Description of protocol tokenomics.
Tokenomics are key to bootstrapping and sustaining the growth, adoption, and usage of a decentralized protocol. Shade Protocol has a range of token pools, all of which play an important role in the adoption life cycle of Shade Protocol.
There are 9 categories of distribution of an initial 10,000,000 total SHD supply within Shade Protocol over the course of 10 years:
Please note that discrepancies between Chart A and Table A is due to rounding. See Table A for exact amounts.
Note that grants, community pool, and airdrop going to 0 on year two should be interpreted as no new additional SHD being released to these categories, not that those categories went to 0 in terms of supply. In the same vein, private raise and launch expenses pausing at year two implies that there is no additional emission towards these categories after year two. Additionally, SHD supply is not capped at 10M due to bonds and algorithmic components.
Using the Osmosis release model, there will be ~1/3rd of LP and staking rewards released in year one (with ⅓ decay every year thereafter).
To incentivize SHD staking, a 10 year Osmosis thirdening model is used with 12.36% of SHD supply to incentivize stakers while other sources of non-inflationary rewards are established via treasury bonds, synthetics market, SCRT staking from the treasury, SHD← →SILK swap fees, Silk transaction fees, staking derivatives, and other key DeFi primitives.
Importantly, SHD staking collateral is deposited in the sky arbitrage contract to help maintain the Silk peg. Additionally, Shade staking is important for governance, as well as pulling SHD out of active circulation (21 day unbonding period). Over the long haul, the #1 goal is to have sustainable non-inflationary economic revenue streams being directed towards SHD stakers. As such, the supply pulled aside for SHD staking should be viewed as a 10 year bootstrapping mechanism for the protocol, not to be confused with a long term sustainable value accrual mechanism for SHD tokenholders.
To incentivize Silk & SHD LP pools, 15% of SHD supply has been set aside to incentivize LP providers. Liquidity is important for making acquisition of Silk and SHD as convenient as possible for users. Via bonds, protocol owned liquidity and LP rewards in the form of tokens other than SHD & Silk is a highly prioritized goal. If LP rewards can take the form of a token uncorrelated to Shade Protocol, this would ultimately enable the rent-seeking model of LP providers to be “sustainable” and not as a mechanic that damages the overall market capitalization of Shade Protocol (assuming yield farmers are simply selling off LP rewards). Protocol owned liquidity for obvious reasons allows for deep liquidity without the need to incentivize the liquidity itself as the protocol is essentially committed to locked liquidity for key token pairs for the protocol and underlying tokenholders.
Collectively, 27.36% of SHD supply is devoted to SHD staking and SHD liquidity providing. It should be noted that SHD LP rewards will not go live until an audited double-sided LP reward model is available on a Secret Network DEX or until a related SHD primitive gets created. Additionally, SHD staking rewards will not go live until the SHD staking contract is live on mainnet.
In order to incentivize users to directly interact with all of the functionality that Shade Protocol has to offer, as well as to decentralized the protocol, 14.5% of SHD supply was airdropped to incentivized testnet contributors as well as community members that staked on SCRT, ATOM, or LUNA from Nov 7th. — Dec 13th.
Initially, 20% of the 13% of the airdrop supply is available for claim at the initial launch on February 21st (2.6%), with the remaining 80% (10.4%) of the airdrop becoming available to users upon the launch of SHD staking, Silk, and other key contracts of Shade Protocol. Users will perform tasks related to these key contracts to receive the remaining 80% of their airdrop. This rewards users who participate in using the protocol, and builds excitement around the launch of contracts providing tangible utility to Shade Protocol.
Of the 14.5%, 1.5% of the airdrop supply is in reserves for airdropping testnet contributors leading up to the launch of Silk. This will include UI/UX testing, bug bounties, community initiatives, and contributions to protocol research. Contributing has already begun to occur, so be sure to join the Shade Protocol discord channel and join and start contributing today. Any amount of airdrop supply that is not used on the incentivized testnet (1.5%) will be returned as an airdrop bonus during the final claim process to the community. Note, high participation airdrops typically have claim rates of around 50%, and as such circulating supply from the Shade Protocol airdrop claim could potentially (initially) be as low as 1.30% (130,000 SHD → .026 * 0.5).
Airdrop atrophy follows the Osmosis model. Airdrops that are unclaimed will slowly atrophy back to the Community Pool. Airdrop atrophy will begin ~1 month after the launch of Silk and will go into effect for 4 months of atrophy. As of the time of this post (Feb. 20th), users will not experience the effects of airdrop atrophy and will be given an adequate heads up in advance of the beginning of airdrop atrophy.
Atom airdrop was given due to the contributions of the CosmosSDK to Secret Network, and due to the size of the Atom community.Luna airdrop was given because of the significant amount of influence Terra/Luna has had on Shade Protocol design and economics. Additionally, the Terra/Luna community understands the importance of stablecoins, and because of this background are immediately familiar with Silk as a product and the vision of Shade Protocol and its potential.Secret Network is the underlying security layer inherited by Shade Protocol. Due to transaction fees being paid in SCRT, it makes sense that Secret Network holders should be incentivized to use Shade Protocol immediately as they are already familiar with using Secret Network products.
The sky arbitrage contracts are tied to the community pool (i.e. “Treasury” or “ShadeDAO”) capital, of which 10% of the SHD supply is allocated to. A percentage of this allocation within the general treasury will be used to help maintain the stability of the Silk peg. Additionally, governance can make general requests from this treasury. A percentage of the general treasury can be thought of as a community pool, but capital allocation should be thoughtful as the general treasury plays an important role as a stabilization and yield bearing mechanism, and there is already a significant tranche of tokens pulled aside for grants.
12.34% of total supply is devoted to grants which are used to accelerate development of key Shade Protocol DeFi primitives, Silk adoption, and community growth. Specifically, these funds can be used for hackathons and milestone based products and community initiatives. Teams and individuals are encouraged to approach the grants fund to obtain this set of funding. Community signal proposals and Shade governance will help dictate how these grant funds are used. Note that ~4 key DeFi primitives are actively being built as a direct result of the Shade grants program. All of these key primitives have 100% value capture directly back to the Shade Treasury and SHD stakers.
Grants pool will be migrated to the community pool upon the implementation of governance on mainnet.
The Shade Protocol Development Fund has a four year vesting schedule totaling 23.25% of the supply. These funds will be used to build out key Shade primitives, and to secure as many key integrations for Silk and Shade as possible. Core contributors currently consist of 10+ individuals — with the goal of scaling beyond 25+ individuals as rapidly as possible, with capital and token distribution from this tranche providing long term sustainability and builder incentives for any original or new core contributors of Shade Protocol throughout the entirety of the protocols lifespan.
The development fund is committed to participating in OTC deals that result in locked liquidity and vesting periods from buyers versus the alternative of selling directly in open markets. This is standard practice, as open market sells to sustain operations of core builders can negatively impact the long term health of the protocol.
Approximately 1.5% of supply is pulled aside for marketing, influencers, branding, events, key community contributors, and part-time builders that helped promote or build Shade Protocol. Note that none of the launch expense distribution went to entities that are part of the developer vesting. Additionally, all entities that are part of this category have committed to locked liquidity providing, as well as 2 year vesting that includes a multi-month cliff before vesting begins.
The private raise of Shade Protocol fundraised $5,000,000 for 7.75% of total supply. The support for the Shade Protocol fundraise came from a range of key investors and contributors. The private raise funds are actively being used to bootstrap the core protocol development team (with 10+ people making the jump to being full time builders).
The private raise releases tokens using a linear vesting schedule over the course of 24 months, unlocking ~1,061 SHD per day spread across 25 different organizations and individuals (averaging 42.44 SHD per investor per day). These funds are received by private investors by request, and are not a continuous stream. The private raise for Shade Protocol was oversubscribed by ~$12.5M out of $5M ($7.5M in funding interest was rejected by the core developers) such that partners that were selected to be part of the private raise were specifically chosen due to their alignment with Shade Protocol, as well as what these partners could bring to the larger community.
It is important to note that linear vesting was chosen by the core developers to smooth out any liquidity supply shocks — market research has shown that cliff schedules encourage (1) Partners not to be engaged during the cliff period (2) A higher rate of dumping upon completion of a cliff. As such, linear vesting keeps these key partners engaged with assisting with the success of the protocol, while also smoothing out any liquidity shocks that could emerge from a cliff.
Due to expenses to list Silk & SHD on exchanges, a percentage of SHD is pulled aside in reserves to cover listing costs for Shade Protocol on CEXs. Note that Shade Protocol highly prefers DEX listings until an adequate amount of liquidity is available. There are currently four advisors assisting the core contributors with the growth of Shade Protocol. None of these advisors receive from the development fund category. Advisors are on a 6 month cliff before they begin a 4–6 year vesting schedule.
At Feb 21st, assuming 50% claim rate
The above chart represents actively circulating supply on February 21st, assuming a 50% claim rate of the first 20% of the airdrop amount (13% * 0.2 * 0.5) = 1.30%. During this phase, there is no utility for SHD outside of pure market speculation and liquidity providing opportunities.
The above chart represents actively circulating supply assuming a 50% claim rate of the whole 14.5% of airdrop and assuming 3 months passed from the initial airdrop before Silk got launched. Note, the launch of Silk and the utility contracts could happen quicker or slower than 3 months, but 3 months will be used for examples sake in this post.
Note that the above chart/analysis assumes SHD staking and Silk went live, 50% of the airdrop was claimed, but that no one chose to stake, and that 0 SHD was burned at the time of the launch of the Silk contracts. Essentially, the above chart is the frozen moment in time moments before a variety of key contracts that impact tokenomics goes live.
Airdrop claim + private raise unlock + core development team
(0.5 * 14.5%)+(.25 * 0.5 * 7.75%) + (0.25 * 0.25 * 23.25%)
7.25 + 0.96 + 1.45= 9.66%
Upon the launch of Silk and SHD Staking, multiple key components enter the picture that impact the economics of Shade Protocol.
(1) SHD staking goes live (what % of holders will stake/lock their tokens?)
(2) SHD staking rewards go live
(3) Silk goes live (how much SHD gets burned during the adoption of Silk?)
(4) SHD LP rewards guaranteed to go live
(5) Entry minting & bonds
This is where the analysis of what “end of year 1” could look like becomes quite speculative. Analysis #1 will assume that 0 SHD is burned, and that no SHD is staked, and that no SHD is entry minted. Analysis #2 will assume that ~500,000 SHD (5% of SHD supply) is burned to support the blossoming demand for Silk in the first 9 months (on par with the beginning lifecycle of other stablecoin algo ecosystem historically) and that 50% of all circulating supply becomes staked.
Assume 0 SHD burned, 0 SHD staked
Airdrop claim + private raise unlock + core development team + advisors/listing + (3/4 of Y1 staking rewards because the first 3 months between first airdrop and utility contracts these staking rewards are not emitted) + (3/4 of Y1 LP rewards emitted) + launch expense vest unlock
(0.50 * 14.5%)+(0.50 * 7.75%) + (0.25 * 23.25%) + (0.25 * 3.3%) +(0.75 * .33 * 12.36%)+ (0.75 * .33 * 15%)+(0.50 * 1.5%)
7.25% + 3.875% + 5.81% + 0.825% + 3.00% + 3.70% + 0.75% = ~25.21%
50% staked, 500k SHD burned to support Silk
((Airdrop Claim + private raise unlock + core development team + advisors/listing + staking rewards + LP rewards + launch expense unlock) * (50% of active circulating supply staked)) — 5% burned)
(((0.50 * 14.5%)+(0.50 * 7.75%) + (0.25 * 23.25%) + (0.25 * 3.3%) +(0.75 * .33 * 12.36%)+ (0.75 * .33 * 15%)+(0.50 * 1.5%))*50% staked) -5% burned)
7.25% + 3.55% + 3.875% + 1.65% + 3% + 3.7% + 0.75% = ~25.28%
25.28 * 0.5 staking = 12.64% of supply actively circulating after staking
12.64% — 5% of total supply burned= ~7.64% of active circulating supply
Due to a variety of key variables and emission rates that are not fully predictable, supply fluctuation models will be released overtime to give the community a better understanding of circulating supply. While this blog post could have been devoted to extensive multi-year predictive analysis on supply, we will leave modeling of said effects for a later blog post.
5.13.2022 — changed text to ensure that people would not mistakenly believe that the supply of SHD is capped.