Using a Low Inflation Rate to Strenghten the Alpaca Finance Protocol

Dear Alpaca Finance community,

It has now been a year since the last discussion about changing Tokenomics. In that year, the decentralized finance landscape and the position of the Alpaca Finance Protocol changed significantly.

Below is a proposal to implement a low inflation rate for the Alpaca Finance token and use it to strengthen the protocol.

I hope this can serve as a conversation starter.


Problem statement

The industry’s move towards concentrated liquidity has meant that the old business model of Alpaca Finance is no longer viable. To reclaim the top TVL spot in this new concentrated liquidity landscape, Alpaca Finance needs to develop new products and expand its user base.


What a low inflation rate could accomplish

A low inflation rate would allow Alpaca Finance to boost the entire development lifecycle of new products.

  • Token emissions can be used to hire skilled (external) developers.
  • Once products are developed, token emissions can be directed to marketing and user acquisition & retention.
  • When new products are successfully established, token emissions can be redirected to new products, and so on.

The two recent products developed by Alpaca Finance (Perps and AF2.0) have shown how much can be achieved with tiny incentive budgets.

Most protocols in the decentralised finance space heavily incentivise the use of their product by high governance token emissions. In order for Alpaca Finance to compete with these protocols it needs to also do some incentivization. For the reasons described earlier, it does not need to go as far as other protocols and can outcompete them with significantly less incentivization.


Why Alpaca Finance needs less inflation than other protocols:

The following reasons describe Alpaca Finance’s strong position:

  • Alpaca Finance enjoys a very strong reputation within the Defi community.
  • Alpaca Finance has a large existing user base that is well-versed in complex Defi structures.
  • The development team has a proven ability to deliver innovative new products.
  • The management team has proven to be very adept at choosing which products to develop and how to deploy its funds.

What is a low inflation rate?

Please note that in this proposal, I define inflation as an increase in the circulating supply through the emission of new ALPACA tokens.

At its core, coin inflation rewards the beneficiaries of inflation at the expense of existing holders. High rates of inflation can work in the long term, but rarely do. A balance must be struck between the benefits to Alpaca token holders (gained through the development of successful products) and the damage caused by inflation. As described in the previous forum proposal: “The goal is to create more revenue through these new tokens than the selling pressure made possible by them”.

To assess how much Alpaca token is needed to fund the development of new products, it is good to look at the two previous products: perps and AF2.0. For these products, the ALPACA token was successfully used to incentivise early adopters and build a user base.

  • 850,000 ALPACA for Perp
  • 900,000 ALPACA for AF2.0 Money Market

The current circulating ALPACA supply is 150.140.268 (source: xALPACAv2 Dune Dashboard).

The combined incentive budget for Perps and AF2.0 (1,750,000) represented an inflation rate of 1.15%. I would consider this to be the minimum future yearly inflation rate. A higher inflation rate could be used to:

  • Increase the incentive period for new products
  • Also fund the development of new products

The maximum inflation rate I am personally comfortable with is 5%. However, this is something that should be voted on by the community.

Reference inflation rates:

  • BNB: 4.85%
  • Pancakeswap: 3-5%

Tokenomics

To create predictability, a fixed inflation rate is optimal. This would mean weekly/monthly token emissions.

Rather than pre-allocating certain token emissions to specific items such as development or liquidity mining, it would be best to leave this to the Alpaca Finance management team. The team has proven to be responsible with the development funds allocated to them so far. Major funding decisions could be made through a governance vote.

The low inflation rate requires an expansion of the token supply and monthly/annual token emissions. I suggest taking a long term view and upgrading the token to handle 20 years of sustained inflation of 1-5% of the circulating supply.


How is this plan different from the previous proposal?

[For Discussion] Potential adjustment to ALPACA tokenomics to support upcoming (Perp, AF2.0) and future product launches

Approach 1 from the previous proposal came with the following token allocation:

Item Allocation %
ALPACA → ALPACAv2 51%
Liquidity mining incentives 30%
Development Fund 9%
Warchest 10%

Of these, only the ALPACA → ALPACAv2 exchange was to be released immediately. The Liquidity Mining Incentives, Development Fund and Warchest were proposed to be released over a 10-year period. Due to a declining emissions schedule for the liquidity mining incentives, this would have resulted in an inflation rate of approximately 6.5% in year one and 3.5% in year ten.

The current proposal describes both a much lower and a linear inflation rate.


Closing thoughts:

I invested in Alpaca Finance because I believe the company is well run and well positioned to develop the products of the future. Without additional development funding the team is hamstrung. I would rather risk losing 1-5% a year to inflation than lose everything to lack of development.

Thanks for taking the time to write this proposal. It’s always appreciated to see people taking the time to help the protocol.

I personally am NOT supportive of this proposal.

My rationale is outlined below.

Without additional development funding the team is hamstrung.

There’s no evidence or communication to support the thesis that the team requires additional funding. This statement is not true.

In fact, the latest tweet said that the core issue behind the lack of an established roadmap is the ability to find suitable products to develop. At no point lack of funding was mentioned since the bear market started

Furthermore, as far as i can tell from the on chain data, the protocol generates enough recurring money/revenue to hire talents or do what is required.

We also have reserved development funds and a full warchest.

We also have £35k that was approved that hasn’t been spent.

Nevertheless, Let’s hypothesise that extra budget was indeed required, redirecting the budget that’s used for burns (circa $10k a week) should be the first port of call, before changing tokenomics.

Irrespective of the above, first we should ensure we have a successful product/baseline to promote. Until then all of these tokenomics changes are pointless.

I will be against changing tokenomics until we can see organic growth underpinned by successful products trusted by the core of the community

1 Like

Hi Gianni,

Thank you for your feedback. I really appreciate it.

Regarding the thesis that the team requires additional funding:

The last two products (Perps & AF2.0) were incentivised with a total of 1,750,000 Alpaca tokens. These incentives were essential to bootstrap liquidity and attract new users. Remember that both products reward liquidity providers by redirecting fees. Fees are only generated when liquidity exists and is used. So there is a chicken-and-egg problem, where external funds are essential to get things going.

One could argue that especially for AF2.0, the bootstrap incentives were not sufficient. There was not enough liquidity to meet the demand generated by the automated vaults. Additional incentives for usdt would have solved this and allowed it to grow faster. The same can be said for perps. Perps has been very successful from a fee perspective. Could additional incentives have made Alpaca Perps the biggest Perps product in the BNB Smart chain?

If we want to launch new products, we will again need to bootstrap liquidity. Even if the team designed the most beautiful product, without a significant incentive structure, the acquisition of liquidity and new users would be too slow.

Regarding the question of whether we already have enough funds (warchest, unspent marketing funds, burn budget)

The management team told us in their last proposal that additional funds would benefit the development & use of new products.

For example, without new tokens being issued, it will be more difficult to attract new users to Alpaca’s new products, which will ultimately cost ALPACA holders because they will not earn the revenue from those users, and it will also make it more difficult 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 the BNB chain and even other networks, creating the highest revenue potential for ALPACA holders. [For Discussion] Potential adjustment to ALPACA tokenomics to support upcoming (Perp, AF2.0) and future product launches

Most companies have the ability to issue stock to raise funds for new products or growth. At the end of the day, if most shareholders agree issuing for growth will be a net positive to the bottom line, they approve it. This is a reasonable and common approach.
The alternative is also reasonable, and one might have different reasons to vote no to growth, but without those funds, you should expect less growth, lower chance of success of new products, fewer new products, less R&D. [For Discussion] Potential adjustment to ALPACA tokenomics to support upcoming (Perp, AF2.0) and future product launches - #40 by Samsara

So the dev fund portion can make the difference between having some marketing/BD people to grow the products or not, or more devs to develop faster. While it’s true revenues can increase, more revenues also come with more work and more resulting expenses (more customers to support, more tech maintenance, security, and operational oversight, etc) [For Discussion] Potential adjustment to ALPACA tokenomics to support upcoming (Perp, AF2.0) and future product launches - #60 by Samsara

I fully agree with you that it would be preferable to use the funds we currently have before minting new tokens. However, I do not believe that the current funds are sufficient, especially in the longer term.

Sure, the unspent 35K + warchest + burn budget could be enough for development and incentives for another product. But do we want to risk it all for just one more product? I think what we all want is sustainable development and a long term, fully funded roadmap.

If, as you suggest the team does not need the emissions to fund the development of new products, then I trust them to save the funds for a later date.

Why does this proposal have to come from the community and not the management team?

We, the community, voted not to increase the token supply. I believe that the situation has changed since then and that we need to reconsider. As such, it is up to the community to propose it. I value your opinion and that of others, and if it turns out that my desire for a 1-5% inflation rate is not shared by the community, then we can leave it as it is.

To be honest, I also do not support the proposal. I believe redirection of part of the burn, say 20-30% and keeping in an address that can be used later for a rewards drip is better. Also, HUGE Warchest. Changing tokenomics is undesirable because:

  1. it will require dev time as the ALPACA contract will need some reworking.
  2. it will be pointless unless we know exactly what the money will be used for. At this time we don’t have any products tgat require support and there is no roadmap update that suggests some will appear soon.
  3. while I don’t want to generalize, previous discussions (and some current opinions on TG) have indicated that a sizeable portuon of token holders are completely against new emissions. If a fraction of these get disgruntled and sell, we may be getting more disadvantages than bemefits. ALPACA being strictly deflationary is a strong sales pith we shouldn’t give up on lightly.

P.S. I may support inflatuon in the future when there is real need, but not for now.