Time is money.
You’re a user with some bags & want to allocate that capital such that you receive the best deal for risking your assets - how does that work in DeFi?
You’re a protocol developing your tokenomics schema & want to pay users who “align” with your mission instead of just giving your value away to mercenary capital.
What is your time worth & why?
*sorry for the lack of images - will work on updating with some examples*
What even is “alignment” in this space?
In my mind, “being aligned” or “protocol alignment” is a user’s willingness to commit their money to a protocol for a period of time. This is especially critical during the early days of a protocol starting up, but it is also a key factor in ensuring the long-term success of a protocol.
This cuts both ways! If a user is excited about a novel protocol & wants to get in early, they’re taking a huge risk - things don’t always go as planned in the crypto space. They’re taking a position that says “I have faith that you will make this awesome thing work & won’t give me the rug as soon as the block finalizes.” But protocol’s also have to take on risk - that the user’s won’t just come in, game the system, and exit with as much profit as possible.
So how do they balance it? They incentivize sticking with it through thick and thin.
Value Allocations
There are four clear cut breakdowns of how protocols require users to “align” with them, and it all comes down to time.
Three types of Time Value:
Neutral: This is the classic staking method. You get in, you put up some capital, you get paid block by block, then you get out - no hard feelings! So long and thanks for all the fish!
Flat: This is a newer type where you commit for the set duration, there’s no boosts, nothing, just every user get’s the same access for the same periods & when it ends you can either exit or remain in the system. Think vlCVX - you’re innit for 16 weeks, cast your votes, collect your birbs, and reassess if you want to “re-lock" after the time’s up.
Negative: This is the classic ve-Model. You commit for a period of time, during which you’re “alignment” diminishes as you approach zero-time.
Positive: The opposite of the ve-Model. You don’t have to lock. Instead, you accrue bonuses over time as you’ve proven your alignment. Think GMX staking or Beanstalk’s Silos with their accrual of Stalk. Even Dyad’s up & coming “XP” accrual.
Neutral Time Value
Protocols get the benefit of your service, while users get paid for what they're doing & can exit at any time. This is the innovation that launched DeFi Summer of the good ole’ days of 2020 (bad old days? definitely crazy days…)
Most often, protocols drip (pour?) their own tokens as incentives to try to get capital to stick with it, usually paying for the honor of watching your Liquidity Provider positions get absolutely decimated by Impermanent Loss, a direct result of said token emissions!
Although this is still employed widely, it has become less common as a standalone system & often requires that those emitted tokens have caveats to when you can claim them or have other use cases/time-related incentives to give users a reason to not sell them (or at least absorb some of the liquidity).
Flat Time Value
This model gives users the full benefit of their protocol by simply committing capital for a specified duration. For example, with Convex you lock your CVX for 16 weeks, during which time you get access to the fee share, governance over the controlled underlying assets, and incentives paid out for casting your votes in specified ways. It stays level throughout the whole time period & when it’s done, you’re given the boot with all your tokens (usually) returned to you or you can chose to opt in again - spin the wheel again!
Negative Time Value
Although Curve pioneered this model, it was seen as being so successful at negating the harmful IL caused by a Neutral style staking token emission, that it has been forked all across DeFi. This is the wei to Hoover up some amount of the protocol tokens distributed to the masses & prevent complete and utter price collapse.
This often comes with a lockup period of 1 to 4 years, where you commit your capital to the protocol & they give you back the privileges associated with doing so - namely revenue sharing & control over decisions. Although it often isn’t enough to drive prices to the moon, if the incentives are good enough, it can be enough to stop the bleeding.
One of the most interesting improvements to this method has been with the creation of Balancer’s veBAL. Instead of simply being a liquidity vacuum of single sided asset removal, they require you to pair their BAL token with wrapped ETH deposited into a Liquidity Pool. You then lock that LP-ERC20 token up for a duration, creating a very healthy pool of deep liquidity.
The interesting part about negative time value is when it is applied to non-protocol-native assets, similarly to how Balancer did it. For example, long before veBAL, Frax Finance was utilizing locking of LP’d assets as the way to ensure dollar-peg stability of the FRAX stable coin - there is literally not enough withdrawable liquidity in the ecosystem to break the peg! For this, you’re given boosted yields on that asset.
Positive Time Value
This is a fun one. It might not be enough to prevent systemic collapse in the even of a black swan, since if the risks are high enough, it’s better to just gtfo & see what happens. But, what better way is there to demonstrate alignment with a protocol than by proving it block after block, day after day, month after month, especially in the face of being able to exit at any time?! Well, you’d certainly better make sure the incentives are strong enough to make users want to stick with it as risk levels rise.
The first protocol that I learned about that employed this in a fruitful manner was Beanstalk. Yeah yeah, they got rugged - hard - by a governance exploit made possible by not having flash loan prevention built in. Twas my first loss of funds due to exploit! Good times indeed.
Prior the the exploit, it was working beautifully! Every hour, you were issued an incentive as a thank-you for staying in the system & not exiting with your capital. If everyone deposited and stayed that way, no one made out like a bandit. But is that what people do? Nope. People come and go all the time. If you’re one of those folks that keep your money in & suddenly half of the other boosts get’s burned, you’re all of a sudden a much larger stakeholder in the protocol, which, in Beanstalk’s case, printed you fresh crisp stablecoins every hour (BEAN).
With positive time value, the user becomes MORE aligned with the protocol over time! The opportunity cost of exiting the system becomes greater & greater, allowing committed users to weather riskier & riskier environments, while still giving them the option of exiting at any point if some alarm bell starts going off that even the costs of leaving don’t outweigh staying.
Within Beanstalk, users are able to change asset types from single sided to LP’d, taking advantage of price movements, even transferring assets between addresses without losing the boosts those assets receive, all while not needing to exit the system.
This is the opposite of Negative Time Value - where the user is less aligned as time goes on (unless they continue to re-commit), and where the benefits of staying/risk tolerances diminish over time. This happens all while the user has no option to bug out, even for a fee, and exit early - those funds are locked in place until the timer dings.
Another protocol that does this is GMX, where you get a multiplier on your yield that accrues over time. This gives other protocols, like Plutus DAO the ability to step in and offer vaults that allow the long-term accrual of excess value to participants.
What works best?
Nothing! It all has flaws. But we can mix and match various components to achieve something really innovative, even in this era of mind-blowing innovations! It’s obviously up to you as a user, or a protocol, to determine what works best for your needs & to align yourself according to your own style of existing.
Which type of Time-Value do you think is best? Hit the polls & tell me why in the comments!
If you wanted an option to be some combo, tell me about that :) Cheers!
In the next write up, I’ll look at how some of these have been mixed together & what the benefits & costs are of the various systems.
Nothing here is financial advice. Please don’t invest your hard earned money because of something I said. I’m not a RFA, and certainly not your RFA. All representations made here are strictly my own. Nothing here represents anything other than the ponderings of my own mind.