GEAR Tokenomics - Derek [Variant]

About me: My name is Derek and I’m an intern at Variant Fund, a first-check token fund investing in the ownership economy. This post is meant to spark discussion around the GEAR token model and represents personal opinions.

Revenue Sharing: As the environment becomes more risk-off, having income accrue to tokenholders is better than a pure governance token for driving intrinsic value and supporting its price.

ve Model: The model is growing in popularity with YFI tokenomics. Similar to veCRV, veGEAR could be locked for up to 4 years and be non-transferrable. Longer lockups could be used to boost rewards with a penalty fee for withdrawing early.

GEAR staking for universal collateral:

Considerations:

  • Important to consider that GEAR’s price will likely be quite volatile, especially in its early days, so it could be difficult to use GEAR to prevent liquidations across several positions
  • Leverage user would be accepting a lot of price risk for their cross collateral

Potential model:

  • Cross leverage user could stake GEAR proportional to the total borrowed in multiple CAs (a relatively small percent of the total CAs in dollar terms)
  • Staked GEAR would allow user to maintain an overall LTV across CAs
    • If one is low-risk and well above the liquidation threshold, and another more degen position falls below it, could use healthy position to prevent liquidation of the other
  • Staked GEAR could accrue rewards at the same time, even above those of passive stakers (meaning veGEAR with lowest lockup)
    • Still generating yield as it’s being used, so not unproductive
    • Better rewards for users versus passive stakers encourages product use
    • Rewards would likely be temporary
  • If all positions fall below liquidation threshold (and staked GEAR cannot be used to cover the position), could transfer staked GEAR (or veGEAR) to liquidity providers, along with possibly burning a portion of the tokens
    • Would place deflationary pressure on the token considering inflationary pressure from rewards
    • Cross leverage users will likely deploy riskier strategies with greater threat of liquidation (especially relative to siloed leverage users), which community members might disagree with since lots of protocol revenue will likely come from APY spread, and liquidations could threaten the sustainability of that revenue
    • Serves as punishment for overly risky CA users in addition to liquidation
    • Creates automatic equilibrium-like state where protocol will transfer governance power to liquidity providers when leverage users take on too much risk, and alternatively, when their positions are healthy they can exert greater control through governance participation with their GEAR
    • All parties importantly also are incentivized to act in ways that increase the price of GEAR

Thoughts?

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By the way, thank you! This was all noted during the economics committee call, and the changes have been reflected for the v4 version of the document by @ov3rkoalafied as well as the general direction, I believe. Let’s see what the econ committee comes up with at the end. More info: