Ocean Token Model
System Dynamics for Near-Term Growth and Long-Term Sustainability #tokenengineering
This post summarizes the OCEAN token design from a Token Engineering perspective, as of Ocean Protocol V3. It collects information about V3 token dynamics described across several posts: Sustainability Loop, Datatokens, Ocean Market, and Data Farming. This post complements Ocean Tokenomics II by fleshing out the “token utility” aspect.
Ocean’s core token dynamics are those of a work token, embedded within a loop for growth and long-term sustainability. OCEAN is designed to increase with a rise in usage volume.
This post is organized as follows. First, it describes the system design for near-term growth and long-term sustainability. It then elaborates on design facets: how value is added to the system (via work, including staking and governance), Ocean Data Farming for growth, OCEAN-datatokens relation, how supply contracts (burning), and how supply expands (minting).
Overall Dynamics: Ocean System Design
This section recaps the Ocean System design (first presented here). A key question is: How do we grow the Ocean data ecosystem and make it truly self-sustaining? These are questions for the near-term and long-term, respectively.
Long-Term Sustainability
By examining successful businesses and nations over time, we quickly see that the key is a loop: take a small fee from data ecosystem transaction volumes (e.g. marketplaces), and redirect it to the community projects that grow the ecosystem further. Repeat, repeat, repeat and it will snowball. The image below illustrates.
A healthier $OCEAN leads to a healthier, more sustainable Ocean data community. There are a few drivers for OCEAN demand. First, OCEAN is used to vote how fee income is allocated. Second, OCEAN is used for staking in the OCEAN data ecosystem drives demand (with more uses here anticipated). Third, some OCEAN is burned as a function of transaction volume. The rest of this post elaborates.
To ensure long-term sustainability for the Ocean community, the OCEAN token is designed to increase with a rise in usage volume (all other things being equal). Here’s how.
- First, a rise in usage volume (of Ocean tools in the Data Ecosystem) leads to more OCEAN being staked, leading to more OCEAN demand, which then drives $OCEAN. The first example of this is in V3.0: staking OCEAN as liquidity for datatoken-Ocean AMM pools for Ocean-powered markets. Publishers are incentivized to stake to get automated price discovery of their data assets, and liquidity providers for the transaction fees.
- Second, a rise in usage volume leads to more Network Revenue, which goes to (a) burning and (b) OceanDAO. As of V3.0, the Ocean community gets 0.1% of all volume, and an additional 0.1% from volume coming through Ocean Market. Burning OCEAN reduces supply, which drives $OCEAN. Funds go through OceanDAO to workers who have the mandate to grow usage of Ocean tools.
Near-Term Growth
Ocean Data Farming is a program to drive near-term growth of the supply of data assets.
51% of OCEAN is minted over time as “Network Rewards” directed via OceanDAO to community projects. This ensures a baseline of funding regardless of transaction volume. To help near-term growth, more tokens are disbursed in earlier days than later days.
We elaborate on both Data Farming and OCEAN minting in dedicated sections later in this post.
Work: Injecting Value into the System
Summary
Blockchains are incentive machines: you can “get people to do stuff” with appropriately designed token dynamics. Designing such a system is the realm of Token Engineering (TE). We want actors to do “work” that add value to the Ocean ecosystem.
Ocean incentivizes for work to happen in several parts of Ocean System:
- Ocean Marketplace Tools: Supplying data assets, providing liquidity, and more in the data ecosystem
- OceanDAO Governance: voting to collectively direct the flow of resources towards growth and sustainability.
- Ocean Workers: building software, outreach, and more.
Overall, this gives Ocean token dynamics like a work token. The next few paragraphs elaborate.
(1) Ocean Marketplace Tools
There are several ways for the Ocean ecosystem to gain value via “work” inside the “data ecosystem” box of the image above.
- More liquidity in datatoken pools gives lower slippage, for a better data buyer experience, which in turn drives volume, and in turn Ocean value. The promise of LP transaction fees incentivizes people to add OCEAN liquidity to OCEAN-datatoken pools.
- Curation of assets (=amount staked in the corresponding datatoken pool) allows data buyers to surface the best assets more easily, which in turn drives volume, and in turn Ocean value. To have the best returns, LPs are incentivized to seek datatoken pools with the highest volumes, which tend to be the ones with the best datasets. That is, they’re curating.
- Referrals bring new users to Ocean tools, which in turn drives volume, and in turn Ocean value.
- More marketplaces with good volumes drives total Ocean volume, and in turn Ocean value. The promise of marketplace fees incentivizes people to run their own marketplaces and grow their volumes.
(2) OceanDAO Governance
In Ocean, governance is about directing the flow of resources towards the teams and projects that offer the best chance for growth. OCEAN holders are incentivized to do work to learn more about each team and project proposal, and then use OceanDAO to vote for the most promising teams/projects [1]. There are two criteria:
- Is the project’s expected Return on Investment (ROI) > 1.0? ROI is measured over years. (Details here.)
- Is the project aligned with Ocean Mission & Values? Or at least not against them.
For a given funding period, if there aren’t enough projects that meet the criteria to use the OCEAN funds available, then remaining OCEAN gets burned [2]. This therefore sets a baseline for the value-add needed. Note that Ocean governance is not about specific decisions for protocols or software, it’s at a higher level and more directly about value creation.
(3) Ocean Workers
With grants from OceanDAO, these teams do a variety of work, including: improving core software (datatokens, etc), building and improving applications, outreach and community building, and unlocking data for use in Ocean.
These activities aim to drive value to the Ocean ecosystem (on average) precisely because the work has been filtered by OceanDAO towards value add.
Ocean Data Farming for Near-Term Growth
Ocean Data Farming is a program to incentivize a supply of relevant and high-quality data assets into Ocean Protocol. It focuses on nearer-term growth.
Ocean Data Farming aims to maximize the data supply reward function (RF). The RF is a function of liquidity added to datatoken pools, dataset usage, and potentially more. In other words, liquidity providers (LPs) can earn extra OCEAN rewards for providing liquidity to data assets that people actually use.
Data Farming draws inspiration from the successful Balancer Liquidity Mining Program [3].The program allows its program managers to start simple, then to quickly learn and improve the RF every week. If this initial pilot is successful, it may be repeated (potentially for a much longer time scale).
For the pilot, OCEAN will be drawn from the treasury of Ocean Protocol Foundation (OPF). Future versions may draw from OPF treasury as well as OceanDAO funds.
This post has details.
OCEAN-Datatokens Relation
OCEAN is not involved for any ERC20 transactions on datatokens (transfer, approve, transferFrom, etc). This means that OCEAN “gets out of the way” to give maximum space for DeFi apps to leverage datatokens. It also reduces the opportunity for attack vectors on datatokens.
Being ERC20 tokens, datatokens may be transferred in return for whatever payment is desired, such as fiat, DAI, or ETH. Community participants may add capabilities like this as they see fit.
Accordingly, OCEAN can be used as a unit-of-exchange to buy and sell datatokens, but it’s not mandated. OCEAN is the default unit-of-exchange in Ocean Market and in Ocean libraries, for both fixed-price and auto-pricing scenarios (the latter also defaults to staking OCEAN). While Ocean Market transacts in OCEAN, it also displays the price in EUR. Community participants may build data marketplaces that transact in fiat or other crypto-tokens.
Shrinking Supply: Burning OCEAN
From the above, here we summarize where OCEAN supply shrinks (burns):
- First, 5% of all Network Revenue is burned. This ensures that OCEAN holders will always see some deflationary actions, and as Network Revenue increases, deflation increases.
- Second, for a given funding period, OceanDAO burns all non-allocated funds.
Growing Supply: Minting OCEAN
As mentioned, 51% of OCEAN is minted over time as Network Rewards directed via OceanDAO to community projects. This section describes Ocean’s minting schedule.
The Bitcoin emission schedule has several nice features, including a fixed supply of tokens, more benefits to early movers, and a track record of being live for a decade. For these reasons, Ocean uses Bitcoin’s network rewards schedule, including half-life of four years, as a starting point [4].
Our main additional challenge is: how to be resistant to instability in the early days of OceanDAO? E.g. if OceanDAO gets gamed or hacked. To address these, we “bake slowly” by ratcheting up the amount of rewards over time, until stability is reached.
We start with manually-sourced grants directly from Ocean Protocol Foundation that aren’t part of the 51%. With a bit of stability, we begin to draw on the 51% rewards. First, there’s a 10% multiplier on the rewards curve, then 25% once we are more comfortable (6 months or less), then 50% after more comfortable yet, and finally 100%. The ability for manual intervention will be removed by the time the 100% multiplier is hit.
The Appendix provides the exact equations.
Ocean Network Reward Curves
This section shows how network rewards are dispensed over time. Initial funding from OPF is not shown; and it assumes a 6-month interval between each ratchet. The actual interval will be a function of perceived stability, as described above.
The image below shows network rewards over 25 years. The curve is shaped much like Bitcoin’s, except the initial years of ramp-up.
The table below shows network rewards going to 50 years. It takes just over 5 years to get to 50% dispensed.
Conclusion
Ocean’s core token dynamics are those of a work token, embedded within a loop for growth and long-term sustainability.
This post described the system design for near-term growth and long-term sustainability. It then elaborated on design facets: how value is added to the system (via work, including staking and governance), Ocean Data Farming for growth, OCEAN as a unit-of-exchange, how supply contracts (burning), and how supply expands (minting).
Appendix 1: On Burning & Growing Value
One reviewer question [by Eden Dhaliwal] was: “Why was the burning mechanism selected vs buying back OCEAN and then locking up in a treasury? Since OCEAN is also used as a governance token, burning might limit the network’s ability to grow fundamental value: I tend to agree with the points made [by Joel Monegro of Placeholder] here.”
This is an excellent question, and an excellent article. The article’s thesis is: don’t make burning the core of your token model, because it’s a major lost opportunity for growth.
We agree with that premise!
The article, however, frames things in a binary fashion: either burn is the heart of your token model and you do it completely, or not.
It doesn’t have to be binary. It can be more nuanced, with relative rates of supply and burning adaptively set over time. The primary objective is to grow fundamental value. Burning helps as a tool towards value. In Ocean, tokens are minted with the possibility of allocation towards growing fundamental value, and if they can’t grow it, they’re burned. To be more specific: in a given funding interval with newly minted tokens for that interval, the OceanDAO community chooses whether each funding proposal will drive more value than simply burning.
For longer-term value, we expect that the majority of funds will be allocated to growth, because there is exponential “snowball effect” payoff compared to just “one-time” payoff for burning.
We confirmed this in simulation as follows. We conducted experiments in TokenSPICE agent-based simulator to test the effect of using 100% of minted tokens for growth, versus burning 100% of them. The summary result is that in medium time frames, there was 4x value creation for 100% minted tokens for growth.
At some point in time, there will likely be diminishing returns on projects towards value. But will that be in 5 years or 50 years? We don’t know. But the community will be able to adaptively decide using OceanDAO. Minted tokens will go to projects that promise to drive growth sufficiently; the rest will get burned.
Besides burning inside OceanDAO, Ocean also burns 5% of Network Revenue. This is a nonzero value to give a lower bound of the benefits of revenue growth to OCEAN holders over time. It’s a small number (vs. large), because there is greater benefit to redirecting revenue back to growth.
Appendix 2: On Burning & Surviving Shocks
A second question [also by Eden Dhaliwal] was: “If burned, my concern is that long term there are not sufficient tokens available to react to future shocks. Locking in a treasury [as in Joel Monegro’s model] could help mitigate this risk.”
It’s important to consider the problem of how to handle future shocks in revenue. If the token doesn’t have an expanding supply, then the treasury approach is a great design choice. However, Ocean has an expanding supply. The supply is only a function of time, not of revenue. This means that even when there are future shocks in revenue, the Ocean community will still have access to funding to keep building and growing fundamental value.
Appendix 3: Ocean Network Reward Equations
This section describes the equations of Ocean Network Rewards, which implement the goals described in the “Growing Supply: Minting OCEAN” section.
First, Bitcoin’s Network Rewards schedule is:
Where F(H, t) is the fraction of all reward tokens that have been released after t years, and H is the half-life, in years. Half-life is the time taken for 50% of the remaining supply to be released. Bitcoin uses a half-life of 4 years.
Ocean’s Networks reward schedule uses Bitcoin’s schedule as a starting point, including half-life of four years. However it has a “ratchet-up” phase in the beginning to give time to OceanDAO to stabilize.
We now provide precise equations describing the Ocean Network Rewards schedule. g(t) is the overall schedule. It’s a piecewise model of four exponential curves.
Where gi(t) are pieces of the piecewise model chosen depending on t, and Gi are the values of gi(t) at the inflection points.
Mi is a multiplier for a given interval i. f(t) is the value of F(H,t) assuming a constant H. F(H,t) is the base exponential curve. The units of H and t are years.
The pieces of the model are a function of t, which are parameterized with Ti. The units of Ti are years.
The following parameter values are chosen: H=4 years; M1=0.10; M2=0.25; M3=0.5.
Further Reading
- Here’s the tweetstorm summarizing this post.
- “Ocean Protocol V3 Posts: Links to all V3-Related Stories” [link]
- The Ocean token model is the result of years of thinking and collaboration on Token Engineering. Here’s the articles that introduced TE: 1, 2, 3. Learn more yet and stay up-to-date via tokenengineering.org.
Acknowledgements
Thanks very much to the following people for reviews: Sarah Vallon, Monica Botez, and Bruce Pon. Special thanks to Eden Dhaliwal for reviewing plus insightful questions, and to Julien Thevenard for collaboration on the token design and modeling.
Notes
[1] This is a “governance” token in that it is overseeing the allocation of capital towards projects that drive the future of the Ocean ecosystem. It is different than typical DeFi “governance” tokens which tend to be for tweaking protocol parameters, which is rather small in the grand scheme of the project. We believe that direct community control over allocation of resources, with an incentive to drive long-term value to $OCEAN, is more useful.
[2] This is inspired by DASH protocol, which has used this burning approach for several years in its grant-giving process.
[3] Balancer Labs is a longtime collaborator with the Ocean Protocol team.
[4] The shape of the Network Rewards emission schedule is the same, except time scale.
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