Each project has its unique tokenomics, but as an experienced DeFi user or crypto investor, you may find out their difference and similarities based on observation and analysis. Normally, DeFi projects tend to adopt an inflationary model, something with an extremely high APY to attract countless users, but quickly diminish and disappear as its economics model is not designed for sustainability.
When the market is in a bull cycle, an inflationary model is lucrative to incentivize users to invest. Because the profit may far exceed the inflation rate. However, when the markets turn opposite in a bear cycle, disaster comes. With decreasing limited liquidity, the selling pressure is high while buying power is dying. Then, the token price collapsed and you would not be able to find this project in the next bull cycle.
As we saw the drawback of the inflationary model, Derify Protocol believes that restrained inflation is a key factor for a token to survive and be prosperous in the long run. Inflation is not always a bad thing. For instance, promotion is a form of inflation, but it is a good strategy only in bullish market conditions, like 2020–2021. Until today, most DeFi projects still use promotion as their only strategy to attract users. We all know that it is not sustainable and would eventually fail.
When you closely monitor a DeFi project for a longer period of time, a $100 promotion probably only rewards the protocol $50 in return. A negative cash flow or a death spiral eventually comes, such as Olympus DAO, Luna, and etc. No matter how large the scales and market cap are, they all end up the same.
Derify Lab doesn’t want to repeat the same mistakes as failed projects mentioned above. $DRF is released and distributed phase by phase. Any decision-makings regarding token release and distribution are based on protocol development and crypto market conditions. The release of 60% of the total token supply has already been written in smart contract. The only thing Derify Lab can do is parameter changes. Parameters determines 2 things in general,
- How many $DRF tokens are used for promotion?
- How long does the promotion event last?
(*Parameter changes are determined by community voting, which leverages the use of eDRF)
Besides tokenomics, the buy-back mechanism is another key factor for $DRF long-term price support. When we take a look at the mechanism of UniSwap, we observed that its trading fees only reward liquidity providers. We decided to do it differently. Derify Protocol uses a buy-back fund to purchase $DRF circulating in the secondary market and permanently burn them to decrease the total circulating supply. This will substantially increase the token price in the long run according to the basic economics concept of demand and supply.
As the graph illustrated above, when the token price goes down from P2, the buyback action is triggered. This will stabilize the market, from P2 to P3, because token circulating supply is decreasing. Later, the token price may go up after the market swings because we buy back a lot of circulating $DRF in the secondary market and burn them permanently. Sounds great? Yes, $DRF holders definitely would support the buy-back mechanism. But, where does the money come from for this buy-back fund? It mainly composed of 4 income sources,
- 40–70% of the protocol trading fees, specific % number depending on the market conditions and parameter setting
- Trader net PnL
- Liquidation margin
- Invalid Brokers’ income
Besides trading fee, most Centralized Exchanges wouldn’t tell you where trader net PnL eventually goes. Here, we can tell you that traders net PnL would be one of the sources for the buyback fund. Liquidation margin is another source of income as some traders’ positions may be liquidated after margin calls.
Compared to GMX that uses 70% of its trading fees to incentivize liquidity providers who potentially bear significant losses in a single-sided market (for e.g. very bull or bear market conditions). For Derify, we use protocol revenue and profits to buy back our native tokens to support token price in the long run. Our principle is to restrain the release of $DRF, but never hesitate to buy back $DRF.
Lastly, $DRF holders can also stake to earn eDRF, a governance token, which benefit them in 3 ways:
- eDRF is governance voting power
- Apply for brokers & get broker privilege, and extend broker privilege
- eDRF yield farming (coming)
I’m excited to discuss with you about $DRF tokenomics, buy-back mechanism and the logic behind our design. Nevertheless, the most exciting thing hasn’t come yet in our roadmap. Derify V2 will be linked with various crypto projects in the future, leveraging the energy of other projects to empower $DRF. The product tokens of various projects may become countless opportunities to buy back $DRF in our roadmap.
Important Links & Docs:
Audit Report: https://www.certik.com/projects/derify-protocol
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