A discussion on the implications of the ApeCoin staking proposal

Hopefully we don’t live in a world where the main currency of the internet is called “ApeCoin”.

I was recently contacted by a member of the ApeCoin board of directors and they asked me to provide some feedback on some proposals and I presented my thoughts over the phone.

I want to write about things that are open for discussion because I think they are interesting topics.

Before I start, I want to make it clear: I do not hold any ApeCoin, I am not short ApeCoin, I used to own BAYC in the past, but now I have no idea of ​​long or short exposure to anything related to the Yuga Labs ecosystem. I am not a financial advisor, in fact, there have been rumors in the industry for a long time that I am an idiot.

The Death of Staking

Staking has made some sense in the past. I think Peercoin was the first protocol to launch the Proof of Stake (PoS) mechanism, about ten years ago. Since then, the PoS mechanism has become more and more popular in new blockchains, and all newer ecosystems are built on PoS blockchains.

For Peercoin and the PoS networks that followed, staking serves a purpose. Owners will provide their tokens as collateral for the opportunity to validate blocks, for which they will be rewarded. Staking therefore rewards users for risking their collateral and doing the work: it is a necessary function for participating in the network or protocol to continue to function.

But somehow, over time, the term staking has been redefined to mean that if you don’t sell your current tokens, we will give you more tokens as a reward, rather than being rewarded for contributing to the security of the blockchain.

These modern staking mechanisms have no function in the ecosystem they are a part of. They don’t do anything in a practical or technical sense, they don’t make the ecosystem stronger, they are just shell games that use the names of different things to obscure their actual purpose, which is to encourage less selling.

When PoS protocols issue rewards to stakers, they are buying the security of the blockchain. When DeFi projects offer liquidity mining programs, they are buying growth and TVL. It seems worthwhile to trade something for making the protocol more sustainable, larger, or more secure.

But these new “staking” mechanisms achieve nothing except reducing liquidity for potential sellers.

If you don’t stake, your share of the network or protocol will be diluted by new emission. Plus, new staking is risk-free! You won’t lose your tokens because staking does nothing! So, lock up your tokens! Move them off the market instantly… In fact, we’ll pay you to do so!

Simply using rewards to encourage users not to sell, where the payment is the same asset that the user chose not to sell, seems like the way to go in the late stages of creating a Ponzi scheme.

ApeCoin

Okay, here’s a quick overview of ApeCoin.

Its total supply is 1 billion, and it will not mint or burn new tokens, so the total supply will always be 1 billion APE.

ApeCoin's Token ownership distribution is as follows:

• 47% belongs to ApeCoin DAO "Ecological Fund"

• 15% for community airdrops

• 15% belongs to Yuga Labs

• 14% are “startup contributors” (investors?)

• 8% belongs to founders

• 1% goes to charity

In terms of unlocking, it looks like Yuga Labs, founders, and investors will be locked up for a year, but there appear to be exceptions, with some coins unlocking immediately and some unlocking after 6 months.

The remaining unlocking schedule appears to be in the 1-3 year range, with the entire supply being 100% unlocked in 4 years.

Anyway, back to the topic.

ApeCoin Staking

There is a proposed staking program for ApeCoin, written by Animoca, which appears to be a crypto-gaming VC software hybrid company whose founder is on the board of ApeCoin.

In the words of the proposal author, the goal of this proposal is to make ApeCoin the preferred Token of web3 by incentivizing early NFT adopters and existing and potential ecosystem participants to participate in activities that benefit the APE ecosystem.

The proposal itself seems complicated, but I can summarize it for you. Basically, it says:

We should pay 17.5% of the total ApeCoin supply to people who hold ApeCoin over the next three years, and if they also hold BAYC/MAYC/BAKC, we should give them different rates of return.

It is not clear to me how issuing APE Tokens to people who already hold APE can "incentivize early NFT adopters and existing and potential ecosystem participants to participate in activities that benefit the APE ecosystem."

Isn't this just paying ApeCoin to people who hold ApeCoin?

In fact, if we’re being honest about this proposal, what it really means is “let’s pay some token rewards to founders/investors/contributors when they unlock for holders who don’t sell, so we can fake some utility before we actually build.”

$2.6 billion in staking rewards for nothing

ApeCoin's current overall valuation is approximately $15 billion, which means that its DAO treasury holds approximately $7 billion in tokens.

Animoca’s proposal suggests giving away $2.6 billion worth of tokens (about 37% of the DAO’s remaining tokens) to APE holders for free over the next three years.

Since this staking doesn’t actually do anything in practice or technically, you can simply think of it as a means of bribing users not to sell. The proposal reads: “If you don’t sell your APE or BAYC, we’ll give you more APE Tokens!”

The DAO uses the remaining 37% of tokens for bribes, so it must consider the importance of the bribes.

Considering that these tokens can be spent on a lot of things, after all, they are currently valued at $2.6 billion! They can create a lot of value for ApeCoin, build a sustainable ecosystem and attract new external capital.

From an external perspective, it looks like the DAO spent over 1/3 of its remaining tokens to bribe people not to sell when early contributors passed the early unlocking phase.

But when you consider the supply and demand dynamics this staking program would bring about, it seems more like a conspiracy than an actual malicious strategy.

There is currently about 15% of the ApeCoin Token circulating supply in the market, and this inflation/emission plan will increase the supply on the market by about 75% in the first year alone, but I do not believe this will increase the demand for ApeCoin by 75%, so an isolated staking plan may harm the economic interests of locked token holders.

However, ApeCoin does have a real problem: how does it provide additional supply to the market so that upcoming founders and investors do not get the lion’s share of the liquidity supply when unlocking?

I personally think that it is a good thing to spend this special fund, but the funds should be spent for growth purposes and move towards their original goal: to become the currency of web3. These tokens should not be used to reward those who already hold tokens.

ApeCoin DAO

The remaining assets of ApeCoin DAO should be used to solve practical problems for users.

I don’t know what it means to achieve the mission of “becoming the main currency of web3”, but I know there is “user demand” in the NFT ecosystem, which can be funded or built by ApeCoin DAO .

Why is OpenSea the main trading venue for Bored Ape? Last year, traders from BAYC and MAYC spent about 20,000 ETH in fees on OpenSea, which means that $60 million is leaving the ecosystem every year.

BAYC holders, or NFT holders in general, may want to get a line of credit on their NFTs while retaining ownership. Can ApeCoin DAO create a major NFT lending market?

Why do BoredApe users keep getting hacked? What educational resources are needed to help people self-custody their assets more effectively? Can ApeCoin DAO launch an attractive custody service?

Etc. I'm sure the community will come up with some better ideas.

DAO should be committed to creating new value for APE ecosystem users and potential users, and it should solve practical problems faced by users in the NFT community.

These funds should be used to acquire and incubate utilities, build revenue streams, and create sustainable DAOs.

Should there be a staking program?

I have a reasonable argument that 15% “retail” ownership is too small, and that a staking program over the first year or so (where the only token supply eligible for staking comes from retail) could increase it to a more meaningful level.

I can also see an argument for a 10-15 year emission plan: APE Token has no minting function and cannot increase its own supply. If the DAO consumes all of its APE Tokens in the first few years, it will have no more firepower to incentivize activity or capture future value. In addition, over time, you will achieve a wider and more ideal distribution by extending the time someone has to be a participant in the ecosystem.

I can see an argument as to why BAYC NFTs should be staked: so that users don’t have to choose between joining the community by buying BAYC or buying ApeCoin. Also, newcomers are more likely to enter the APE community through NFTs rather than fungible tokens, as this is how everyone in the APE community currently works.

I can also see an argument as to why BAYC NFTs shouldn’t be staked: ApeCoin is a completely new entity that was created by the BAYC community but is not actually directly affiliated with the NFT anymore.

In reality, these arguments don’t have much basis in reality, as it’s hard to say: what’s the point of this staking program? What is the program trying to achieve?

The proposal says some nonsense about "incentivizing participants to do things in the APE ecosystem", but the staking proposal itself seems disconnected from this goal.

If ApeCoin DAO wants the goal of the staking program to acquire new members for the DAO, then a credible staking program may include issuing ongoing rewards to NFT holders within the APE ecosystem. The APE ecosystem may even acquire other NFT collections and issue APE Tokens to these community members.

If the goal of the staking program is to support liquidity in the BAYC ecosystem, then APE Token emissions should be provided to LPs in the APE/WETH market and those who provide liquidity to pools such as NFTX.

If the goal of a staking program is simply to drive up prices, then it would need to lock up assets and offer higher rewards for longer lock-ups, and keep supply off the market for as long as possible.

Without stated goals about the purpose of a staking program, it is difficult to design a staking program that achieves those goals. Bringing more supply to market, bribing users not to sell, or providing "false utility" are not credible goals of a staking program.

Personally, I would design a small program to incentivize the introduction of more and more new people into the Ape ecosystem over the next decade, and I would reward existing holders for continued participation in the ecosystem. I personally believe that new users will join the NFT community, not interchangeable assets, and therefore, NFT asset holders should be paid, not holders of these tokens.

I would supplement this staking program with an aggressive, larger purchase value program.

Governance

ApeCoin is now a multi-billion dollar organization, and it needs a long-term plan that is long enough. This question should have a good answer: How do we turn these $7 billion APE Treasury assets into $100 billion in the next ten or twenty years?

However, crypto investors’ time horizons are not always very long, and on average I guess they don’t care too much about what their token project will do in 2 months, let alone a 10-year plan.

So if you told the community, “Hey, we decided that there’s not going to be a staking program, and we’re going to invest in growth by paying builders to contribute to the ApeCoin DAO ecosystem,” they would probably be very unhappy.

“I don’t get any tokens for free anymore? And outsiders can get millions of dollars worth of tokens? Just to build a lending market? What the hell is this?”

Retail investors are unlikely to strictly consider the impact of "OHM-style supply inflation" on existing holders, nor do they consider the ripple effects of a falling price chart.

Governance of complex and multifaceted analytical issues is therefore a strange environment that quickly enters the political realm.

I have little faith that retail investors’ token votes will give the best mid-term outcomes, and in fact they are more likely to vote for destructive mid-term outcomes.

I read an article today that said Sushi's treasury shrank from $1 billion to $30 million in 1 year. I don't know if this is an exaggeration or fiction, but I think this will be a common story for many failed DAOs.

Summarize

Staking mechanisms should be designed to support ecosystem goals. They should be used to incentivize parts of a product, community, or network that require people to work or take risks.

ApeCoin DAO currently has $7 billion in funds, which it should use to incentivize people to take risks, work, and grow the community, rather than giving it to existing holders as an interest rate bribe to reward them for not selling.

Spending 37% of fiscal coffers on emissions without utility or value capture is not only worthless, but could actually be detrimental to the long-term prospects of the APE ecosystem.

We should have resisted changing the meaning of the word “staking,” but it may be too late now. The word is now inherently misleading and can mean several different things.

I really hope we don’t live in a world where the main currency of the internet is called “ApeCoin”, but I hope to try to avoid this obvious bias in this post, which is relevant to any DAO that finds itself in a similar situation.

How bad is ApeCoin’s staking proposal?

The Bored Ape community is well known in the crypto space for their consistent failures in self-custody.

In response, the ApeCoin committee suggested that the BAYC NFT will actually “contain” your APE Token.

How Staking Works for NFT Holders

If an NFT holder in the BAYC ecosystem wants to stake in pool 2, 3, or 4 (depending on the NFT), they will pair the NFT with their ApeCoin to enter the relevant staking pool. The NFT itself is not staked, it just acts as a key to the "vault" that holds the staked ApeCoin. NFT holders still retain the ability to sell their NFTs. By default, if you sell an NFT that is actively staking ApeCoin, then you are also selling the key to access the associated staked ApeCoin.

If you only want to sell NFT without selling the associated pledged ApeCoin, the NFT seller will release the pledged ApeCoin before listing the NFT.

This means that if you lose your BAYC, you also lose your APE Token!

You can't split your NFT and your APE Token into different wallets, which means if someone steals your BAYC, they don't need to do anything extra to take your APE Token. By default, APE and BAYC are used together! Great!

This design seems intentionally confusing and produces more bad outcomes than good outcomes. Even forgetting that you ever staked APE behind a particular NFT could be a huge financial mistake, it’s just terrible design.

ApeCoin’s board of directors also issued the following statement:

“Why can’t I just stake one BAYC ecosystem NFT?

We believe that everyone in web3 should control their own assets, and in order to provide this right to NFT owners, the NFT itself will not be staked into the staking pool. In addition, by staking ApeCoin instead of NFT, ApeCoin DAO incentivizes and promotes the long-term development of the ApeCoin holder community. "

This seems like a straightforward pun. Everyone should control their own assets, so you can’t put those assets in a contract. But you can put other assets in a contract!

This doesn't really make sense and I can only conclude that they are treating their users like fools.

What happens after three years of staking, anyway?

“What happens at the end of the three-year staking period?

A new AIP needs to be drafted and voted on to determine the future staking mechanism, and then that decision will be placed in the hands of the community. Ideally, at the end of the 3-year staking period, the DAO will have ongoing revenue to continue to incentivize staking and reward ecosystem participants.”

"Ideally"? Well, wouldn't it be better to have the revenue plan finalized before the staking plan? What if a solid revenue plan takes 5 years instead of 3? It also seems crazy to design a staking plan without understanding the product and revenue plan, when the plan is initially just for subsidies.

Anyway, it doesn’t really matter since staking doesn’t serve any purpose in this case, it’s just a bribe to people to continue to be members of the community.

Oh, and the current staking proposal also includes $1.3 billion in token emissions over the next year (at current market prices). Assuming all holders are in a reasonably “Western” high-tax regime, that alone would generate $700 million in selling pressure. That’s pretty cool.

Having written this, I don’t want to write any more.