Changing the Tokenomics of Factom

We are looking to change the governance and make other changes to Factom. We should also consider changing the tokenomics of the protocol itself.

At this time, we have pretty simple rules. The crowd sale produced X number of tokens, early token buyers, developers, and contributors were issued X tokens for a total of 2X tokens. We set the inflation rate to be roughly 10% of 2X to be paid to the Authority Set. Efficiency (tokens ANOs leave in the protocol) fund the grant pool. Usage of the protocol lowers inflation, and if usage developed, it may well have offset inflation, but it hasn't to date.

We find ourselves low on resources, and an inflation rate that is on auto pilot. While I continue to assert the inflation rate is nothing much to worry about, the inflation rate remains a worry to the community.

In conjunction with an agressive roadmap to redesign the Factom 2.0 to a 1000's of TX per second kind of protocol, I believe we could consider a redesign of the tokenomics.

My proposal is also simple:
  • Set a absolute token limit on the protocol of 21 million tokens
  • The current issued tokens are 9,265,134 tokens
  • Create an Endowment within the protocol of the difference of the limit and the issued tokens, i.e. 21,000,000 - 9,265,134 = 11,734,866 tokens
  • ANOs and grants are limited to 7.5% of the Endowment per year
  • Critical needs (such as creating liquidity for the token) can be addressed with tokens from the Endowment.
No particularly special code is necessary. Tokens are issued through the coinbase today, and special issues to exchanges can be handled like grants.

Consider very low utilization of Factom under the revised tokenomics. Currently we would be issuing the same tokens, about 73k per year. But the next year we would issue 68k tokens, and the next 63k tokens. By year 10 we would halve the tokens issued.

Inflation
YearIssued TokensEndowmentper yearper monthUsage of issued tokens
7.50%0.50%
09,265,13411,734,866880,11573,34346,326
110,098,92310,947,402821,05568,42150,495
210,869,48410,181,011763,57663,63154,347
311,578,7129,475,635710,67359,22357,894
412,231,4918,826,402661,98055,16561,157
512,832,3148,228,843617,16351,43064,162
613,385,3167,678,846575,91347,99366,927
713,894,3037,172,624537,94744,82969,472
814,362,7786,706,694503,00241,91771,814
914,793,9666,277,848470,83939,23773,970
1015,190,8355,883,135441,23536,77075,954

However, for the protocol to flourish, we need to provide tokens for exchanges. Suppose that we through a special vote, allow 1 million tokens to be issued for this purpose, providing liquidity and paying exchange fees.

Inflation
YearIssued TokensEndowmentper yearper monthUsage of issued tokensProtocol token issues
7.50%0.50%
09,265,13411,734,866880,11573,34346,3261,000,000
111,098,9239,947,402746,05562,17155,495
211,789,4849,266,011694,95157,91358,947
312,425,4878,633,460647,51053,95962,127
413,010,8698,051,258603,84450,32065,054
513,549,6597,515,395563,65546,97167,748
614,045,5667,022,183526,66443,88970,228
714,502,0026,568,226492,61741,05172,510
814,922,1086,150,402461,28038,44074,611
915,308,7785,765,832432,43736,03676,544
1015,664,6725,411,872405,89033,82478,323

While issuing over 10% of the current supply of tokens becomes possible to provide for the urgent need to list FCT, the cost is not unaccounted for, as it cuts the ANO/Grant pool by 5k tokens per month. And does not do anything to raise the ultimate limit on the number of tokens to be issued by the protocol.

Connected to a complete overhaul of the Factom Protocol to push our transaction rates up to numbers that represent real usage, the endowment becomes self sustaining, but guaranteed to live under the Bitcoin token limit.

Other scenarios are pretty easy to construct. Happy to share the spreadsheet used with anyone interested.

@Governance Working Group
 
Thank you Paul. Let me explain why I think this idea is moot.

We might change the number of tokens that are issued, but the core problem that we are facing will persist: The protocol is running at a deficit. It has little revenue (i.e. tokens bought for usage and investment) and large expenses (development and infrastructure). Both the revenue and expenses are eventually paid in fiat. So no matter the amount of tokens, there will be a supply that will be larger than demand, which will push down price. To sustain a higher token price we can grow the revenue by having increased usage or convince people that the token will be worth more in the future. Or we can cut down development or infrastructure AND reduce the token supply at the same time (because if we still issue the same amount of tokens ANOs might just sell them in the market). Either way cutting down expenses would still mean saving resources in fiat terms - so someone would have to receive less.

Since there is always development to be done and heavy usage still seems to be somewhat out in the future, I believe focus should be on adjusting infrastructure to an appropriate size and most importantly by building the case for new investors to put their money into the protocol. Not by moving tokens around, but by making it clear how Factom will deliver real business value, that will eventually drive usage. One component of that is a roadmap, another is ANO communications. I think Colin and FederateThis provided an excellent example in their latest update on how to tell a lot, without promising too much. Lastly the story needs to be put in front of the right people. My view is that retail crypto investors might not be the best people to try to attract, but on the other hand I cannot judge if the cost/benefit is better if going towards more professional investors.
 
We have talked @Hinamatsuri to exchanges and they want tokens to list, and to make the markets.

So yeah, this does two things. It allows us to give tokens to exchanges, and it addresses the inflation issue some have with the protocol.

I do think it must also be coupled with a significant advance of the technology. And I am helping with GWG on the roadmap.

Factom remains compelling as a technology. But we have to leverage tokens to create liquidity.
 
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Thanks Paul. Great to see you engaged, especially when it comes to the roadmap work.

Knowing us, we'll have regular votes for "critical needs" to take money from the endowment, making us reach the fixed cap sooner than expected. How do we prevent running into issues at that point if usage is still very low?

Would it make sense to keep a tail emission (0.5 - 1%) like Monero that kicks in at a certain supply - limited to staking (with ANOs)?
 
Although I like the idea, I feel it’s incompatible with staking. Am I right?
No it would not be incompatible. It would force staking to live within the limits of the budget. I used the term endowment, and that might be bad.

So if staking is today intended to live within the 73k fct issued per month, staking would have to live within the 7.5% of the remaining tokens under the new tokenomics.

So everyone receiving tokens has to get used to the fact that token issues from the protocol will decline over time. It does place importance on getting into the protocol early, while payouts can be higher, because they will be lower going forward.

Token holders want to know that they hold a token with a strong token limit.
 
Thanks Paul. Great to see you engaged, especially when it comes to the roadmap work.

Knowing us, we'll have regular votes for "critical needs" to take money from the endowment, making us reach the fixed cap sooner than expected. How do we prevent running into issues at that point if usage is still very low?

Would it make sense to keep a tail emission (0.5 - 1%) like Monero that kicks in at a certain supply - limited to staking (with ANOs)?
Maybe? But I believe if we can pull off the massive jump in capacity and stability promised by the Factom 2.0 design, I think usage could go up exponentially. Our usage does generate fees that does refill the token pool.

Under any reasonable scenario, the token pool is sufficient for decades.
 
It is an interesting idea Paul.

At first glance it looks like we are going to be printing a couple Millions worth of FCT right after this proposition is accepted.

  • Collin is already talking about 3M$ which might very well translate into 2M-5M FCT depending on where we stand at that time.
  • Exchange committee might want a 1-2M$ allocation to secure something like binance + some other tier 1 exchanges
  • Core committee might be seeking for 1M$ worth to implement your idea around pushing Factom to 1000 Txs/sec
  • etc

So right from the get go we might have to issue half of the 11M endowment the next few days this proposal goes though.

Is it good or bad ? I have no clue but I think it is a very likely scenario. We would ended up seeing 5+ years worth of inflation shortly after approuved. This is a lot of inflation in a short span, the impact that this is going to have on the price is not going to be negligible.

I think any tokens printed this way would need some kind of vesting window (1 year) just like you see in lots of ICO. I think there's a real risk of seeing the price of FCT capitulating further if we are to issue 50% of our market cap within the same day. People are going to front run this event as lots of people are going to sell these tokens to fund their projects and you don't want to stand in front of that train.
 
It is an interesting idea Paul.

At first glance it looks like we are going to be printing a couple Millions worth of FCT right after this proposition is accepted.

  • Collin is already talking about 3M$ which might very well translate into 2M-5M FCT depending on where we stand at that time.
  • Exchange committee might want a 1-2M$ allocation to secure something like binance + some other tier 1 exchanges
  • Core committee might be seeking for 1M$ worth to implement your idea around pushing Factom to 1000 Txs/sec
  • etc

So right from the get go we might have to issue half of the 11M endowment the next few days this proposal goes though.

Is it good or bad ? I have no clue but I think it is a very likely scenario. We would ended up seeing 5+ years worth of inflation shortly after approuved. This is a lot of inflation in a short span, the impact that this is going to have on the price is not going to be negligible.

I think any tokens printed this way would need some kind of vesting window (1 year) just like you see in lots of ICO. I think there's a real risk of seeing the price of FCT capitulating further if we are to issue 50% of our market cap within the same day. People are going to front run this event as lots of people are going to sell these tokens to fund their projects and you don't want to stand in front of that train.
I believe we will need standing parties to agree to issuing tokens like this. And their payouts will be cut if the token pool is depleted, perhaps below sustainable levels. So I'd strongly oppose issuing large amounts of tokens.

But getting tokens to pay for exchanges from the protocol is an exception. We have to have exchanges to repair our token price and create the resources the protocol needs.

Put a pile of tokens on the table and everyone's going to want to spend them. Luckily few will agree to how, so making sure deadlocking the process easily ... That will be our friend.
 
One-time allocation of tokens for “foundation/EC” is very good idea. Not necessarily to issue them right away (bc we need an entity to hold it right away), instead we can issue them directly for investor(s) when it’s needed.
I'm still not a fan of an actual foundation, as that is more centralization than I like. I think this approach might allow decentralization of the foundation.
 
The math on this is kind of interesting because it makes inflation depend on both token usage and endowment spending, when right now it doesn't depend on either of those things.

Just for fun, here are some calculations of the share of total protocol value assuming a 10% discount rate. "Current token holders" include is whoever currently holds the 9.2M token supply, "inflation recipients" accounts for future issuance going to ANOs and the grant pool, and "endowment recipients" are whoever receives the endowment payments - presumably exchanges. I assume any endowment payments are a one time action at time 0.

This is a pretty good deal for current token holders under any realistic usage scenario, and ANOs are hurt more than token holders for any endowment payouts.

ScenarioCurrent Token HoldersInflation RecipientsEndowment Recipients
Baseline, current scheme of 876K per year flat issuance51%49%0%
No usage, no endowment spend65%35%0%
No usage, 5M endow spend54%17%29%
1M per year token burn, no endowment spend50%50%0%
1M per year token burn, 5M endowment spend43%33%23%
 
Paul,

I generally like this proposal's approach to setting a limit on FCT that will exist.
That magic 21 Million limit sure would simplify the FCT supply scarcity story.

One aspect that this might enable that hasn't been touched on thus far would be the ability to this type of mechanism to fund "sinks" for FCT tokens. Projects such as PegNet burned more than 1 Million FCTs in their boot strap phase. We need 10 more PegNet type projects to launch on the protocol and having a repeatable boot strap mechanism like this that produces say 2X the burns of tokens as FCT awarded would be quite the engine for FCT burning.

I'll think about this more but it could be the missing piece to connect FCT to a broader set of projects that could use FCT especially after its on a Binance yet exchange as this proposal would provide funding for.
 
" That magic 21 Million limit sure would simplify the FCT supply scarcity story. "

Just to clarify, all burned tokens get "reconstituted" back into the FCT endowment correct?

Said another way, endowment + issuance will always equal 21MIL. So if all 21MIL were issued (0 FCT left in the endowment) and 5MIL were burnt in a single event, 5MIL would get added back to the FCT endowment for issuance to ANOs, available for grant pool, etc.)?

Would this allow for infinite unused EC to accumulate? If yes, maybe not a bad, but want to clarify to ensure I'm processing this correctly.
 
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I was hoping @TroyWiipongwii could drop in here but he's swamped atm so consider this more/less a proxy comment.

Thanks for broaching this topic @PaulSnow. This feels like the right direction. At the same time, (I don't have to tell you) changing the tokenomics of the protocol is a massive decision to make. No one aside from (arguably) bitcoin has nailed tokenomics.

To whit, I encourage us to consider this a prime opportunity to engage William & Mary.

1. They have one of the leading incentive designers in the world: Donald E Campbell
https://www.wm.edu/as/economics/faculty-directory/campbell_d.php

2. Donald may be joining the Blockchain Lab's affiliated faculty and this would be a perfect project for him to sink his teeth into:
https://www.wm.edu/offices/global-r...ain-lab/our-team/affiliated-faculty/index.php

3. Going this route would engender confidence and credibility both within the ecosystem and in the broader market

4. Making this a process with some public milestones represents an ongoing PR opportunity

I understand the need to move forward. If we're feeling urgency, are there aspects of this we can be decisive about in the near-term while taking our time with other components? For instance, can we cap the tokens at 21m in the next few months while giving ourselves more time to determine the rest?

P.S. It's worth looking at W&M's advisory board as well. Some potent development opportunities here: https://www.wm.edu/offices/global-research/projects/blockchain-lab/our-team/advisory-board/index.php
 
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One aspect that this might enable that hasn't been touched on thus far would be the ability to this type of mechanism to fund "sinks" for FCT tokens. Projects such as PegNet burned more than 1 Million FCTs in their boot strap phase. We need 10 more PegNet type projects to launch on the protocol and having a repeatable boot strap mechanism like this that produces say 2X the burns of tokens as FCT awarded would be quite the engine for FCT burning.
If we create 1 million FCT and then immediately burn them to create tokens in a project build on top of Factom, would that not be the same as just creating tokens out of thin air in that project itself? Or am I misunderstanding what you mean, when you say "sinks"? :unsure:
 
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" That magic 21 Million limit sure would simplify the FCT supply scarcity story. "

Just to clarify, all burned tokens get "reconstituted" back into the FCT endowment correct?

Said another way, endowment + issuance will always equal 21MIL. So if all 21MIL were issued (0 FCT left in the endowment) and 5MIL were burnt in a single event, 5MIL would get added back to the FCT endowment for issuance to ANOs, available for grant pool, etc.)?

Would this allow for infinite unused EC to accumulate? If yes, maybe not a bad, but want to clarify to ensure I'm processing this correctly.
That's right. Burns allow tokens to be re-issued. It is another way to allocate fees to support the network.
 
Two assumptions that are constantly brought up in these discussions that need to be addressed:
1. We need mass usage shortly - there is no mass usage of blockchain/cryptocurrency today and there likely be little more in 3 years. Bitcoin does not have mass usage, Ethereum does not have mass usage. Mass usage does not drive crypto pricing (because there is none).
2. We need limited supply/scarcity to drive pricing up. While overall scarcity generally means more value, supply side economics aren't fact and let's leave the crypto gold bugs to play around with Bitcoin, we aren't going to change their minds.

I do think what people want is a chance to earn a return, POW is open mining and POS is basically a dividend. If we don't fit either of those (or any other open system that allows users to earn a return) it's a turn off to many speculators and early adopters and that's who we are trying to attract. We are still incredibly early in this game, even though it doesn't feel like it, and early money wants a way they can diversify investments with returns. I think Factom is definitely one and our initiatives in POS are, imo, the way forward here.
 
We do need to do something and this discussion feels on the right track, but we don’t need to rush it. Quite the contrary.

I’d like to point folks to @Matt York and MaxCollab’s grant proposal which will formalize a partnership with the William & Mary Blockchain Lab to begin proper peer-reviewable research in the tokenomics and governance of not just Factom (2.0) but also dApps deployable on the protocol.

The proposal evolved over the course of the discussion period. @TroyWiipongwii’s comment (linked here) is the most concise description of the proposal.
Matt’s comments at the end of the thread are also worth reviewing.
 
Two assumptions that are constantly brought up in these discussions that need to be addressed:
1. We need mass usage shortly - there is no mass usage of blockchain/cryptocurrency today and there likely be little more in 3 years. Bitcoin does not have mass usage, Ethereum does not have mass usage. Mass usage does not drive crypto pricing (because there is none).
2. We need limited supply/scarcity to drive pricing up. While overall scarcity generally means more value, supply side economics aren't fact and let's leave the crypto gold bugs to play around with Bitcoin, we aren't going to change their minds.

I do think what people want is a chance to earn a return, POW is open mining and POS is basically a dividend. If we don't fit either of those (or any other open system that allows users to earn a return) it's a turn off to many speculators and early adopters and that's who we are trying to attract. We are still incredibly early in this game, even though it doesn't feel like it, and early money wants a way they can diversify investments with returns. I think Factom is definitely one and our initiatives in POS are, imo, the way forward here.
I have been wanting to write along winding thread about usage, who should pay for what and where the value of a dividend should come from, but I lack the time. For now, let me just ask: Do you believe we can provide a market beating return for years to come, until usage eventually happens, which in turn would fund the ANOs that do not have Factom related income, outside the tokens they receive? The figure that has been kicked around has been 3-9% return per year. That is on an asset that has already dropped 50% in value this year. You could probably do just as well in the stock market, with much less risk.

By the way, pulling out Bitcoin or Ethereum to show that mass usage does not drive price could be seen as an example of survivorship bias. There are hundreds of projects that are not faring particularly well and you could argue it is because they are not delivering much value to anyone.
 
@Hinamatsuri I think most market activity (purchasers not necessarily active traders) is speculation. So, yeah I do think that there are people who would be very interested in a 'discounted' token with a strong team and roadmap that has potential to pay off big time in the long run and they can earn a dividend while waiting. There are staking tokens right now, that dropped >50% in the last year but are coming back or already have.

And ok, I mentioned Bitcoin and Ethereum becuase they're the top two projects. I should have said there are no projects with mass usage. What I'm trying to say is that speculation is driving price and the open ecosystems that give early adopters a chance to earn tokens are more attractive to speculators.
 
So, yeah I do think that there are people who would be very interested in a 'discounted' token with a strong team and roadmap that has potential to pay off big time in the long run and they can earn a dividend while waiting...

What I'm trying to say is that speculation is driving price and the open ecosystems that give early adopters a chance to earn tokens are more attractive to speculators.
These are valid and important considerations. They needs to be taken in conjunction with all other considerations. Please, let’s not do this purely out an observation of the market thus far.

We need to be forward-looking and lead. Not just cut and paste what others are doing.

By the end of business today (PST) we’ll know whether we’ve established a partnership with the W&M Blockchain Lab and, if so, potentially one of the top incentive structure researchers in the world.

Can we frame this discussion as a compilation of considerations rather than a debate about preconceived notions?
 
Agreed, and what I'm afraid of is that we have been comparing our success thus far on observations of the market, which is driven by inconsistent and unpredictable speculation. I don't think copying and pasting work but in the short run, making ourselves attractive to the current market will help secure us for long term success. This isn't meant to be a debate on preconceived notions but if there are differing in assumptions (e.g. supply side economics) held by the various parties, we need to at least address them before we can solve the equation. If you believe that scarcity drives demand and I don't then we'll have a hard time talking about the best burn rate or token issuance policy.

I also realize it probably sounds oxymoronic to say it's both a bad idea to compare success to speculative tokens and say we need to adopt a model to attract speculators but I think there's a middle ground where we can build for long term success while modifying short-term market-driven functionalities (such as staking) to attract investment. I do look forward to the W&M partnership in this as we investigate this and at the same time realize that incentive structures are not solved and we will probably need to continue to evaluate them as conditions change.
 
I think there's a middle ground where we can build for long term success while modifying short-term market-driven functionalities (such as staking) to attract investment. do look forward to the W&M partnership in this as we investigate this and at the same time realize that incentive structures are not solved and we will probably need to continue to evaluate them as conditions change.
Totally. Wasn’t meant as a harsh critique, and wasn’t meant to be directed at you personally, @Nate Miller. Just offering some framing for the discussion.
 
@Hinamatsuri I think most market activity (purchasers not necessarily active traders) is speculation. So, yeah I do think that there are people who would be very interested in a 'discounted' token with a strong team and roadmap that has potential to pay off big time in the long run and they can earn a dividend while waiting. There are staking tokens right now, that dropped >50% in the last year but are coming back or already have.
Fair enough, our assessment on how much incentive is needed to attract money to PoS might differ. But I do think there is a possibility that some of the speculators might not consider the performance of alternative investments, because they have commuted themselves to crypto. Even though I would prefer not to bank on it.

One thing where you lose me, though: you say you expect no mass usage in three years time. But you still say that speculators could have a potential big pay off in the long run. Would you consider the long run more like five or seven years? Or maybe even longer? Maybe a qualifying question is also what you consider to be “mass usage”? Of course that can differ quite a lot from person to person.
 
But you still say that speculators could have a potential big pay off in the long run. Would you consider the long run more like five or seven years? Or maybe even longer? Maybe a qualifying question is also what you consider to be “mass usage”? Of course that can differ quite a lot from person to person.
Tbh, I don't know. I'm thinking in 3 years it's possible that we could see wide usage of specific aspects of the technology, such as blockchain stored identifiers for IoT or immutable databases for audit purposes. But speculators may have a longer or shorter view depending on the person. I have no evidence for this but I suspect that the drop in Factom pricing is related to exchange listings and emergence of new consensus protocols, like staking, encouraging speculators to look for what's next. For mass usage, this is another good question and I don't have a solid answer here either, but consider the ubiquitous comparison, the internet. In 1999, about 36% of the US and 7% of the world's population were internet users. Today, it's estimated that around 5% of Americans and 0.5% of the world holds Bitcoin. So, I'd say we need 5-10x usage we see today.
 
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