An Alternative to Token Burning Which Increases FNX Utility & Value
The community has been pushing for a token burn, however, I believe it will not have the effect they intend. The concern (which is a valid one) is that the team currently has control of too high a portion of the total token supply, and could potentially dump those tokens in the market and tank the price of token. Burning a big chunk of the token supply which is currently controlled by the team is of course one possible answer to this problem, however I don’t think it is the answer which is best for FinNexus, and I don’t think it’s best for the long-term returns of FNX token holders.
Prof. K Had a few very good points about why it’s not the best idea, which I am pasting here, and below that I have some of my own thoughts on why it’s not idea:
Burning tokens from non-circulating supply is useless. And it reduces flexibility going forward. For me, this is an emphatic NO and an extremely bad and short-sighted idea. It MIGHT cause a temporary pump in the price at best. AT WORST, it leaves us with no way to attract deep enough liquidity to our options pools.
Here are my reasons:
Current FNX token supply is not a lot. HEGIC has a supply of 3,012,009,888 HEGIC, so since this is the closest project to FinNexus, you could say that our current max supply of 469,097,362 FNX is quite small by comparison.
What matters is circulating supply of FNX. Our current circulating supply of 17,900,126 FNX is quite reasonable. What we need is a burn mechanism built into the protocol that burns FNX from the existing supply. Burning from the non-circulating supply does absolutely nothing for us and reduces our flexibility going forward. What if we need to sell those for treasury? What if we need to increase mining rewards? It doesn’t make any sense to burn FNX tokens that are already not circulating.
Limits our potential growth to other blockchains. One of the founding goals of FinNexus is to be a cross-chain DeFi protocol suite. How can we move FNX to other chains if we burn it all now? What if we need to have supply across 10 different blockchains? We already have Wanchain and Ethereum. Elrond and Kardiachain are on the roadmap. If we add Binance Smart Chain, Polkadot, Zilliqa, Tron, etc. (all completely reasonable possibilities), where will FNX supply come from if we burn it? How will we fund mining rewards?
History proves FNX burns have no effect on FNX price. Guys, we’ve already burned over 30 million FNX and that had literally no effect on the price. What makes us think this will be any different?
A massive burn is a desperate move that makes us look bad. To me, a massive token burn is a last-ditch effort to pump the price before giving up on a project entirely. The optics are bad. We have a lot of blocking and tackling to do to improve the protocol before we go down this road: Overhauling the UXUI, implementing vesting of FNX mining rewards, expanding the underlying asset portfolio of the pools (adding things like XRP, LTC, XLM, etc.), starting up on Elrond and Kardiachain, tweaking the mining rewards rates, improving the tokenomics so as to better tie the stablecoin pools to the value of the FNX token… There is literally so much to experiment with before we take such a drastic step as this.
I could go on but I will leave it at these 5 reasons. I dare those in favor of a token burn to try and refute them. I don’t think you can. But let’s have a debate.
To sum up, I am EXTREMELY opposed to a token burn. Now, if we are talking about a burn mechanism embedded into the protocol that slowly and transparently gobbles up FNX from circulating supply, now that is something I could get behind!
I generally agree with everything Prof. K says, and have some of my own thoughts:
A token burn does nothing to support the long-term price of the token. Long term, it will be a token utility which drives the token price. So whatever we are doing with the token supply in order to solve the issue of having too many tokens in the team’s control, it should not just reduce the token supply, it should increase the token utility.
So, I have an alternative proposal to a large token burn, my proposal is that we combine inflation with a small burn and put the majority of the tokens which were to be burned in previous proposals into a community control fund. The fund can be used to sponsor community projects which benefit the FinNexus platform. This way:
- …the tokens are actually are used to continue the development of the platform…
- …and the tokens also increase in utility since FNX holders get to decide what happens with the community funds. That makes it so that FNX holders are all like chairmen of this fund.
Why Add Inflation?
Currently, the liquidity mining rewards do function as a sort of inflation, but since they are pretty much a short-term awards program and there is no guarantee of the long-term inflation due to liquidity mining rewards, they don’t really have the effects of a truly inflationary policy. Inflation is a excellent tool we can use to ensure that ecosystem participants are rewarded while passive holders of FNX are penalized. The idea is that all participants (that is, people who lock FNX in any of FinNexus’s Protocols or who contribute liquidity to Uniswap or other DEXes) are rewarded with inflationary tokens. As these tokens increase the total token supply, they could potentially push down the price of the FNX token, however, any participants who lock FNX tokens will be increasing their percent holdings of the total FNX token supply, which means the total value of their FNX token holdings should be increasing even if the value of individual tokens may potentially be falling. It also means that passive HODLers of FNX will be penalized by the inflation since they are token value will fall without them being compensated with inflationary tokens.
This is the same principle behind pretty much all major POS systems. The only reason that Polkadot works, and that it is able to attract enough stake to secure the system is that They have an inflationary system which pumps a lot of DOT into the system and devalues the price of individual tokens while rewarding active participants in the system (stakers and delegators) So that as long as they participate actively, their total percent holdings of the DOT token supply will increase even if the price of individual token decreases.
General Outline of New Token Buckets
Currently, the tokens in question account for 70% of the total token supply. My new proposal divides these tokens up into several different buckets for different uses
Bucket A: Token Burn ~ 10%
Bucket B: Community Fund ~40%
Bucket C: Inflationary Fund ~30%
The inflationary funds are set in a time locked smart contract, and will be distributed equally amongst all users who lock FNX in any beneficial way to FinNexus. Topics specific types of locked FNX which will receive inflationary funds can be adjusted by FNX token holders through voting in the new governance system which will be set up and which will also control the community fund.
The rate at which the inflationary fund is issued will be set from the beginning in the smart contract, only the types of locked FNX can be adjusted, not the issuance rate.
New Governance System
For the new government system, we want a system which will use smart contracts to ensure that the funds in the community fund cannot be spent by anyone, not even the team, unless it is voted on by FNX to holders.
I believe we can use the same system used by Idle.finance, which is based on Compound and Uniswap’s governance.
Compound has a excellent governance system where In order to call any of the small contract methods of the protocol which are reserved by the admin keys, COMP token holders must vote and reach a consensus. The way Idle does it is they required at least 5% of the available tokens must participate in the vote, and that way they ensure that votes only get passed with a significant portion of token holders supporting them.
Some of the smart contract methods which can be called methods which update the protocol proxy contracts to point at new addresses, which basically allows for total updating of the protocol. If you’re not familiar with the idea of proxy contracts, you can read about them here, basically it’s a design approach which allows for DAPPs to be upgraded even though Ethereum smart contracts are immutable.
Long term, I expect that FNX token holders will likely vote for some sort of profit-sharing proposals so that fees from the platform are shared with FNX token holders. I believe that for the short term, the best strategy for FNX token holders will be not to do this and rather to ensure that the majority of the funds go towards bounties for people who are contributing to building up the protocol and increasing usage of the platform, and once platform usage increases, then it will be a good idea to start turning on fee sharing.
Regarding this, I’d like to point our community towards these posts which explain why it’s not a great idea to start fee sharing right away, and why it’s better to focus on platform development while we’re still such a young project.
- Thread in the Idle forums about fee sharing
- Thread in the Yearn forums explaining why fee sharing at an early stage of project development are NOT a good idea
I believe that a large token burn will backfire, and will not lead to the intended effect which the community believes it will. I think that any actions we take regarding token supply should increase FNX token utility and encourage FNX token holders to be active participants in our ecosystem, and not passively HODL FNX tokens. A one-time token burn event does not have any long-term positive effects, want to be using our token supply to set up mechanisms which encourage token holders to act in constructive ways in which increase utility of the token itself. A combination of a relatively small token burn, establishing community governance with a fund that holds the majority of the tokens in question, and establishing a smart contract controlled inflationary fund to encourage active participation in our ecosystem are a far better usage of the 70% of the token supply in question.
These are the documents and forum posts which influenced my thinking on this matter: