Econometrics: Modelling the BUMP Token
Several months ago, a few of us from the Core Team met with Lisa JY Tan from her firm, Economics Design. We’d been searching for a good economic modelling company for some time so this was an important one. Part-way through the introductions, our CTO Sam finally emerged on the call in signature dishevelled scientist style, and the ceremony of formal introductions was done.
As Lisa talked us through some background of Economics Design and the work they do, Sam suddenly piped up: “Oh, I know who you are!”. Turns out he’d recently read an article she had published, and it’d made an impression. He promptly followed this up by explaining he couldn’t recall the content of the article (Sam, don’t mess this up, we like them…), and that he completely disagreed with another one of her articles (Sam, seriously?), but then he ended with compliments that he felt she was one of the very rare few who actually “got it”.
Great, we have a winner! Since that meeting, Economics Design impressed us with how quickly they came to understand the protocol, and their deep thinking of the token utility. It was a good thing too as we wanted them to give it to us straight about the good, the bad, and the unexpected when it came to the BUMP token.
Collectively, we wanted to understand:
- Should we be concerned about our circulating supply at listing time? Is it even high at all?
- How can we better understand the forces influencing token demand? How can we optimise our parameters more intelligently? Is there a way to de-noise speculation so we could better measure the utility signal for the token?
- And, most of all… do we have enough tokens?
While not all questions are able to be furnished with a practical or knowable answer, we’re quite happy with where they landed. We now have some quite interesting and valuable insights into what to expect from BUMP under different market scenarios. These insights will allow us to more confidently and intelligently tune the settings for our various BUMP-based incentive mechanisms.
If you’d like to hear Sam’s take on things, we’ll publish an article when things cool down. For now, though, take a read of the highlights…
“Throughout the three years, our model forecasts a strong increase in the value of the treasury monotonically.”
- Okay cool, we start with some good news… So, lower fees, or hire more staff and build more stuff? Hmmm.
“…our model indicates that the protocol TVL will reach $1 billion by month 18 and approximately $2.9 billion at three years. This is reasonably consistent with the broader market landscape…”
- Okay, happy? Now, please, no more “wen moon” in chat. /facepalm
“Based on the analysis below, we observe that there are adequate tokens available to distribute incentives to market participants for a full 3 years.”
- Phew! Now, let’s try and tune things to last 5 years.
“… the price of BUMP will stabilize around 22 months at approximately $5.52, representing a 90.72% correlation to the TVL”
“The impact of such a change of selling pressure was found to be minimal in terms of price and correlation coefficient, indicating that the model is stable with respect to changes in selling pressure over the modelling time horizon.”
- Now, this was interesting. There was very little change in long-term price under various demand and supply conditions. My initial thought was that this was a fault with their model. But, I then realised that this is exactly how it should behave; as the protocol grows, the core utility gets stronger and gains ground on speculative price activity. Wild swings in price up and down are not the true price signal. Sound familiar?
“The lack of sensitivity to fundamental price change suggests that the design of the BUMP token is quite robust and may be able to withstand far more severe market shocks than indicated with our chosen modelling assumptions.
- While this is true for the time horizon that was modelled out (three years), if you take a different time horizon your mileage may vary as the initial price volatility may not yet have shaken itself out, resulting in quite different prices depending on when you look at the market; sometimes it’s sky-high, and sometimes it’s taking a bath. But, at some point in time (well, more accurately, at some point along the TVL dimension), the transient sloshing of newly circulating BUMP tokens starts to calm, like waves in a pool.
Remember, this is a static model. For this report on the Bumper ecosystem in relation to the BUMP token, Economics Design set the initial parameters and then let it rip. The real world is much more chaotic, and, hence, the presence of various disclosures and disclaimers.
Still, it is undeniably very fun seeing the system start to come to life in front of us, and the level-up in insight that that brings with it. Take a read. Have a think. What would you do to iterate? Which bit is the most interesting for you?
Finally, it goes without saying that we’re all under the pump right now making sure things go as smoothly as possible for everyone in the community, both veteran and rookie, for the rest of December and beyond. Stick with us; there’s more to come.
Bumper protects the value of your crypto using a radically innovative DeFi protocol. Set the price you want to protect and if the market crashes, your asset will never fall below that price. Importantly, if the market pumps, your asset rises too.
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