Your Protocol's Token Will Go to Zero. Here's How to Fix It | Guillaume Lambert - Panoptic

[Music] all right thank you everyone so today is going to be uh the most amount of negative Alpha you'll see at e Denver my thesis is that unless you really think about it and design a token with some purpose it's going to go to zero the pressures the long time longevity is actually hard to get and it's not something you copy off someone else you have to be very very purposeful so yes negative Alpha on how autonomics work and this kind of all started I me way back when but I read a book by Stephanie Kelton called the deficit deficit myth and in the book to kind of uh paint an image of the US economy going down a drain they actually use the analogy of a drain to model the US economy the key point is that flows from the facet are money is money printing government printing money through bonds issuance quantitative easing and the drain at the bottom is taxes you pay you get rid of the taxes that lowers the amount of floating um money you open the facet open the floodgates more money into the system and if you look at this this view you don't have to believe it or this is just kind of a a cool analogy you have some level of interaction between citizens the ex Executive Branch the Federal Reserve turns out if you make the switch that paying taxes burns your funds a little bit like EIP 1559 you get to a very very interesting uh setup and if you look at this closely for a long time you can actually get to a point where you can look at the US government's toomics for the dollar it's actually kind of similar to the tokenomics for eth and how ethereum handles supply of the eth token and again one question burning question I know you'll want to know the answer I'll uh give you the answer at the end of the talk one of these two systems is highly inflationary and prone to manipulation don't don't don't shout it don't tell the answer I'll give it to you at the end of the talk but yes why can a token go to zero what's the driving force not necessarily the US dollar but any currencies can either go through bouts of inflation Argentina for the past decade they've seen more than yes some Argentinian 50% inflation per year for 10 years this year you hit 200 that's great but that's value uh of your uh currency going down with respect to Gold Bitcoin US Dollars you inflate the supply the net buying power goes to zero if it's a stock like we work uh 98 99% 99.8% decrease over four short years it's also value of a company whatever it's asset goes to zero uh and and and it's actually quite striking now it's bankrupt another thing FTX the FTX token maybe it has some value but the event of a collapse of an exchange means that no one wants to be associated with that token that uh entity sell it immediately dumps to zero so whenever there's these interesting um Dynamics happening people respond they try to fix it and again the person from Arina can tell me if it's a good or bad decision but one way to solve this is to hire a new politician with wild ideas that may work and fix the system in the case of weor can bring back the same that uh led the token to go to zero or in the case of FTX you can hire some good-look version of of FDF and have him restart FTX so again response to the change in value of currencies stocks or token typically is dealt with in the meat space world you change who's at the head you change how it's controlled and you hopefully get to a better stage but when it's tokens there's no governing body it's actually decentralized whatever decision process needs to happen takes months and uh is happening over uh forums most of these toomics that started in a bad spot will keep going down that slope and many will go to zero unfortunately and when you deal with a token that goes to zero there's no point in buying and if you don't have the asset yourself you cannot do anything so you just watch it down go down if you're a bag holder you should get rid of it if you're just a Observer there's nothing you can do my pitch and then that's the only place I'm going to talk about my own uh protocol is that you can profit in barar markets using options I'm the CEO of an options protocol called panoptic and if you have a bare view on tokens could be e could be any asset there's a wide variety of strategy that allows you to get that negative Alpha you know it's going to go down you send set sell calls go short per buy puts the options will open up a lot of different strategies that will if you think that a token will go to zero will allow you to profit in a way as opposed to just watch watch it fall down the cliff so that's my protocol will allow you to to short all of these tokens the rest of the talk is just going to be about Hawai a lot of these tokens will go to zero so one place where can go wrong is and there's going to be one slide with some math depending on your background hopefully you won't get um it's going to be too overwhelming but one place it can go wrong is the supply control Argentina printed a level of money this is the issuance component to it you issue a lot of tokens the balance goes up there's also a burn or removal from the economy in the case of the US dollars maybe in Argentina as well paying taxes removes funds depositing into bonds or treasuries removes funds from the circulation so typically balance issuance and in the case of many tokens the burn rate and as long as the the equation doesn't go too wild you should keep a token Supply that's bounded if the parameters are a bit out of whack you can go unbounded Supply Supply which is infinite growth and no way to stop it or you can go deflationary Supply where the token itself the insurance will go down too much burn too much remov from circulation it's going to become useless or kind of rified in that stage what you want to be in this bonded Supply is where you know from a mathematical standpoint that you're not going to explode or go to zero which is two of those are very very like unfortunate end points Supply is one way to control this another place which is very important is how resilient that Supply control is uh again I'm a physicist by training you can think in terms of a ball in on top of different surfaces but the key point you want the whole system to be stable to perturbations we know crypto is volatile lots of different uh factors at play but if it's in a stable equilibrium it's going to return to its initial state if you perturb it if you increase the gas if you print tokens you want to be in this stable equilibrium you want to avoid being in this unstable equilibrium where a single perturbation pushes you out down the cliff to the path of uh explod explosive growth or going to zero you can be neutral and that's what you have when there's no real dynamism it's very very stale and overall it's okay not as bad as unstable but typically you want to be stable to perturbations and again another math it's a dynamical system you can solve a mat mat the igen values not igen layer the the values of that Matrix tells you about the type of equilibrium so whatever par parameters you throw at this equation you can solve a very simple um again igen value problem and you can mathematically demonstrate whether you're stable unstable or kind of neutral in your token Supply so let's go over uh the supply is one of the key aspect of how token value is uh defined or determined there's also demand so supply and demand have to be in balanced demand is what's the price even though the supply is a million what's the price that someone is willing to pay for that so why would you buy a token to hold to vote it has does it have some utility that contributes the demand of that token what's the intrinsic value of that token do you own a part of a Dow do you own just future return returns voting power or just speculation this will affect what's someone is willing to pay for that token foro comes in I guess in that inic value when should you sell you can buy and hold forever but most companies most protocols May F A life- ending event what should you have a profit in mind when do you sell when do you actually exit that uh that system and also if you're a protocol a token launcher yourself you are in the business business of capturing value why do you launch a token really why would you do it is it the right time is it the right model that's something that is extremely important if you want to be surviving I guess for a long period of time so let's do a few case studies and we'll go over some of the mat but then I'll give you a maybe qualitative picture of these token systems the first one is the Bitcoin Network you have users that interact with Miners and validators they pay some fees to transact the miners solve again this proof of work to provide security that you're really sending tokens to to your friends the way that the miners are rewarded is that the block reward is printed out of tin air and that's kind of securing all the money spent on validating is rewarded by this reward so it's a very simple system users on one side gain Security pay some fees validators on the other side gain some reward and provide that security to that computition power if you go through that uh formula the issuance is basically the only thing that happens meaning that issuance is known there's a Bitcoin having we know that it's going to go down over time the burn rate is pretty much absent on unless you burn your keys or send it to uh the wrong address there's no burn so if you just solve for the token Supply over time given that the issuance decreases every four years you'll get to a fixed 20 million uh tokens it's actually okay no burn no change the value will depend on how much people want to use it it's one of those neutral equilibrium even if you perturb the balance the supply the demand it's not going to change much because you're in that state where beside losing your keys there's no Dynamic to the Token Supply so the only value is how much do you value security that's how much you're willing to pay so again we'll show show a few of those examples but Bitcoin has a neutral type of equilibrium it has value by Network effects you trust that the Bitcoin has value everyone trusts it so that's how you gain some value from it that's Bitcoin proof of work kind of neutral fixed token Supply somewhat boring but kind of works let's look at layer one tokens like Solana that has some staking component to it you have a new path for uh again attaining block reward you still have validators very very uh Advanced high-tech uh again computers users pay some fees to the validators there's a burn mechanism as well in in Solana they get security so the right hand side is very similar you also have ways to stake your soul tokens get some rewards get your piece of the pie so that the validator transits this back to you to some extent we can look at the issuance and burn the burn is that again burn your fee so we know it it's kind of somewhat dependent on the activity and the issuance I didn't know too much but the schedule is that it's going to stabilize to a fixed inflation rate of 1 and a half% for Solana sold tokens so it starts fairly high now it's going to go down over time and eventually it's going to be fixed so the issuance is going to be constant over time and that burn will vary with network activity and that is again what makes it a tiny bit unstable you can stake as well and currently a lot of the stake tokens uh a lot of the balance the the supply is staked so you have a incentive to State and get passive returns and you have uh a natural removal of tokens from circulation so the more you wait the less Supply is there it may not compensate for the inflation and at the same time this burn rate can vary somewhat widly and you think about the end state in 25 years most of the burn will be extremely volatile extremely high most of the tokens will be in that Stak uh system you go through the M it's somewhat unstable so I don't want to offend anyone from from sonana but the key point is that the the actual long-term 10 years plus in the future given the given externalities is giving some instability in the price you could go to a point where everything is staked and the token price goes very very high and no one can use it or the burn rate is way way too high it doesn't compensate for the 1.5% issurance Solana of course has a lot of value itself you burn the tokens who it has some intered value you have some rewards but it's a bit unstable let's go to two more examples uh and go back to the US government of course Dows again I try to use these interaction users interact with smart contracts they uh provide some activity get some benefits ad Dow controls the smart contract the issuance and burn could be defined by voting they change depending on the voting mechanisms in if no one votes is very sale if everybody votes it can be taken over depending on how you do it there could be a burn that happens in waves or there could be no burn and then fixed supply all of this is managed by thous humans uh various individuals could go wrong without saying it's certain but it could go wrong so that means inherently it's unstable because all of these parameters if they could be change they could be taken over if they don't change you get to a stale State most of the time it's unstable so the token Supply could even go to zero Infinity print no one one really knows one key thing and that's a very recent development I think Unis swap of course but a l of pro Protocols are realizing this that the token self has has some value uh what they are enshrining is the fees now will be collected from the smart contracts it's going to the Dow controlled uh again Staker their fees flow go back to the users that participate in voting or delegation now you get some uni token you delegate you have a direct connection between who you delegate to and how much fees you collect so there's a natural feedback and the active delegation and fee means that now it's actually a kind of bit better you get rid of some of the instabilities you don't burn any tokens which is what I don't like but overall it Cate creates a value for the token that is clear if you delegate to YZ they gave you a fra they vote for prot for turning on the protocol fee they gave you some value so in that case Unis swap is stable or unstable but rather uh the the the value of the token now has a clear meaning it's not just voting for XYZ but voting for you the delegator getting more Revenue the last one is ethereum the granddaddy of all token systems getting a little bit more complex getting uh still able to Analyze This using the parameters there is burn EIP 1559 this is very important you burn some tokens you spend it to gain economic activity as a user you don't mind because you may make 10x that in an nft trade or Unis swap trade so that's good lots of burn the other thing is the issuance again square root of the number of tokens State dictates how much you issue over time so this is a vitalic had a post about this like not linear not Square let's do square root who cares but at the end that creates a very interesting Dynamics if everyone Stakes it's square root of the number of tokens so the diminishing returns uh you get from adding audio tokens to the stinging pool if no one Stakes then you can get more proportionally so square root creates very interesting Dynamics uh you have uh the balance of the two means that again alra sell money you have changing Supply can go up can can go down in the times when it goes down it's because there's a lot of burn in the times when it goes up is that there's less burn issuance brings it back so it adds some two-sided action and if you go through the analysis it's actually a stable equilibrium this might be complex but you perturb it and it's going to relax with some time scale to a fixed Supply so if burn rate changes activity changes number of stickers changes it's actually resilient it's not going to go off to zero Infinity that is a very very clear example of a stable equilibrium e in my opinion has the best economics protocol should emulate both the square root issuance it di Mission returns and also the burn rate that happens so that is somewhat of a summary slide it at the end is very very uh welld designed whether they intend it or not it gives this stable equilibrium which is kind of unseen in most protocols um back to the initial Point US government government and uh token supplies there's some again if you squint there's the user citizen analogy there's a execution layer executive branch analogy consensus layer Federal Reserve that's how far is going to push this but there's also some interactivity between the different components burn in e45 ethereum is clear you spend your tokens to get reward this is also a different way looking at but if you pay taxes those taxes don't go and fund on roads they print new money for roads they take your money and burn it you pay taxes so that you stay in the system they take your money it's gone they print out of thin air what they need but similar to EIP 1559 you can issue more tokens so very quickly uh that means that it's going up to the right burning the taxes issuance very very uncorrelated however it's stable in it in its explosivity it's going to go up forever regardless of how many taxes you pay how many uh issuance you do it's always going to go up this is a stable exploding type of system so I'll end it here and uh that's the takeaway e has a good Supply because it's stable usdc has a stable Supply but it's always exponentially increasing go do what to do with this but they also figured out a stable way it's not going to change if uh the what happens it's always going to explode so thanks everyone remember if it goes to zero you can trade options to profit otherwise stay away from those tokens that haven't figured out that Tok yet all right thank you