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