Beyond points: A gearshift to tokenomics

• Tokenized Points can be further evolved into a new paradigm for tokenomics.

• Pre-TGE Points systems align with post-TGE token incentives.

• Points can be transformed into a secondary token, enhancing tokenomics and project governance.

• Streaming-based incentive models and KYC parameters can help solve token distribution dilemmas.

• A combined module can provide a universal token distribution solution encompassing Velocity, Shift, and Switch.

• It enables projects to adjust token emission speed dynamically and activate/deactivate the module as needed.

• We may see a brand new paradigm for tokenomics involving the combination of an existing token with a "temporary token".

Starting with Blur, the use of points for possible airdrops seems to be increasingly common in recent projects. Points themselves not only keep users engaged and excited but also contribute to the project's token performance after it's launched. Similarly, many existing projects use yield farming, which serves a similar purpose but focuses on the period after the launch rather than before.

The existing strategies seem mediocre and not flexible enough. So, why not merge these objectives and create a crypto-native mechanism to adjust a project's existing tokenomics? With this question in mind, let's explore the current state of affairs and delve deeper to find an answer.

As shown in the picture below, with the timeline before and after token launch, the points play different roles with some similarities. The importance shifts throughout the timeline.

During this period, points are mainly used for an airdrop strategy since there needs to be a way to record wallet contributions. There was a design similar to points but aimed to solve the problem in a more crypto-native way, like the vesting token design. This design caters not only to investors and teams but also to individual users before the token launch. However, it makes the overall process less exciting and does not effectively help mitigate a Sybil attack.

It truly depends on the inherent tokenomics of the project. In the case of most single-token projects, the yield farming mechanism is commonly employed to earn additional tokens, especially in the DeFi sector. However, for dual-token projects like Stepn and Axie Infinity, the dual-token system inherently alleviates selling pressure from the governance token to the utility token, thereby enhancing the value of the main token.

The points system is a prevalent design in Web2, primarily employed for loyalty objectives. However, in Web3, the structure diverges due to its decentralized nature, encompassing factors like token distribution rights and overall project governance. Consequently, points serve distinct purposes within Web2 and Web3, with the common ground lying in power distribution and the token itself.

These disparities transform points into something more than mere loyalty indicators. To address this complexity and elevate Web3 to the next level, a sophisticated yet unified solution should be introduced.

Points, acting akin to a secondary token, serve as a mechanism to mitigate direct mining and post-token launch sales. This opens the door to transforming points into a "second token" for single-token projects or a "+1 token" for dual-token projects.

While intentionally designing an inflationary token may not sound appealing, considering an inflationary points system as a subsidy could promote a healthier token status. Unlike a utility token that might alter the intrinsic value of the main token and introduce potential gaming, a less financially-focused points system makes more sense. In essence, both the "second token" and "points" can be viewed as "temporary tokens.”

For projects that have already adopted a dual-token system, points can serve as a safeguard against extreme situations, potentially preventing the collapse of the token. Moreover, risks associated with systemic flaws, such as imbalanced token emission speed and overwhelming product materials, can now be transferred to points rather than the utility token. This approach might help avoid a death spiral and provide more time to build a robust economic cycle.

There are a couple of known issues with a major impact on token distribution:

1. When and how to distribute points/tokens?

2. Who should receive the distribution?

These issues are inherently challenging, as no one has a crystal ball to perfectly predict the future. Therefore, a practical approach is to constantly adjust and react to the situation. From the project's perspective, breaking down contributions and rewards into the smallest possible pieces is the recommended strategy.

Rabbithole shares a similar philosophy of providing micro rewards for micro transactions. However, the challenge with this approach lies in the relatively small size of the rewards. While it enhances the sophistication of the reward system, it simultaneously increases the fraction for an individual user to claim these rewards regularly, which may not be necessary.

What if, instead of using a step-based rewards distribution model, we adopt a streaming-based incentive model? Inspired by Superfluid, we can seamlessly integrate this into the tokenized point gearshift, creating a perfect synergy.

For this scenario, it essentially relates to mitigating the Sybil attack. Projects can establish their own n/n rules of KYC when the token is allowed to be redeemed for real tokens. Similar to the Uniswap hook, the AMM is possible to set individual parameters triggered right before token swaps (in this case, tokenized points redemption).

For instance, a project can require users to have a 3/3 passed score to get a multiplier of 1 or a 2/3 KYC passed to get a multiplier of 0.5 (meaning a 50% deduction in points quantity). This approach doesn't compel users to undergo KYC but provides them with the flexibility to trade or opt out as they see fit.

With tokenized points (temporary token) and the stream emission KYC multiplier combined, we have now created something unique - The Token Gearshift. We will be examining the design from three different aspects.

The most common attribute of any tokenomics is velocity, but why does this matter? To maintain the optimal performance of a token, it's essential to prevent a sudden increase in token circulation. Or, let's say, at least try to align with the market sentiment and liquidity as closely as possible.

Currently, we observe certain approaches, such as the vetoken model, which leverages governance to regulate both the velocity and direction of token release. It essentially links governance power to token emission speed. However, this concept should extend beyond governance, and the speed should be dynamically adjusted. To achieve this, there is a need to create a more universal model.

ERC777 provides an intriguing perspective, elevating this notion to a different level. Streaming, as opposed to active claiming, emerges as a much more effective way to incentivize users while maintaining control over token emission. Going one step further, using tokenized points inherently enhances control over token emission.

The design enables projects to regulate the acceleration of tokens in circulation by introducing this additional layer of tokenized points. Given the dynamic nature of point supply, the speed of token redemption can be adjusted accordingly. In line with micro-contributions, the acceleration can be fine-tuned at a micro level. Similar to how DeFi protocols adjust their parameters, the point exchange ratio can achieve a similar goal.

The flexibility that Gearshift offers lies in the ability for a project to activate or deactivate this module at any time. Essentially, it entails owning a group of "temporary tokens" that can be given greater weight or even removed from the tokenomics by the community. Each project then has the power to fully leverage the benefits of a dual/tri tokenomics system while retaining the option to remove it when necessary.

If the market chooses the points, then it would and should eventually become a part of tokenomics. Since tokenomics has always been a crucial aspect of web3 projects, regardless of their simplicity or complexity, the necessity to continually adjust the circulation supply and token emission speed remains constant.

By introducing this new strategy tool to both existing and new projects, it provides them with additional flexibility and time to maintain or create healthier tokenomics. Despite this kind of value transfer empowering projects to manipulate their tokenomics even more, a potential brand new paradigm for tokenomics (Existing Token + Temporary Token) will be very exciting to see.