Dec 10, 2021
Spool: Governance Token Value Generation
As a SPOOL Token Holder it is important to understand how the Spool Ecosystem accrues value and funnels this value back to its investors. This article serves to lay out how the Spool Ecosystem collects revenue and distributes it according to the current DAO-voted structure.
· Generating Value as an Ecosystem
∘ Direct value creation via performance fees
∘ Indirect value creation via trading fees
· How does the SPOOL token accrue value?
∘ Rationale
∘ How does value accrual work?
· Spool Token EconomicsGenerating Value as an Ecosystem
Direct value creation via performance fees
Spool generates value in the form of performance fees, of which 100% are distributed back to SPOOL Token Holders via the Spool DAO treasury they govern.
As voted by the SpoolDAO, Spool collects a 10% performance fee on all yield generated by Value routed through the ecosystem. Revenue is driven by two main factors: Total Value Routed (TVR) and Global Yield Generated.
The amount of TVR is primarily driven by the potential yield and corresponding risk. More TVR often means lower yield and lower risk, whereas on the other hand lower TVR is generally correlated to more yield and higher risk. This relationship between yield and risk has a direct impact on APY itself too since an increase in TVR more often than not decreases the APY for participants.
In contrast, Spool supporting more yield generating strategies leads to Spool being able to absorb more TVR at the same relative yield.
More strategies= More available yield = More TVR
The number of supported Strategies in the Spool Ecosystem may be considered as a third metric that drives the other two, Total Value Routed and Global Yield Generated.
This third metric (the number of Supported Strategies) is largely qualitative and is approached via the “wisdom of the crowd”. The Spool DAO routinely curates new in-demand strategies which requires being in touch with the market and capturing new opportunities as they emerge, while also paying close attention to avoid less desirable strategies.
When a strategy is voted in, it has to be implemented before it is available for inclusion in future Spools. A new strategy brings additional yield to the Spool Ecosystem and represents a new tool in the Spool toolbox accessible to creators. It increases potential TVR as people who were previously accessing that strategy manually can now include it in their Spool, migrating over their manually managed liquidity into a Spool with exposure to that strategy.
Adding a new strategy creates a scenario where either TVR rises or global Spool APY increases as Spools become more diversified and there is less APY-suppressing value routed to individual strategies. Both of these outcomes result in more protocol generated revenue and therefore more value created for Spool Holders.
Indirect value creation via trading fees
A useful token attracts interest, which in turn translates to trading volume. In DeFi, trading volume generates value for token holders as they may capture trading fees by acting as liquidity providers.
How does the SPOOL token accrue value?
Rationale
Before delving into the value accrual of the SPOOL token, let’s take a very brief look at the status quo. In many other cases, direct and indirect value generation are split into two separate “pools”:
- Single-sided token staking to capture direct value accrued by the platform
- A “Pool 2” that offers token rewards to incentivize liquidity provisioning
In this case, two separate groups of people are attracted:
1. Single Stakers, who generally are “in it for the project” — This shows they believe in the growth of the platform as they are fully exposed to the governance token at spot price.
2. Liquidity Providers, who are taking a calculated approach in betting on whether the consistent selling of short-term rewards are offsetting any impermanent loss that volatility may expose them to. Importantly, the long term incentive of accruing trading fees takes a back seat here.
In this model, it could be argued that these two groups oppose each other — Group 1 is taking a “buy-and-hold” approach which will suffer from Group 2’s short term focused approach that is fuelled by consistent selling of the token.
More on this issue in our Token Economics Medium article.
Now that we have established the difference in general value accrual for these two groups, let’s now take a look at SPOOL’s value accrual.
There is no classic “Pool 2”. Instead of separating and creating two groups, all value generated by the ecosystem is accrued with single stakers.
SPOOL stakers make up the Spool DAO and therefore hold decision making power over the addition of strategies. As previously mentioned, this function of the DAO is a major driver behind any value creation within Spool (including the indirect value created). Meaning they should be able to capture both direct and indirect value with the same strategy, instead of being forced to choose between them.
How does value accrual work?
SPOOL Token Holders have only one choice in order to participate in collecting protocol revenue: Single-stake the token in governance.
Stakers are entitled to performance fees. These fees are distributed to them in two ways:
- 20% of protocol fees are reinvested into the DAO Treasury controlled by stakers
- 80% of protocol fees are distributed to stakers directly in the form of SPOOL/DAI LP
Because protocol revenue is directly funnelled to the liquidity pools, Spool establishes a baseline of liquidity as users will never claim and unwrap LP at the same time. In other words: A significant portion of fees generated by Spool will always provide liquidity and capture trading fees for stakers.
Even more importantly: The entirety of SPOOL liquidity will be owned by stakers who are already committed to Spool’s long term success by being stakers and participants of the DAO.
Additionally, Spool does not pay for liquidity via a “Pool 2”, which means stakers will not be diluted. This is a core element of Spool’s “+EV Token Economics”.
Spool Token Economics
Spool DAO (made up of SPOOL stakers) receives the entirety of the protocol fees, consisting of the 10% performance fee levied on yield generated by total TVR. In order to be in this position, the DAO is collectively exposed to the SPOOL token. Therefore, the DAO has a collective interest in removing any negative influences on the SPOOL token to protect its interests. In an ideal scenario, every SPOOL holder would also be a SPOOL staker.
To make this happen, SPOOL staking needs to be a strategy that:
1. Captures the entire value generated by Spool, and;
2. Yields positive future expected value (+EV)
Point 1 was covered before, so let’s dive into point 2: +EV Token Economics.
Expected value is the anticipated value of something in the future. This means we need to look at token value without taking speculation into account since we assume that in the long run, the token price will be equal to its fair value. This leaves us with a situation where expected value is positive as long as the value captured by staking exceeds dilution from newly emitted tokens.
In the long term, SPOOL emissions should be capped by fee generation from Stablecoin stakers, ensuring that SPOOL stakers do not get net-diluted by new SPOOL emissions. In other words, SPOOL stakers need to be able to at least maintain their relative ownership of circulating supply with the yield they are generating.
In conclusion, all participants in the Spool ecosystem would be rewarded without negatively impacting the Spool token itself in exchange for their participation in the DAO.
There don’t need to be losers.
A positive sum game is possible.
Yield for the world. Fuel for DeFi.
