Jack Kubinec

DeFi depends on liquidity providers (LPs), but LPs can face an uphill battle in generating yield. Steer Protocol announced on Thursday that it is integrating its so-called Smart Pools on Sushi to try and make liquidity provision more attractive.



Steer’s Smart Pools take some data off-chain and automate aspects of liquidity management to increase efficiency for LPs. The Smart Pool integration comes as Sushi weighs an overhaul of its tokenomics and its native SUSHI token gets swept up in a market rally.



LPs put capital in pools that automated market makers (AMMs) like Sushi use to create order depth for DeFi assets. Providing capital as an LP <a href="https://blockworks.co/news/bell-curve-lvr-defi-liquidity-providers-unfair">can be inefficient because of loss-versus-rebalancing (LVR)</a> where an LP essentially faces arbitrage from AMM prices lagging behind centralized venues.



Read more: <a href="https://blockworks.co/news/bitcoin-ether-altcoins-etf">Bitcoin may be riding the ETF wave, but altcoins are where the rally really is&nbsp;</a>



Steer is an active liquidity management platform (ALM) that <a href="https://steer.finance/steer-protocol-and-sushi-collaborate-to-optimize-concentrated-liquidity/">focuses</a> on concentrated liquidity. LPs provide the platform with capital for a certain price range to increase their chances of the funds being used for a trade and earning fees.&nbsp;



The ALM moves some data off-chain to deal with LVR.



“From the arbitrage perspective, we can place liquidity, which looks like books that are on — let&#8217;s say a centralized exchange — which allows us to capture that price movement before it actually might happen on-chain,” Derek Barrera, the founder of Steer, said. 



Since launching over the summer, Steer has become the ninth-largest liquidity management protocol by total value locked (TVL), <a href="https://defillama.com/protocols/liquidity%20manager">according to</a> DeFiLlama.



Sushi’s Steer integration comes soon after the protocol’s “Head Chef” Jared Grey <a href="https://t.co/KWsPQKKhoV">proposed</a> changes to Sushi’s tokenomics. He indicated that these are meant to incentivize LPs to lock their liquidity into the DEX for longer periods of time.&nbsp;



Under Sushi’s current tokenomics, an average of over $100 million has been paid out in emissions to LPs for every $300 million in total value locked (TVL) created, the proposal <a href="https://docs.google.com/document/d/1UYr_BxBp8AfappwF-1vGExJWIRNkEDRjCuYcEkOWQUA/edit">said</a>.&nbsp;



The price of Sushi (<a href="https://blockworks.co/price/sushi">SUSHI</a>) jumped from around $0.55 in mid-October to $1.26 in early November, per Blockworks Research, and currently trades at $0.96 at the time of publication.



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Sushi’s ‘Smart Pools’ hope to boost LP efficiency

Bessie Liu

Cross-chain communication platform Axelar is looking to revamp the tokenomics of its native token AXL and simplify the blockchain integration process.



According to Axelarscan, since its genesis the network has processed over $6 billion in cross-chain transactions. It currently has a total value locked (TVL) of $95.3 million and a market cap of $143.3 million, as shown on DeFiLlama.&nbsp;



As it currently stands, Axelar’s native token (<a href="https://blockworks.co/price/axl">AXL</a>) is inflationary. Its existing inflationary design is intentional, as it incentivises validators to offer connections to external chains. But the Axelar Foundation, the team behind the Axelar network, has proposed to modify the inflation parameters and introduce a gas burning mechanism.



In an interview with Blockworks, Axelar Foundation Chairman Georgios Vlachos noted that existing inflation parameters add rewards for each connected external chain that does not have light clients.



&#8220;We cannot support hundreds or thousands of chains in this model without inflating the network substantially. So in the short-term, these parameters should be reduced to allow us to support more chains, while the community is working on launching the Virtual Machine and new connectivity models that do not have these inflationary properties,&#8221; Vlachos said.&nbsp;&nbsp;



The culminated total inflation rate of Axelar is currently around 11.5%, with each externally verified chain adding an inflation rate of 0.75%. The proposal suggests lowering the inflation to 0.3% for each external chain, which will reduce total <a href="https://blockworks.co/tag/inflation">inflation</a> to around 5.2%. Then, with the addition of five other chains which will join the network, the new model would bring inflation up to around 6.7%.&nbsp;



Addressing the <a href="https://community.axelar.network/t/adjusting-axelar-network-incentives-a-proposal-to-scale-to-thousands-of-chains-call-for-comments/2515/2">feedback</a> from community members that inflation should be gradually adjusted, Valchos notes that it is relatively straightforward to submit governance proposals that will gradually adjust the inflation if the community believes that it is the best approach.&nbsp;



Beyond revamping its tokenomics, the Axelar Foundation is also hoping to streamline the process of integrating <a href="https://blockworks.co/tag/layer-2-2">layer-2s</a> onto its network.



Read more: <a href="https://blockworks.co/news/microsoft-axelar-team-up">Microsoft, Axelar team up to ‘further advance’ adoption of blockchain technologies</a>



In the medium term, this means transitioning to using the Axelar Virtual Machine (AVM) and the Interchain Amplifier — a set of <a href="https://blockworks.co/tag/smart-contracts">smart contracts</a> built on top of the AVM, both which are currently under development.&nbsp;



The Interchain Amplifier will be able to automate new-chain connections across <a href="https://blockworks.co/tag/evm">EVM</a> and other consensus mechanisms, said Sergey Gorbunov, CEO of Axelar Inc.&nbsp;



&#8220;The AVM is a combination of Axelar network&#8217;s <a href="https://blockworks.co/tag/interoperability">interoperability</a> with CosmWasm smart-contract logic — enabling what we like to think of as a programmable interoperability layer,” Gorbunov said.



Programmability at the interoperability layer will enable Axelar to automate integrations with thousands of different chains and also explore new interoperability use cases that will enable developers to quickly deploy and manage multi-chain applications from a single environment, Gorbunov explains.



In the long term, the Axelar Foundation is hoping to employ light clients.



Light clients in blockchains are nodes that run a “light” client software that proves blockchain data from providers rather than keeping it and verifying it on the blockchain itself. These light client connections would be supported by relayers, instead of external validators.



Read more: <a href="https://blockworks.co/news/zerosync-starkware-zero-knowledge-proofs-bitcoin">Bitcoin’s first zero-knowledge light client seeks to drive innovation</a>



&#8220;Light-client connections would mean a new EVM chain could get full-service interoperability via Axelar network without requiring Axelar network validators to run a node on the new chain,” Gorbunov said. “This reduces onboarding overhead substantially, and can scale to thousands of chains.&#8221;&nbsp;



If the proposal is approved by community governance, the token economics proposal will be implemented before the end of year. Meanwhile, the Interchain Amplifier and any other new-chain activities will not be until 2024.



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Axelar prepares tokenomic overhaul for AXL

Darren Kleine

Ethereum’s DeFi ecosystem and its many components operate like a collection of blocks, built upon and interlocked with each other. When one block gets knocked out for whatever reason, the whole structure wobbles.



The past week’s Curve-Vyper exploit and <a href="https://blockworks.co/news/curve-egorov-exit-defi-positions">subsequent knock-on effects</a> got Myles O’Neil thinking about the role that tokens play in crypto applications.&nbsp;



“I really don&#8217;t think it&#8217;s healthy,” he says, “when the functionality or utility of your protocol can be impacted by the price of your token.”



On the Bell Curve podcast (<a href="https://open.spotify.com/episode/7pfcijhPoPDgW4urlyETFg?si=bW6StGEuT8ehOAlL3GgxJA">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/curves-%2470m-hack-base-launch-exceeds-%24230m-24hr-trading/id1641356619?i=1000623435515">Apple</a>), the associate at the advisory and investment firm Reverie compares Curve’s relationship to crypto tokens with the investing app Robinhood and its Nasdaq-traded HOOD shares.



“Imagine,” he says, “if there was a market event that impacted HOOD and then all of a sudden, Robinhood…was less secure or services that were relied upon could no longer be relied upon. I don&#8217;t think that&#8217;s a healthy thing.&#8221;



Curve&#8217;s role is to be a critical piece of <a href="https://blockworks.co/tag/defi">DeFi</a> infrastructure, O’Neil explains. “Many of these <a href="https://blockworks.co/news/curve-suffers-exploit">DeFi protocols use Curve pools</a>. They rely on Curve emission incentives to offset what would be otherwise pretty unprofitable [liquidity pool] positions.”



Podcast host Mike Ippolito explains that Curve (<a href="https://blockworks.co/price/crv">CRV</a>) token holders are incentivized to lock up their tokens into a “vote escrow model,” directing emissions to <a href="https://blockworks.co/news/wheres-the-liquidity-crypto-lending-explained">stablecoin liquidity pools</a> for rewards. Unlike the price of legacy finance shares in companies like Robinhood, “the price of the token matters a lot to the actual functioning of the product,” he says.



“If your protocol relies on incentives to keep all this scaffolding intact and the incentives are at risk of going to zero at any given point,” O’Neil says, “that&#8217;s one more risk that protocols really don&#8217;t need to introduce to build a successful product.”



Because Curve founder <a href="https://blockworks.co/tag/michael-egorov">Michael Egorov</a>’s position and the implications of liquidation “are very well known,” people are going to “hunt that position” for profit, O’Neil says.



“If half of the circulating market cap of CRV is liquidated,” he says, “I&#8217;m guessing that drives the price of CRV close to zero and then all of the scaffolding comes apart.”



<h2 class="wp-block-heading">Token successes</h2>



O’Neil mentions the decentralized exchange <a href="https://blockworks.co/tag/uniswap">Uniswap</a> as an example of a protocol that has taken the “opposite route” with tokens. “[Uniswap] doesn&#8217;t have the token play any role in the protocol, and instead relies upon this assumption that there&#8217;s a sophisticated supply side that will come in and actively manage their liquidity to be profitable.”



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG4459567860" width="100%"></iframe>







Ippolito pushes back on the notion that token incentives don’t work. “The major successes that we&#8217;ve had thus far in crypto also are these sort of circular, reflexive mechanisms. <a href="https://blockworks.co/tag/bitcoin">Bitcoin</a> is one, <a href="https://blockworks.co/tag/ethereum">Ethereum</a> is one.”



Ippolito continues: “Whenever someone says, ‘We haven&#8217;t found the <a href="https://blockworks.co/newsletter/issue/32264855">killer use case</a> yet for crypto,’ I mean, haven&#8217;t we?”



“Non-sovereign money, an open smart contracting platform that anyone can build anything on. These are not ‘nothing’ use-cases. And Curve reminds me of that a little bit.”



O’Neil replies, “Some of the most successful apps that we&#8217;ve had today have no token functionality whatsoever. I just point to <a href="https://blockworks.co/tag/opensea">OpenSea</a> and <a href="https://blockworks.co/news/synthetix-uniswap-building-dex">Uniswap</a> as two of them.”



“But I will stay open-minded,” O’Neil says, “because if you don&#8217;t in this space, then you get left behind.”



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Tying tokenomics to crypto app functionality is just asking for trouble

John Gilbert

Aptos led the January bull run with a 470% return for the month. With little on-chain activity and only $60 million in TVL, you may be asking why. 



Advocates argue that these gains were the result of ecosystem announcements. Critics point to its opaque token distribution as a sign of predatory tokenomics.



But what tokenomic clues signal predatory behavior? And why is it a common accusation?



Tokenomics turn predatory when project insiders use supply controls to artificially drive demand and take profits at the expense of others.



These insiders are like wolves in wolves clothing — a mixed bag of venture capitalists and angel investors. The flock, conditioned to follow the flow of smart venture capital, chase the momentum despite warnings.&nbsp;&nbsp;



Some find a distinct joy in arguing that all crypto tokens fall under this model. But the economic incentives, supply controls, utility and revenue sharing vary greatly between digital assets. Our previous <a href="https://blockworks.co/news/what-is-tokenomics">Investor&#8217;s Guide on Tokenomics</a> explains the different models in more detail. In this article, we will explain how some models are more prone to exploitation than others.



<h2 class="wp-block-heading">Tokenomics gone wrong</h2>



A project&#8217;s tokenomics is a blueprint that outlines the key characteristics and factors that influence its value and price. A token issuer, just like a house architect, may include exploits in its design.&nbsp;



But because the number and severity of these exploits exist on a spectrum, it is hard to pinpoint exactly when they turn predatory. Unfortunately, an accusation can only prove conclusive if someone makes it after project insiders use a design exploit. And even then, the charge still requires evidence of intent to qualify.&nbsp;



This article in no way makes such an accusation against the examples listed. And it should not be interpreted as investment advice. Instead, it explains the most recent concerns and extrapolates a list of red flags to avoid.&nbsp;&nbsp;&nbsp;



<h3 class="wp-block-heading">Flag 1: Misleading distribution disclosures</h3>



Token distribution disclosures are essential to understanding the risk of when, who and why insiders will take profits. An issuer with predatory intent may make the disclosure appear less risky to attract investors.



For example, many could perceive Aptos&#8217; supply schedule disclosure as misleading. The project started with a total of 1 billion tokens (none of which were made available through public sale). Here is how they distributed the total supply:



<figure class="wp-block-table"><table><tbody><tr><td>Community</td><td>51.02%</td><td>510,217,359.77</td></tr><tr><td>Core Contributors</td><td>19.00%</td><td>190,000,000.00</td></tr><tr><td>Foundation</td><td>16.50%</td><td>165,000,000.00</td></tr><tr><td>Investors</td><td>13.48%</td><td>134,782,640.23</td></tr></tbody></table></figure>



The <a href="https://aptosfoundation.org/currents/aptos-tokenomics-overview" target="_blank" rel="noreferrer noopener">post</a> stated, &#8220;All investors and current core contributors are subject to a four-year lock-up schedule with no <a href="https://blockworks.co/price/APT">APT</a> available for the first twelve months.&#8221; These two categories amount to 32.48% of the total supply.&nbsp;



The project made the distribution schedule of the other two categories vague. The post states that &#8220;these tokens are anticipated to be distributed over a ten-year period&#8221; and that after an immediate distribution of 130M tokens, 1/120 of the remainder &#8220;are anticipated to unlock each month.&#8221;&nbsp;&nbsp;



Using hedging language like &#8220;are anticipated&#8221; may seem irrelevant at first glance, but it creates ambiguity shielding the project from making a firm commitment not to sell.



It also stated that insiders across all categories were staking 82% of the supply. Consequently, popular sites have used the staked data to calculate a circulating supply of roughly 15% to 18% (currently 162,086,803).&nbsp;



This adds to the confusion because CoinGecko&#8217;s circulation supply definition states, &#8220;It is comparable to looking at shares readily available in the market (not held &amp; locked by insiders, governments).&#8221;



But according to Aptos co-founder <a href="https://twitter.com/moshaikhs/status/1582470822886637568?s=20&amp;t=RUz9LN39xHYMg6cyUA2mSQ" target="_blank" rel="noreferrer noopener">Mo Shaikh</a>, stakers can unlock tokens every 30 days.&nbsp;



This distribution is not evidence that the project intended to mislead investors. But, when combined with the supply schedule graph, one could argue that they made it appear as if 82% of the supply (the same percentage of tokens staked) can&#8217;t become available for at least a year, when in fact, only 32.48% is subject to an official 1-year lock-up.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh3.googleusercontent.com/2845Ltk40l29VnMfRtQyjIwyx84dbS8-j5S4ZgmZH9WCBm4xVWG7VxN82mCxosBTGIJZb2Z-d7P_na-eliYz_R1dr_C77w0mge05gHvSrESbjlMMrB_Jqz_LG7t5OujehYQq5mSmzF3vEOnyJwJvI_4" alt=""/></figure>



The tokenomics post did state that the schedule is an estimate and included a disclaimer stating that it is subject to change without notice. But this has not prevented investors from <a href="https://youtu.be/6oywqy5AMsk?t=147" target="_blank" rel="noreferrer noopener">using the graph</a> to share a popular investing thesis predicated on the belief that close to 8.5 million (85%) of APT is locked for a year.&nbsp;



The limited liquidity on exchanges and the massive supply at the disposal of project insiders have led some to make accusations of price manipulation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Aptos dev team wallet has started feeding the Korean ducks, ~$20mm in spot sent to Binance in the last hour. $1b in inventory remains in the wallet. The tightly controlled supply has activated. <a href="https://t.co/Ll75mTX0TQ">pic.twitter.com/Ll75mTX0TQ</a>&mdash; light (@lightcrypto) <a href="https://twitter.com/lightcrypto/status/1619155047618850818?ref_src=twsrc%5Etfw">January 28, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<h3 class="wp-block-heading">Flag 2: Lack of utility</h3>



A token&#8217;s utility is a crucial aspect in determining its value. If it has no utility, its price is purely the result of speculation, leaving it vulnerable to manipulation by early investors and insiders.



Some see the <a href="https://blockworks.co/price/dydx">dYdX governance token</a> as an example of broken utility. While the platform uses it to incentivize trading activity and provide liquidity on the dYdX platform, there is very little reason for investors to hold the token once earned. There is no revenue-sharing model or meaningful governance incentives. The protocol removed all previous staking opportunities. And now the only motivation left is trading fee discounts.&nbsp;&nbsp;



Read more on the <a href="https://www.blockworksresearch.com/assets/dydx/tokenomics" target="_blank" rel="noreferrer noopener">Blockworks Research analysis of dYdX tokenomics</a>.



&#8220;To me [the governance feature] is just disingenuous,” Jeff Dorman, chief investment officer at Arca, said of dYdX. “You can&#8217;t ever actually participate in governance, because six holders own 90% of the token.&#8221;



This lack of utility makes it easier for project insiders to potentially generate speculative demand by delaying insider token unlocks, leading to, as Dorman states, &#8220;time-based selling pressure rather than merit-based buying.&#8221;



DYdX is one of the tokens that made the leaderboard for top-performing tokens in January. It increased by 210% from the start of the year. But this bull run coincided with an <a href="https://twitter.com/dydxfoundation/status/1618302395603161114?s=20&amp;t=i81l9j2-VcC-hq0q9Yn_iQ" target="_blank" rel="noreferrer noopener">announcement</a> to &#8220;postpone the initial release date applicable to investor $DYDX tokens to Dec 1, 2023.&#8221;&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/eQCh0m2qy8FPfovaLiF42dsaG_Pv1kxoD0z_A99FV4XgzaFWMxFH3Y3fwi-orV-TYhicZiJ6aWry_IXhNRnZN8GYKpsrJPWx97oabVvK_6Xg1uIS1LgRrswfNd777ic7O-rnIlTKlbg30rFOI9LFG0Q" alt=""/></figure>



While this correlation is not direct proof that the announcement drove the price, it supports the narrative that tokens with weak utility are vulnerable to this type of manipulation.&nbsp;



<h3 class="wp-block-heading">Flag 3: Conflicts of interest</h3>



How a project makes money and shares it with its investors is crucial in determining the alignment of incentives. In the unregulated world of cryptocurrency, many projects choose not to share revenue with token holders due to their close resemblance to a security. And, in some cases, such as dYdX, all revenue is directed to an <a href="https://www.ar.ca/blog/dydxs-broken-tokenomics-and-pointless-vc-unlocks" target="_blank" rel="noreferrer noopener">LLC</a>.&nbsp;



This arrangement can lead to a conflict of interest between token holders and inside investors. The lack of shareholder obligations makes project owners less incentivized to drive token demand.&nbsp;



Tokens that behave like commodities or currencies can fit this model. However, when there is no practical use or widespread adoption as a payment solution, the token acts more like an inflationary store of value. In dYdX&#8217;s case, the token saw an 82% decrease in value since its launch in September 2021.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/nq3rEw7tvEP43qvAfxjYVwff5OVMwZrferaHl5z8q1xQd9vqmVPNM7QaGvUyG4i9EJBpqhi29FYO-UiyAL1zZVX0uBqqxpd2asmXDxnCRwZHiWUXa5u9SWf1AvgS5X5i0AhL1IklgHimG1JXZeTfMVU" alt=""/></figure>



Dorman explained that there are many creative ways to drive demand for the dYdX token.&nbsp;



&#8220;One is to feed some of those revenues back through the token, either in the form of buybacks, or in the form of building up the DAO treasury. They could have partnerships with other platforms or protocols where the dYdX token has some value within someone else&#8217;s ecosystem. What you can&#8217;t do is just assign zero value and just say it&#8217;s a governance token, where you can&#8217;t ever actually participate in governance.&#8221;



Though, when a project like dYdX has scheduled token unlocks, there is a real temptation to pull the postponing lever instead of implementing the changes Dorman listed.&nbsp;



He added: &#8220;In my opinion, we&#8217;d be better off if there were no unlocks. It doesn&#8217;t incentivize any parties, the investors nor the issuing company to do anything before you get to unlock that value. And two, it restricts and floats and the tradable asset in a way that artificially creates gains.&#8221;



<h2 class="wp-block-heading">Understanding the wolf of crypto</h2>



The common occurrence of predatory tokenomics has led many skeptics to claim that the problem is inherent to crypto. But if you take a closer look, the pattern reveals that the wolf behind the wolf mask isn&#8217;t necessarily coming from within the industry.&nbsp;



&#8220;Most of these projects in their early days are very reliant on venture capital money,” Daniel McAvoy, blockchain and funds attorney at Polsinelli, said. “You know, there isn&#8217;t really a great way to get off the ground without going that route.”



“So in addition to equity and a slug of tokens, the VCs also want a hand in helping determine what the tokenomics are even going to be.&#8221;



He said that the one-year locking period is &#8220;almost universal&#8221; in the token purchase agreements and that a big reason for that is, &#8220;Under Securities Act Rule 144, there&#8217;s potentially an ability to resell something without requiring registration of that resale — so long as there&#8217;s been a one year holding period with respect to the token.&#8221;



If based in the US, venture capital fund managers must take reasonable steps to comply with SEC guidelines. But in addition to staying compliant with rules on the offer, sale and resale of securities, McAvoy said, &#8220;there&#8217;s also the fiduciary responsibilities that the venture capital manager has to their clients.&#8221;



He added: &#8220;The venture managers have a duty of care and loyalty. One of the things that they&#8217;re supposed to try and do is maximize returns for their investors. And to do so in a manner that is as close to compliant as possible. So there&#8217;s a bit of a push and pull. The duties that you have to your investors don&#8217;t necessarily match up with your desire for a particular protocol to succeed.&#8221;



So if a venture capital fund has a hand in influencing a project&#8217;s bad tokenomics, it may benefit from exiting a major position in a way that avoids potential fallout. Their playbook is to argue that their sale of an unregistered security qualifies for exemption and is in the interest of their investors. The SEC regularly enforces and takes into account the fiduciary responsibility of these fund managers to their investors, but they do not provide token holders the same degree of protection.&nbsp;&nbsp;



The reliance on venture capital funding and uneven enforcement of securities law fuel this predatory behavior. It creates an environment where token issuers are afraid to work in the interest of token holders and venture capital funds are encouraged to take profits at token holders expense.&nbsp;



This sad reality is an extension of the hyper-financialization problem seen across markets – where powerful institutions use the concentration of capital to drive speculative bubbles and extract wealth from new participants.&nbsp;



<h2 class="wp-block-heading">Final thoughts</h2>



Crypto has a complicated relationship with the &#8216;wolf of trading&#8217; archetype. News about venture capital investment in a particular project can carry credibility for some and incite suspicion in others. This division combined with the inherent competition between projects makes it difficult to navigate for an uninformed newcomer.&nbsp;



And while there are many innovative projects with fair launch distribution and real world utility embedded in their tokenomics, they often get lost in the socially engineered hype of well connected and venture capital-backed tokens.



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