I recently went through the medium posts about AQUA tokenomics and tried to figure out why AQUA is experiencing a rapid decline towards 0. In case I´m basing my following analysis on incomplete information, please let me know and provide links to the missing pieces.
These are the main characteristics I gathered:
- Unlimited supply
- Initial airdrop of 800m tokens
- Aqua Is generated in excess value of 50-100% of accumulated trading fees at time of unstaking and send to user.
- A dropping AQUA price leads to exponential minting when people unstake to match the dollar value of accumulated LP rewards plus the premium.
- Diversification of LP investments
- “free money”
A weakness right there is that AQUA doesn´t have any real use case except for investment diversification. Free money is worth 0 because it´s literally free and anyone can create their own play token. Governance rights of a young start-up protocol go towards zero as well because there is no treasury to manage and no influence on other protocols. Since there is NO VALUE CAPTURE of the use case of diversifying LP investments by the protocol, there is no revenue stream for the treasury to be expected, hence this value will stay at 0 without design change.
This initial analysis tells that AQUA only has 1 single use case which doesn´t transfer additional value to the token holders. However, the supply is being constantly inflated, leading to an exponential price decline towards zero. This doesn´t stop when burning Aqua in exchange to LP fees is enabled because then people will just burn the token to get out their farmed value – which leaves the protocol useless.
To go one step further, I developed a game theory payoff matrix of Aqua users who are pooling their LP tokens. The actions are related to the Aqua token.
|Selling immediately||HODL!||Buy more|
|Selling immediately||2 / 2||3 / -1||4 / -2|
|HODL!||-1 / 3||0 / 0||1 / -1|
|Buy more||-2 / 4||-1 / 3||1 / 1|
For player A and player B the dominant strategy is “selling immediately”. This means, no matter what other participants are doing, everyone will always sell because the payoff is the best.
The Nash Equilibrium is in the configuration Selling / Selling, which means players get stuck in this configuration once it happens. Because selling is the dominant strategy for all players, the token is guaranteed to end up there, which is what we can observe.
In conclusion, the game needs to be changed. Tokenomics and protocol design need to be revamped to lead to a dominant strategy of buying or at least holding for all users.
I think the general idea of providing LP investment diversification is nice, but it needs quite a bit of refinement.
In my view, Flash V3 is becoming what Aqua wanted to be - plus the extra neat feature of upfront yield.
Hope that helps and let me know if I missed some important information.