New utility for SOV: minting subprotocol tokens

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Thanks so much everyone for the great comments and thoughtful feedback so far! Will respond to some questions/comments that stood out to me below.

@exiledsurfer

Could you please post one or two Bond Curve overview articles for community members who are unfamiliar with what they are?

I linked one in my OP but ICYMI: https://yos.io/2018/11/10/bonding-curves/

@magicmike

if lending/borrowing is one subprotocol, it may be very dependent on margin trading for demand. If it is scorecarded separately, the full platform could be suboptimized and margin cost may be too high. Or if lending is subsidized (via loot drops), how does that affect each subprotocol, are there winners and losers?

Yes I would keep the AMM, lending, and margin trading protocol bound together by the same Bitocracy because of this tight interrelationship. I’m moreso thinking about incentive isolation for future subprotocols: sovBTC, for example, or the rollup, etc etc… there are a bunch of ideas that have been floated, even code in various stages of completion, for various protocols that could be seen as Sovryn subprotocols due to the close relationship with Sovryn and the other parts of our system.

@magicmike

Simplicity. In order to climb the adoption curve as quick as possible, we need to keep things as simple as possible. This means the straightest line possible from providing the customer value to token value. Right now, the masses are struggling to understand the SOV token value itself.

I hear you about the need for simplicity. We shouldn’t make either the end-user-facing product or the underlying technology more complex than it needs to be. However as there are several subprotocol projects (a few I have mentioned above) in flight we may have to make a decision about this sooner rather than later. I’d rather do it the “right” way (and I think this model may be the right way; open to other ideas though hence why I posted about it here) rather than go with a subpar alternative for the sake of “simplicity”.

There are two main classes of SOV holders we need to have messaging for: passive holders and stakers. Passive holders buy SOV and hold it in their wallet until they’re ready to sell. Stakers actually stake SOV in Bitocracy and participate in governance. You can also think of these as two stages along the adoption curve (every SOV holder starts off a passive holder, but some graduate to stakers).

At the very beginning of the journey I think the SOV pitch is: buy SOV to get financial exposure to the potential success (or failure) of the Sovryn ecosystem. Once people own SOV and feel invested in the protocol’s success, they may be interested in becoming more active in contributing to that success. Then the messaging changes to, participate in the community, add value, stake and vote, create proposals, and earn extra rewards in the form of protocol revenues and SOV subsidies.

The continuous token model I described doesn’t actually change either of these messages. But it does have the potential to create new markets for SOV – for example, maybe someone isn’t interested in the AMM or lending protocol. But they are interested in sovBTC. So before they had no reason to buy SOV, but now they have a reason to buy SOV: so they can buy the subtoken from the sovBTC bonding curve. That’s how I am thinking about this right now anyways.

@dseroy

Can you provide some actual examples of how this would work using current ‘sub-protocols’ or upcoming developments?

See the examples I gave to magicmike above

@dseroy

I read this as having two objectives: 1) provide more utility to SOV token and thus create deflationary effect when it is used to mint sub-tokens and 2) Create economic link that helps us identify which sub-protocols are valued vs which are failing, almost like a futarchy? Are there any other objectives this proposal aims to achieve I am misunderstanding?

The goal is twofold:

• Create an economic link, so SOV holders share in the accrual of value to any subprotocols. This because SOV holders are the ones ultimately footing the bill for subprotocol development.
• Isolate incentives to the degree that subprotocol stakeholders most strongly feel the benefits of success or pain of failure. This because we don’t want market signals to be diluted, and token price is an important signal to monitor on a medium-long term scale.

@dseroy

What incentive is there to use SOV to mint a sub-token?

A given subprotocol will be solving a different problem than the others, and so people will buy a subprotocol token if they want to participate in the potential upside (and downside) of that specific protocol. There will also be an incentive if there’s an arbitrage opportunity between the bonding curve price and the secondary market price.

@dseroy

So, is this idea in competition with the primary SOV value proposition of protocol fee revenue?

If the assumption is that SOV holders will directly receive a share of revenue from every protocol that the Sovryn community builds, this model would change that assumption. Value accrual sharing works differently using the continuous token model. See the last section “An alternative” of my OP for an explanation of the differences here.

@dseroy

In a hypothetical situation, if a bunch of SOV is locked as collateral to mint a sub-token, then the sub-protocol fails in dramatic fashion, what happens? Do all the sub-tokens likely get redeemed, which unlocks the SOV back onto the market?

Yes

@dseroy

It’s like the opposite effect of BabelFish. It segregates value accrual as opposed to aggregating it.

I don’t see how this is related to BabelFish. Can you explain what you mean here?

@dseroy

I keep thinking that any benefit you get from minting sub-tokens results in a corresponding draw-back to Bitocracy stakers?

I don’t think so. I think there are only benefits. They are just different benefits than not using subtokens.

Here are the options as I see them, with pros/cons summary:

• Subprotocols governed by SOV stakers.

  • Pros: Simple. SOV holders get full and direct financial exposure to all subprotocols via all sources of potential value accrual.
  • Cons: There is no incentive isolation here, no specialization of labor, no deference to local knowledge. Weak incentive alignment between subprotocol governors and users; failure of a subprotocol could hurt SOV value but depending on its importance overall, maybe not much. So SOV stakers have a weaker incentive to show the care and attention needed by all subprotocols. “Tragedy of the commons” for Bitocracy attention.

• Independent tokens for subprotocols, sharing revenue with SOV stakers.

  • Pros: Also relatively simple. Isolates incentives and creates some economic link to SOV.
  • Cons: Does not share value from non-revenue sources of value accrual.

• Continuous tokens for subprotocols.

  • Pros: Incentive isolation and economic link to SOV. SOV holders share in all potential value accrued to subprotocol/subtoken.
  • Cons: Relatively complex compared to the other options.