API3’s Fractal Tokenomics
I knew when writing my first qualitative article on API3 tokenomics I’d have to supplement it with addenda and revisions, but I didn’t think a follow up would be needed so soon. After reading Burak’s post on fractal scaling of the API3 ecosystem, I realized there’s a massive but largely unmentioned value accrual mechanism in the $API3 token: the native tokens of API3 ecosystem projects and sub-DAOs (which arise through the fractal scaling process) and their usage to incentivize API3 governors.
API3 has already engaged in several token swaps with partner projects and protocols, which from a tokenomic perspective tend to align incentives and provide some mutual assurance the tokens will not be imminently sold (effectively removing them from circulating supply, whether by the swap entity’s reluctance to sell and signal a lack of faith or their active desire to stake API3 and participate in governance). These token swaps are generally accomplished directly between the core DAO treasuries.
However, what I’ve now realized is the tokenomic force which will stem from API3 subDAOs and ecosystem projects and dApps: in exchange for grants from the API3 DAO treasury and/or devotion of API3 resources to such subDAOs/projects, beyond the somewhat intangible benefits to API3’s network effects and protocol maturity/features, such grantee subDAOs/projects may agree to airdrop their own native token to API3 governance stakers. This functionality is already natively implemented in the API3 pool contract, suggesting such airdrops will be (1) a trivially easy process and (2) a common and frequent suggestion/component of DAO proposals of a certain size (i.e. for a recipient subDAO/protocol which is large or sophisticated enough to need its own native governance or utility token).
Further, this should be an attractive proposition for such subDAOs and grantees. As Burak noted in the fractal scaling post, “the burden falls mostly on the subDAO, i.e., the subDAO must convince the API3 DAO to fund its operations and support it with its products, know-how and network of business partners (e.g., API providers).” A native subDAO governance token airdrop to API3 stakers as a component of a DAO proposal:
(1) is free to the subDAO other than gas costs,
(2) assists in setting a market price for the subDAO tokens (presumably not already widely circulating), especially where smaller allocations would not otherwise be motivated to sell, and
(3) provides a wider, more decentralized distribution of the subDAO’s token among actors they know to be aligned with their incentives as fellow members of the API3 ecosystem, and who should govern accordingly.
API3 DAO stakers will vote in favor of subDAO proposals if the projected net benefit to the API3 DAO and the subDAO appears positive, and airdrops help to swing this pendulum. This is even possible for grantees which may not have a governance token but instead a utility token: airdropping such a utility token has similar benefits to the above list with the addition of potentially bootstrapping the usage of the protocol at issue via the airdropped tokens.
This tokenomic functionality can quietly transform API3 DAO grants from a largely gratuitous process with murky milestones/deliverables/economic benefit (which, for smaller grants, enforcement is pragmatically limited to restriction of future grants), in some cases to seed or angel investments native to the API3 ecosystem. Such grants serve to both holistically bolster the API3 ecosystem and individually reward API3 governance stakers for shrewd usage of the treasury they control and astute identification of promising subDAOs and projects. With no further effort beyond staking and voting, API3 governors may find themselves holders of subDAO tokens which may grow in market value and potentially even accrue revenue of their own should a successful dApp or protocol be built under the governance of such airdropped token.
As such, I have to add a fourth primary value driver to my list of beneficial API3 tokenomic forces for governance stakers:
1) Governance: protocol management, direction and production,
2) Collateral & staking: quantifiable data feed security by pooled API3 and risk-commensurate governable floating staking rewards paid out to governors,
3) Burn: Airnode-enabled API and dAPI fees and feed insurance fees paid and burned in $API3, deflating amount of tokens in circulation, and
4) Airdrops: native tokens of API3 subDAOs/ecosystem grantee projects airdropped to API3 governance stakers in return for API3 DAO grants or allocation of resources.