Token Economic Model Reflection: Having powerful functionalities does not necessarily equate to having a high token price.
A decentralized financial product that is user-friendly, with high total value locked (TVL), typically plays a crucial role in the ecosystem on the chain. However, it does not have a direct correlation with its "token price," and one must consider the design of the token economic model behind the protocol.
After the bull market and hype last year, investors in the current market seem to be more rational, making the consideration of token economic models even more crucial. For many investors, whether the token price will rise is far more important than the practicality of the DeFi project, which is closely related to the underlying token economy.
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The field of use, users, the role in the on-chain ecosystem, and token value need to be actively captured through design and execution. Many DeFi projects in the market actually do not perform well in this aspect, so "governance tokens" can be seen as a compromise, a remedial solution. When application scenarios and user numbers cannot support the operation of the economic model, as long as one maintains faith in the more elusive governance rights, there is an opportunity to make up for the value gap. However, not all projects' governance rights are so intangible that the value is difficult to assess.
To put it more extremely, governance tokens that purely possess governance rights are a form of value capture inaction.
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Representative of Practicality: Uniswap
When it comes to Uniswap (UNI), it is definitely one of the most iconic and practical DeFi protocols in the market. Despite facing fierce competition from Curve, Sushi, Balancer, and other similar protocols, Uniswap's market share in Ethereum-native decentralized exchange (DEX) has grown by over 30% compared to the previous year, with spot trading volume now accounting for around 80% of the total spot trading volume on all Ethereum DEXs.
One key reason for this development is the launch of Uniswap V3. While Uniswap V2 used the constant product formula x*y=k to determine asset prices to ensure liquidity for all potential prices, Uniswap distributed LP assets across the entire price curve from 0 to infinity.
V3 introduced the concept of concentrated liquidity, allowing liquidity providers to choose to provide liquidity within a fixed price range. For stablecoin exchanges, V3 allows LPs to provide liquidity in a very narrow range from $0.99 to $1.01, significantly increasing capital efficiency compared to V2. Therefore, after the release of V3 in May 2021, Uniswap began to eat into Curve's market share, which has always focused on stablecoin exchanges.
Following Uniswap V3, pools were introduced with a fee of only 0.01%, further narrowing the gap with Curve, almost equalizing the trading volume in stablecoins in just over half a year. What is even more impressive is that Uniswap achieved this with almost zero issuance, in stark contrast to Curve, which generates around $2 million worth of CRV daily (annualized at $750 million).
If Uniswap is so useful, what about UNI?
If we simplify the value capture of tokens into two levels: "taxation" and "monetization."
The value capture of taxation is straightforward, where token holders can receive a share of the fees, but the obvious drawback is that users must pay a certain fee. However, this step is essential because if taxes are collected, and people are still willing to use the platform, it means that the business model is self-sustaining and has the ability to provide feedback, serving as a source of motivation for the development and protocol updates by the team behind it.
Since there is no intention to tax, can UNI be monetized?
The case of monetization can be considered with ETH. Although one is the native token of the chain and the other is the governance token of a DeFi protocol, they cannot be directly compared. However, before Ethereum transitions to PoS, ETH also lacked a mechanism to obtain price when holding tokens. Yet, in almost all applications on the Ethereum chain and even on other public chains, ETH is considered a representation of value or collateral, can UNI achieve this? It seems difficult given the current situation.
The Possibility of Value Capture in DEX
@taorongqi_1 proposed a simple train of thought: considering the value source and economic model of centralized exchange platform tokens. Taking Binance as an example, it has created the following possible value sources or use cases for BNB by utilizing strong liquidity and services:
- Transaction fees
- Derivatives margin
- Listing fees
- Undervalued investment
- IEO
- Using BNB as the base currency within the exchange
- Using BNB as the funding pool composition for protocols on the BNB chain
In theory, tokens of DEXs can achieve value capture through functionality and model design from the aforementioned processes. However, in practice, it can be observed that the further we go, the more highly monetized the models become, rather than purely tax-based models.