FOO Tokenomics Mechanism on A51

A51 Finance
5 min readJul 6, 2024

Background

Liquidity mining has been a widely used method to bootstrap liquidity for DEXs and lending protocols. In this approach, protocols offer token incentives to individuals who provide liquidity. However, this incentivized liquidity is often short-lived, with farmers quickly selling off the reward tokens.

Why wouldn’t they? It’s free money.

The interests of these farmers often clash with those of token holders. Farmers benefit at the expense of token holders. Once the token incentives decrease or end, farmers withdraw their liquidity, leaving the protocol depleted and causing the token’s price to plummet. It’s evident that traditional liquidity mining is not sustainable for the long-term growth of such protocols.

This document introduces a tokenomics system called Fungible Ownership Optimization (FOO) and the reward mechanism in A51 Finance. FOO aims to achieve four key objectives:

  1. Incentivize Liquidity: This fundamental goal is accomplished through traditional liquidity mining techniques.
  2. Disincentivize Mercenary Farming: The system seeks to minimize farming-and-dumping behaviors.
  3. Ensure High Liquidity for the Token: This reduces the token’s price volatility and enables higher incentivized total value locked (TVL).
  4. No Excessive Inflation: 50% of inflation is offset by new value coming into the system in the form of $A51 sales.

FOO aligns the interests of farmers, token holders, and liquidity providers, creating a more sustainable and beneficial ecosystem for all stakeholders involved.

FOO Starting Point: The Gauge System

Similar to Curve’s veTokenomics, the Gauge System in FOO incentivizes liquidity in the following manner:

  1. There is a continuous stream of reward tokens.
  2. These reward tokens are distributed across different liquidity pools.
  3. Voters vote on pools where they want the reward emission.

This is the starting point of FOO.

How to Become a Voter

To participate in the voting process, users need to provide liquidity in A51 pools on either Balancer or Quickswap (with plans to shift completely to Balancer in the future). The eligible pools are:

  1. A51-ETH Balancer Pool
  2. A51-MATIC Quickswap Pool

BAL-LP and QUICK-LP Token as Vote-Locked Token

Users become eligible to vote after depositing liquidity in the above-mentioned pools. They obtain BAL-LP tokens (on Balancer) or QUICK-LP tokens (on Quickswap), which grant them the voting right for vault reward emission.

Why Balancer?

The reason for primarily using Balancer over other DEXs is that Balancer supports an arbitrary weightage system between the tokens in the liquidity pool. For instance, an 80–20 A51-ETH liquidity pool ensures that the LPs can enter the pool much more easily by contributing 20% in ETH only.

Since farmers are likely to hold BAL-LP and QUICK-LP tokens for voting on the gauge, they become LPs for A51. This reduces the likelihood of farmers dumping the A51 rewards they receive, as they would be dumping into their LP position.

However, it is still possible for farming and dumping to occur, as a farmer without any BAL-LP can still earn rewards in the form of option tokens or $oA51.

What is $oA51

$oA51 is an options token within the FOO tokenomics system. It allows holders to purchase $A51 tokens at a discounted price, incentivizing long-term participation and loyalty among liquidity providers.

By offering $oA51 as a reward, the protocol aligns the interests of farmers and token holders, ensuring more sustainable liquidity provision.

Voting Mechanism

Once a user becomes eligible for voting by depositing liquidity in the designated pools, the voting mechanism begins. Here’s how it works:

Voting Process

  • Each month, there will be up to 10 pools available for voting.
  • Eligible users can cast their vote on up to 10 pools per voting period.
  • Votes determine which pools will receive the reward emissions for that month.

Note: Strategy creators can enlist their strategies among the decided vaults to be voted on after approving their proposal through governance.

Reward Collection Through Merkl

  • Users who voted and provided liquidity in the selected pools start collecting $oA51 as rewards.
  • 17,975 $oA51 will be emitted per month to the users of the protocol which could then be converted into $A51 tokens at a 50% discount.
  • The rewards are distributed through a Merkl claim system on Arbitrum only. No NFT is required to be locked here.

Claim Rewards

Users can view their collected $oA51 tokens in the “Claim Reward” on the user dashboard. This dashboard provides a detailed overview of metrics of the user’s earned rewards and their current positions.

  • My BAL-LP token
  • My $oA51 holding
  • My claimed $oA51
  • My unallocated votes
  • Current voting period
  • Current and past voted vaults

Converting $oA51 to $A51 at 50% Discount

Users can convert their $oA51 tokens to $A51 at a discounted price by purchasing with $ETH.

Initially, the discount starts at 50%, but this is something that $A51 holders would be able to vote to change in the future.

This approach allows the protocol to accumulate a substantial cash reserve regardless of market conditions and enables loyal users to purchase $A51 at a discount.

Let’s illustrate this mechanism with an example.

Suppose the price of $A51 is $100, and there is an option token, $oA51, that gives its holder the perpetual right to buy $A51 at 50% of the market price. The protocol issues 1 $oA51 to a farmer, Alice, who immediately exercises the option to buy 1 $A51 for $50 and sell it on a DEX for $100. The resulting gains and losses are as follows:

  • The Protocol: -1 $A51, +$50
  • The Farmer Alice: +$50
  • The DEX LPs: +1 $A51, -$100

Compare this to regular liquidity mining where the farmer doesn’t pay anything to the protocol:

  • The Protocol: -1 $A51
  • The Farmer Alice: +$100
  • The DEX LPs: +1 $A51, -$100

Furthermore, when option reward tokens are used in FOO, where the farmers are also the token LPs, the tally becomes:

  • The Protocol: -1 $A51, +$50
  • The Farmer-LP: +1 $A51, -$50

This means that as the farmers receive $oA51 rewards, they get the right to buy tokens from the protocol at a discount and increase their ownership. Over time, protocol ownership will shift away from holders who aren’t providing liquidity to those who are, optimizing protocol ownership.

Earn Protocol Revenue in $ETH

Users who hold BAL-LP tokens from the A51-ETH pool on Balancer earn protocol revenue in $ETH, as well. This ensures a steady income stream in $ETH while participating in the protocol’s governance.

Conclusion

The FOO tokenomics system introduces a novel approach to liquidity mining by using option tokens ($oA51) instead of direct token rewards. This method not only incentivizes liquidity but also aligns the interests of farmers, token holders, and liquidity providers.

By allowing users to vote on reward distribution and convert their earned $oA51 tokens at a 50% discount, the protocol ensures a sustainable and growth-oriented ecosystem.

Through these innovative mechanisms, FOO aims to create a more resilient and financially healthy protocol, driving long-term success and stability.

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