FLX Tokenomics Revamp

Overview

This post is meant to give an overview for a new FLX tokenomics design as well as implications for (un)governance.

Abstract

The new tokenomics design centers around two main changes:

  • Removal of buyback and burn and the addition of vested escrowed FLX (veFLX), a design inspired by Curve with the veCRV token
  • Transition from fixed supply to long term (terminal) and low inflation that goes to the FLX/ETH staking pool

This new design is meant to encourage long term alignment with the RAI protocol while also allowing newcomers to get a stake in RAI.

veFLX

The transition from buyback and burn to veFLX is fairly straightforward. Instead of auctioning surplus RAI (stability fees) from the protocol as it is done today, excess surplus would be sent to veFLX holders.

Similar to veCRV, veFLX can be obtained by locking FLX in a smart contract anywhere between 1 week and 4 years. The longer someone locks for, the more veFLX they receive. Besides receiving stability fees, veFLX will also be used to vote on updating any remaining RAI parameters post ungovernance (e.g ETH/RAI oracles) as well as vote on spending the DAO treasury. Note that veFLX will be non transferable.

One limitation of the veFLX/veCRV design is that it does not allow delegation. While this may not be a complete deal-breaker, it would be ideal to find a solution for delegation by the time the veFLX contract is in production.

Transition from Fixed Supply to Terminal Inflation

Currently, the total FLX supply sits at 1M and the RAI protocol is authorized to mint new tokens in case of a debt auction.

This proposal would add terminal inflation for FLX as well as double the current incentive runaway for RAI. Terminal inflation will be directed toward the FLX/ETH staking pool. Before we discuss the inflation schedule, let’s look at current FLX distribution as well as distribution targets for the next 6-10 months:

  • Daily distribution (starting 27th of October 2021): 424 FLX
  • Target daily distribution by end of August 2022 (around the 2nd phase of ungovernance): 320 FLX or less. This would translate to 9.6K FLX per month or less (assuming the month has 30 days)

Besides the daily distribution, the community treasury should ideally have 4-6% of the current total supply (40-60K FLX) after ungovernance so it can allocate grants for community contributors, continue research around RAI like assets and operate RAI in the next years.

Currently, the treasury has approximately 221.5K FLX. With the upcoming daily distribution (424 FLX) and taking into account the 4-6% set aside for community votes, there’s enough runaway for 380 to 428 days (between 12.5 - 14 months from this point onward). Reducing the reward rate to maximum 320 FLX will of course make runaway last longer.

In terms of inflation schedule, the proposal is the following:

  • Increase incentive runaway for RAI from 12.5-14 months (just enough to finalize ungovernance and have the DAO operate for 3-4 months) to 25-28 months. This would allow the DAO to operate for at least 15 months post ungovernance without worrying about RAI incentives. Concretely, at 320 FLX per day, this translates to 121,600 - 136,000 newly minted FLX. The community could have the option to decrease this amount of newly minted FLX. Let’s call this amount (A).
  • Add a 2.5% annual inflation rate starting after amount (A) is fully minted. This inflation rate cannot be changed. Inflation would only go to the FLX/ETH staking pool that is protecting the RAI protocol

The inflation schedule and the option to decrease amount (A) would be set in an immutable smart contract. This contract would be authorized in the FLX ERC20 contract to mint new tokens. Post ungovernance, the arbitrary FLX mint authorization will be removed and only the inflation contract and the RAI debt auction contract will be allowed to mint new tokens.

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Overall, this seems like a very sensible set of proposals.

Here’s how I understand the future yield opportunities for holding FLX. Either I can

  1. stake flx/eth to receive flx (in perpetuity, thanks to terminal emissions) or
  2. lock flx for veflx and receive stability fees from the protocol. What would these fees look like? Would they accumulate in a vault and I would claim them at some interval?

In a rational market, I assume we’d also expect the price of flx to increase in proportion to stability fees (as people buy for veflx yield), rather than as a direct mechanism of buy/burn?

One of the major components of veCRV tokenomics is the fact that holding more veCRV acts as a multiplier on CRV emissions from LP positions. I’ve noticed that this dynamic is omitted. Do you have thoughts on why this wasn’t something you wanted to introduce? (To be clear I’m not advocating for this myself, I understand this model mostly serves to further concentrate tokens into fewer hands, tho it also serves to disincentivize dumping tokens.)

VeCRV holders also receive bribes from other protocols who want to influence CRV emissions in the future. Given the ungovernance approach, I assume this also wouldn’t be an expected behavior / source of value?

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Fees will be distributed on a weekly basis like veCRV is set up.

Vote incentives don’t make sense indeed and would either way not go far with ungovernance.

LP boosting also doesn’t really make sense for FLX. CRV distro is extremely long, FLX’s should be way shorter and focus less on ponzinomics and more on RAI utility.

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Why would veFLX be non transferable? It would be cool to be able to trade it like savings bonds. I do like the idea of a non transferable voting token though. (Except when I want to switch wallets. . .)

Also, how are stability fees collected exactly? Would this be in RAI left over when debt is re-payed, or Eth reclaimed on liquidation? Also, is it possible to capture stability fees outside of these events?

I’m also still a little confused on the stability fee + FLX inflation revenue streams. Stability fees go to veFLX stakers, while FLX inflation goes to ETH/FLX stakers. This seems a little redundant to me, why not combine them into one? Also where do treasury funds come from? Does one of these revenue streams contribute to that?

I’m also not sure about the immutable 2.5% inflation rate. That feels like the kind of thing you would want to be able to change.

All that said though I’m pretty excited to see, and participate in, the future of this protocol!

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As I veCRV holder myself I do understand their model, but in this case I don’t fully understand veFLX and how attractive the stability fees will be for locking FLX tokens.

Also not sure how would those compete with the FLX inflation proposed to be distributed to liquidity providers that are protecting the protocol.

Isn’t it possible that people would just find more attractive to participate in veFLX and remove their liquidity, because with veFLX they don’t carry both IL and dilution risks?

What’s wrong with the buybacks and how does veFLX means better tokenomics? Maybe I am not seeing something at first glance. Is there a model that may help to understand it better?

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You have to make the token non transferable so people actually have a stake and don’t exit the tokenized version.

Stability fees will be collected like they were prior to the negative fee. Fees apply to all currently opened positions by increasing their debt. Liquidations can also bring fees but that’s pretty much it, kinda how Maker and DAI work.

We can’t really combine veFLX with FLX/ETH, the mechanisms are not compatible. Slashing from FLX/ETH staking messes with the veFLX lockup accounting. Also, very few or even no participants will stake for years at once which goes against the idea of having a long lockup of maximum 4 years.

Changing inflation kind of goes against the ungovernance ethos and it also makes monetary policy unpredictable in the long run. Not sure people would like it.

Also thank you for all the questions and feedback!

If people unstake from FLX/ETH the APY there would just go higher which makes others come in. Personally expect the market to find a balance like it does now.

Buybacks are silly and incompatible with terminal inflation which is healthy for a protocol and makes participants work for RAI. Buyback and terminal inflation is like making two forces fight against each other.

You have to make the token non transferable so people actually have a stake and don’t exit the tokenized version.

Shouldn’t this just be done by incentives? I mean, it shouldn’t make a difference if the token is transferable or not if there’s enough incentive to keep the position intact.If there’s not and it’s non transferable people just won’t stake.

Stability fees will be collected like they were prior to the negative fee. Fees apply to all currently opened positions by increasing their debt. Liquidations can also bring fees but that’s pretty much it, kinda how Maker and DAI work.

I still don’t understand this. Fees being applied to increasing debt is just an item on a balance sheet no? Those fees aren’t actually collect as tokens until the safe is closed right? Before that it’s just an IOU?

Slashing from FLX/ETH staking messes with the veFLX lockup accounting.

Ah, got it. In that case thought I’m not sure I understand the value of veFLX. What is it doing for the platform? Couldn’t you just give the stability fees to FLX/ETH stakers and have that be the voting token?

Changing inflation kind of goes against the ungovernance ethos and it also makes monetary policy unpredictable in the long run. Not sure people would like it.

Hmmm, that does make sense I suppose. I guess part of it is ungovernance makes me nervous. I like the concept but it worries me in practice.

Also I just read this from the original post

One limitation of the veFLX/veCRV design is that it does not allow delegation. While this may not be a complete deal-breaker, it would be ideal to find a solution for delegation by the time the veFLX contract is in production.

And I’d like to hear more about it. I think a project I’m working on might be the solution here. If so I guess I’d really need to start working on it so we could use it. . . :sweat_smile:

It does make a huge difference, if it’s transferrable you’re effectively not staked anymore, meaning no skin in the game if you can exit anytime.

Re: fees the system mints new RAI inside the protocol. It increases everyone’s debt and mints RAI on the balance sheet. It’s not just an IOU, it’s an entry in the protocol.

Staking is generally a preferred way to get fees and veFLX in particular allows people to lock their tokens for the long run.

Re: delegation, I have some ideas to make it possible but it’s extremely gas intensive. Rari Capital should be working on something for this.

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Thank you Stefan for the write-up. Lot of interesting ideas.

Let me first post a small recap of Stefan’s proposal from the perspective of the user:

Model Risk Opportunity
veFLX - Variable lockups between 1 month to 1 year
- FLX Price risk
- SF returns
- Voting power
stFLX - Protocol slashing (capped to 30%)
- LP risk/Impermanent loss on ETH/FLX
- 21 days exit delay
- Inflationary rewards
- FLX/ETH trading fees

I have one concern with the design. It’s likely, especially at the start, that the returns from stFLX is significantly higher than veFLX. This would mean very few veFLX holders and leaving the system vulnerable to governance attacks. The set of governable params will be small but since it include things like Oracles, you could seriously mess up with the system.

There is also a miss alignment issue. From what I remember, the SF will be changeable by governance within a defined range like -1% to 2%. Since this is chosen by veFLX holder themselves, it will very likely be maxed out at all time.

To solve the misalignment issue I would like to explore building veFLX on the top of stFLX. Stefan already pointed out that this is a “no go” because locked tokens will be subject to slashing. I actually think that this not that crazy. You would give the inflationary rewards to veFLX holders and the price to pay for that returns is slashing risk. Let’s keep mind that

  • Slashing is capped (30% I think ?)
  • Slashing is a black swan event. Very infrequent, maybe it will never happen in the next 5 years.
  • Current stFLX holders are already locked for 21 days during which they can be slashed. It’s seems that most are accepting this risk
  • veFLX lockup period can be chosen by the user to anywhere from a month to 4 years to accommodate for users risk appetite. Also this could be adjusted, for example the max could be set to 2 years.

By merging the 2 approaches, you would get much better alignment. I think it makes sense because in the traditional veCRV model, locked CRV don’t get you directly inflationary rewards. In my model, locked tokens directly give you inflationary rewards, so it is acceptable to take on the additional slashing risk.

Here is the recap table:

Model Risk Opportunity
vestFLX - Protocol slashing (capped to 30%)
- LP risk/Impermanent loss on ETH/FLX
- Variable lockups between 1 month to 4 year
- Inflationary rewards
- FLX/ETH trading fees
- SF returns
- Voting power
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One detail: lockup is between 1 week and 4 years (we can go lower to max 2/3 years)

The issue on the implementation side is that veFLX needs to host the locked tokens. stFLX is not transferrable so when the staker unstakes and change their stFLX balance, veFLX doesn’t get notified.

And yes will continue to say that LP for 2/3/4 years is not viable but will wait for others to chime in.

@Guifel a completely separate design that doesn’t require staking and it overall easier to implement is buyback and make.

In our case, a smart contract can receive RAI as surplus and a portion of the newly minted FLX from the inflation contract and then auto LP in a Balancer pool, potentially with a bit more RAI vs FLX.

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Yeah, you would have to migrate to a new stFLX token.
And I agree that it might be an issue for users that stFLX is LP instead of plain FLX since you’re locking long term. Maybe a plain FLX version would be better for ve style long term locking. Unfortunately, we would lose in FLX liquidity.

The balancer pool can be interesting. Are you thinking this instead of the veFLX or stFLX or both ?
One small issue might be that people prefer to LP volatile tokens with ETH instead of stables.

Balancer as alternative to veFLX. stFLX stays.

Every option we pick will have downsides but at least this one is easier to implement, we don’t even need a frontend for it.

The Balancer idea does seem pretty neat, with the exception that it increases risk due to Balancer platform risk.

Would the Balancer/buyback-and-make approach still have the lock-up times? Would the FLX be locked inside of or outside of the Balancer pool/treasury?

The protocol will initially seed the pool with RAI and FLX and from that point arbitrageurs will rebalance the pool.

No one will lock FLX, they’ll just trade.