Open Discussion: SCRT / SEFI Value Capture and Creation

Hi all,

One of the main functions of the Secret Foundation is to steward and accelerate the growth of the Secret ecosystem while ensuring its sustainability. Since there is currently a large focus on Secret DeFi from multiple participants in the ecosystem and an influx of liquidity and interest, we’re starting an open discussion thread for maximizing SCRT and SEFI value capture and creation.

Here I’d like us to discuss and uncover best practices from research and other ecosystems so that they can be applied in our own products. We can also share threads and writing that can support our thinking in this regard. Any of these practices can be applied to any Secret App or token, and many of these mechanisms can and should also be applied to Secret NFT products as well (a new unique primitive that I believe will be instrumental to growth).

We’ll start with an excerpt from Ryan Watkins’ Messari research piece “DeFi Citadels: How DeFi Protocols Create and Capture Value.”

Protocol defensibility is derived from a combination of a few things:

  • Community including developers, token holders, liquidity providers, and users

  • Integrations both between real world institutions and other protocols

  • Brand and User Experience which is especially powerful when a protocol is the first to succeed in its market allowing it to build brand equity and set user expectations

  • Protocol Resources such as protocol treasuries and insurance funds

  • Security which is especially important for application specific chains

~ From “DeFi Citadels”

By the above metrics, we have built a highly defensible protocol - a necessary foundation for sustainable growth. Our community is large, resources are vast, and security is strong. Integrations are increasing as we have constructed some unique fundamental primitives for any chain to take advantage of. Brand / memetics are strong, though user experience and UIs do need improvements. This is a weak point that will naturally evolve as we push from early protocol adopters to the long tail of end users.

However, defensibility simply protects growth - it does not create it.

What Creates Growth?

Simply put, all growth results from an imbalance between supply and demand. And loosely speaking, sustainable demand always comes from increasing adoption (which can have a downstream impact on speculation - the relationship between speculation and adoption doesn’t work well in reverse). Constraining supply, however, must be more carefully considered - it doesn’t naturally occur.

Since all products being deployed on the network rely on SCRT for gas fees, demand for SCRT scales with demand for applications. But creating further incentives for SCRT stakers (perhaps by finding ways that SCRT staking derivatives can be used at the application layer?) increases demand for SCRT while further restricting supply. Identifying other supply sinks at the protocol level will create a spring-loading effect that impacts the application layer and any product integrated with Secret.


An example from the Terra ecosystem of interconnected protocol / application layer

There’s ways to create demand amplifiers for application layer tokens at both the protocol and application level. Example: a share of all network fees (paid in SCRT) goes towards buying certain application tokens via SecretSwap pools. Alternatively, a share of SecretSwap user fees go towards buying SEFI via SecretSwap SEFI/SCRT pool. There’s also potential mechanics involving cashback tokens for SecretSwap traders to incentivize volume.

We should also be prioritizing integrations (as the Messari piece mentioned) for creating sustainable demand. Here is where plugging into existing successful value capture and creation models (where Secret Network and its applications provide additional unique value) is a massive growth lever, especially if done at the protocol level with SCRT. Or we can work with other protocols to create new value capture / creation models across ecosystems. The obvious choices here are within the Cosmos universe (Terra, Thorchain) or in the ETH and BSC DeFi ecosystems, but there are many other potential avenues. Secret Tokens (SNIP-20 or SNIP-721) give us a lot of flexibility in how these integrations can work and they are unique to our chain.

The other piece here, which is delicate, is the biggest supply constraint of all - lowering network inflation. Establishing a lower issuance rate for SCRT is a bazooka that can kickstart a well-structured value capture/creation model that has properly balanced supply sinks and demand creation across the protocol. Right now we should be working to nail that model before pulling this thread, but it may be worth considering in the short term regardless. Perhaps inflation can be dynamically adjusted based on metrics beyond the bonded rate in the network. Perhaps staking derivatives can play a role here.

What Now?

This is just a jumping-off point for conversation across the Secret community - and others. I’ll be pushing for contributions from existing network participants and potential new collaborators. SEFI holders and SCRT holders should comment here with their own observations on best practices or recommendations. Now that we have confidence in the defensibility of our ecosystem, we can and must be aggressive in establishing these growth mechanics.

I look forward to your ideas and conversation. I will be heavily dedicating myself personally here and recruiting intelligent contributors from around the blockchain universe.

Good luck, Secret Agents :male_detective: :female_detective:

~Tor

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The 2021 Spring Meetings of the World Bank Group and the International Monetary Fund and related ancillary events will take place virtually from Monday, April 5 to Sunday, April 11 .

Keep our ears to the ground on what develops from this event and be a step a head of the incoming finacle trends

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Hey Guys. wanted to share my idea with You. As we will have Secret NFT’s I thought that we could establish some partnerships where we will be able to use Secret NFTs and take advantage of SSCRT / SEFI LP.

I wanted to put Your eyes on a project called AnRKeyX. This is a gamified NFT marketplace that combines Defi and eSports gaming. They will have an LP game called BattleWave where there are clans/races and stackable NFTs in LP pools. My idea would be to partner with them (I’m their supporter also and can establish initial meeting between You Tor and JD Salbego - if You would be interested) and create Secret NFT Legion / Race for their Game and build and leverage the Secret community in there and around Defi gamified market. We can create Secret Agents Race for BattleWave 2323 and bring them to the game with SSCRT / SEFI LP and do incentivize all this gaming part of Secret NFTs and LP.

If You would be initially interested please let me know and ofc I would love to see Your comments and proposals also. Feel free also to criticize the idea, I’m completely fine with that. Constructive criticism is more than welcome. And sorry for my English, as it’s not my native.

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One idea I have been thinking about to provide value to SEFI holders, and I know Uniswap has noted they might implement (or at least have the ability to add it in the future) a similar thing: a protocol-wide fee of 0.05% for swaps.

Now, I think if we integrated this change to Secretswap this could be handled one of two ways:

  1. Be in addition to the 0.3% LP fee so total fees would be 0.35% for each swap.
  2. Could remove 0.05% from the 0.3% LP fee and give it to SEFI holders. (Maintain total 0.3% swap fee)

Additionally, I don’t know if that fee (assuming implemented) should go to all SEFI holders or if it should go to SEFI stakers or what exactly. I also don’t have the technical knowledge how that fee would be distributed to SEFI holders, hopefully others can chime in their thoughts.

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Some sort of burn mechanisms to control the emission of Sefi and Scrt would be useful in controlling inflation of both coins. An example of this could be Scrt or sefi lottery whereby users can purchase tickets and say 75% of the pot is paid out to winners and 25% is burnt, thereby reducing inflation.

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Would be great to see trading competitions PancakeSwap, combo boxes www. bakeryswap. org/ #/gamification/combomeal. This could run in addition to the lottery idea above, and burn 25% of tokens.

Also a time lock staking like HEX for the lifers?

Greater variety of stablecoins for those not in the US

I think using the part of the collected fees in the SEFI ecosystem to buy back and burn SEFI tokens would be one way to create demand for the token.

Another way would be to use the fees to have an artist create NFT that would be dropped to holders of X amount of SEFI.

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Hey Tor, I thank you for creating this discussion, because it is the most important topic to tackle RIGHT NOW. We all know there’s an important game theoretical component to defi that glues all the intricate pieces together - and value capture & network effect are a huge part of that. I want to put focus on terra, arguably the most successful cosmos chain, and in my opinion, the most likely to be adopted on a major scale. The stable 20% rate of UST is a great, working, incentive for exchanges etc to onboard it. We know that an increased demand in UST results in a demand for LUNA, which subsequently gets burned to create UST. Terra products work, are cheap and easy to use, secure, and very quick. I think instead of creating a stable coin, secret network needs to onboard UST, LUNA, MIR, LDO, providing privacy for the ecosystem. Back to the 20% rate and value capture: it is achieved by using “productive assets” as Do Kwon puts it. Before in CDPs and pools, non-productive (assets that didn’t produce any yield) were used as collateral. However, in the terra defi ecosystem, LIDO finance helps improve capital efficiency and value capture. By bonding Luna, consumers are able to stake LUNA to validate the network (and receive fees from all stablecoin tx) receive bLUNA, and use bLUNA as collateral in a CDP to borrow UST. This is called liquid staking. Most cosmos chain networks do not have liquid staking, and require a 21 day lockup period after unstaking. I think that with the launch of sienna (defi lending platform on secret network) SCRT has a chance to capture even more value. Imagine bonded SCRT, bSCRT, being used as collateral for not only the terra ecosystem (anchor) but also for sienna. The fees collected from staking (in bLUNA case) were used to keep the 20% APY UST deposit stable. With bSCRT, users can collect the fees themselves OR it could be burned, distributed amongst future pools to incentivize liquidity (osmosis gravity dex) Please let me know if this is already in the works! Thanks!

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SEFI

Couple immediate ideas, which have already been mentioned:

  • Add period for staked SEFI (21 days) to limit circulating supply

  • Add governance for utility

  • Implement a % fee for SecretSwap per trade

Brainstormed ideas for fee usage:

  • Rewarded to SEFI stakers

  • Rewarded to liquidity providers (already default?)

  • Add to community pool for growth initiatives

  • Burned to reduce supply

  • Converted to SCRT and added to a community pool to increase demand for SCRT

  • Converted to liquidity for the trading pair it was spent on, a pool that community votes on, or sSCRT-sUSDC (even possible?)

  • Equally distributed to node runners without weight % to incentivize small nodes (even possible?)

  • Used to improve randomness and privacy of SecretSwap somehow

Side note as a UNI holder, I see added value of receiving airdrops from other communities that are adding trading pairs

Make UX intuitive for other communities to add a trading pair and grant airdrops for SEFI holders?


SCRT

+1 for reducing inflation

Reduce % of inflation allocated to stakers to increase rewards for LP providers on other cross chain DEXs (Uniswap, PancakeSwap, Thorchain etc), given that this would increase TVL whereas staking doesnt

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Is this a correct summary of the Terra mechanics?

  • Fixed 20% APY is rewarded for staking UST on Anchor protocol, driving demand for UST
  • LUNA is burnt to mint more UST based on increased demand, subsequently driving supply down for LUNA
  • While staking LUNA, users are allowed to use a liquid derivative “bLUNA” (1:1) to provide collateral for lending on Anchor, which in turn allows it to give out the fixed 20% APY rewards

And you’re proposing:

  • Secret-Terra bridge to convert UST LUNA MIR LDO to secret tokens to grant privacy
  • Ability for SCRT stakers to use bonded “bSCRT” (1:1) as a liquid derivative used for both Terra ecosystem for lending on Anchor and Secret ecosystem on Sienna (pending development)

Couple questions for clarity:

  • Still not quite sure how 20% UST rewards is achieved from using bLUNA as collateral?
  • What do you mean by fees for bLUNA?
  • Whats LDO?
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I would head for Standard Protocol instead of Terra / Luna…

Tor, thank you so much for raising this as value capture is what both SCRT and SEFI need the most right now.

I’m aware that the team is planning to implement a cashback mechanism on Secretswap. However, cashback mechanism is only used to attract more new users but it doesn’t capture value for both SCRT / SEFI. Here is why:

New users will trade often on Secret swap > get cashback in terms of free SEFI tokens > dump

Unless there’s a reason for them to hold, they will dump the tokens for sure.

I would personally suggest a buyback mechanism to be implemented along with the cashback mechanism. A portion of tx fees (and potentially some additional ‘trading fees’) should be used to purchase SEFI on Secretswap. This is a viable way to capture values from trading volumes/activities.

This is likely what’s gonna happen when Secretswap has implemented both cashback and buyback features:

Cashback > more users are attracted > trading volume increases > fees collected increases > SEFI’s buying pressure from buybacks and staking rewards for SCRT increase > more values accrued to both SEFI and SCRT

These mechanisms can also be used alongside with burning or some other good mechanisms that the folks mentioned above.

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In my humble opinion, one key aspect is composability. You already described it: increase the use cases, integrate / partner into other projects (and bring them over) to create a vibrant ecosystem. Increase the use cases for the token, for example SCRT and SEFI used as collaterals for loans in other projects, such as KAVA.

Inflation is another key component. I know that people are looking for the highest APYs and taking their money elsewhare if they see higher rewards, but they forget that a lot of those rewards are inflationary and dilute value long term. This is why other value creation mechanisms should be found, so when even the rewards are lower, there are other utilities, the tokens are widely integrated into other projects and useful. This needs to be calibrated of course, as the utility increases, inflation lowers.

Value needs to be created organically and not through artificial mechanisms such as lock ups or burning (even when those mechanisms can help and also be used strategically) but they should not be the focus. I prefer, for example, reward boosts and other features that align incentives.

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Sefi’s collateral for a single currency should be removed to reduce sefi’s selling pressure.

Create a list of Top 10 industries you want to disrupt. Then build MVP apps tailored for each and partner with real-world companies, businesses and partners to use these products. With a good feedback loop, begin tailoring the Secret apps to grow its capabilities. A couple I can think of are, in no particular order:

  • Healthcare
  • Government
  • Contracting
  • Social Media
  • eSports
  • Digital Licensing
  • Transportation & Logistics
  • Legal
    and more.

By actually applying Secret and SEFI to real world applications, the sky’s the limit for demand. Focusing on DeFi and NFTs (which is pretty much every suggestion so far) are for the most part crypto for crypto’s sake. By trying to manipulate tokenomics to increase prices, we’re doing exactly what central banks do. Just because you increase the price, doesn’t mean you generated value or wealth. Rather, you want to grow the economy to generate true wealth.

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I think the bridge rewards need to be discontinued, by moving incentives to secretswap and having as much liquidity as possible move there. It really is one of the biggest catalysts we have available right now to increase liquidity substantially in SecretSwap.

Prior to the launch of sefi and secretswap, having the bridge rewards made sense as an introduction to the ecosystem and a way to gather attention, and I really do think it is what began serious awareness for the project. The situation has changed now however. People already know about Secret, the products have launched, and the bridge is nothing but a constant free airdrop with no impermanent loss risks for users who are really not contributing much to the ecosystem.

Sure, posting tweets like 100 TVL reached is nice for awareness don’t get me wrong, but what is that TVL doing for us though? Nothing. Moving incentives to secretswap and capturing liquidity there is the way to go.

I share the concerns on inflation as well. One thing to take into account is that SCRT fees are actually not that insignificant considering the current number of transactions. Maybe having some sort of burning mechanism of transaction fees would allow to maintain attractive staking rewards so that network security is not compromised. I do not agree on having SCRT play a part in “buying certain application tokens”, as I think the network has to remain neutral and not favor certain applications over others.

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Hey everyone,

Great to see this open discussion on the forum - it has compelled me to finally create an account!

I had a few sparse ideas for general improvements and some random thoughts. I guess this seems like a good place to dump them?

SEFI

  1. To incentivize providing liquidity for any & all pairs, it may be beneficial to allocate a percentage of the SEFI distribution for those providing liquidity for ANY pair. APY for staking any set of SecretSwap LP tokens could be much lower than the current standards. If someone wants to provide liquidity for an odd pair, say, BAT-ENJ, they can be encouraged to do so by receiving some sort of APY in the form of SEFI on this. This should go a long way in improving liquidity across all pairs and making the newly deployed swap router much more effective.

  2. I’m quite surprised there isn’t already SEFI rewards for providing liquidity on Uniswap (etc?) for wSEFI-ETH. This seems like a no-brainer?

  3. I definitely agree that a portion of the fees charged for swaps should be used to automagically buy SEFI. I guess the question then becomes what do we with that SEFI? Possibilities would be:

  • Burn it
  • Distribute it to stakers
  • Add it to the rewards pool for future incentivization

If we’re going the route of distributing the swap fees to stakers, the question could then become should it be distributed in the form of SEFI or in the form of the coin/token that was swapped?

  1. This is more of a general idea that would require a fairly large amount of work to accomplish but would result in substantial adoption. Cross-chain AMM functionality. The abillity to swap my native ERC20 token for a native BEP-20 (etc) token. I recently purchased some MIR tokens. Because I had not yet interacted with the Luna blockchain, the hoops I had to jump through to do this were pretty outrageous. I mean, it’s not hard to do, but it is long winded and requires a lot of information. If there was a one-stop shop that allowed me to convert my native ETH to native MIR, I would of jumped at it.

A highly functioning cross-chain AMM that hides all of the complexities of bridging in the background is coming. This is a massive gap in the market that someone is going to fill. Could it be us? It’d be quite an undertaking but ignoring this gap in the market would be leaving a lot of money (and users) on the table.

SCRT

  1. Using network fees to automagically purchase SEFI/other native Secret dApps on SecretSwap sounds like a pretty cool, innovative idea. In the long term, this may not be a good option to stick with. As we inevitably decide to drastically reduce inflation, stakers/validators will become more dependent upon network fees for rewards. While this obviously wouldn’t be much of an issue at the moment as inflation is high and the net-profit from network fees is relatively low, it will certainly be something to keep in mind for the future, should we go this route.

  2. Airdrops. People like airdrops. Any fellow-developers reading this should take note of the success Mirror Protocol had by dropping (and continuing to drop) a substantial portion of their tokens to Luna stakers. It gets attention from the community and draws people in. Look at the success of the SEFI drop. It broke the network, lol. Speaking of which…

  3. Everyone’s ideas (including my own) for increased adoption of the network are pretty useless if the underlying limitations and various issues aren’t ironed out. Some of the Engima (etc) developers may not have witnessed the gravity of the issues first hand. I’m sure that as soon as the SEFI drop happened, a lot of the developers were one of the first people to go through the process of claiming their tokens & staking etc (not that I have a problem with this at all). This would of resulted in a lot of the core developers not using the network as much as everyone else during this period. It’s hard to overstate how bad it was. Any new user would of ran a mile.

I’m not having a dig at all by bringing this up, I simply feel that this point needs re-iterated. We only get one chance at a first-impression. If these issues/limitations still exist when we reach the point of gaining a substantial amount of new users - we’re going to lose them just as quickly.

  1. While I do agree that we need to significantly reduce inflation, I’m not convinced now is the right time to do it. I would be inclined to say that we should wait until we have more dApps, more users and more TVL before proceeding with this change.

  2. To combat the high inflation rate, we could burn a portion of network fees. With high network usage, this could even result in us becoming a deflationary currency. People do love their deflationary currencies.

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Great point of view, now is the time to end the bridge, flow the benefits to the liquidity provider, and maximize the value of sefi. The current liquidity is very poor.

Yes you nailed most of my points. I just approve of the terra ecosystem so much that I think it’s wise to bridge it to secret network sooner than later.

Here’s the breakdown on where the yield comes from. Liquid staking allows for productive assets to be used as collateral, the those assets produce yield (bATOM bLUNA) etc
https://docs.anchorprotocol.com/protocol/overview

LDO is lido dao token used incentivize liquidity for liquid staking.

There’s a lot more I wanted to dive into. Specifically how value can and probably will accrue to the scrt token. Secret will likely be the application specific destination for privacy in the cosmos ecosystem (which I think will integrate over 50% of crypto at one point). I think one of the most important factors for success of the scrt token and secret network adoption is providing stable, predictable value over a long term horizon. Creating sustainable moats for the major players is key to long term success/viability of the scrt token, which in turn affects the scrt network. Price is very important, regardless of what people will tell you. The more utility and yield the scrt coin can produce, the more attractive it is for new entrants/participants.

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I fully agree with you that the bridge rewards have to be discontinued.

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