Aqua Tokenomics Analysis

Hey guys,

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:

Tokenomics:

  • 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.

Use case:

  • Diversification of LP investments
  • “free money”
  • Governance

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.

Cheers!

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This is such a great breakdown of AQUA. I was looking at this last night and trying to figure out why there were such high APYs on staking AQUA, but now I get it. You need a 6m% return to even breakeven on your initial LP. Thank you for this!

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Hi @DeFiChad. I think your analysis is spot on and you worded it in a very kind way. All this time I couldn’t bring my heart to enough peace to write a kind review, thanks for doing it right.

AUQA has only one game theory: The moment a liquidity provider stops providing liquidity is when he wants to realize his LP profits in the pairs he wanted to get it. When he gets AUQA tokens, he gets double his profits. As he wanted to realize his profits in the pairs he provided liquidity for, his immediate action would be to sell AUQA for whichever coin he wants to keep.

I can’t find any reason why anyone should hold AUQA or buy AUQA. In its current game theory, AQUA is a super high velocity coin, dumped the second it is minted.

Quick fix: In order to get your double LP profits, you need to hold minimum 10x AQUA of the amount that will be minted for you. If you hold less, your rewards are cut down proportionally.

Example: You will get $100 worth of LP rewards. With AQUA way you would get $200 worth of AQUA. To be able to get that $200 worth of AUQA to be minted for you, you need to hold $2k worth of AQUA all through your LP period. If you kept $1500 worth of AQUA, then you get $150 worth of AUQA reward, instead of full $200.

LP should not be able to receive rewards by holding AUQA when he stops providing liquidity, he should keep it all through the period he provides liquidity. Otherwise same LP above would just buy $2k worth of AQUA, stop providing liquidity and sell $2.2k worth of AUQA, we would end up with the same situation we have today.

This is just a quick idea I had while writing, it may have problems but I am sure we can fix AQUA if we give it more thought.

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