Please describe your proposed solution
Addressing Problem
The problem we are addressing specifically stems from the lack of sustainable incentives for medium and small protocols to secure liquidity in secondary markets. These protocols typically struggle to retain long-term liquidity providers (LPs), as their tokenomics models fail to provide ongoing value capture mechanisms that incentivize loyalty. Without adequate incentives, LPs migrate to higher-yielding opportunities, leaving the protocol vulnerable to liquidity shortages and instability in secondary markets.
How has this problem raised and how is it faced in other ecosystems
In the early stages of DeFi, Tokenomics designs were primarily rudimentary, with tokens often serving as short-term incentives and speculative profit tools. The simplicity of these structures left them vulnerable, particularly in liquidity mining farming strategies to bring adoption and liquidity. For instance, decentralized exchanges (DEXs) commonly allocated all emissions and fees directly to liquidity providers (LPs), creating a short-term gain dynamic without fostering long-term commitment. This flawed design caused many LPs to exit pools when token prices dropped, resulting in frequent collapses due to minimal switching costs.
Over time, DeFi protocols have evolved to incorporate more advanced Tokenomics, such as token supply and demand regulation, game theory, and redistribution models. These changes have linked Tokenomics directly with protocol logic, emphasizing value flow and real income distribution to participants.
Our solution addresses the core issue of failed tokenomics in smaller protocols by introducing governance and utility models that create lasting incentives for liquidity provision and long-term support. By doing so, we aim to reshape value distribution mechanisms, ensuring sustained liquidity and stability.
Our Approach
Our approach is driven by the need to address the limitations in current tokenomics models for medium and small protocols. We aim to create a sustainable value capture mechanism that ensures long-term incentives for liquidity providers (LPs) and supports the protocol's growth. The decision to focus on governance and token utility stems from our observation that protocols often fail to incentivize liquidity in markets, utility & governance, at the same time.
Our main targets are Small & Medium Protocols & their communities. Cardano has hundreds of S&M protocols struggling to bring liquidity to their tokens. We believe that to have a healthy protocol community all these roles must be aligned:
Liquidity Providers (LPs): LPs are crucial for the project as they provide the liquidity that powers secondary markets. By offering long-term incentives and value capture mechanisms, we ensure they remain engaged.
Governance Participants: We will attract token holders who are interested in actively participating in decision-making processes. Governance participants will be crucial to shaping the protocol’s evolution, ensuring it remains aligned with community needs.
Community Members and Token Holders: The broader community will be engaged through incentives to hold and use the tokens, contributing to protocol adoption and market stability.
What is the solution?
Inspired by Curve’s & Balancer’s veModel, we will develop a decentralized infrastructure to mint $gTokens for protocols.
$gTokens is a derivative token, meaning that it represents an underlying token portfolio of liquidity tokens & single tokens. By doing this, the utility token (used for governance, access to protocol features, protocol earning distribution, etc) embedded not only a long position in the protocol value but also liquidity for the single token on secondary markets.
The $gToken can be minted under specific configurations:
- Different proportions of single tokens & Liquidity Pool tokens
- With locking mechanisms and an increasing time-lock minting formula
- With a relocking Max Time mechanism to maximize voting power
We believe that implementing this kind of solution will improve the following KPÏs:
Liquidity Retention: We will track the volume of liquidity provided over time, focusing on the retention rate of long-term LPs compared to the baseline.
Token Price Stability: Stability and growth of the token’s value will be a major indicator of success, reflecting effective demand regulation and value capture mechanisms.
Governance Participation: We will measure the engagement of token holders in governance decisions, monitoring the number of active participants, proposals submitted, and votes cast. This will provide insights into the depth of community involvement.
Secondary Market Activity: By analyzing the activity on secondary markets, such as token trades and staking participation, we can gauge broader market confidence in the protocol's sustainability and value proposition.