TL;DR: Governance tokens with no value accrual mechanism for their holders are zero-sum games with weak tokenomics. With Inverse Plus, Inverse opens a new DeFi category of positive sum tokens which return value directly to tokenholders.
“Focus more on making the pie bigger than on exactly how to slice it so that you or anyone else gets the biggest piece. The best negotiations are the ones with someone in which I say, “You should take more,” and they argue back, “No you should take more!” People who operate this way with each other make the relationship better and the pie bigger — and both benefit in the long run.”
— Ray Dalio
We All Play Games
A zero-sum game is a one where, if one party loses, the other party wins, and the net change in wealth is zero. Or in other words, winning at the cost of others. Think winner-take-all poker games where five people begin a game with a $100 buy-in, one person emerges as the winner and takes home all $500, the others get zero.
Or let’s say we flip a coin. If it is heads, you pay me a dollar and if it is tails, I pay you a dollar. This is a zero sum game since the total amount of money involved remains constant and the gain by one player is exactly offset by the loss to the other.. The sum of all the gains and losses is zero therefore … it’s a zero sum game.
Positive sum games, on the other hand, are those games where all players can claim a “win” and the net change in wealth for both parties is greater than zero. Or in other words, win-win. For example, global trade is, all things being equal, a positive sum game as measured by a rise in global prosperity over the past 500 years. Or maybe when two pro fighters agree to a match knowing that both will be paid well regardless of the outcome, all other things being equal, that’s a positive sum game, too. For most of us, when we cooperate in almost any human endeavor that results in positive (material) outcomes for both parties, those are in positive sum games.
Here’s a picture:
But crypto is full of zero sum games and unbeknownst to many investors in crypto, they are playing zero sum games. We will examine two: governance tokens and rebasing tokens.
Unpopular opinion: most governance tokens are a zero sum game.
In other words, governance tokens that don’t return any accrued value and act simply as either a tool for voting or a lotto ticket to redeem “someday” should the price of the token go up — those are zero sum tokens. Other than the right to speculate, the is no real value inherent in these tokens. Separately — many owners of useless governance tokens or their project leaders would probably agree that price volatility is a major challenge.
Most rebasing tokens, too, operate as zero sum games. Many copied the “prisoner’s dilemma” 3,3 strategy pioneered by Olympus in 2021, effectively aping positive sum games by assuming collaboration is a dominant strategy … i.e., just stake and hodl and everyone wins. Unfortunately with the lack of an inherent value accrual mechanism for OHM holders the incentives to hold are effectively the same as zero sum governance tokens — everyone hold (“3,3”) and the price will go up. While OHM amassed a large treasury, without a business model to accrue real value (beyond treasury ops) it failed to perform as a positive sum token and has experienced the volatility and other challenges of a zero sum token. Due to the lack of true value accrual mechanics, here too (most) rebasing tokens are little more than a right to speculate on price. (Note: if anyone is going to win in the rebasing category, it is the talented team at Olympus, with whom Inverse is a close partner. OHM was huge hit in 2021 with Olympus Pro a close second.)
Negotiations over a shrinking pie are especially difficult because they require an allocation of losses. People tend to be much more easygoing when they bargain over an expanding pie. — Daniel Kahneman
Positive Sum Tokens: An Answer to Zero Sum Tokens
A positive sum token drives some share of revenues or profits from a DAO’s business directly to token holders. The source of the revenue is connected to the actual value driver(s) of the token — in the case of Inverse, it is revenue from lending operations. For other utility tokens in, say, the supply chain or telecom space, it would be revenue from those operations.
While it is possible to achieve comparable outcomes via token repurchases, the widespread abuse of governance token minting/emitting/burning to achieve all sorts of zero-sum outcomes is too vast and for now should be set aside in our discussion on positive sum tokens. Some DAO’s do token repurchases (Inverse actually did one in September 2021) but the value accrual mechanism is more opaque to end users and difficult to forecast.
An additional benefit of positive sum tokens is it begins to move governance tokens toward a valuation model more akin to those used in other asset classes which rely on the present value of future cash flows to derive a token’s price. We may be some distance from using this on an industry-wide basis and while we can wave off valuation methodologies for useless governance tokens (price go up), positive sum tokens give forecasters something to work with and one likely outcome is that positive sum tokens will see higher valuations than those sticking with zero sum tokenomics.
Approaches for sharing revenue/profits with tokenholders are going to vary and even here at Inverse there are an array of options under discussion for how best to implement revenue sharing rewards for our tokenholders. But for tokenholders who tire of hearing their tradfi friends mock their crypto tokens as “owning nothing”, positive sum tokens — or as we refer to them at Inverse, positive sum rewards tokens — give holders a claim on future revenues.
Inverse Plus: INV Becomes A Positive Sum Rewards Token
Revenue Sharing Rewards
For Inverse, the source of revenue to be shared is our growing DOLA lending business. As we lend DOLA and generate interest revenue, we share a portion of it with INV tokenholders.
How much do we share? DOLA has, we believe, one of the soundest architectures among stablecoins. It is not a fractional reserve or algorithmic stablecoin which, we believe, carry significant systemic risk. Like DAI we are a debt-backed stablecoin and while DOLA’s circulation rate may today be trailing those who increase circulation through, let’s say, alternative means, our top priority as a DAO is to build DOLA circulation. This requires substantial investments in liquidity, operating expenses to fund salaries or marketing, and other efforts. So in the short term, our bias as a DAO is to maximize DOLA circulation vs. returning capital to tokenholders.
But regardless, a central feature of INV as a positive sum rewards token is the revenue sharing rewards feature described above and Inverse DAO will be announcing more details on its structure/timing/amounts/other incentives in the coming weeks.
Increased Staking Rewards
Inverse Plus, to be clear, is more a change in tokenomics for our INV governance token and not a new product. While INV holders could stake INV and receive INV staking rewards before this announcement, today INV stakers receive over 100% APY in rewards, with a current max of 500%.
Why increase staking rewards? In creating greater demand for INV we also create new demand for DOLA, which is (ultimately) required to swap into INV. But we also believe the increase in reward rates will incentivize staking over longer periods of time and thereby reduce marginal volatility in the price of INV.
Protocol Owned Liquidity
An important shift in our liquidity strategy occurred simultaneously with the launch of INV+: re-upping our Protocol-owned Liquidity (PoL) investments with the team at Olympus DAO. We had a successful test of Olympus Pro bonds in November and if you visit our bonds page, you’ll see a large uptick in the amount of liquidity Inverse is “buying” now. Better than renting liquidity, PoL gives us long term ownership of our liquidity and, it’s worth mentioning, the share of swap fees generated for LP token holders.
But behind owning our own liquidity is something deeper that many projects don’t/can’t exploit in the same way: creating massive new demand for our DOLA stablecoin. Unlike projects who might seek to own liquidity for their own “useless” governance token, DOLA itself is the fuel for growing lending revenue at Inverse. LP’s on Sushi, for example, create demand for DOLA when they buy it in order to supply the LP pool on Sushi and these LP tokens find their way, via Olympus Pro bonds, to our treasury.
So as PoL generates long-term revenue streams for Inverse (via swap fees), it too becomes part of the positive sum equation and those revenues find their way back to INV tokenholders.
Voting Rights
INV holders and stakers retain full voting rights in the Inverse Finance DAO and can participate in Inverse’s pioneering on-chain voting system, GovernorMills.
Low Cost DOLA Borrowing
Lastly, Inverse Plus is designed to generate new liquidity for Inverse lending partners and enables us to move closer and closer to being able to offer the lowest lending rates in DeFi. While you stake INV and receive staking rewards, your staked INV can be used as collateral to borrow DOLA. Additional features in support of this are due to roll out soon.
Inverse Plus For The Win-Win
By enrolling INV tokenholders directly into the revenues and profits of Inverse Finance we are doing something new and … win-win. Interests among holders are better aligned, community becomes more active, word of mouth spreads, and the overall utility of Inverse increases over time. But even for passive investors INV remains a positive-sum proposition: buy and stake INV and do nothing, and you continue to reap direct revenue sharing rewards.
But we hope you’ll be more than a passive participant. We believe that Inverse Plus is among the first of a new generation of positive sum governance tokens that will, over time, replace the default governance token models of the past. So by getting involved you are making history with all of us. Come take a look at inverse.finance, follow us on Twitter, or poke your head into our Discord server. But today is a great day to ask yourself: which of my tokens are useless governance tokens and do I really have confidence that they will withstand the unstoppable momentum towards positive sum tokens?
Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.
