Part II: A New Era in Blockchain Economics
Introduction
In Saga Liquidity Integration Layer Part 1, we examined liquidity fragmentation plaguing the blockchain ecosystem today. Chains with different technology, stakeholders and economic incentives lead to composability erosion between applications and fragmented liquidity. Saga’s Liquidity Integration Layer (LIL) solves the liquidity fragmentation issue by introducing cross-chain composability into the Saga ecosystem. With the Liquidity Integration Layer, the Saga protocol controls both the block production and the liquidity rails. With this combination, Saga can adopt a powerful new liquidity-centric economic model never seen before in blockchain.
What is a Liquidity-Centric Economic Model
Most blockchain infrastructure depends on gas for protocol revenue and value accrual, forcing gas and transaction fees to be a necessary part of the user experience. However, a gas-based user experience leads to a poor user and developer experience. A gas-centric economic model stifles experimentation and innovation and curtails adoption. Saga’s liquidity-centric economic model opens the door to a new method of token accruals that solve for the problems introduced by gas.
A liquidity-centric economic model is conceptually simple and can be summarized in a single sentence: Saga generates protocol revenue by taking a cut of all liquidity and value flowing through the LIL.
Because Saga’s LIL automatically connects every chainlet and chains outside the Saga ecosystem together in a convenient product, the Saga protocol can essentially take a cut of all economic activity generated by all applications on Saga.
The potential protocol revenue and value accrual opportunity for Saga is many multiples larger using the liquidity-centric economic model vs. a gas-based toll economy. This enables the protocol to derive value exclusively from the liquidity layer instead of infrastructure costs (and gas). This is Saga’s liquidity-centric economic model. Let’s dive deeper.
The Downsides of a Gas-Centric Economy
Traditionally, blockchains utilize a gas-centric token economic system. To interact with applications on the blockchain, users must first acquire a native gas token and pay the validators (and their stakers) to include their transaction on the blockchain. A gas-centric token economic system leads to user experience problems that stifle growth and adoption.
First, a gas-centric token economic system forces users to acquire and hold sufficient gas balances prior to interacting with the network. This creates an adoption barrier where applications must train users to hold an arbitrary token not related to their application. This inconvenience is repeated on every chain that the application is deployed on.
Second, a gas-centric token economic system leads to unpredictable and expensive transaction costs due to market-driven rates. Market-driven gas prices create artificial barriers in the exact moment an application begins to gain traction. The network should promote and encourage popular new applications. Instead, gas-based economic systems increase costs and barriers to adoption.
Third, the gas fee is a net outflow from the users to the network at all times. In a typical product adoption journey, the point where mass adoption begins and when profitability is achieved is usually two different time periods. In the real world, platform costs related to early growth are often subsidized by the platform while monetization begins after the network effects are achieved. However, when the network realizes protocol revenue indiscriminately without considering the application’s adoption goals, it creates automatic barriers to early growth periods for applications deployed on the network. Significant usability and adoption issues emerge when a transaction with zero or low value costs the same as a million dollar transaction.
Large amounts of experimentation with new applications is paramount to network effects and mass adoption. Why did the memecoin experiment explode on Solana? Solana’s cheap transactions enable new builders and applications like pump.fun to flourish. However, this is only possible as long as the infrastructure can meet or exceed the demands for its blockspace. Solana is still a gas-based economic model, after all. When demand skyrockets, it is inevitable that Solana’s gas prices will also rise, leading to the same problems as other gas-based ecosystems.
By doing away with a gas-centric economic model, we can do much better. We can design a new economic model that can giga-charge experimentation as well as maximize protocol revenue in Saga.
Designing a Better Economic Model
Saga’s liquidity-centric economic model is designed from the ground up to enable exponential ecosystem growth. In the technology industry, successful platforms already utilize well-established playbooks that leverage network effects to grow the total size of the pie: successful projects lead to more new projects, which leads to more successful projects over time.
It all begins with the platform maximizing its reach by subsidizing and removing initial costs to new developers. This opens the door to huge amounts of experimentation. The platform supplies these developers with the best tools to succeed and make businesses of their own on top of the platform. Once these developers begin to earn money, the platform shares in the upside of the value built on top of the platform. These platform revenues are recirculated to bring in new developers into the ecosystem.
Saga’s liquidity-centric economic model maximizes the Saga ecosystem and value for the Saga protocol by utilizing the same playbook tested in the technology industry today:
- Maximize experimentation by making Saga free or very cheap to get started
- Maximize project success by supplying developers with the best tools to succeed, even without monetization potentials
- Maximize shared upside when projects do monetize
Maximizing Experimentation with Zero-Cost Infrastructure
The first phase of Saga’s new token economic model is intended to attract as much experimentation within Saga as possible. Counter to most blockchain ecosystems, Saga is designed to make infrastructure costs cheap or close to free. Saga’s token economic system is divided into the front end (user to application developer) and back end (application developer to Saga). A full description of this mechanism can be found in our token paper.
On the back end, the developer directly pays the validators for spinning up and maintaining the chainlet. These chainlet fees are designed to be commoditized similar to an AWS instance.
On the front end, Saga does not charge any gas fees to the end user. Unlike other gas-centric token economic systems, all transaction fees from the users can be denominated in any token and are 100% returned back to the developer. This allows the developer to offer a completely costless blockchain experience for their users using recycled gas tokens.
In the early stages of product development, experimentation is key. Access to blockchain infrastructure that is affordable and easily accessible is vital to early-stage projects. Saga’s protocol revenue can be used to help reduce (and potentially remove) chainlet costs for new projects. This flow creates a healthy dynamic where profitable projects are subsidizing infrastructure costs for new projects. Lowering the barriers to entry leads to more building and experimentation, which leads to more successful projects that eventually subsidize costs to future new developers.
Unlike other gas-based blockchain ecosystems that demand new applications to generate revenue immediately, Saga’s token economic design creates an environment where applications are not pressured to generate protocol revenue from the very beginning. The developer can focus on making their application the best application for their users or trying several different iterations on the way to product-market fit.
By incentivizing experimentation, Saga will become the hub for new and wild app ideas in the web3 ecosystem. If pump.fun on Solana was a thrilling ride, imagine the fast pace of innovation in a system with zero-cost infrastructure.
Maximizing Project Success
From the pool of wild and experimental applications, a handful of projects will hit product-market fit and transform into a revenue-generating application. The next phase of Saga’s economic model is intended to convert as many of the experiments to successful projects as possible. The Saga protocol uses its protocol revenue derived from the LIL to help bootstrap new applications and ensure the projects are as successful as possible through all stages of the project lifecycle.
In the early stages, liquidity bootstrapping is vital for successful projects. The LIL can offer liquidity matching and incentive programs where the protocol itself bootstraps and matches any liquidity procured by the project and community. For example, imagine a new up and coming token on Saga called $PUMP. Theoretically, an up-and-coming application that needs liquidity bootstrapping should also see $PUMP volume increase across the LIL as users across the ecosystem move the tokens to and from DEXes. These LIL cross-chain transactions will slowly accumulate $PUMP tokens as well as $SAGA and other stablecoins from the LIL rakes. These balances can be used to seed and match liquidity in the ecosystem.
A healthy ecosystem is one with healthy liquidity. By dedicating protocol revenue to protocol-owned liquidity, the Saga protocol can participate in yield-farming opportunities and grow alongside the ecosystem.
The Saga protocol also helps in user acquisition. Saga has been executing and improving on the Power Level Over 9000 airdrop campaigns to cross-seed communities across the Saga ecosystem, ensuring the growth of the ecosystem as a whole. The more successful applications there are on Saga, the more economic activity there is in the ecosystem and ultimately more revenue for the Saga protocol.
Over the lifecycle of projects deployed on Saga, the protocol can deploy resources in other destinations such as NFT marketplaces, lending markets, stablecoins, and other DeFi primitives, depending on the needs of the projects and ecosystems. Protocol participation in the ecosystem not only builds successful applications, but also enables successful DeFi projects to emerge in the ecosystem that draw from the liquidity locked in LIL. With Saga’s liquidity-centric economic model, Saga is not only able to grow with the revenue of these DeFi platforms but also introduce new ways to lock and utilize $SAGA tokens in the ecosystem.
By lending support to applications when they need it the most, Saga will become the hub for the most successful projects in the web3 ecosystem.
Maximizing Shared Upside
The final phase of Saga’s economic model is where Saga realizes protocol revenue. Accruing value by charging gas is not a value-maximizing strategy. Protocols should optimize for application and ecosystem success, then share in the upside of each application’s success. This is beneficial because shared upside in successful projects is potentially many orders of magnitude more valuable than a small fee from many unsuccessful projects.
On Saga, an application is able to get started on a chainlet for cheap. However, as soon as any tokens are bridged across the LIL, Saga takes a small cut of all activity flowing through the LIL. An experimental new project gets access to the Saga LIL essentially for free because a small cut of their experimental new token is worth nothing. The LIL continues to accrue balances of all experimental tokens flowing through the LIL, some of which are expected to become incredibly valuable.
At this point, Saga protocol can determine a plan for the (now valuable) tokens. As discussed in the previous sections, accrued protocol revenue is recirculated in the Saga ecosystem to maximize experimentation and project success. There’s a myriad of additional combinations and policies the Saga protocol can execute with the revenue balances:
- Retain as protocol treasury
- Deploy to accrue further revenue on the held assets through DEX, lending, etc.
- Sell to fund various initiatives in the Saga ecosystem
- Buy and burn, reducing the total supply of Saga tokens
- Distribute as airdrops to continue to grow the project and Saga ecosystem
All these policies drive greater network effects on Saga. Successful projects lead to more new projects, which lead to more successful projects over time. By accruing value when the applications are successful, Saga will become the hub for the greatest value accrual in the web3 ecosystem.
Readying the Crypto Revenue Model for Mass Adoption
How do we know if this economic model will be successful? We know because this has already been proven in the real world. Apple’s iPhone App Store is a perfect implementation of a successful economic model that follows the same design principles. The App Store is a vibrant ecosystem with millions of applications. The App Store has developed a new class of revenue-generating mobile apps, all while raking in billions of dollars for Apple. How did Apple do this?
First, Apple lowers barriers to entry for developers to attract a massive developer base. Application developers can gain access to the full iPhone ecosystem without paying practically anything. This promotes experimentation since anyone can develop new applications, which leads to more competition, driving better applications to bubble up in the App Store. Today’s experimental apps are tomorrow’s Candycrush.
Second, Apple supplies all developers with the tools to build the best applications, even without monetization potential. Apple does not force developers to monetize their products. In fact, applications that remain free forever are encouraged in the App Store and often are the most popular applications.
Finally, once applications are ready to monetize, Apple shares in the upside of the project. Apple gets a cut of every dollar generated on the Apple platform. There is a natural network effect where experimentation builds better apps, which brings in more revenue for Apple in the long-run.
This is the same network effect Saga’s new economic model enables. Saga introduces a successful and highly profitable economic system that has been proven to work in the real world into the blockchain ecosystem.
Conclusion
Historically speaking, an ecosystem’s revenue follows the Pareto principle: approximately 20% of the activity generates 80% of the value. The protocol’s economic system can use gas to squeeze the less successful projects, stifling innovation and experimentation. Or the protocol can adopt a better liquidity-centric economic system that makes blockchains more accessible, maximizes experimentation and application adoption and eventually shares upside with the most successful projects. With Saga, the protocol no longer fights against project adoption. Whether it is gaming, entertainment, DeFi, social or other use cases, Saga is the best infrastructure for developers.
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