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Why is it better to issue tokens than destroy them?

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For capital goods, such as governance tokens, issuance is the key to capitalisation, whereas destruction may hinder the growth of underlying values.

原文标题：《观点 | 回购-销毁是下策》

原文作者： Joel Monegro

Ethereum lovers & NBSP; O sword

What the repo - destroy model has in common is a network that generates revenue (expressed in some cryptographic currency), periodically buys back its own native tokens with business proceeds, and then destroys them. The idea is that by reducing the supply of primary scrip, its value increases with income. Buy-backs should help achieve this goal, but the effects of destruction on currency and capital goods are very different. In the case of money, reducing the supply will cause the value of the unit of money to rise. But for capital goods like governance tokens, the rights issue is NBSP; Is the key to capitalization, and destruction may hinder the growth of basic value.

Currency and capital goods

If the value of an asset comes purely from trading, it is NBSP; Inflation & have spent The value of the dollar, for example, comes from the mere fact that it can be used to consume goods and services. ETH, for example, is also a currency because you use it to consume Ethereum's services and, of course, to buy other assets.

Conversely, an asset is a capital good if its value is derived from governance or equity participation in a pool of resources. A company stock, for example, is basically an intellectual tool used to determine the distribution of power and profits.

As long as a network receives income in a currency and distributes that value to its scrip holders, in whatever form, we know that this is a capital good, because the basic value comes from the business income stream. MKR and ZRX are good examples: both networks receive revenue in the form of ETH, and both redistribute this value to their (governance) token holders. Maker's approach is repurchase-destroy models, 0x's approach is to distribute ETH proportionally to those who lock ZRX and make markets on the network. But both are capital goods whose value is driven by streams of income from currency. (Some assets may be both currency and Capital. See Cryptonetwork Governance as Capital. In the PoS transformation of Ethereum, ETH2.0 will also become a combination of currency and capital goods.

Role of buy-back

Having recognised this difference, we turn to "buy-backs". In the real stock world, buybacks, or the purchase of a company's stock in the market, are a common method used by large companies to push up their share prices. Share buybacks are useful because they raise NBSP; Quality shareholders & NBSP; Participation in organizational capital. The purchased shares, however, are not self-destructed but continue to be held by the company as NBSP; Stock in stock. Unlike outstanding shares, stock does not vote and plays no role in an organization's economic activities. This is the only way: there is no point in dividing your profits to yourself, and you cannot buy what you already have.

By reducing the number of premium shares, buybacks increase certain valuation ratios (such as earnings per share, etc.), and all holders of outstanding shares in the market benefit. This effect justifies paying above market prices for each share at the time of the buyback. But buying back stock and then destroying it is not effective. The buyback alone serves its purpose, because what affects the price is how much stock is NBSP; Participate in & have spent Governance, not how much stock exists -- stock stocks are not part of corporate governance.

From a governance point of view, the destruction does ensure that the stock does not flow out into the market again. But the person with the power to destroy the stock and the person with the power to raise it are usually the same person. Maker, for example, destroys MKR whenever it receives revenue, but can also raise it in the event of a sudden insolvency (such as March 2020). What ultimately controls the supply of tokens is the governance agreement and the social contract between shareholders. So destruction has little protection against dilution.

The point here is that getting a certain amount of capital goods out of circulation is useful, but it does so by increasing the participation rate of the shareholders who own the outstanding shares, not necessarily because buy-backs make such assets "scarcer", nor necessarily because the total value of the shares has increased. Reducing the number of shares may raise the share price, but it does not change the overall value of the system. The same is true of tokens of capital goods in cryptographic money networks: buy-backs have a positive effect on prices, but destruction does not create new value, merely putting what is already there. Redistribution & NBSP; For a smaller group of people. That's why companies that buy back a lot give the impression of low growth.

Issuance, capitalization and growth

Many cryptographic monetary cultures have associated "quantitative inflation" with "value dilution". In the world of money, that may be true. But note that both inflation and deflation are monetary concepts that cannot be applied directly in the world of capital. In the capital world, the issuance of shares that can participate in governance is the key to capitalizing a company's equity. Issuing shares is the cheapest way to obtain the capital needed for growth. For example, for a startup, issuing stock can help its founders access human and financial capital (talent and money) at a low cost.

The issue of stock is also related to how you get the resources you need to expand your business. This is true even for more decentralized systems like DaOs and protocols. We all know that tokens can be issued to compensate the diverse participants and diverse resource inputs in a cryptographic currency network: to compensate producers for their workload, to compensate users for their ongoing purchases, to compensate investors for their capital input and liquidity contributions. In all cases, the rights issue helps the underlying value growth by increasing the capital in the system, which in turn translates into higher token prices.

Not that it wouldn't grow without it, but if it were a cake; A & have spent There is no additional issuance, so there is less incentive to keep pumping money into the system. As a token holder, you're more likely to increase your contribution if there's dilution than if there's no dilution at all. Destroying that incentive is worse than not diluting it, because you increase the participation of token holders without requiring them to invest more. Moreover, when the destruction of tokens does not cause the unit price of tokens to rise by the same percentage as the destruction rate (which in most cases is less than ideal), the destruction actually reduces the overall market value of the network.

A steady reduction in shares or tokens over time would discourage capitalization, just as a deflationary currency would discourage consumption. If the destruction rate is consistently higher than the growth rate of the underlying value, you are essentially sacrificing liquidity and long-term value for a sustained concentration of ownership that could end up with a system & NBSP; NBSP; NBSP; system; Capital is decapitalizing. A sensible rights issue would be better than focusing on "scarcity". For example, you could resell inventory assets, continuously stimulate productive capital input, or sell inventory assets to raise financial capital, or even as collateral for loans. We must abandon the idea that increasing scarcity automatically means more value.

Instead of destroying tokens, come up with a more creative way to restructure the capital cycle.

Buyback and Make

To summarize our point: Buybacks are a good way to distribute profits equally among scrip holders, but destruction limits the network's ability to reinvest in itself. "Buyback and Make" is an alternative, using an automated market-maker mechanism to maintain the benefits of buybacks and rights issues while avoiding the disadvantages of destruction and not permanently increasing the supply of tokens. Balancer "smart pool" held by a network could be used to implement a protocol repository that could be used as an automated buy-back mechanism, a pool of scrip issuance, or as a liquidity provider. Balancer is an automatic market maker.

This setting is similar to the "cipher economy cycle". Agreement/DAO Smart contracts are responsible for coordinating production and regulating the exchange of productive and financial capital between producers and consumers. Producers provide workload and resources (productive capital) in exchange for tokens of capital goods, which are regulated by additional agreements. Users consume network services and pay for them with a designated currency or service fee token. We added a "smart warehouse" implemented with Balancer pool, controlled by a protocol /DAO contract. Let us assume that the entire network receives revenue in the form of ETH, and that the native token is called TKN.

Balancer is a programmable liquidity protocol and decentralized exchange. Simply put, you can create an indexable basket containing up to eight tokens. You can choose the index according to your needs (i.e. the weight of the number of tokens in the basket), in our case we set it to 10% ETH (currency) and 90% TKN (capital goods token). We also set up the pool as a holding controller (the agreement itself) to increase and remove liquidity from the pool. Suppose we cast a TKN with an upper supply of 10 million and add some ETH to this pool. So this new Balancer warehouse could do a lot of things:

1. Automatic repurchase mechanism. All (or part) of the ETH revenue is deposited into the warehouse pool. Whenever ETH in the warehouse is worth more than 10 per cent of the index price, Balancer pool will automatically sell excess ETH and buy TKN in the open market until 90/10 index is restored. Because the only other token in our pool is TKN, the only way to restore balance is to buy TKN from the market (or add new TKN to the pool). If there is no seller in the market, the pool will automatically offer a higher price for TKN.

Since our pool is held by the network, this process is equivalent to a buy-back -- and has the same positive effect on the price of TKN. Buybacks occur in real time as revenue flows into the network and moves to smart warehouses, and are automatically managed by the Balancer protocol. This is much more efficient, not only because it eliminates the need for developers to maintain complex repo/destroy code, but also the need for special "keeper" robots and the need to design incentives for liquidity providers (which cannot be avoided in repo/destroy mode). Balancer, an established arbitrager in the market, was making these services available for free and in real time, greatly simplifying the agreement.

2. Token issuing pool. The agreement could issue new tokens as capital is put into the network, or cast a specific number of tokens at a specific event and distribute them under a new issue scheme. Our model here USES a pre-cast token (although we can also use mixed mode), and then stores the amount to be distributed in the smart warehouse from the beginning. Because only contract agreements can add and remove liquidity from the pool, the network can retrieve funds from the smart warehouse to finance the TKN needed for the incentive mechanism. Another point is that, like other modes, the distribution mode of the network can be executed by an intelligent contract.

Easter egg: Reverse repo operations also allow the smart warehouse to become an automated cash injection machine. Just as adding the ETH (or any other fee token specified in the agreement) to the pool triggers an automated buyback, bringing back the currency has exactly the same economic effect as releasing the TKN in the warehouse and selling it on the market for the currency. This function can be used to finance expenditures on a continuing basis when necessary. For example, a DAO could retrieve currency to pay for development funds, or a protocol could use a fee token month in the warehouse as an "insurance fund" endorsed with network tokens. This feature is useful for agreements that use their own tokens as insurance against eventual payoffs (such as Maker's MKR), but it also doesn't require special keeper or auction mechanisms to ensure that tokens are minted and sold at the appropriate market price -- Balancer has provided that for free.

3. Liquidity provider. Ultimately, our smart warehouse can also become a liquidity provider. Because assets in our Balancer pool can also be exchanged through its decentralized exchanges, this means that both TKN buyers and sellers are guaranteed liquidity, as they can always trade with the agreement itself -- and token holders are confident of the economic value of those trades. Balancer allowed us to customize the parameters of the pool and adjust the liquidity provided. Such as:

1.Balancer pool can deposit up to 8 kinds of assets. In our case, we have only TKN and ETH. But if your network supports multiple tokens as a means of payment (such as ETH plus various stabilizers), you can also increase and remove TKN liquidity through other tokens, simply by changing the weights. You could, for example, make a pool of 80 per cent TKN, 10 per cent ETH and 10 per cent Dai and deposit whatever you earn into the pool. This also means that you can maintain the liquidity of multiple TKN scrip pairs.

2.Balancer's key creation is that it keeps an index basket. In our case, this feature allowed us to create a pool of 80 to 90% TKN and 10 to 20% scrip. But you can easily change this ratio to any weight you want. Only the overall liquidity of TKN in the pool will be affected. In general, a higher proportion of TKN leads to an increase in the slippage of its exchange price, which makes TKN more sensitive to price changes and makes the transaction more expensive (because prices can easily go up and down).

3. We can design a transaction fee of up to 10% for the pool (that is, to the traders who use our pool to exchange tokens), thus subsidizing our warehouse. This is where we can program the premium that tokens can be bought and sold at. Changing transaction rates can also change the competitiveness of the warehouse capital pool in the trading market. If you want to contain the buyer, protect the TKN balance of the agreement, you can set a higher procedure rate.

These parameters can be set once and then fixed permanently, can be programmed through a smart contract, or updated through a DAO voting mechanism, as the network itself requires. Essentially, you are programming the network to provide much liquidity to the market. The more liquidity you want to create, the cheaper it is to trade to the warehouse-for example, by increasing the share of currency in the pool to reduce the price slippage in capital goods, or by lowering transaction fees. If you want the network itself to become a liquidity provider guaranteeing final payouts -- that is, the ultimate guarantee that people can buy and sell TKN -- you raise transaction rates and slippage points.

The ability to change Settings through DAO also enables the network to change the economic model of token in response to changes in market conditions. For example, in a bull market, it would be better to increase the TKN balance and handling rate in the warehouse because it would accelerate the accumulation of TKN in the warehouse. In a bear market, TKN's liquidity is more important to network health, so lower transaction fees would be better. This is a lot like the way central Banks manage the economic cycle.

Easter eggs: Similar to auto buyback and auto capital injection, our smart warehouse is also useful for clearing collateral. Again, protocols like MakerDAO rely on carebots and incentives to manage the clearing activity, but Balancer pool provides the same functionality for free.

In a word, these are the origins of the word "make" in buyback-and-make. There's no need to burn the tokens, it's a waste; There are better and more interesting ways. On the one hand, TKN can be continuously taken out of the smart warehouse and distributed as incentives. On the other hand, as the network usage increases, all the revenue will be pooled and TKN will be automatically repurchased. Because there is no destruction mechanism, these purchased TKN can be released again according to the same incentive model. Buyback-and-make will not destroy the market value of the network, but destruction will; Another Easter egg is Balancer, which offers a number of features to help simplify code, protocol, and mechanism design.

But what I like most about this model is that it allows us to create a permanent incentive model that can be issued continuously, but with a fixed ceiling on the supply of tokens. At the start of our network, it's possible that more TKN will leave the pool than will enter through buy-back. But as the network matures, the inflow and outflow TKN presents a balance. By getting the returned tokens back into circulation, into perpetual rewards and liquidity, we can ensure that there is always an incentive to pump money into the system. This is great because the network can always take advantage of the rights of additional issuance, while enjoying the benefits of buybacks and a fixed ceiling on the supply of tokens.