Architecting XFT: The Role of Platform Tokenomics and Supply Elasticity
Hey – Alex here.
If you’ve spent any time in the Offshift community, you’ve probably seen me in our monthly PriFi AMAs, as well as in interviews, events, and Op-Eds around the space. As the only doxxed member of the Offshift team, my role is to share and promote our platform, conduct business development, and uphold our principles in public-facing engagements. You can follow me on Twitter.
As we approach our Mainnet launch, questions continue to flow in daily for our monthly PriFi AMAs and in our groups on Discord and Telegram, with a decisive majority placing the spotlight on our tokenomics – and rightly so.
For anyone that plans to explore our forthcoming PriFi platform, understanding our tokenomics serves not only as an essential how-to of sorts; it also provides crucial insight into the viability, sustainability, and growth potential of the Offshift ecosystem. To all those sending in questions, comments, and concerns about our tokenomic model:
Keep ‘em coming, but read this first.
Over the past couple months, I have been seeing a lot of similar questions that exhibit either an incomplete understanding of our tokeonomics, an injudicious aversion to downward price movement, or a departure from the core principles that our project is dedicated to upholding: true decentralization, unequivocal privacy, on-chain architecture, demand-based price mechanics, and above all, ruthless integrity.
To this point, there has only been so much I have been able to do to address inquiries in live AMAs, and only so much our team has been able to do to address one-off questions in our community channels.
Thus, to advance the conversation I have put together a piece to provide deep, unabated insight into Offshift, our platform, our tokenomics, and our principles.
My goal is fourfold:
1) To bring the entire Offshift community up to speed on the nuanced, multi-faceted role that XFT plays in Offshift’s platform tokenomics.
2) To outline the founding principles, thought process, and foresight from which the Offshift team formulated our platform tokenomics, and why we continue to stand behind our tokenomic model wholeheartedly.
3) To elucidate the radical, paradigmatic shift in collateral management we are pioneering via our proprietary Burn-and-Mint Mechanism and elastic supply model, the unprecedented benefits they confer to our users, and the key elements thereof that differentiate Offshift and XFT from other prominent mass market platforms.
4) To fully acknowledge the imperative of liquidity management in our tokenomic model, and to present our approach to establishing and maintaining deep liquidity to facilitate large-volume capital exits from the Offshift ecosystem.
Without further ado, let’s talk XFT.
(1) The Role of XFT
XFT is most directly designed to function as a High-Efficiency Catalyst that facilitates capital flow between Ethereum’s public Layer 1 ecosystem and Offshift’s private Layer 1 ecosystem.
As I have written previously, privacy has been largely relegated to the backburner of cryptographic innovation as the attention and capital of the crypto mass market have been reeled in by DeFi’s provocative double-digit APYs and NFT auction markets. Save for Offshift, DeFi and on-chain privacy would appear to stand diametrically opposed, as accessing each demands forgoing the other.
Breaking down barriers to privacy means building a simple, one-stop opt-out for users in public ecosystems – and one that doesn’t demand expertise in finance or avant-garde technology.
Most principally, XFT allows for frictionless mobility of capital. Users can Shift seamlessly between XFT and any of Offshift’s zkAssets, which can be pegged to virtually any crypto-native or real-world asset for which Chainlink oracles provide a price feed.
Here’s how it works:
To Shift capital into Offshift’s private zkAssets, users burn XFT and mint the zkAssets of their choice on the private side.
To exit the private side – i.e. the Offshift ecosystem – and Shift back to the public Ethereum (or Moonriver/Moonbeam) ecosystem, users burn their zkAssets and mint XFT back on the public side. Throughout the Shifting process, users always remain in possession of their assets, so they can Shift capital into or out the ecosystem at any time, no questions asked. The Shifting process can be likened to a bridging mechanism of sorts – except that when users Shift on Offshift, their assets never leave Layer 1.
To simplify the experience further, users do not need to interact with XFT directly. Via Uniswap routers, users can Shift from wrapped Ethereum, stablecoins, or any other ERC20 token into zkAssets (and vice versa), and the Offshift protocol will take care of conversions through XFT under the hood.
To support users of all demographics and knowledge levels, Shifting between public and private Layer 1 ecosystems is easy, simple, and fast. XFT is the quintessential catalyst for trustless, public/private transfers on Ethereum Layer 1.
(2) Tokens with Principles
When the Offshift team set out to build our PriFi platform, we wanted to make a difference – not a hype bubble. Our goal is to give individuals across the world a resource with which to protect themselves, their personal freedoms, and their wealth from the threats of surveillance and asset seizure in specific, and authoritarianism in general. Since day one, our philosophy remains unchanged. In alignment with the Cypherpunks that conceived Bitcoin and laid the foundation for decentralized system architecture, we are committed to delivering a fully decentralized, private infrastructure for interoperable DeFi applications on Ethereum Layer 1.
As a decentralized alternative to an exploitative monetary system, Bitcoin was developed to serve as empirically sound money, and was intended to attract capital, miners, and node operators on those grounds alone – no marketing arm, no Groupon coupons, no Superbowl commercials. Simply put, Bitcoin surrendered to the free market – to Adam Smith’s invisible hand, per se – to assign BTC a fair value via the aggregate decisions of its constituents.
As a project built on Ethereum, Offshift has and will continue to engage other platforms and developer teams in the Ethereum community and share our vision and principles with the broader blockchain space. However, as far as tokenomics are concerned, Offshift has been designed to emulate Bitcoin’s hands-off approach to growth and adoption. As per our Project Lead Johnny’s recent blog post, we believe firmly in demand-based price mechanics, which is to say that our tokenomics establish a direct, correlatory relationship between platform usership and retained capital AND the market capitalization of the Offshift ecosystem.
Unequivocally, Offshift’s tokenomics are designed such that using the Offshift platform – that is, minting our private synthetics – necessarily creates dollar-for-dollar demand for XFT, which is purchased on the open market and immediately burned. Of course, it should be noted that crypto Twitter’s pervasive “Up Only” meme is antithetical to Offshift’s founding principles. For if capital exits the ecosystem for any reason, XFT is minted and immediately sold on the open market. Quite frankly, we wouldn’t have it any other way.
Of course, our core team stands very much in favor of competing on a level playing field because we’re confident in what we’re bringing to market. As both a user-friendly Layer 1 Privacy tool and a potent derivatives protocol, Offshift already represents a major technical milestone for the crypto space at large. But it is also a disruptive technology that is designed to garner usership and capital by providing users with more of what they want, and less of what they don’t.
We’re happy to leave it to the market to keep score.
(3) Supply Elasticity and Superior Risk-Return Dynamics
Plain and simple, traders and investors want mostly the same two things:
To maximize profit potential; and
To reduce the risk of loss.
As I described in depth rather recently, lending pools and synthetic assets platforms make up the vast majority of the crypto space’s leading DeFi platforms. Both depend heavily on collateral and related collateral management models – especially any that intend to offer even meager protections for user privacy.
The challenge these platforms face is that – stable though their synthetics may be – the collateral that underpins them is composed of some of the most volatile assets in human history, among them BTC and ETH. Ultimately, users shoulder the risk during market downturns, either mobilizing additional capital to meet margin calls or watching helplessly as their positions are liquidated entirely.
To protect users and prevent catastrophic, sweeping liquidations on their platforms, mass market DeFi protocols have increased collateralization requirements by several orders of magnitude, generally requiring several hundred percent from users. Of course, over-collateralization is neither capital efficient nor friendly to profit seekers; it chops down winnings from successful trades – even those that never go anywhere near liquidation levels.
To support traders on both sides of the equation, Offshift developed a radical tokenomic model for collateral management that redefines the relationship between capital efficiency and risk exposure. We call it the Burn-and-Mint Mechanism.
Rather than locking collateral into a contract, users burn collateral in the form of XFT to mint Offshift’s zkAssets at an even ratio. That means dollar-for-dollar, sat-for-sat, one-to-one, users get out what they Shift in — and they never get liquidated or margin called.
The key element that underpins Offshift’s Burn-and-Mint Mechanism is XFT’s elastic supply model. When a user first burns XFT to mint synthetics, he or she can enjoy minting zkAssets at a 1:1 ratio. But when the same user burns zkAsset to re-mint XFT on the way out, Offshift’s Burn-and-Mint Mechanism provides even greater benefit. If any deviations have taken form between the user’s original burned collateral and zkAssets he or she minted, the Mint-and-Burn marginally expands or contracts the supply of XFT to cover the difference. On Offshift, it’s one-to-one on the way in, and one-to-one on the way out, with no sleep lost in between.
An Example: Say a user burns $10,000 worth of XFT – 500 XFT trading at $20 each – to mint 2.5 zkETH when ETH is trading at $4,000 on the open market. Over the duration of the user’s holding period, ETH appreciates to $8,000, and XFT depreciates to $16.
No sweat! The user doesn’t receive a single margin call, and sleeps tight every night knowing that liquidations have been completely removed from the equation.
When the user chooses to Shift back to the public side, he or she burns 2.5 zkETH – a $20,000 value – and the Offshfit protocol mints 1,250 XFT – also a $20,000 value at current market rates. The user is then free to sell the XFT on the open market, fully benefiting from ETH’s appreciation during the designated holding period while remaining free from the burdens of over-collateralization and liquidation risks. A radical, unprecedented win-win for derivatives traders from DeFi and TradFi alike.
A radical new paradigm, Offshift’s innovative framework for collateral management does away with the drawbacks of liquidations and margin calls without decimating the capital efficiency, price parity, or uncompromising privacy that give our synthetics their power in the first place.
Now, it should be noted that Offshift is not the first DeFi platform to deploy a native token with an elastic supply model. It is merely the first to do so in conjunction with Burn-and-Mint collateral management and Layer 1 privacy.
We have received many insightful inquiries from savvy community members who have drawn parallels between Offshift and other highly regarded projects in the DeFi sector. Here, I will touch on a few of those projects, and highlight the refined design elements that distinguish Offshift’s platform tokenomics and XFT.
“So you’re really a private Synthetix, huh?”
In a broad sense, yes. But since we’re talking tokenomics, not at all.
On Synthetix, the platform’s native token SNX is staked as collateral to mint an array of public synthetics called Synths at a 500% collateralization rate (5:1). Users staking SNX effectively collateralize the platform, and receive transaction fees from users dealing in Synths. In addition, users that deploy their own SNX to mint Synths also receive transaction fees from other users in the ecosystem. By redistributing ecosystem transaction fees to SNX stakers, Synthetix establishes a strong incentive mechanism to maintain ecosystem solvency at all times.
On Offshift, XFT is burned as collateral to mint the platform’s array of private synthetics called zkAssets at a 100% collateralization rate (1:1). Offshift employs an elastic supply model for XFT such that over-collateralization is not required to cover deviations between collateral and zkAssets. In order to incentivize users to support the ecosystem, Offshift’s incentives are dedicated to LP (Liquidity Provider) Programs in order to facilitate low-volatility entrances to and exits from the ecosystem.
Distinction #1: Supply Elasticity
Synthetix relies on over-collateralization to prevent liquidations, whereas Offshift’s elastic supply allows traders to enter and exit the ecosystem dollar-for-dollar with liquidation risk completely removed from the equation.
Distinction #2: Directed Incentives
Synthetix charges a minor fee of 0.3% for Synth transactions, and distributes them to SNX stakers collateralizing its ecosystem. Having no staked collateral, Offshift’s primary focus is centered on public market liquidity. As such, Offshift has introduced and will continue to launch LP Programs to reward LPs for absorbing volatility from large volume Shifts out of the ecosystem.
“Ah, so then like Terra basically?”
Getting warmer. Terra and Offshift are built on similar tokenomic principles, but the two should not be conflated with one another.
On Terra, LUNA’s elastic supply functions primarily to maintain price parity for Terra’s synthetics – most commonly its U.S. dollar stablecoin, UST. Much like on Offshift, Terra users burn LUNA to mint UST, and burn UST to mint LUNA.
Arbitrageurs play an essential role on Terra. Terra always permits traders to exchange $1 USD worth of LUNA for $1 USD worth of UST. Thus, arbitrageurs are the key players that capitalize on minute deviations between Terra stablecoins and their real world counterparts.
When UST’s value rises above $1.00 USD, users are incentivized to burn LUNA and mint UST, thereby returning UST to parity with the dollar by expanding its supply. When UST falls below $1.00 USD, the protocol incentivizes users to burn UST and mint LUNA, returning UST to price parity by contracting its supply.
On Offshift, XFT’s elastic supply ensures price parity by guaranteeing one-to-one convertibility back from zkAssets at market price. When zkAssets are burned, XFT is minted in whatever quantity necessary to satisfy a 1:1 exit. Market making and other arbitrage-related incentive mechanisms are not employed.
Distinction #1: The Price of Privacy
Terra’s synthetics are public assets that live on the Terra blockchain, and which are available on a number of CEXs (centralized exchanges). Offshift’s zkAssets, on the other hand, live in a fully private environment on Ethereum Layer 1, and can only be accessed via XFT’s Shifting function. While simple and fast, Shifting transactions are computationally intensive, and therefore may not be conducive to arbitrage operations that involve high-frequency trading. Price parity is best achieved via 1:1 convertibility, guaranteed by XFT’s elastic supply.
Additionally, While XFT’s elastic supply sets a price floor for zkAssets, Layer 1 privacy is an unprecedented achievement in the Ethereum ecosystem, and the market will ultimately determine if zkAssets are to be priced at a premium for the protection they provide users. Attempting to combat the formation of any such privacy premium will ultimately contribute to market inefficiencies in the Offshift ecosystem.
Distinction #2: The Role of Staking
On Terra, users stake LUNA to earn allocations from gas fees, and to receive newly minted synthetics. For Offshift’s purposes (see**: 4) Liquidity Management: The Next Frontier**), public market liquidity for XFT/WETH is a crucial factor in supporting the long-term viability of the Offshift platform. Consequently, all XFT staking incentives will continue to be geared toward providing deep liquidity for XFT pairs in public markets. Any incentives that reward users for staking unpaired XFT will ultimately detract from both user experience and user outcomes on the Offshift platform.
TL;DR: Both Terra and Offshift employ elastic supply models to ensure price parity for their synthetic assets, and provide strong incentives for staking. Whereas Terra relies on arbitrageurs to ensure price parity through market modulation and incentives, Offshift guarantees direct, 1:1 convertibility via XFT’s elastic supply. Moreover, much of Terra’s economic incentives are based on users staking LUNA, whereas Offshift’s efforts are focused on staking XFT alongside wrapped ETH in public markets.
Ultimately, both Terra and Offshift employ demand-based price mechanics. That is to say, the values of their native tokens – and therefore, the market capitalizations of their respective ecosystems – are directly correlated with platform usership and retained capital. On these grounds, we salute the Terra ecosystem and their tokenomic model.
(4) Liquidity Management: The Next Frontier
Before diving in here, I would like to applaud all of the individuals that have sent in prescient questions in recent months regarding Offshift’s strategy for liquidity management. All such questions exhibit a nuanced and comprehensive understanding of our protocol and the value we are bringing to users on the DeFi side.
Needless to say, Offshift’s Burn-and-Mint Mechanism and elastic supply model do not magically eliminate risk for traders; although they very effectively mitigate risk by relocating it outside the Offshift ecosystem, and in a broader market that has a greater capacity to absorb volatility shocks.
In the current DeFi landscape, platforms deal with liquidation risks by instituting steep collateralization requirements such that market downturns do not easily trigger liquidations. In place of forcing its users to over-collateralize, Offshift upholds 100% (1:1) collateralization and utilizes an elastic supply model to transfer volatility shocks to target off-platform capital.
In the event of a large-volume capital exit from the Offshift ecosystem – whether as a consequence of unforeseen volatility or a wealthy individual freeing up capital for personal reasons – a significant quantity of XFT will be freshly minted and subsequently sold into the market.
Naturally, XFT’s flexible supply model ensures the security of user funds denominated in zkAssets and fully eliminates liquidation risk from the equation. Nonetheless, in order to protect the integrity and sustainability of the Offshift platform, deep liquidity must be available on the public side to absorb the selling pressure produced by the influx of freshly minted XFT. Otherwise, traders on the private side will lose confidence that they may freely and comfortably exit the ecosystem at any time.
To those sending in the (excellent) questions:
We hear you loud and clear. Here’s where we stand:
As pioneers developing a disruptive and relatively unprecedented technology, we expect to encounter novel circumstances and challenges. Such is the journey of a first mover.
Already, we have been very successful bootstrapping liquidity on Uniswap and launching our Cross-chain LP Rewards Program on SushiSwap and PancakeSwap. LP incentives are a well-established strategy for building liquidity, and we plan to support LPs with related incentives going forward.
Beyond LP Rewards Programs, there is a lot of room for innovation in the DeFi landscape, and we remain open to experimenting with and exploring alternative incentive mechanisms to deepen liquidity pools on the blockchains where our platform lives.
“Sick! You guys know Olympus? Bro, wen POL?”
OlympusDAO has become renowned throughout the crypto space for conceiving an innovative tokenomic model called Protocol-Owned-Liquidity (POL). First, Olympus draws on a combination of incentives from staking and bonding (5-day coupon loans) to build up a substantial volume of wealth in the DAO’s Treasury. Subsequently, Treasury funds are used as a form of backing for OHM, the protocol’s native token. Because OHM is partially backed by treasury funds, advocates of the Olympus protocol classify OHM as a floating-value reserve currency rather than an algorithmic stablecoin.
While algorithmic stablecoins such as Terra’s UST maintain a peg – that is, a fixed price – to another asset, OHM’s partial backing establishes a baseline support level for OHM’s price, while staking and bonding incentives allow for some degree of demand-based price growth. To many who support and contribute to OlympusDAO, OHM offers a comfortable balance of price stability and growth potential. As the Olympus DAO owns and manages Treasury funds, the Olympus community also guides and directs the ecosystem’s monetary policy.
While Protocol-Owned Liquidity is an exciting and innovative concept making great strides in the many Olympus forks that have spawned across the space in 2022, POL necessarily detracts from the demand-based price mechanics inherent in Offshift’s tokenomics.
At this stage, our team will not make any preemptive commitments to strategies concerning liquidity management. However, seeing as liquidity is a critical issue that affects all members and stakeholders in our community, we look forward to including our community in discussions and considering ideas and suggestions as we explore innovative solutions to the newfound challenges we confront on our platform. If any such ideas and suggestions incorporate various elements from OlympusDAO’s POL, we are happy to consider how they may add value to our tokenomic model.
In the meantime, if this article leaves you with any lingering thoughts or questions, don’t hesitate to send them our way. Myself and the rest of the Offshift team are available on our community channels on Discord and Telegram, and we’re always happy to go back-and-forth.
While you’re at it, go ahead and submit your best question to our January 27 PriFi AMA at 12pm ET, where we will be selecting 3 winners to receive XFT.
Offshift is leading private decentralized finance (PriFi) with the world’s first Private Derivatives Platform. It leverages zero-knowledge (zk) proofs and sources reliable, real-time price feeds from Chainlink’s decentralized oracle network to enable users to mint zkAssets, an unprecedented line of fully private synthetics. Offshift’s mostly anonymous team has developed a trusted reputation for their thorough privacy research, development and execution.
To learn more and get involved, visit the links below: