conversion but instead of it being hardcoded as the only option on LimboDAO, it’s now one of many options existing as a standalone contract.
Solution 3: A market for governance
As mentioned earlier, Curve Finance and others have mechanisms with which to sell governance power through delegation. EYE has no delegation mechanism and is a simple ERC20 with a burn function. Out of the gate, there is no direct way for EYE holders to be bribed into delegating their governance powers. Since Fate is non transferable, the only credible vote buying can happen after the event as a reward to users who voted yes on “the right” proposal. But it’s unlikely this can be enforced at the smart contract level.
However, the delegation mechanism in governance tokens certainly feels a little over-engineered. Solidity code which verbosely expresses the cryptoeconomic desires of the developer is quite often a code smell. Exploits take shelter in overly complicated code. Cryptoeconomic properties are best when they emerge out of simple parts. For instance, the simplicity of Uniswap V2’s balanced token pairs created a foundation for liquidity mining. If you can convince your community to simply provide liquidity for your new project token in Uniswap V2, the scramble will set off a price rise AND will deepen liquidity. The “inefficient” curvature of Uniswap had a peculiar effect where, even if you hand out your token as a reward (liquidity mining) for providing liquidity, the price would rise to compensate for this and the LP’s rising liquidity would absorb the negative price impact of profit takers. This simple mechanism alone set off the successive DeFi booms. There’s no code in Uniswap that speaks to mining incentives or protocol owned liquidity or any of that. There’s no need for it. The elegance of the algorithm is enough to allow economies to grow.
So returning to LimboDAO, it felt instinctively wrong to over-engineer the market for governance. Instead, one simple tweak to Solution 2 would do the trick. Fate Spenders (contracts which are allowed to take your Fate) should be allowed to allocate existing Fate between users. In other words, if Maxime has 100 Fate and Nico has 10, a Fate Spender Contract should have the authority to transfer, say 50 Fate from Maxime to Nico. It should also have the authority to burn Fate in anyone’s balance.
This is enough to allow for a market for governance where owners of Fate can sell their voting power to the highest bidder. A simple contract that allows whales to offer bounties for Fate would suffice.
Why not ERC20 Fate? One word: corruption
You may be wondering at this point why we don’t just let Fate be an ERC20 token so that holders of EYE can sell their Fate onto open markets. The market price would then reflect the marginal value of governing Limbo. The problem here is that any short term malicious entity could scoop up Fate and wreak havoc on Limbo, draining as much value as possible in a bid to hyperinflate Flan.
By restricting the spending and transferring of Fate to whitelisted contracts, the DAO can regulate the rules of the game. To understand why, a vision of the future may help.
A contract is deployed in the year 2023 called PerpetualPudding. LimboDAO approves it to be a FateSpender. It has a function called ProposeListing()which takes 4 parameters
TokenToList, RewardToken, FateToTokenRate, ProposedFlanPerSecond
Anyone can call ProposeListing() so long as they submit a 2000 EYE deposit. PerpetualPudding has been calibrated by the DAO so that a cap on proposed Flan per second is established. Also there’s a limit on the number of new proposals per epoch of time.
Once ProposeListing is called, PerpetualPudding must be loaded with any amount of RewardToken. Holders of Fate can convert their Fate to RewardToken at the rate of FateToTokenRate.
Once the allotted reserves of RewardToken are exhausted or once a certain time has passed, PerpetualPudding lodges a proposal with LimboDAO to list TokenToList on Limbo and auto votes yes with all the purchased Fate.
If successful, the token is listed as a perpetual token and receives ProposedFlanPerSecond Flan to entice staking.
PerpetualPudding can be designed so that if the token proposed is an LP token with either EYE, SCX or Flan in the pair then the upper limit of FlanPerSecond allowed is much higher. Of many more such improvements will emerge along the way. This is just an illustrative example.
The important feature of this market for governance is that Fate can only be sold for the voting on of proposals which are explicitly not harmful to Behodler. The Fate purchased can’t be used for just anything but immediately is spent on a narrowly defined proposal.
First Principles: an EYE on the moon
Tokens like CRV and Sushi are reward token, governance token and liquidity all bundled into one. This means that perpetual inflation for rewards is offset by a demand for governance to keep the price stable or increasing. In the Behodler ecosystem, we have the opportunity to unbundle these features into separate tokens. Flan is the perpetual inflationary token whose value is expected to hover around 1 Dai. EYE is the governance token and can have a capped supply. SCX is the liquidity token which underpins Flan. Unlike other farms, the governance token need not be inflated in order to keep the show running. By introducing this governance market, we get the same fiery governance incentives enjoyed by CRV, Convex, Tokemak and the like brought about by every dapp wanting to list on Behodler and Limbo scrambling to purchase Fate. But all that demand isn’t propping up a reward token. Instead it’s all crashing against the vertical cliff face of a fixed and declining supply of EYE. Limbo is like Curve but governed by Bitcoin and rewarded with Dai.