I went to comment on @mintcloud’s post, but it felt like it was breaking off into separate discussion on “why someone would want to hold the token,” which is different from “token economics.” Related and intertwined, but still different.
As the community begins to participate more in governance discussions, I thought it would be helpful to align on a general framework of “Why someone would hold the ZRX token.” We can’t align on what we are doing before we know why. From there, we can figure out where we’re already succeeding, where we’re doing well but need to do a better job telling the story, and where there are some potential gaps.
The main purpose of this thread is to begin a debate on what belongs in the framework. It’s not to solve all of the problems. I encourage lively discussion on where this framework can be better (or where I’ve missed the boat completely). I propose we cap the initial discussion to 14 days to come up with a solid draft, knowing that we’ll iterate and improve on this framework throughout the year. Think of it as the community’s North Star, which needs to align with both the core team’s North Star and community’s long-term desires to realize the true value of the 0xproject.
To start, let’s work with an outline to make it easy. This is based off the assumption that for the total market cap of the token to increase in a healthy, sustained matter, the amount of ZRX being held AND the number of ZRX holders needs to increase.
Overall rationale for someone buying and holding ZRX
In general, someone would want to buy and hold ZRX when:
- They feel strong incentive to participate in governance regularly
- They feel the benefits of staking outweigh the opportunity cost
- They feel future price will exceed a certain benchmark over a certain time horizon
- They feel it’s exciting and / or fun to participate
- They feel it’s safe (i.e., the the team / project / community will be around and the protocol and value proposition are evergreen)
- They believe deeply in the mission
Now, let’s take these one by one. What are our “need to believes” for each bullet?
People feel strong incentive to participate in the governance process when:
- They’re aware of a current or upcoming vote. Or, votes happen often enough that it’s not worth trading out of a position
- The proposals are easy to understand (this is subjective)
- The financial cost (e.g., gas) isn’t a barrier
- Participants feel their vote is large enough to matter / make a difference, and that the vote isn’t dominated by large token holders or funds
- They generally want to support the team and project in the long-run
Conversely, people don’t feel incentivized to participate when:
- They’re unaware of the vote, or votes happen infrequently
- The proposal is too complicated or it’s not clear how a token holder will benefit
- They only hold what they feel is an insubstantial amount of ZRX
- Gas costs are too high and they aren’t already participating in a staking pool
- Other costs (e.g., they find moving tokens is too complicated, fear of screwing something up and losing their tokens forever) outweigh the benefits
Generally, if the first bucket outweighs the second, they will participate. If participation is low, it means the converse is true for the majority of holders.
II. Staking (or, receiving a regular dividend derived from the value that the protocol is accruing)
When someone would stake?
- They want (or don’t mind) exposure to the token AND… (at least one of the following needs to hold true)
- They’re aware of the most current annualized staking returns
- The present annualized return is greater than they could get elsewhere for the same perceived amount of risk
- The present annualized return is around the same (or lower than) they could get elsewhere, but they feel this will change in the short-term future.
- They trust the staking system, or the combination of trust + monetary return of staking + financial cost to stake outweigh trust of holding ZRX in another location (e.g., Ledger, Coinbase Vault)
- They feel confident enough in their technical acumen that they can stake without risking funds
- The technical side of staking is completely abstracted away and / or difficult decisions (e.g., which pool) are automated
- Staking pools have capacity (i.e., saturation levels are below 100%)…note: even if saturation levels being above 100% won’t dramatically impact real returns, this is enough to scare people away
- Conversely, someone wouldn’t stake if they don’t want exposure to the token OR:
- They’re unaware of the current returns
- They can get a higher annualized return elsewhere for the same perceived risk
- They don’t believe the short-term financial return will hold at current levels (or grow in the future)
- They don’t trust the staking system or it’s too intimidating
- Gas fees are too high to make it worth it (depends highly on # of tokens held)
- Pool capacity constraints
Generally, if the first bucket outweighs the second, they will stake.
III. Holding ZRX as a speculative asset
In general, someone will hold ZRX as a speculative asset when they believe that the price of the token will outperform a benchmark over a specified time horizon in terms of a specific fiat or cryptocurrency
I’d guess that in general people who hold ZRX use the following as an investment benchmark. This isn’t to say they don’t use fiat as a true benchmark, they’re just chosing to invest in ZRX over the following:
- Other L1 blockchains
- Other ERC20 tokens / classes
From this list, it’s going to be very difficult to demonstrate potential value of ZRX in a portfolio in replacement of BTC, Ethereum, and other non-ethereum based blockchains or tokens, but it should be easier to demonstrate how ZRX can be a great addition to a portfolio in addition to those assets and in replacement of other ERC20 tokens
- To do this, we’ll need to run a few risk-adjusted models showing how ZRX could potentially help an investor reduce risk and volatility in their portfolio without losing potential upside
- Now that ZRX is providing regular dividends, we should be able to model out value by using a two or three-stage growth or FCF model. The first stage should account for some sort of exponential growth, and the second and third stages should account for some sort of plateauing of returns. Of course, we’ll need to run a sensitivity analysis on all of the inputs.
- Speaking in very general terms, we need to demonstrate the speculative benefits of holding ZRX over a long-term time horizon. But, what does this mean? How are we defining long-term in a space where each day is exhausting and months feels like years? While this doesn’t change the 0x team’s mission, I do believe it should be a staple guiding principle for all community proposals.
IV. They feel it’s exciting / fun to be part of the community
In general, token holders feel excited to be part of the community when:
- They understand how to participate
- There’s generally lively discussion that’s not dominated by a handful of people
- They feel their voice is heard and that their views are respected, even if different from the core team
- They feel that suggestions or proposals they make are responded to and / or acted upon quickly
- They feel that their participation can have financial benefit over a set time horizon
- They feel that their participation can further the mission of the token and / or the broader Ethereum ecosystem over a set time horizon
- They feel that there’s exciting things on the horizon
In general, token holders aren’t excited to be part of the community when:
- They don’t understand the best way to participate (i.e., reddit? discord?)
- Discussion feels dead or “forced” by a handful of individuals
- The core team leaders don’t participate regularly or aren’t consistently offering an inspiring vision
- Their views are dismissed prematurely
- They feel that proposals they make end up going nowhere…or end up in some message-board graveyard without a clear plan for discovery
- Participation won’t provide them with a monetary benefit (real, or potential), compared to time spent on other projects will
- They don’t feel there’s anything exciting on the short-term horizon
- Their intentions are misaligned with the mission and / or long-term health of the ecosystem
In general, if bucket 1 outweighs bucket 2, people will actively participate. Assumption: people who actively participate are more likely to buy and hold the token
V. They feel their funds are safe (i.e., they won’t get ‘rug pulled’)
When would they feel their funds are safe?
- They feel the project is at less of a risk of an exit scam than other projects, and the team has a relatively long, established history
- Team is known and established within the industry. The community knows who’s on the team and what their roles are
- Team has a track record of prioritizing safety / caution and invests heavily in security
- The token is listed on reputable, centralized exchanges (i.e., there’s an assumption that someone else has done due diligence)
- The project has reputable VC backing
- The market is liquid enough that they can exit their position quickly
When would someone not feel their funds are safe?
- They feel the project could ‘rug pull’ or exit at any time
- Team is anonymous or team / company structure is opaque
- Team is newly established and / or has a subpar track record
- Token is only listed on decentralized exchanges
- Project hasn’t been backed by a VC
- Market for the token is illiquid or dominated by a few large holders
VI. They know about and believe in the mission
This one is self explanatory
- Where are the gaps in this framework? Where am I missing something obvious?
- Where am I off-base with my assumptions or interpretations of the average token holder?
- Are all buckets equal? Do some matter more to the team than to holders, and vice versa? How can we “bridge the gap?”
- Where does 0x hold a differentiated advantage? Where is the team at a disadvantage? How do we promote the former while working on the later?
- Where’s the “low-hanging fruit” where the community can step in and add value during 2021? What buckets should the first community-led proposals focus on?
- Should we establish community-led calls separate from the community / governance calls led by 0xProject? Or, maybe we can start by starting a community-led Telegram group?
I need to run, but I’ll do some proofreading later so sorry for any typos…
Thanks everyone for reading - I’m looking forward to the discussion!