A Few Thoughts on Phezzan Tokenomics
Nothing here is final.
In this document are some of the Phezzan team’s initial ideas about tokenomics. There will be no Phezzan token before PMF and the Phezzan team needs more time to design Phezzan tokenomics. Currently there is no ETA for Phezzan token (referred as PHE below) launch date. Traders and LPs on Phezzan mainnet V1 will receive retroactive rewards. For more on why the Phezzan team holds off token launch, please refer to this article.
To quote the “Stuff I Thought About Last Week” newsletter: “we don’t believe it’s possible to accurately predict the future with any meaningful degree of precision……The prediction game has such low odds of winning (as it favors blind luck over innate foresight), that we prefer to play a different game.” The Phezzan team doesn’t think we could ever possibly know how much % should be distributed to liquidity providers 3 years from now. So this is what the team plans to do:
As mentioned above, there will be retroactive rewards for traders/LPs who used Phezzan prior to the launch of PHE.
The Phezzan team would like the PHE emission schedule to synchronize with the vesting schedule so incentives are aligned better. Say the Phezzan team has a 12 months cliff and 36 months vesting, then that’s 4 years in total. There won’t be any newly minted PHE before the end of year 4. If any pre-allocated PHE is not distributed, they will go to the community treasury.
The pre-allocated pool for traders/LPs/insurance fund stakers/Phezzan L3 stakers in those 4 years is allocated with xx% of all tokens, but the Phezzan team does not plan to have a specific yearly/quarterly emission schedule. Instead:
Before each quarter, the PHE holder community will have a vote on how much to allocate to traders/LPs/insurance fund stakers/Phezzan L3 stakers in the coming quarter. When the community anticipates a bull quarter, the allocation will be higher and vice versa. The Phezzan team chooses to have a quarterly vote instead of a yearly vote because the crypto market moves quickly and no one can predict the market of September in January.
If no vote passes, then there will be a default emission for insurance fund/Phezzan L3 stakers. Those numbers are the average per quarter from the total allocation in 4 years. At the end of year 4, all undistributed PHE will go to the community treasury.
After 4 years, as the original 100% PHE is all vested, the Phezzan team expects Phezzan Protocol to have full Product-Market Fit. Thus less token incentives are needed. The default emission will be changed to a lower number. Again, a vote will happen at the beginning of each quarter. If the Phezzan community feels the need to change the default xx% per quarter emission, a separate vote will be casted.
Phezzan’s community treasure will consist of PHE, BTC, ETH, chain native tokens that Phezzan launches on, and stablecoins. Specific allocation is undecided and the Phezzan team will swap PHE into BTC/ETH/chain native tokens/stablecoins gradually with permission from the community.
After 4 years, if the intrinsic value of $PHE is lower than market price, another separate vote may happen at the beginning of each quarter to authorize the Phezzan team to buy PHE from the market using funds that belong to Phezzan token holders, then burn them.
If the amount of PHE burned in that quarter is higher than PHE minted, it will create a deflation. If the amount of PHE burned in that quarter is lower than PHE minted, it will create inflation. The Phezzan team will watch closely to ensure Phezzan’s long term interests are served. More about this in “3. Governance & Voting”
PHE holders can stake PHE into the insurance fund. Phezzan’s insurance fund will mainly consist of stablecoins and some Phezzan token. Holders with staked PHE will have trading fee discounts, higher voting power, and more LP rewards just like in other veToken models.
Liquidity providers and insurance fund stakers will be rewarded in stablecoins with additional PHE as incentives. The combined value of stablecoins and PHE rewarded will be lower than trading and liquidation fees received by Phezzan Protocol.
PHE holders can stake his/her/their PHE into Phezzan’s insurance fund to earn yield. Phezzan’s insurance model will be covered in another article.
The longest period a PHE holder can deposit his/her/their PHE into the insurance fund is 3 months. The crypto market is too volatile for yearly or even multi-year token locks. There will be an option for PHE token holders to auto-redeposit into the insurance fund after the initial 1 or 3 months.
Staked Phezzan token holders will have trading fee discounts.
PHE can be used as collateral to trade or to make markets on Phezzan Protocol just like USDC, ETH, stETH, or aDAI once Phezzan Protocol supports PHE-USDC trading pair.
If Phezzan Protocol launches its own L3 with a network of order relayers and order matchers, order relayers and matchers will be required to stake PHE as collateral.
The Phezzan team plans to implement some extent of futarchy to encourage responsible voting behaviors. An example (specific numbers may change):
To start a governance vote, a PHE holder or a group of PHE holders needs to deposit at least 1% of circulating PHE to a smart contract for 2 weeks. Vote participants need to lock their PHE for 1 week to enter the vote (a participant can lock 10 PHE to vote YES, and lock 5 PHE to vote NO). If the vote fails, 0.05% of circulating PHE regardless of how much the proposer locks in, which comes from proposers’ deposit, will go to Phezzan’s community treasury.
Phezzan Protocol will be governed by two houses: the PHE House and the ZAN House. The PHE house works like other crypto governance bodies and uses “one token, one vote”.
The ZAN house is set to have members who care about the long term success of Phezzan Protocol. Since most token holders care more about short term gains compared to long term, the ZAN house will serve as the watcher of Phezzan Protocol.
The ZAN house consists of members who have made unparalleled contributions to Phezzan Protocol in the past, such as team members/delegates from investors/core community contributors/quarterly highest trading fee payer/quarterly highest liquidity provider, etc. After a vote within the ZAN house, a soulbound token (Phezzan ZAN) will be sent to the newly admitted ZAN House member’s address.
The ZAN house’s primary power is to veto proposals passed by the PHE house. The ZAN house cannot initiate proposals. Any proposal needs to pass both the PHE house and the ZAN house before being implemented. A ZAN House member needs to own a ZAN House soulbound and to lock more than 0.1% of circulating PHE for a month to vote.
The specific mechanism of the ZAN House has not been finalized yet.
The value of PHE comes from trading fees. Phezzan Protocol will charge 0.1% trading fee in stablecoins on each transaction. 50% of the trading fee will go to PHE holders.
The exact use of the 50% that goes to Phezzan token holders will be covered in another article.
The 0.1% and 50% are subject to change. PHE will not be a “useless governance token”.
Phezzan Space Bar is a series of official Phezzan NFTs airdropped to early community contributors of Phezzan Protocol. In the future Phezzan Space Bar will be airdropped to community contributors, monthly highest trading fee payer, monthly highest liquidity provider, etc.
Phezzan ZAN is the soulbound token as in “3.2 Using soulbound token to create a two-house system”.
Holders of Phezzan Space Bar and Phezzan ZAN will have 1 tier of trading fee discounts and x% of referral fee boost. If an address holds both Phezzan Space Bar and Phezzan ZAN, that address can still only have 1 tier (x%) of discount (boost).
In each transaction, the taker of the order will be recognized as a trader, and needs to pay trading fees as specified in this section. The maker of the order will be recognized as an LP, and will receive some rewards as specified in “4.4 LP rewards and boosts”.
Phezzan Protocol charges a 0.1% trading fee on all transactions. The trading fee discounts will have many tiers based on volume.
Phezzan will charge 0.1% on all trades and send the discounts back to a trader’s address at the beginning of next month.
50% of the trading fees goes to LPs in the pool and the rest goes to Phezzan Protocol.
Phezzan Protocol will also have referral programs. Referees will get a 5% discount on trading fees in their first 6 months of trading. Referrers will get 10% of referees’ trading fee.
If the referrer is a Phezzan Space Bar or Phezzan ZAN holder, the referrer will get 11% of referees’ trading fee.
50% of the 85% (or 84% in the case of NFT holders) left will go to LPs and the rest will go to Phezzan Protocol.
There are two types of LPs in Phezzan Protocol.
Professional market makers may provide the capital they make markets with. In this case, market makers will get all the LP rewards including profits from market making, LP earnings and PHE.
Phezzan Protocol will enable permissionless automatic market making strategies (referred as “MM strategy” below) so retail LPs can provide liquidity as they do in AMM style DEXs. A regular crypto user can select any number of MM strategies with a click of mouse and start market making. Professional market makers can provide their strategies in a private way.
When retail LPs provide liquidity to MM strategies, they will share the LP fees with the owner of the strategy. Initially the Phezzan team will partner with some professional market makers and the distribution percentage will be predetermined.
Phezzan Protocol will support permissionless listing of MM strategies in 2023. By then, strategy owners can set their own fee percentages. A strategy owner can set 10% to quickly get some market share or 90% if that strategy owner is confident enough.
There will be a 5% minimal strategy charge percentage to avoid destructive competition and Phezzan will take a flat 5% to cover MM strategies related expenses.
Money earned by making markets except liquidity rewards will be splitted between strategy owners and retail LPs. The strategy owners will set their parameters based on their needs.
Since MM strategies need a steady stream of capital to operate, retail LPs must lock their liquidity for some time. The minimum time a retail LP provides capital is 7 days and maximum is 365 days. A strategy owner can set its lock time requirements within the 7 to 365 days range. There will be an option for retail LPs to auto-redeposit into the same MM strategy. LPs cannot withdraw the capital they provided prior to the preset date.
Since Phezzan Protocol asks retail LPs to lock their liquidity, each liquidity locked will be different.
If an LP provides multiple liquidity positions, that LP will have cumulative earnings/boosts calculated separately by each liquidity position even if all liquidity positions are in the same MM strategy.
An LP can have at most 5 liquidity positions at the same time.
LPs’ fees will be 50% of the trading fees earned in a given month.
Phezzan Protocol will calculate the fees by each MM strategy and let the strategy owner decide how to distribute the fees to LPs. The distribution mechanism must be on chain and can only be changed once a month. If a strategy owner changes the distribution mechanism, LPs who provided liquidity for that strategy can withdraw their liquidity within 7 days.
Different MM strategies may have different preferences, thus they can allocate the fees according to their own needs. If LPs do not like strategy A’s distribution mechanism, they can provide their liquidity to a more preferable strategy.
Profits earned through market making other than trading fees will have similar mechanisms.
Any strategy that creates the most trading fee for any trading pair in a given month will get 51% of trading fees instead of 50%. This boost is to encourage more market making activities for trading pairs that have less volume.
When LPs deposit their liquidity into a strategy, they will get a new ERC-20 token that represents their ownership of liquidity in that strategy. Bots owners and projects who want more liquidity can use those tokens to provide extra incentives, or “bribes”, outside Phezzan Protocol. When Phezzan matures, this mechanism will create a new kind of “Curve War”.
Liquidity providing boosts, which are PHE distributed to LPs, will be allocated to MM strategies.
The amount of PHE a strategy receives is in proportion to its earned trading fees compared to total trading fees on Phezzan in a given month.
Again, Phezzan Protocol will calculate PHE distributed to each MM strategy and let the strategy owner decide how to distribute earned PHE to LPs. The distribution mechanism must be on chain and can only be changed once a month. If a strategy owner changes the distribution mechanism, LPs who provided liquidity for that strategy can withdraw their liquidity within 7 days.
There will be another article about the details of insurance fund staking.
If Phezzan Protocol launches its own L3 with a network of order relayers and order matchers, order relayers and matchers will be required to stake PHE as collateral. Part of insurance fund staking rewards will be distributed to order relayers and matchers. Specific mechanism has not been decided yet.
Thanks for reading this far. The Phezzan team understands that tokenomics is extremely important and difficult to make major changes once implemented. All the mechanisms and numbers in this document only reflect the current thinking of the Phezzan team and may change in the future.