[Return to Archetype Founder Playbook](https://hackmd.io/b2qxqbZLSIe-gky3ZVcuWA?view)

# Token Design
## Table of Contents
[TOC]
## Part 1: Design Structure

### Summary

Before launching a token, teams should consider the extent to which a token launch will accelerate the long-term functionality of the product and improve the long-term adoption of the product. This decision should be based on multiple factors, such as the project's vertical and its competitive environment. Token models such as governance tokens with fee-distribution, utility tokens, and token demand value accrual mechanisms should be taken into account. Additionally, token distribution mechanisms such as airdrops, emissions, and lockdrop & LBA, as well as token supply distribution and token vesting should be considered.

### Decision Framework

**Is a token the right decision?**

Before launching a token, we recommend teams spend a significant amount of time deciding whether or not to launch a token in the first place. This decision should be a function of multiple factors, from the project's vertical to its competitive environment. While multiple factors are at play here, below is an attempt to guide the decision process based on the following questions.

1. **To what extent will a token launch accelerate the long-term functionality of the product?**

Whether using ETH to bootstrap Ethereum’s economic security or GRT to coordinate the curation of subgraphs to be signaled by The Graph, the launch of certain tokens is integral to the projects' success. The team needs to keep a delicate sliding scale in mind before converging on a choice of token design, though. An analogy to frame this scale is leverage. The more the token launch accelerates the product's functionality, the more it depends on the token itself, and developers have less control over the product. In certain cases, this scale is rigid, and developers may have little choice in sliding the scale, as the token is critical to the network's security (L1 blockchains). On the other hand, this scale is much more flexible for consumer-facing applications.

2. **To what extent is decentralization necessary for the project’s success?**

To answer the question above, a helpful question for teams to ask themselves is how important decentralization is for the project's long-term success. If having an added governance layer that enables open participation in decisions around product development and go-to-market benefits the product because it’s critical for the credible neutrality of the product, then this could be a good reason to integrate a token. On the other hand, there are ways to ensure credible neutrality without a token. However, this may mean that if the protocol is not ossified, a smaller core team centralizes product development decisions, which may have negative regulatory implications. If projects need to make decisions with community consensus around how a project evolves from a certain point, governance tokens may be an effective way to coordinate that process (more on governance tokens below). If a network’s resources need to be rationed, for example, it makes sense to decentralize access to those resources, and utility tokens can be an effective way to do so (more on utility tokens below).

3. **To what extent will a token launch improve the long-term adoption of the product?**

Once the first question is roughly answered, team members should strongly consider this second question. While the answer will often depend on the choice of token design (more on this below), before such a decision is made, it makes sense to consider how a token launch would help accelerate user adoption irregardless of design choice. A helpful question to ask oneself in answering this question is:

4. **To what extent is our vertical subject to network effects?**

The reason for this is that in categories whereby the more users in a network, the exponentially larger the value provided to all users, and hence the underlying project’s moat and barrier to exit, the more it makes sense to be aggressive in capturing users to build network effects and to be aggressive in trying to disrupt the network effect of others. Tokens are particularly effective at building/overcoming incumbents’ network effects because they serve as a fast (and often costly) means to market to, acquire, and make community members financially aligned project stakeholders. Importantly, it’s important to ensure that in launching a token to build network effects, the team is careful in building a network of users aligned with the long-term goals and expected user profile of the underlying application and, in some cases, its governance system.

### Token Launch Timing

If the decision is taken, the choice of when to launch a token takes precedence. Our view is that this depends on the answers to the questions above. If the underlying project is working on disrupting incumbents that have already achieved clear PMF, it makes sense to launch a token earlier in the stage of a project’s life. Moreover, if the token is critical to the product's function, launching a token before any signs of PMF makes sense. On the other hand, when projects tackle a nascent market where the likelihood of organic user demand is uncertain, launching a token before any meaningful traction is a dangerous way to obscure PMF, as network users contributing to the network to receive tokens can lead to a lack of clear insight as to the success of the product, and block teams from pivoting to better or new products.

The more critical a token is to the product's functioning, the less the team has the luxury of choosing the market conditions to launch the token. More generally, though, many projects prefer to launch in favorable market conditions so that the value of their treasury is high enough to maximize runway. While this is understandable, launching a token during a bear market means that projects are putting tokens into the hands of community members at reasonable prices, which encourages user loyalty. As markets recover and the project progresses, this loyalty compounds, leading to a galvanized community of loyal stakeholders.

#### Token Design

The frameworks in the following report serve as a starting point for understanding what token designs work.

More generally, it’s important to understand the role of tokens as a valuable tool to decentralize protocols, but not an end goal in and of itself. Launching a token should be pursued when teams want to align incentives between stakeholders in the protocol to achieve a specific goal. Still, teams should avoid letting token hype obscure their product market fit.

Moreover, teams should avoid blurring the lines between the protocol and the token. Not only can this create an over-dependency on the token for product functionality, but it can also lead to the token performance taking more headspace than how it’s benefiting the protocol. As the case studies will make clear, there are tradeoffs to all mechanisms that need to be chosen based on the specific nature of the protocol itself.

More specifically, it’s best to choose a token model by working back from the core product’s **unique selling proposition** (USP) and core competitors in the following steps:

1. What is the USP?
2. What is the key positive outcome of the USP?
3. How can we position participants to buy the token to benefit from this positive outcome?
4. How can we design the token such that stakeholders are integrated & aligned to further contribute to the protocol's health?

**For example, for a DeFi project like Curve:**

1. The USP is low slippage on swaps between stable assets.
2. The primary positive outcome of this USP is outsized trading volume for these assets compared to competitors.
3. The CRV token is uniquely designed to enable users to benefit from this outsized trading volume by redirecting these fees to users that buy and stake it.
4. CRV Tokenholders vote on the best ways to allocate CRV emissions to different liquidity pools.

### Token Design

**1. Governance Tokens with Fee-Distribution**

A typical path for projects is creating a governance token that allows users to govern the decisions taken by the protocol or project while also representing a claim on the fees generated by the protocol and control over the allocation of the protocol treasury. Usually, this type of revenue-sharing comes hand in hand with governance rights, especially for the regulatory advantages that come with decentralization (more on this in our regulatory section). The extent to which governance token-holders control the product's underlying software must consider the risks of their being uninformed voters.

Projects can mitigate this risk through effective distribution mechanisms and filtering methods to ensure top voting proposals are being discussed. Nevertheless, limiting the scope of what the governance token can change is important to creating safe, permissionless systems.

**2. Governance-Only Tokens**

Some governance tokens are “pure” governance tokens with no fee distribution. While teams may choose this for regulatory reasons, it’s also worth noting that it allows for re-directing cash flows into business operations, which is common for earlier-stage businesses rather than issuing cash flows to holders. Some protocols find ways to attempt to get the best of both worlds, such as Uniswap’s embedded right to turn on the [Fee Switch](https://gov.uniswap.org/t/fee-switch-pilot-update-vote/19514). In this case, token holders can still vote on allocating treasuries and may create proposals to update tokenomics later.

**3. Utility Token**

Another path that projects can take is to create a utility token, meaning that the token’s role is integral to the functioning of the underlying protocol/project. For example, a utility token can be used as a system's de-facto currency or required to be burned to access a particular service.

### Value Accrual Mechanisms

**1. Staking**

**a. Classic Staking**

Staking is a mechanism by which holders of a governance or utility token can commit or "lock up" their tokens for a certain period to contribute to the functionality and/or governance of a protocol or project. In exchange for this commitment, stakers are typically rewarded with additional tokens that serve as yield and are usually composed of some combination of that underlying token and the revenue generated by the project.

This process simultaneously serves as an economic incentive for individuals to actively participate in the network while reducing the circulating supply of the token, thereby potentially increasing its market value.

**b. Time-based Lockups**

- **VeToken Model**: The VeToken model is a variation of staking that involves boosting rewards by creating a commitment to locking up tokens over specific periods. Participants that have signaled their commitment to the project are rewarded proportionally to the length they lock the tokens for, so the size of the opportunity cost they have forgone.

One of the popular implementations of this model has been the vote escrow (also referred to as “ve”) token model. To take advantage of the governance rights & fees generated by Curve, participants need to lock up their CRV tokens to obtain veCRV, a non-transferable token. The duration of the CRV lock-up is proportional to the level of voting power and rewards offered by veCRV.

- **Retrospective Rewards**: Another similar variation of a time-based lockup involves retroactively issuing rewards proportionally when tokens are staked without needing to lock them up, unlike in the VeToken model.

**2. Payments / User-controlled Burn**

A common value-accrual mechanism that projects have decided to adopt is to have participants utilize tokens for payments internal to the protocol, giving value to a token by directly tying its scarcity to the adoption of the product. Ethereum’s use of ETH is an excellent example of this, as the adoption of the network leads to greater scarcity and value, which is spent and burned due to network transactions.

**3. Project Buyback & Burn**

This model involves the project or protocol manually or autonomously (given some condition) periodically buying tokens from circulation and sending them to a zero address, erasing them from existence and creating scarcity for the underlying asset.

### Token Distribution & Supply

**Airdrops**

Airdrops are a way to distribute ownership of a project and incentivize participation in the broader community by distributing tokens to participants based on their engagement with the project, such as protocol contributors and largest traders. They can create a significant marketing boost and help decentralize the network, but they can also be gamed by participants creating multiple wallets and unsustainable short-term incentives. Therefore, the timing and method of the airdrop need to be balanced to optimize the tradeoff between the pros and cons highlighted in the case studies.

- **Lockdrop & Liquidity Bootstrapping Auction**: The Lockdrop and Liquidity Bootstrap Auction (LBA) method is a two-phase process that addresses challenges in traditional token sales and airdrops, such as legal risks, lack of public participation in setting the initial trading price, and lack of liquidity. The Lockdrop phase involves depositing exogenous assets to receive the project's native token, while the LBA phase involves depositing the native token into one side of a liquidity pool and stablecoin into the other, determining the token price by the formula: stablecoins/project tokens. This ensures a fair price set by the public and limits price manipulation by restricting stablecoin withdrawals. Once the LBA is completed, the token officially launches with deep liquidity for the community to trade freely. This method is only relevant when exogenous assets are locked in return for the governance or utility coin.

**Emissions**

For projects to build and/or overcome network effects and spur growth, token emission mechanisms have been implemented to create additional financial incentives to utilize the platform. Token emissions are a means of distributing tokens to participants who contribute value to the protocol over a specified period and usually take the form of yield distributions allocated to the most active users of the protocol or product, such as liquidity providers or NFT traders to incentivize continued participation and engagement with the protocol. Emissions are often done hand-in-hand with, In addition to initial token distribution methods, such as airdrops or lockdrops, to create longer-term incentives for users to use the platform.

**Vesting**

Foundational Concepts lays out some standard practices for equity vesting. Below are some additional vesting types commonly selected for equity and token-based vesting.

- **Linear Vesting**: Linear vesting is a method of gradually and consistently granting access to assets over a set period. This approach involves the distribution of assets at a steady rate over an equal period, for example, granting 5% of the vesting assets every six months until the participant accrues 20% of the total assets after two years.

- **Graded Vesting**: Graded vesting is a token distribution method that offers a more flexible asset allocation approach than linear vesting. Instead of distributing assets at a consistent rate over a set period, graded vesting allows for varying amounts of assets to be granted over different time intervals. Projects can tailor this approach to align with the project's development milestones and goals, allowing for a more dynamic and adaptable distribution schedule.

- **Cliff Vesting**: Cliff vesting is a token distribution strategy establishing a specific time when vesting begins or becomes fully vested. This is typically done by setting a fixed period during which the participant must fulfill certain conditions before gaining access to any assets. If the participant leaves or is terminated before this period, they will not be eligible to receive any assets. Once the cliff period is reached, the token distribution can proceed according to a linear or graded vesting schedule, ensuring that the assets are distributed fairly and only to committed participants.

**Insider Allocations**

Typical token allocations across stakeholders of venture-backed projects that do release a token to decentralize can be approximated below:

- Core Team: 20%
- Investors: 20%
- DAO Treasury or Foundation: 30%
- Community Distribution (Emissions and/or Airdrop): 30%

We believe that this represents a solid foundation for the average project, though skewing to larger % allocations to community distribution makes sense the more important that decentralization is to the functionality & adoption of the project.

## Part 2: Case Studies

### Summary

The main takeaways from the case studies are that airdrops can be an effective way to attract users and increase engagement with a product, but they should be structured in a way that the cost of acquiring a customer (CAC) is less than the customer's lifetime value (LTV). Projects should consider a schedule of "waves" of airdrops with more specific criteria to encourage ongoing engagement with the product and allow for the use of data to evaluate the reputation criteria and determine its effectiveness in terms of retention and LTV. In addition, there are means by which teams can launch tokens in such a way that is focused on creating loyalty through tailoring experiences to customers, providing reasons for customers to come back, and giving customers a sense of belonging to the brand. Finally, we show that non-financial protocols & applications can accrue value without necessarily incentivizing users with emissions, and discuss the integrating a token’s use into the core functioning of the platform can create strong value accrual, but making such to tightly couple both should be done with caution, and after PMF if possible (unless token is critical for underwriting risk, bootstrapping economic security).

### **Uniswap**

- Governance Token with Fee-Distribution
- Airdrop

**Background**

During September 2020, Uniswap airdropped $UNI tokens to addresses that retrospectively interacted with the AMM. To be eligible for the airdrop, addresses had to have utilized the protocol before the 1st of September 2020. The token grants holders the ability to participate in the decision-making process of the Uniswap protocol by voting on proposals and submitting new ones by locking UNI tokens, and is used to determine voting rights through delegation. Users can delegate their voting rights to an address (including their own) without locking their tokens. A quorum is necessary to ensure only measures with adequate voter participation pass, requiring at least 4% of all UNI (40M) to vote in the affirmative.

Holders also collectively have ownership over the community treasury, comprised of 430 million UNI tokens out of the 1 billion minted on genesis. Finally, Uniswap features an optional fee switch that allows UNI holders to redirect a 0.05% trading fee back to the protocol and away from LPs.

Uniswap's governance process consists of three main phases: Temperature Check, Consensus Check, and Governance Proposal, which take place on various platforms like Discourse forums, Snapshot, and Governance Portals. $UNI token plays a crucial role in this process as it determines the voting power of users.

1. Temperature Check involves posting questions to the Uniswap governance forum, and creating an associated Snapshot poll. A majority vote with a 25k UNI yes-vote threshold is needed to proceed to the next stage.

3. Consensus Check aims to establish formal discussion around a potential proposal. This phase requires creating a new Snapshot poll and discussion topic on the governance forum. A 50k UNI yes-vote quorum is needed to move forward.

5. Governance Proposal is the final step where the proposal is based on the winning outcome from the Consensus Check. It requires writing code, auditing it, and ensuring at least 10 million UNI is delegated to the address submitting the proposal. After calling the propose() function, a seven-day voting period starts. If successful, there's a two-day timelock before executing the proposed code.

**Performance & Data**

The distribution of $UNI tokens through the airdrop was heavily skewed. A large majority of addresses, 93.8%, received less than 412 $UNI, while a small number of addresses, over 250, received 250,000 $UNI. These large recipients were primarily composed of historical power users, such as large liquidity providers.

Uniswap showed impressive growth in new traders and liquidity provided on the platform following the airdrop, creating a liquidity flywheel effect that enabled Uniswap to become the top DEX on Ethereum.



Approximately 7% of wallets still hold $UNI tokens. Additionally, among this remaining percentage, most have sold some of their tokens, with only 1% of wallets increasing their $UNI position. This suggests that the governance rights of the protocol and the potential future value of the token did not outweigh the surprising amount of free money received by many recipients.

Moreover, an analysis of the current top 5000 $UNI wallets shows that only 10.5% were airdrop recipients.

Additionally, the number of airdropped users actively trading declined in the weeks and months following the drop, falling from over 62,000 weekly traders in mid-September 2020 to around 10,000 a year later. This trend continued through 2022, with active traders dropping to 4,000 by September.


Above are some helpful figures generated by the team at Bankless when looking into the $UNI airdrop. Beyond the user metrics above, here is the price performance of the $UNI token and the distribution of tokens.



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**Takeaways**

To drive sustainable growth and increase the effectiveness of airdrops, projects should structure them so that the cost of acquiring a customer (CAC) is less than the customer's lifetime value (LTV) for the project. While airdrops in their current form continue to be seen as less effective than desired, much of this is tied to an overallocation of tokens to the community (high CAC), with little mechanisms in place to avoid churn (lower LTV).

The current standard for airdropping criteria is simply users interacting with the product. While this approach may be beneficial for users, it may be less effective for the project as it needs to engage the user with the product effectively. By also considering how to integrate behavioral loops into the airdrop process, it becomes possible to identify the ideal user and the actions that may lower the likelihood of them churning.
:::

### **BLUR**

- Unknown Token Design
- Airdrop

**Background**

NFT-Marketplace BLUR launched its reward system via airdrop in October 2022. They have done this in 3 intermediate steps: airdropping "care packages" with NFTs that determine how much $BLUR allocation users will get in the third and final airdrop. Their criteria for launching the first round of airdrops were those who traded NFTs during the bear market. Subsequent airdrops will be based on usage platforms.

**Performance & Data**

The ETH volume below shows that Blur’s market share over other NFT marketplaces has been impressive starting in October, doubling its share of NFT trading volume from 16% before the airdrop to 33% at the time of writing.


Analysis shows that the BLUR airdrop managed to attract more "NFT" Flippers while not as many everyday NFT users were on the platform. Some users looking to take advantage of future airdrops delisted some of their NFTs from mainstream platforms, but nothing out of the ordinary, as cancellation data shows it’s in the hundreds.

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**Takeaways**

BLUR’s success suggests that instead of implementing a significant, one-time airdrop event, Projects should consider a schedule of "waves" of airdrops with more specific criteria. This approach has two main benefits: it encourages ongoing engagement with the product and allows for the use of data to evaluate the reputation criteria and determine its effectiveness in terms of retention and customer lifetime value (LTV) to improve future airdrops.
:::

### **dYdX**

- Governance & Utility Token
- Staking: Retrospective Rewards
- Airdrop & Emissions

**Background**

In September of 2021, dYdX airdropped 7.5% of its initial token supply, which reached a peak value of over $1 billion. Eligibility for the airdrop was determined by prior usage of the dYdX trading protocol, and users who had traded more than $100,000 in the past were eligible to receive approximately 6,400 DYDX tokens. DYDX is a hybrid governance and utility token that gives holders of dYdX tokens a discount on trading fees and additional token rewards based on trading volume through a trade-to-earn program.

**Performance & Data**

$DYDX faces significant token unlocks in 2023, with the tokens circulating supply increasing by over 206%. Moreover, in September 2022, dYdX removed a promotion involving a liveness check, which scans a user's image and compares it with a database to see if another account has used the image. This caused some users to raise concerns about the nature of dYdX and resulted in a 35.07% decrease in trade volume on dYdX over the next 24 hours. However, from the figures below, there is no obvious evidence that the airdrop in and of itself failed, as cumulative USDC & DYDX staked, volume, and fees generated by the platform continued to increase until the market downturn.




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**Takeaways**

To improve user retention after airdrops, teams should focus on creating loyalty through tailoring experiences to customers, providing reasons for customers to come back, and giving customers a sense of belonging to the brand. Instead of relying solely on governance or financial incentives, this approach can be more effective in retaining users. Being sensitive to Web3 sensitivities around privacy is also crucial to creating brand loyalty. Although the allocation of token rewards conforms to standard practices, spreading out the timing of unlocks is also essential to avoid the risk of unfavorable narratives developing around the underlying project.
:::

### **ENS**

- Governance-Only Token
- Airdrop

**Background**

ENS is a governance token that grants its holders the ability to vote on proposals presented to the Decentralized Autonomous Organization (DAO) and control over its treasury, which accumulates fees gained from new user registration for “.ETH” ENS names.

In November of 2021, ENS airdropped 25% of the tokens to .ETH holders, 25% to ENS contributors, and 50% to the DAO community treasury. ENS represents an interesting experiment of an airdrop of a governance token with no dividend distribution or buybacks that have managed to accrue value and effectively decentralize.

Token holders can participate in the governance process by delegating their voting rights to an address, including their own, effectively determining the weight of their votes in the governance process. Delegated tokens can then create, support, or vote on various proposals, such as executable, social, or constitutional amendments.

The ENS governance process involves multiple steps and platforms, including:

1. Temperature Check on Discourse: An informal and optional step to gauge community interest and sentiment on a potential change.

3. Draft Proposal on GitHub: Formalizes the discussion around a proposal and incorporates feedback from the community.

5. Active Proposal on Snapshot/Governance Portal: After finalizing the proposal, it's submitted to Snapshot for off-chain voting or the Governance Portal for on-chain voting.

There are three main types of proposals:
1. Executable Proposals: These involve smart contract operations and require at least 1% quorum and 50% approval to pass.

3. Social Proposals: These involve non-enforceable actions and require at least 1% quorum and 50% approval to pass.

5. Constitutional Amendments: These proposals aim to amend the ENS constitution and require at least a 1% quorum and two-thirds approval to pass.

**Performance & Data**

DeepDAO reports that ENS has a highly engaged community, with over 87,000 participants and one of the top 3 treasury values among DAOs, boasting $1.2B in funds.



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**Takeaways**

ENS presents a good example of how non-financial protocols & applications can accrue value without necessarily incentivizing users with emissions. This is especially true as ENS is the direct supplier of naming services and doesn’t need to bootstrap the supply side of their business. When tokenholders recognize businesses with a clear value proposition, with strong tailwinds and growing network effects, tokenholders are willing to hold ENS at a valuation of $1.6B at the time of writing without seeing any of the fees. Despite the market downturn having a clear impact on fees and registrations in recent months, it also seems as if the airdrop was effective at increasing registration starting from the point of the airdrop, despite the lack of promised future airdrop waves.
:::

### **The Graph**

- Utility Token
- Classic Staking

**Background**

The Graph is a decentralized network that facilitates indexing and querying blockchain data using a token economic mechanism. The network comprises four main participants: Delegators, Curators, Developers, and Indexers. Delegators delegate their GRT (The Graph's native token) to Indexers to secure the network and earn a percentage of query fees and indexing rewards with a 0.5% delegation tax. Curators identify high-quality subgraphs, signal/stake GRT on them to earn curation shares, and pay a 1% curation tax. Finally, developers build and query subgraphs to retrieve blockchain data and pay in GRT, while Indexers operate the network and earn GRT rewards through query fees and indexing rewards.

Indexing rewards are the 3% annual issuance distributed to Indexers based on the number of subgraphs they index. These rewards incentivize Indexers to index subgraphs and submit Proofs of Indexing.  Both the taxes, as mentioned earlier, for Curator and Delegator tokens are burned, in addition to 1% of the query fees. In addition to these regularly occurring burning activities, the GRT token also has a slashing mechanism in place to penalize malicious or irresponsible behavior by Indexers. If an Indexer is slashed, 50% of their indexing rewards for the epoch are burned, and their self-stake is cut by 2.5%, with half of this amount being burned. This helps ensure that Indexers are incentivized to act in the network's best interests and contribute to its security and stability.

**Performance & Data**




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**Takeaways**

Integrating a token’s use into the core functioning of the platform can create a strong value proposition, which reflects in the early performance of the GRT token as well as the robust network health. For example, looking at Etherscan, most GRT transactions perform functions in the protocol instead of transfers and trading. Nevertheless, it’s important to be sure that the product has PMF before closely tying the token’s narrative to the functioning of the product.
:::

### **MakerDAO**

- Governance Token
- Buyback & Burn

**Background**

MakerDAO facilitates the minting of DAI tokens, a decentralized stablecoin on Ethereum. MakerDAO generates revenue through liquidations, interest/lending income, and swaps between DAI & USDC. DAI tokens are created when investors deposit collateral, typically Ethereum, into a collateralized debt position (CDP).

The MKR token is used for governance and voting on proposals related to MakerDAO. MKR holders also have ownership of the treasury and act as a lending backstop for the protocol. Notably, the surplus buffer created from the revenue sources above is used to buy and burn MKR, rendering it more scarce. However, the other side of this model is that there is a risk of holding insufficient treasury reserves.

MakerDAO's governance process mainly occurs on the MakerDAO Discourse forum for discussions and proposal development. Once a proposal is ready, it is submitted through MakerDAO's Github account. The governance token, $MKR, is central to this process, as it grants voting power to users in both executive votes and polls.

The voting interface consists of two sections:

1. "Executive votes": These votes approve formal changes and code updates. $MKR tokens are used to represent users' voting power in these decisions.

3. "Polls": These votes measure community sentiment without executing any changes. $MKR tokens also determine users' voting power in these polls.

MakerDAO uses a "continuous approval voting" system, where new proposals must receive more $MKR-based voting support than the previous passed proposal to be executed.

The procedural governance framework, Maker Improvement Proposals (MIPs), governs the inclusion or exclusion of items in executive vote bundles. The $MKR token plays a significant role in this process, as the distribution of tokens in voting affects the decisions made. Community Facilitator(s) and MIP Editor(s), who are elected by $MKR holders, have the final say in meta-governance requirements. However, any $MKR holder can submit a proposal or vote directly through the MakerDAO governance smart contracts. Executive votes are timelocked for 12 hours before execution, allowing the $MKR holders to respond to any malicious governance actions.

**Performance & Data**

The yearly profit of the MakerDAO protocol is at $140M, which can be used to burn nearly ~40K MKR annually or over 4% of the market cap, which is considered attractive from the perspective of potential valuation.

The MakerDAO credit system faced an eventually-averted crisis, resulting in significant erosion of token holder value. From its launch in 2018 through March 2020, the DAO used net earnings to buy and burn $MKR tokens, with a total of 14,600 MKR burned at the cost of over 7 million DAI. However, during the COVID-related market crash, Maker failed to liquidate underwater positions in time, resulting in $6 million in losses to the protocol covered through new issuance and auctioning of $MKR tokens. This erased $10 million in earnings accumulated over 3 years and could have been avoided if Maker held more treasury reserves in stable assets like DAI. It took until December 2020 for Maker's accumulated earnings to reduce the token supply back to the original supply of 1 million $MKR through buybacks.


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**Takeaways**

The MakerDAO case study highlights the benefits and drawbacks of the Buyback & Burn model, especially if applied to DeFi. Specifically, DeFi protocols must ensure that they have significant enough treasury reserves capital buffer, and certainly more than MakerDAOs 0.35% for $140M in loans (2020). Moreover, when implementing a token buyback & burn model, it is vital to consider the value of its token and the potential returns on internal reinvestment. In bull markets, the DAO should consider selling tokens for cash and reinvesting that cash into the protocol. In bear markets, when the token is undervalued, and there is excess cash without high internal returns, the DAO should consider buying back the token.
:::

### **Curve**

- Governance Token with Fee-Distribution
- VeToken Model
- Emissions

**Background**

Curve, whose unique feature is the low slippage in swapping, is a decentralized exchange (“DEX”) for stablecoins. CRV is the native token of the project, gaining utility by allowing those who lock it to participate in the protocol's governance around CRV rewards allocation, liquidity provision incentives (which other protocols can “bribe” CRV holders for), and fee structures. The locking process involves receiving vote-escrowed CRV (veCRV) in proportion to time-locked. Once the tokens are locked, the process is irreversible, and the tokens are not transferable.

**Performance & Data**





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**Takeaways**

Curve’s AMM is tailored for highly correlated, stable assets, meaning that the allocation of CRV rewards also plays a significant role in determining liquidity for various assets, significantly impacting trading activity. For highly cyclical products such as trading, though, the price of those emissions decreases significantly, and to maintain the same rewards, emission quantities need to increase. As a result, the interdependence between Curve & $CRV leads to vulnerability to high CAC & low LCV in bear markets, as indicated by the graph plotting emissions & yield above.

The locking feature in the CRV token design is intended to incentivize long-term commitment from stakers by providing them with voting rights and rewards. This is expected to improve governance by giving more weight to committed members who are more likely to be interested in the long-term health of the protocol and are more likely to make informed and time-consuming decisions. However, locked stakers in a market downturn will likely feel that all market forces are against them, especially for high-emission tokens, making them more likely to seek short-term actions that maximize personal gain by supporting decisions that may not support the long-term health of the protocol, as the tokens might be fully depreciated mentally. For this reason, it’s essential to make sure $CRV style tokenomics are not integral to the core function of the underlying project.
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### **YFI**

- Governance Token with Fee-Distribution
- VeToken & Buy Backs
- Emissions

**Background**

Yearn is a leading DeFi yield aggregator that gives users access to Yearn Vaults, which are automated yield-earning strategies designed by incentivized community contributors. YFI, Yearn's governance token, was launched in mid-2020 through a liquidity mining program with a "fair launch" approach, meaning that the initial supply of 30,000 YFI was evenly distributed to liquidity providers, with no initial airdrop. Despite the success of Yearn’s products, its token price did not follow.

After a few iterations, YFI holders added a dual VeToken & Buyback model to incentivize long-term YFI holding and active engagement in Yearn's governance. The veYFI mechanism in Yearn allows YFI holders to lock their tokens for a minimum of one week and a maximum of four years, with rewards proportional to the lock duration. Locks can be extended, but there is a penalty for an early exit. In exchange for locking, veYFI holders receive a share of bought-back YFI, early exit penalty fees, and governance rights over gauge weights and reward distribution across Yearn Vaults. Every two weeks, veYFI holders can decide on the distribution of protocol earnings (repurchased YFI) to Yearn Vaults’ respective users as additional yield.

**Performance & Data**


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**Takeaways**

First, like many developing protocols, the desire to gain TVL & market share has led Yearn to prioritize distributing earnings rather than investing in growth and development early on in its development (2.5 years), which is uncommon in traditional industries. Nevertheless, the additional need to decentralize effectively incentivizes protocols to do so.

Beyond some potential flaws already mentioned in the Curve case study, it’s important to point out the potential feedback loops that may negatively impact Yearn’s VeToken model. Specifically, decreased fees may accelerate the protocol’s decline in activity, as it would directly cause a decrease in YFI buybacks and decreased yield for Yearn Vaults – which disincentivizes deposits and further decreases earnings. The data above shows that market downturns can ignite this feedback loop.

On the other hand, this feedback loop is part of what makes Yearn’s token model powerful and effectively ties protocol success to token performance. For this reason, teams in DeFi should consider implementing such a model when the protocol has already developed enough usage for organic fees for those contributing capital to the system.
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### **GMX**

- Governance Token with Fee-Distribution
- Retrospective Rxewards
- Emissions

**Background**

The GMX token is a governance token used to participate in the GMX protocol, a perpetual futures trading platform. By staking GMX tokens, holders can receive escrowed GMX and trading rewards, a combination of emissions and fees. The GMX token has a floor price fund funded through trading fees and protocol-owned liquidity.

The GMX platform offers two options for users to earn rewards: Compound and Claim. By choosing to Compound, users stake their pending Multiplier Points and Escrowed GMX rewards, resulting in increased rewards. On the other hand, selecting the Claim option will transfer any pending Escrowed GMX rewards and fees to the user's wallet. The Escrowed GMX (esGMX) tokens can be used in two ways: they can be staked for rewards similar to regular GMX tokens or vested to become vanilla GMX tokens over one year. Each staked Escrowed GMX token earns the same amount of Escrowed GMX and fees. It is important to note that esGMX tokens that have been unstaked and deposited for vesting will not earn rewards.  The Multiplier Points reward system is designed to reward long-term holders without inflation. When staking GMX, users receive Multiplier Points every second at a fixed rate of 100% APR, and those multiplier points boost rewards upon unstaking.

**Performance & Data**

GMX has managed to capture a significant portion of the market share from its competitor, dYdX. The average daily traded volume has surpassed $150M since the start of the year. In 2022 they went from 1% to 40% of dYdX volume, which is impressive, considering that while dYdX trading emissions remained constant, GMX trading emissions were reduced, going from 250k/mo in May to 100k/mo in Sept. This indicates that GMX can attract liquidity and grow its market share even with a reduced trading emission rate.





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**Takeaways**

The GMX token delicately balances token emissions, distributes network revenue, and effectively incorporates vesting (esGMX), incentivizing long-term contributors and holders without mandating lock-up methods that can create a zero-sum mindset in a downturn. On the contrary, despite current market conditions, the healthy PMF of GMX’s trading venue, paired with their sustainable emissions and token design, have led to the significant outperformance of GMX’s valuation compared to other protocols.
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### **ACX**

- Governance-Only Token
- Staking: Retrospective Rewards
- Airdrop & Emissions

**Background & Takeaways**

Across Protocol is a multichain decentralized bridge network built on top of UMA’s oracle, and $ACX is Across’s native token. $ACX token holders have the power to propose and vote on changes to the protocol, making the project adaptable and responsive to the community's evolving needs and preferences.

The token distribution includes 1,000,000,000 $ACX tokens, with 700,000,000 reserved in the Across DAO Treasury and 300,000,000 allocated as the initial supply. The initial supply is divided into an airdrop allocation and the Across Reward Locking Incentive Program, which encourages participation in the protocol through actions like staking Across LP shares, staking $ACX LP shares, referring users, and providing liquidity.

Across has implemented a reward-locking mechanism to incentivize long-term commitment by offering personalized multipliers for liquidity providers and tiered referral fees for referrers. As liquidity providers leave rewards unclaimed, their multipliers increase, resulting in faster reward accumulation. Referrers, on the other hand, can earn higher referral fee percentages by reaching specific milestones without claiming rewards.

The Across Referral Program fosters organic growth by converting the community into a sales force. The tier-based model, with Copper to Platinum tiers, offers increasing referral fee percentages based on the volume of bridge transfers and the number of referrals. This system motivates users to promote Across Protocol and attract more users, further strengthening the network effect. This gamifies the user experience, fostering user engagement and discouraging short-term profit-seeking behavior while promoting active participation in the ecosystem.

The Across Protocol's reward-locking mechanism can be seen as a direct alternative to the veToken model. While both incentivize long-term engagement, the veToken model necessitates locking tokens for a set period, with longer lock times yielding greater rewards and governance power. However, this can be restrictive due to the volatility in the crypto market. In contrast, Across Protocol's mechanism allows personalized multipliers for participants based on unclaimed rewards duration without requiring fixed lock periods. This flexibility makes it more appealing for aligned users seeking long-term benefits but unwilling to take on volatility risk associated with crypto and early stage protocols.

## Disclaimer
*This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment or legal matters. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Archetype. This post reflects the current opinions of the authors and is not made on behalf of Archetype or its affiliates and does not necessarily reflect the opinions of Archetype, its affiliates or individuals associated with Archetype. The opinions reflected herein are subject to change without being updated.*