vePhonon Working Group Proposal

Gathering Consensus
1

Hello Phrens,

@hinchy , @AndrewB , @rake , @Dan and @OG69380 and I have been drafting a proposal to weight votes cast by locked phonon. The purpose of this discourse post is to solicit feedback before crafting and promoting a full fledged proposal.

We will keep this discourse post open for discussion for two weeks until 6/7/22. Pending feedback, we will proceed by completing the proposal with all relevant implementation and logistics details, and put it up for a vote.

The Question:

Should we weight votes cast by DAO members whose Phonon tokens are locked in a vault (for years+) more than votes cast by DAO members whose Phonon is unlocked and could be sold to market at a moments notice?

The Hypothesis:

DAO members who lock tokens away for months or years, are committed to the long-term success of the protocol. The longer someone locks their Phonon away, the more likely they are to vote in favor of proposals that benefit Phonon long-term.

The Proposal

We expect the hypothesis to be true - and believe locked phonon should be counted more than unlocked phonon. For this reason, we are crafting a proposal for Phonon to adopt a vote-escrow (ve) model.

The vote-escrow model, popularized by Curve Finance, has been and continues to be adapted by many successful defi protocols. To participate in governance, the model requires users to lock their protocol governance tokens for a period of time. A detailed explanation with examples can be found in the Curve Finance documentation.

To reduce smart contract risk, and minimize development and auditing costs, we believe forking and tweaking either the Curve Finance or Frax Finance would serve us best. Both have been in production for over a year, have been well tested and audited and are currently securing billions of dollars of value each. Here are the options, with their differences listed:

Option A: Curve Finance

  • Person locks CRV for 0-4 years and is granted veCRV for voting
  • You CANNOT vote unless your curve (veCRV) is locked and has a remaining lock duration > 0.
  • The longer you lock the more power your vote (see figure below)

Option B: Frax Finance

  • Person locks FRX for 0-4 years and is granted veFRX for voting
  • Unlike veCRV, when your lock duration expires (i.e. = 0) your unlocked veFRX still counts as 1 vote.
  • veFXS has an admin controlled emergency unlock functionality that, when trigged, allows users to withdraw FXS before unlock
  • Like CRV, the longer you lock, the more power your vote, except the weights are skewed right compared to CRV model since it gives unlocked FRX a vote (see figure below)

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Questions and Requests for Feedback

  1. How do we want to weight vePhonon?
  • We should copy the veCRV model.
  • We should copy the veFRX model.
  • We SHOULD NOT let unlocked phonon vote.
  • We SHOULD let unlocked phonon vote.
  • We should customize our own weights

0 voters

  1. Do we want the admin controlled emergency unlock mechanism to allows users to withdraw their vePhonon? If we use the veCRV model we can copy this functionality over from veFRX.
  • Yes
  • No

0 voters

  1. Would you prefer to discuss this over a voice discord call?
  • Yes
  • No

0 voters

  1. Do you have any other feedback, concerns or questions? Please comment below.

EDITS: Replaced bullets with multiple polls

2 Likes
2

Some reasonable criticisms in the model are found in the attached post - Token Economics Thoughts: Disadvantages and Alternatives to ve Tokens - CoinYuppie: Bitcoin, Ethereum, Metaverse, NFT, DAO, DeFi, Dogecoin, Crypto News I really struggle to see the incentive for people to lock when there is no protocol revenue attached and worry about the impact on potential new buyers.

Whilst I understand the well-meaning intent behind the proposal I consider it intensely flawed for such an early stage protocol as Phonon. I do think a broader discussion on tokenomics is warranted.

2 Likes
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I agree with Dcc in that I don’t know that there will be enough incentive for many users to lock Phonons without a revenue component as well. It could end up attracting less people to the project if we require Phonon to be locked for voting rights but don’t provide another incentive.

There’s an argument to be made that those people who would join without another incentive than voting rights as less committed, but the question is this: If Option A with locking Phonon and no revenue incentive doesn’t attract anyone, but keeps people committed, is that better than Option B where Phonon is locked but revenue is gained that could attract many people, only some of whom are committed to the project?

I think a voice discussion, or possibly several, could be useful in hashing the community’s thoughts out on this.

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This is something we have discussed in the proposal group already. I agree that governance alone is not enough of an incentive to lock-up tokens. The lock-up mechanics provides the foundation for staking and we can build monetary/alternative incentives on top of that later. Some ideas:

  • Use locked Phonon in DAO changemaker/swap system. For instance swapping nphonons for $PHONON and take a small fee. (huge liquidity likely not needed for this, so fees will be small). DAO can choose to make its changemaker exclusively available to provide liquidity in by stakers, so pool rewards don’t get diluted by others. Rewards from swaps weighted more heavily in favour of longer stakers.
  • Require X staked to bid on nphonon card DAs.
  • DAO supplements staking with $PHONON rewards (fairly amongst stakers or via a lottery system). This would likely not be enough alone and perhaps is not a good use of DAO funding, but is one way to build monetary incentives.
  • DAO can use its $PHONON to provide liquidity on AMMs like Uni/Sushi/Curve. Fees can be directed to stakers instead of the DAO treasury.

We’re open to hear more ideas on this. There are ways to build economic incentives for stakers, but many come at trade-offs (often with the DAO). We have to decide whether or not we think these trade-offs are good. (are we happy diverting DAO fees from DAO treasury to stakers?).

2 Likes
5

I share concerns that creating a locking mechanism for PHONON without the following two criteria being met, is unlikely to be effective:

  1. Clear responsibilities associated with locked governance tokens (met in this case in terms of having more voting power)

  2. Clear incentives/benefits for locking tokens

It seems like the primary benefit/incentive for this proposal is to have tokens locked up to introduce scarcity on the market and prevent people from selling.

There are some good points made by Cobi in the past about why this particular rationale for locking tokens is not very strong: ApeCoin & the death of staking - Cobie

My thoughts are as follows re: this:

  1. Stronger responsibilities for staked tokens: For example, if there is a way to have staked PHONON play a stronger role in the native PHONON network, that might make staking more beneficial

  2. Stronger incentives for staking: I’m not adverse to providing additional PHONON rewards to stakers, but I think additional reward sources are required to make staking have the maximum benefit for stakers.

It might be that it’s too early, without a released product, additional use cases for the PHONON DAO token, and strong revenue streams for the DAO to consider a ve staking at this point.

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I had always envisioned it that we would build out the locking contract, leaving it open to add financial benefits later. We are asking people to trust us that we’re going to implement this down the road. Perhaps that isn’t the way to do it?

I absolutely agree that:

  1. We need to have a larger tokenomics discussion; and
  2. I approve of the idea that the DAO would divert fees from the DAO treasury to those who stake. This is not a zero-sum game – saying we prioritize token holders doesn’t mean we’re abandoning the DAO treasury (and therefore long-term stability).

For me, the question is, “Is it OK to launch the staking contract now, with the DAO being on the record for prioritizing revenue towards those who stake?” If not, then we should table this until tokenomics is settled.

2 Likes
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I’d say that if the staking contract is launched with:

  1. A clear staking rewards mechanism for stakers, that’s attractive, and a timeline for implementation (ideally immediately at launch of the contract)
  2. A contract mechanism that allows for future network revenues to be provided to stakers

A baseline overview of how this will fit into potential PHONON DAO tokenomics in the future (no need for the full tokenomics to be locked) then I think launching it earlier makes sense.

For reference here is a doc I produced a few months ago on potential tokenomics strategies for the token, which might be helpful for the conversation

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Pausing Proposal

After considering your comments, we have decided to pause this proposal and work. Thank you everyone for your participation.

Our intention is to align holder interest with long term protocol health. But, as @Dcc pointed out we are “early stage”. Our DAO membership is small, and it’s evident in our discussions and participation that people think long-term. While alignment between holder interest and long term protocol alignment will at some point need to be systemically considered and designed - that moment is not yet here.

That said, we should revisit this conversation once

  • Additional incentives/benefits for locking tokens emerge as our DAO, protocol and products mature. (@davoice321 , @AndrewB , @Hawkins ) No doubt creative opportunities will present themselves as our network grows and products come to fruition. Maybe that’s revenue - hopefully it’s something much cooler and integral to supporting the network.

    I for one would NOT want to see inflation or treasury used to incentivize voting anytime soon - especially during this cold-start phase of our journey. Right now IMO we must be product and service focused.

  • People stop holding phonon for long periods of time, or vote in ways that prey on short term outcomes that benefit individuals over long term protocol health.

    How might we measure or monitor this type of activity? This may be worthwhile to think about. And when that time comes - we’ll need to really dive in and understand what’s going on. vePhonon may not be the solution.

Thank you again everyone. @hinchy has saved his work and progress thus far - proposal, draft of vePhonon UI - in a Github repo that can be picked up in the future should that need arise. Thank you @hinchy for your work. Appreciate your time and perspectives. - @Senor

4 Likes