Update to ZRG Tokenomics: No 2nd Token, ZRG Value Capture & Zircon DAO Funds
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Update to ZRG Tokenomics: No 2nd Token, ZRG Value Capture & Zircon DAO Funds
Plans for ZRN are scrapped, while we propose the start of the Zircon DAO structure.
Tokenomics play an important role in driving the success of a DAO and decentralized protocol. We’ve held back from defining them too strictly for ZRG so far, as we expected to do most of the work for the future ZRN token.
However, the situation has changed. With the market as it is right now, it is difficult to drive value to one token — let alone two. Hence, we’ve decided to put plans for ZRN on an indefinite hold.
Our sole focus for the foreseeable future will be Zircon Gamma and its success. The FTX collapse and associated drop in ZRG value allowed Zircon Labs to acquire a significant position in the token on the open market (approximately 10% of total supply, or 40% of circulating), despite starting with a fair launch and just 25 million ZRG.
This allows us enough flexibility to operate and reward our contributors fairly, at least for the foreseeable future. Thanks to the Hybrid Burn method on Zircon pools (also known as Burn & Swap), Zircon Labs will likely never need to dump the price to realize its ZRG for cash (The Pylon is a very powerful tool for treasury management!)
All of this means that we can focus all our attention on Zircon Gamma and ZRG without missing out on its growth.
Here’s a TL;DR of our proposed tokenomics model for ZRG:
The purpose of ZRG is to incentivize and align the users' behavior with the protocol. “Staking” ZRG (primarily in Pylon pools) will unlock functionality that could otherwise be abused by disinterested parties.
A Buyback and Burn model will ensure the perfect balance between spending for growth and sharing proceeds with the DAO community.
Until August 2024, the model will be “Buyback and Hold”, dividing proceeds equally between the Zircon DAO treasury and Zircon Labs.
The unclaimed portions of the airdrop will be the seed funding for the DAO.
Read below to find out more:
Defining the value capture mechanism
So far, ZRG was a “farm token” with an unclear model, and it’s time to change that.
We see the role of ZRG as the great incentive aligner. Much like with Proof of Stake, users and maintainers of the protocol must prove they have a stake in the future of the system to earn its benefits and share its risks.
It’s very important for this system that the set of users and token holders never diverge too much from one another. In other words if a ZRG holder stops contributing to the platform in some way, their ownership share should be gradually reduced in favor of new entrants.
This is how the system can remain relevant and competitive in the long run. Stale ownership structures are often the underlying cause of social tensions, predatory and/or failed corporations, or even some revolutions.
“Democratic” token distribution models are good to “reset” the DAO ownership structures, but without proper safeguards they’ll become just like the corporations they’re trying to replace. We’ve seen this play out first-hand with experiments like SushiSwap.
We also have to remember the largest utility of DAO tokens so far: as growth mechanisms. Token inflation is used to pay for liquidity mining rewards, developer salaries and other expenses that are hopefully useful to grow the protocol. The cost is shouldered by token holders.
In moderation, this is an extremely powerful approach and provides a way for “fresh blood” to join the protocol. What it’s missing is the “reward” for tokenholders: sharing platform revenue.
Here, the simplest model is something similar to Ethereum’s EIP-1559. Part of the protocol’s fees (in ETH’s case, gas fees) are burned. At the same time there is a constant emission needed to pay for the ETH security budget. The calculation for token holders is simple: if the protocol burns more ETH than is emitted through staking, the token is deflationary.
For ZRG, we aim to implement a similar model: a constant staking component, balanced by a buyback and burn. We feel that there’s no point in trying to invent fancy new models, as the market clearly demonstrated that it doesn’t care about tokenomics. UNI is the most valuable DeFi token out there, and yet it’s the least useful.
Details on ZRG staking
The ZRG staking part will be key for incentive alignment between users and the protocol (which is not too different from the purpose of staking in blockchains, in general).
Incentive alignment in Zircon helps unlock more functionality and relax some of the system’s protections against abuse.
For example, a common problem plaguing DEXs and liquidity mining is mercenary liquidity: people who farm, dump, and never look back. Mercenaries have their place, but not in a bear market. Loyal LPs are far more valuable for a protocol now, even if it may result in lower TVL records.
This problem can be solved by introducing restrictions on mercenary behavior. There are many ways to do it (such as delays for bonding/unbonding, vesting of rewards etc.), but for us the most logical approach is to make sure that most LPs have some ZRG staked (proportionally to their current reward potential).
We might combine approaches: you get bonding and vesting delays by default, while staking ZRG unlocks the usual, no limit farming.
In the future we expect to introduce other benefits of staking as well, including those targeted at traders and not LPs.
One final note. A lot of people ask if/when we will add “ZRG Staking”, which refers to an independent staking feature similar to PancakeSwap’s. The answer is never. We believe staking should always have an economic utility.
By staking in a blockchain network, you are committing your capital to slashing risk in order to secure the network. With Zircon, we believe it should be the same: staking should carry at least some level of utility to the protocol, which invariably means risk for the staker.
The best example of this is supplying liquidity to ZRG pools, either as Float or as Stable.
This requirement accomplishes multiple benefits:
Stakers can choose their risk profile (reducing it by choosing Stable staking).
Stakers offer real economic value by providing liquidity, and take on all of the risks associated with Zircon.
Lending and futures markets are more efficient for ZRG, as margin lending yield becomes a potentially valid alternative to staking yield.
Because of all this, staking ZRG is not just a value extraction of old holders from the new.
Token buyback
Currently, the Zircon Protocol earns through swap fees and the Pylon entry/exit fees (about 60% of the total is taken as revenue, while the remainder is used for the Stable IL compensation).
Soon we expect to release smart contracts that would automatically buy back ZRG from the market. But until we finish the distribution phase for ZRG, it makes little sense to burn the rewards.
Instead, until August 2024, we propose that the ZRG bought should be divided equally between the Zircon DAO treasury and Zircon Labs.
After that, all rewards should go toward burning ZRG, and everyone will be able to benefit from the reduction in supply.
Token distribution & the Zircon DAO
Finally, we need to recap the token distribution so far and in the future.
We’ve made a mistake in our previous post on tokenomics: the sum of the ZRG distributions is less than 1 billion (the max supply). Hence it makes sense to bump up the liquidity mining distribution to 600 million ZRG, while the DAO reserve should make up the rest to reach 1 billion ZRG total supply (so approximately 300 million).
Hence the new distribution would be:
50 million ZRG (5%) as initial Zircon Labs bootstrap
600 million ZRG (60%) as liquidity mining distribution
64,146,364 ZRG (6.4%) as initial airdrop supply
285,853,636 ZRG (28.5%) as supply devoted to the DAO
On the liquidity mining front, the max distribution formula follows a Bitcoin-like model, with regular “halvings”. So far, 238,125,000 ZRG has been minted for farming rewards (not all deployed), and we are well behind the theoretical schedule so far.
The exact formula for the liquidity mining circulating supply is:
Min(maxLiquidityMining, baseMonthlyAmount * monthsCount * (strength/(1+floor((monthsCount)/halving))))
Where:
maxLiquidityMining is the max emission, 600 million ZRG
baseMonthlyAmount is defined by the distribution length (24 months) and equals 25,000,000
monthsCount is the number of months from launch, starting from 1.
Strength is an arbitrary parameter, equal to 3
Halving is the frequency of halvings, also set to 3.
In practice, the first three months would have 75 million ZRG minted, the three months after 37.5 million and so on. According to this schedule, there should be a maximum of 300 million ZRG minted for liquidity mining rewards so far.
The formula should be treated as a maximum, not necessarily as the exact amount to be minted every month. Our farming system is managed manually, which gives us the flexibility of changing rewards frequently, or cutting them completely from certain pools.
We have also yet to mint 5 months worth of the Bootstrap share vesting, worth 13,888,000 ZRG.
After the distribution phase is over, we propose establishing a “tail emission” of 30 million ZRG per year. This guarantees that Zircon will always accept new stakers and let users become token holders without having to buy from existing holders.
The airdrop
The initial ZRG airdrop suffered from a misconfiguration, which essentially blocked both users and the team from retrieving it (until December). But given the results of the airdrop, this might have been a blessing in disguise.
The reason is that we at Zircon Labs were extremely disappointed with how the airdrop was actually used. Many people dumped it almost the second they got it (often at ridiculously low prices), many people “scammed it” in very creative ways (we had people with 10 whitelists to their name).
The rest never really converted to users, and the few who did weren’t enough to justify the trouble. While the portion devoted to on-chain DeFi users (40 million ZRG) was never properly available, we don’t think it will have enough conversion rate to justify the extra dumping potential.
We’ve completed the obligation towards beta feedback participants and whitelisted users manually (filtering obvious cases of WL fraud), and consider this matter to be settled.
The 2000 ZRG for participating in the testnet was likewise heavily botted and represents more hassle to track than it’s worth (currently $0.80).
So far we’ve fronted about 13 million ZRG between compensation for losses in the Pylon and the airdrop, and we aim to subtract this from the airdrop stash before giving it away.
Whatever is unclaimed from the airdrop (about 45 million ZRG) will become the initial seed funding for the Zircon DAO. Once it runs out, more funds can be minted from the 28.5% share.
The DAO will be able to choose what to do with these tokens, including giving them away as an airdrop. Nonetheless we would recommend to use these funds for community grants: development, meetups, marketing initiatives and anything else that would bolster Zircon.
The time has come to decentralize Zircon. This will be a gradual process, as we will need to set up forums, devops and a legal Foundation structure to support our decentralization efforts. We aim to finish the year with a fully functional and active community of decision makers who aren’t the core Zircon Labs team.
Will be you be there for this journey?