Background:
We’re very proud that Alpaca Finance is one of the few successful fair-launch DeFi projects. We never conducted a token sale, and 87% of our total supply is distributed to our community and users–one of the highest ratios in the industry!
Back in early 2021, when we designed our ALPACA token, we optimized on certain dimensions to give us the best chance of success at launch, and while that served us well in the past, it also created limitations for the future. We will address those limitations in this post.
Specifically, making our ALPACA token contract non-upgradable, with a hardcap on supply, served to maximize the community trust in our project at launch; a trust we’re grateful to have, and have worked hard to maintain and grow. However, there are downsides to that structure.
For example, without new tokens emitted, it will be more difficult to attract new users to Alpaca’s new products, which will ultimately cost the ALPACA holders because they will not earn the revenues from those users, and it will also make it more challenging for those products to scale. On the contrary, with sufficient token support, the upcoming products will have the best chance of attracting new users from BNB Chain and even other networks, creating the highest revenue potential for ALPACA holders.
With the upcoming launches of our Perpetual Exchange and AF2.0, two products with great potential to attract new users to Alpaca due to the various novel use cases they enable, we believe now is an appropriate time to discuss tokenomics with our community, because tokenomics will have a significant impact on the success of these products.
Proposal:
Today, we would like to put forth some potential directions, in order to kickstart a discussion about the possibility of adjusting the tokenomics of ALPACA, should governance decide it the best direction. At a high level, there are three directions we can take, which are:
- Extend the ALPACA token supply (requires upgrading token contract to ALPACAv2)
- Issue a new token
- Keep everything as is
Elaborating on how each direction will impact our upcoming products, Perp and AF2.0, we get the matrix below which results in 4 possible approaches:
Approach #1: Extend the ALPACA token supply
This approach would update the ALPACA token with tokenomics to best support existing and future products. Among other improvements, this update would allow for continued emissions and liquidity incentives, in order to maximize the chance of success of the upcoming product launches.
With this approach, revenue from the new products would accrue to xALPACA holders in the Governance Vault, adding to the revenue from existing products. (As of Q1 2023, this product line will be LYF, AVs, AUSD, Perp, AF2.0).
Below, we discuss the key design considerations for ALPACAv2.
Note: Please keep in mind that all numbers presented here are preliminary drafts for discussion, and not final. We chose these numbers because we believe they are a logical starting point for the community discussion.
Conversion of ALPACA → ALPACAv2
Users who currently hold ALPACA will be able to convert their tokens to ALPACAv2 at any time.
Note: Based on what the community decides, we can make the conversion open-ended with no deadline, or we can give a long enough time frame for conversion (e.g., 2 years) and any allocated v2 tokens that aren’t claimed by that time can be burned.
- Current ALPACA will make up a majority (50-60%) of the ALPACAv2 supply: ALPACAv2’s purpose is not to significantly dilute stakeholders, but rather to extend the token supply to support new products that generate net-positive revenues. The goal is to create more revenue through these new tokens than the selling pressure made possible by them. So we believe 50-60% is about the right percentage to achieve these goals.
Furthermore, we’ve designed two ways that would significantly minimize any dilution from these extended tokens:
- We plan for these extended tokens to emit over 10 years, so that the maximum possible average-yearly-dilution of the existing ALPACA supply would be only a single digit %.
- An updated emissions method for liquidity mining incentives, where newly emitted ALPACA will be locked and thus illiquid. We’ll describe this a little later.
- Conversion ratio: 5 ALPACA = 1 ALPACAv2
New Tokenomics:
We next describe how the ALPACAv2 tokens will be allocated:
| Item | Allocation % |
|---|---|
| ALPACA → ALPACAv2 | 51% |
| Liquidity mining incentives | 30% |
| Development Fund | 9% |
| Warchest | 10% |
See details in this spreadsheet.
ALPACA ->ALPACAv2 (51%)
Users will be able to convert ALPACA to ALPACAv2 at any time. Their ALPACAv2 tokens will become liquid immediately. ALPACA tokens currently staking in the Governance vault will be migrated to ALPACAv2 under the same staking conditions.
Liquidity mining incentives (30%)
Liquidity incentives will be provisioned for a long period of time; i.e., 10 years. We will have a relatively smooth, decaying emissions schedule (see this sheet).
In regards to liquidity mining incentives, we have another important innovation–Locked Emissions.
We will update the method of emissions to minimize inflation and the circulating supply of ALPACAv2, as described below.
For liquidity incentives, instead of directly giving out ALPACAv2 as most projects do, we’ll instead give xALPACA locked for 1 year.
This means that new emissions will be unable to dilute ALPACA tokens until they unlock after a year, or until the holder decides to take a significant haircut on their tokens through an early withdrawal (up to -39%). Other details below:
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Users will be able to extend locked time or do early withdrawal on these xALPACA just like normally-locked xALPACA.
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There will be an upgrade to the Governance Vault where a single wallet will be able to hold multiple xALPACA positions with different lock durations.
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Users will be able to claim these rewards at any time (as xALPACA). When they claim, a new governance staking position will be created.
- xALPACA received from liquidity incentives will be entitled the same voting rights and protocol revenue as the xALPACA locked normally.
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It’s important to mention that this will make it easy for new Alpaca users to participate in governance, and strongly increase the likelihood of them doing so.
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These users will naturally visit the governance page because they will want to see their rewards there. Then, because they will already have tokens there and not have to do anything like deposit, they’ll be more likely to use their available right to vote, check out the forum, and generally become more involved with the project. So at the end of the day, this emissions method will have the added benefit of creating more loyal and energetic alpacas, growing our Herd!
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In summary, by employing this mechanism, the new token incentives will not result in 1) an immediate increase in circulating supply; and 2) selling pressure on ALPACA. It will also significantly increase the chance of new users keeping their rewards in governance, or even extending the lock, because it will minimize the barriers for them to do so. So all in all, this emissions method can be called win-win for everyone involved!
Development Fund (9%)
The Development Fund will be vested linearly over 10 years. Development funds will be given out in the form of ALPACAv2.
Warchest (10%)
Reserved for business strategic purposes
- Applications for trademarks, patents
- Security Audit costs
- CEX listings
- Partnership costs
- Entity setup & renewal related costs.
- Market making
- M&A
- Etc.
Warchest Details:
- Unlock over 10 years linearly (1% / year.)
- Similar to the current warchest set up, the unlocked portion can be used at the discretion of the core team, (to minimize governance overhead on each small decision)
- However, any spend above the unlock schedule would have to go through the Governance process for approval.
Approach #2: Creates a new token for Perp and migrate to ALPACAv2 for AF2.0
This approach would mean that the perp product would have its own token for governance/revenue-accrual, but would sit within the Alpaca platform. All revenues from the Perp product would accrue to a separate Perp’s Governance Vault stakers. ALPACA token holders would receive the benefits from the Perp product through an allocation of the new token to Alpaca’s Governance Vault stakers.
Revenue from the remaining products (LYF, AVs, AUSD, AF2.0) would accrue to Alpaca’s current Governance Vault.
Tokenomics:
For the sake of this discussion, we’ll temporarily reference the new token as PERP. We next describe how the PERP tokens will be allocated. Shown below is a distribution that has a lot of parallel from the ALPACAv2 distribution.
| Item | Allocation % |
|---|---|
| Alpaca Governance Vault stakers | 40% |
| Launch incentives | 5% |
| Liquidity mining incentives | 30% |
| Development Fund | 15% |
| Warchest | 10% |
ALPACA Governance (40%)
By allocating a significant portion of the tokens to the Alpaca community, xALPACA holders would receive substantial economic benefits from the Perp product, even though the revenues from said product would no longer go directly to them.
The differences are as follows:
- Only Alpaca’s Governance Vault stakers would receive token allocation of the new PERP token. We would set up a permanent Grazing Range pool to distribute the token to stakers.
- There could be some vesting conditions to minimize the selling pressure on the tokens.
- The emissions schedule would be the same as liquidity mining incentives
Launch incentives (5%)
We can create a lock-drop scheme to bootstrap the liquidity pools. (Users lock assets in the liquidity pool in exchange for Perp’s token). This portion of the incentives will be immediately liquid and does not have to go through vesting.
- We can do liquidity bootstrapping pool and price discovery for perp token.
This bucket will be the only liquid supply of the token at launch.
Liquidity mining incentives (30%)
Incentives for LPs and traders. They would emit as locked xPERP tokens similar to xALPACA in approach 1.
Development Fund, Warchest
These use cases follow a similar framework as ALPACAv2. The Dev Fund portion is a bit higher because the new token means we’ll need to pay additional staff to work on it. We’ll need to create some separate web pages, develop the brand, work on listings, BD for the new token, etc.
The nice aspect of a new token is it would isolate revenue-accrual with the corresponding product; ALPACA holders buy ALPACA for the exposure to the Alpaca products, PERP holders buy PERP for the exposure to the PERP product. The negative aspect is it would create some of the additional aforementioned work, of which most could be considered unnecessarily overlapping.
Because we still plan to primarily focus on Alpaca’s internal products, such as AF2.0, most of our current staff won’t have the time to work on developing the PERP token and brand, seeking and negotiating listings for it, etc… We’ll need to hire more staff for this.
With some new products in the future, it may also become a bit more complicated to select which user base should receive revenue accrual from it (for example, if we launch an AV that integrates with the Perp product). This kind of decision would be difficult to go through governance when there are two sets of governance.
Lastly, right now is a bad market to launch a new token so it’s difficult to say what the price will be like in the beginning. In contrast, with Approach 1, we can at least estimate how much there will be to pay staff expenses because the ALPACA token’s price has been relatively stable for a long time.
Approach #3: New token for Perp but no change to ALPACA tokenomics
This approach is similar to Approach#2 where we will create a new token for the Perp product. However, there will be no change to the existing ALPACA tokenomics, and emissions will expire in a few months. This means AF2.0 and future internal products on Alpaca, like new AVs, will have to grow mostly organically.
Approach #4: No new token and no changes to ALPACA tokenomics
This approach will keep the status quo and make no changes to the ALPACA tokenomics or launch new tokens. It would mean we launch the Perp exchange fully as a sub-product within Alpaca’s platform, and it will have to grow mostly organically.
One of the main purposes of this proposal is to help bootstrap the liquidity for our planned upcoming products, and any other ones in the future. In a positive case, the products may prove to be capital efficient enough to be successful without a token. In a negative case, we might not be able to launch the product at all without token incentives; Projects that go this route often raise VC investment to finance growth, which we don’t plan to do.
It’s hard to say which way it would go. We can only say that token incentives would significantly increase the chance of success. For example, by providing incentives, we could temporarily offer higher APYs to LPs and significant rebates to traders, who are currently using competing platforms, in order to get them to at least try our exchange. The same goes for AF2.0’s new use cases, such as overcollateralized lending. Since Alpaca is an established brand, they would be more likely to try it because the risk is lower than using a new platform. We’re also confident in our UX design, security, and support team, so we believe our chance of keeping these users long-term is higher than other platforms.
For the perp product, there’s a chance it can be successful without a token incentive, but having a token would certainly help the chance of it becoming successful (bootstrap liquidity pool, early incentives for traders, trading competition rewards, etc.) and raise revenues, which would ultimately feed back to ALPACA holders.
