Capturing Value with the FNX Token
Explore the various sources of return for FNX token holders and peer into our plans for the future of the FNX token economy.
The original FinNexus whitepaper describes a “fee scale” formula that will be “automatically adjusted according to the usage of the platform.” This post will explain more specifically those sources of value capture that will go into that calculation. If you’re into math, please visit pages 26 and 27 of the whitepaper. There we provide all of the calculations that will go into our dynamic inflation model.
For more discussion about how we intend to use FNX inflation to bootstrap network effects, please take a gander at this post. While inflation of the token affects the supply side of the token economy, this post discusses the demand side and how usage of the ecosystem will get driven back into the FNX economy. Putting both the supply side and demand side together gives a better picture of how value capture will work in FinNexus.
The Variable Issuance Mechanism
The FNX token supply reserves 15% of its total supply, or 75 million FNX tokens, to fund the variable issuance mechanism. The most important component of our “fee scale” formulas is the “average volume of fees,” so let’s take a look at what those fees include. In general, the mechanism which will govern this 15% of our token supply, which we call our Variable Issuance token bucket, looks like the graphic below.
First, 25% of all fees collected will accrue to a “Buffer Fund” that serves as insurance “to compensate user losses when an uncontrollable factor causes FinNexus users to lose their assets.” This kind of fund exists all over the cryptoverse, most notably with Binance’s SAFU Fund and the BitMEX Insurance Fund. Given the recent DeFi exploits of bZx, dForce, and others, we feel it is an absolute necessity to maintain as a service to our users.
Second, the other 75% of those fees collected will be reallocated to active participants on the FinNexus platform. Initially, they will receive a pro-rata portion of the FNX inflation pool, according to the “fee scale” formula included in our whitepaper. In the long run, because FinNexus is a cross-chain DeFi crypto supermarket and the resulting fees earned are likely to be denominated in a variety of assets, the combined buying power of those fee-earning assets could be used to buy FNX tokens directly off exchanges before redistribution. We may explore the use of a burn mechanism to distribute value at a later date, but we feel it is important in the early stages of a token economy to focus on distributing the token widely to encourage ecosystem participation and bootstrap network effects.
The Protocol Fees Mechanism
The fees earned by our various products and protocols are only limited by how fast our developers can create them. Each time a user interacts with any of our smart contracts, micro-fees will be generated. Those fees earned will be included in the “fee scale” formula. For example, in the current beta version of our Wandora Box price prediction game, 10% of all contributions are donated to a lottery pool that is then, once every 3 days, redistributed equally to all participants in the game. At some point, a significant portion of those fees will be directed to the FNX “fee scale” pool. While we will retain the game element of this platform and still have winners that earn tokens from the pool, FNX token holders would have access to the remainder. The Wandora Box is a small part of our expected sources of return. It is a fun game where we can experiment and test new ideas, like for instance our integration with Band Protocol. What we learn there we can expand to higher stakes later.
Another more significant source of return for the “fee scale” pool will be fees charged to enterprises for tokenizing their real world asset portfolios. Those companies who float such assets, especially since they would hopefully be repeat customers, may prefer to stake FNX tokens to earn fee discounts for accessing the FinNexus Assets Distribution Protocol (ADP) cluster to mint those tokens. Although FinNexus would earn less in direct fees with this option, if enterprise customers choose to stake FNX, it would lead to a greater demand for the FNX token. On the buy-side, we’ll also experiment with purchase discounts for FNX token holders, providing an additional source of demand for FNX tokens. In combination, these implementations serve as just the first few value capture enhancements we have planned for the FNX token economy at launch. And that’s just in relation to our tokenized asset products. We have a long list of products and protocols that we plan to develop. As usual, though, those mechanisms will evolve once in practice.
Perhaps the source of return that we are most excited about at the moment are those fees derived from our upcoming decentralized bitcoin derivatives product. Although I call it a bitcoin derivatives product, it’s actually even more interesting than that. You’ll be able to mint tradable options tokens on a variety of cross-chain assets. Right now, we are planning on making available BTC, ETH, XRP and WAN as assets that you would be able to buy and sell both puts and calls for. We expect a beta version of this platform to go live by the beginning of Q3. Each time an option token is minted, a fee of 0.3%-1% (currently still under design) will be assessed and the proceeds will be diverted into an address tied to the “fee scale” pool. These options minting fees will also be a source of value capture for the FNX token. We are also investigating a system where FNX stakers could subsidize, or sponsor, traders that would like to mint options but lack the collateral to do so. The stakers would earn a portion of the fees from the premiums written and the Buffer Fund could help defray some of the risk.
Once minted, these options tokens will be freely tradable, most likely via WRDEX. They may not even solely exist on Wanchain. We are currently exploring tokenization and liquidity options for these products on both Ethereum and XRP Ledger as well. Wherever the tokens live, we are committed to supporting their liquidity. After all, the most attractive part of these derivatives in traditional finance is their transaction on the secondary market. Any spread revenue that our liquidity provision for these products earns would also accrue to the “fee scale” model, providing another powerful benefit for FNX token holders.
A Note on DeFi Monetary System Design
Our tokenomic design here is based on our belief in “niche and nimble protocol clusters,” which I outlined previously in my post “The Crypto Revolution Will Be Delivered Via Protocol.” Basically, it’s our own variation on the “FAT protocol” theory first touted by Joel Monegro. In the coming blockchain-enhanced world of Web 3.0, we don’t believe that we will have a repeat of Web 2.0, where all value was captured by those platforms that dominated the application (or HTTP) layer of the internet. Facebook, Amazon, Alphabet, Netflix, Baidu, Alibaba, and Tencent represent about $3 to $4 trillion of value in today’s markets. All of their products live at that top application layer.
FinNexus is building our platform under the assumption that “more lucrative protocol investments are probably likely to live up the stack and not at the base.” In other words, we don’t need to build the base infrastructure layer. That’s what we have Wanchain, Ethereum and XRP Ledger for! We think we’ll be able to induce more value capture to the FNX token if we knit together all those different base layers (and legacy systems, too) via the middleware layer. So, yes, we will have our own user interface and operate our own platform that interacts with our own and other protocols. But that will serve more as a proof of concept. With a protocol like Uniswap, you can use its native UI at uniswap.exchange or you can embed the protocol on any frontend you want. Either way, you are utilizing the protocol and value accrues to the utility token that enables that protocol to function. In Uniswap’s case that utility token is ETH, but for FinNexus protocols of course that will be the FNX token.
At its base, token economics is fairly simple. Use begets value. From the beginning of a project, the token supply is there to incentivize use. As use of the protocol(s) increases, theoretically, token incentives can be removed, leaving only the earned fees as incentive. In fact, this mechanism works much the same as the bitcoin protocol, which in the early years incentivized miners to participate in the network (by contributing hash power) in exchange for block rewards of 50 BTC per block. As we are reminded this week, those block rewards diminish over time. Soon bitcoin block rewards will only be 6.25 BTC per block. This number halves every 4 years. In the end, by approximately 2140, there will be no more BTC block rewards. Only the bitcoin protocol fees will remain.
Don’t worry though! With FNX, you won’t have to wait 120 years like with bitcoin. It took only 18 months for Uniswap to increase its asset base from 0 ETH to 150,000 ETH. DeFi protocols have recently shown a remarkable capacity to scale. Our plan for FinNexus is to create a Crypto Supermarket of products and protocols, the fees on which will all accrue to the FNX token economy.
The Governance Mechanism
Having reviewed FinNexus’ plans for various sources of return, it is time to discuss other reasons for demand for the FNX token. While staking FNX on our platform will certainly earn you fee discounts and other participation rewards, rights are also granted to FNX token holders in the governance process. As our ecosystem increases in complexity, FNX token holders can actively participate in making important decisions such as putting forth FinNexus Improvement Proposals (FIP), voting on allocating inflation pool rewards, setting interest rates on various products, deciding what products can be made available, and electing FinNexus Foundation committee members.
Another source of demand for the FNX token is potential participation in liquidation auctions. As collateral inevitably gets forfeited due to wrong way bets on price movements of the underlying tokens, we will periodically hold auctions for that collateral. Although we don’t expect to hold these auctions very often, if you want to participate in these liquidation events you must actively stake your FNX tokens.
As we move forward with the FinNexus project, we intend to seek out other governance use cases that create long-term sinks for FNX tokens, gradually implementing a variety of means to improve both the governance and token economics of the ecosystem to optimize protocol usage.
The Collateral Mechanism
I’ve saved the best use case for last. Eventually, once we’ve built out some of the products and protocols we are currently working on and worked out the inevitable kinks that arise from starting your own tokenized micro-economy, the next step is to develop mechanisms for the FNX token to become not just a utility token used to pay fees, and not just a protocol token built to allow access to innovative protocols, but also a collateral token. Other crypto-economies like Synthetix, Ren and Thorchain have used this mechanism to create positive feedback loops between use and/or expectation of use and their token price.
An early form of this model for FNX will be investigated with the rollout of the options minting protocol, where FNX stakers could, in effect, sponsor undercollateralized minting by using their FNX tokens to make up the gap between the collateral requirement threshold and the collateral contributed by the proposed options minter. But FinNexus, in the long run, envisions a much more complex collateral mechanism than just that related to options minting. We hope to foster a cross-chain means to allow anyone to supply the requisite collateral to mint their own synthetic token.
Initially, we would roll this capability out step by step. First, only a curated set of investors could even supply collateral. Then, only a restricted set of investors could propose bespoke tokens. But if those initial experiments are successful, we would hope to expand those capabilities to all FNX token holders. That’s probably about 12 to 18 months out from today. Certainly, however, fees to mint and manage collateralized synthetic assets would represent a significant fee stream for FNX token holders in the long run.
Conclusion
The FinNexus vision is all about creating a sustainable circular economy using innovative product and protocol development and properly aligning tokenomic incentives. Over time, we expect to accumulate a collection of use cases for the FNX token, only some of which are included in this post. When taken together as a whole, all of these initiatives are intended to drive value into the FNX token economy.
The FNX token will be available for purchase on Bitrue starting May 11 at UTC 9:00 am. More info can be found here and here.
About FinNexus
FinNexus is building an open finance protocol to power hybrid marketplaces that trade both decentralized and traditional financial products. The FNX token will live on the Wanchain blockchain to take advantage of the most robust cross-chain capabilities currently available in the industry. The first products FinNexus will release are innovative tokenized assets with value based on real world cash flows that live on Wanchain and XRP Ledger. The second product to be released is a fully decentralized bitcoin options model.
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