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?
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.