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CryptoEconomic Research

Tokenomics Research | October 2021

Today, we discuss the tokenomics of the major lending protocol tokens: CREAM (Cream Finance), CEL (Celsius), COMP (Compound), and AAVE (Aave).
by Mattison Asher, Laurence SmithOctober 31, 2021
tokenomics 3 featured
Cream Finance Banner

CREAM

Overview 

Cream Finance is a DeFi lending and exchange protocol created as a fork from Compound Finance. The platform itself is based on liquidity mining, whereby users supply liquidity to DeFi applications by depositing tokens onto the platform. In turn, the users are rewarded with liquidity tokens proportional to the liquidity they contributed. Each of these tokens receive a portion of fees from whenever a trade occurs on the platform, which the user can claim when taking their assets back from the protocol. 

Token Utility

Cream Finance’s CREAM token is an ERC-20 standard token that can be used for governance staking, and economic rights on the platform. 

The economic rights endowed on CREAM holders translates to a percentage of the fees taken from token swapping on CREAM’s decentralised exchange. Cream takes a fee of 0.25% for their token swapping functionality, of which a fifth (0.05%) is rewarded to CREAM holders. 

Holders can also stake their CREAM  for up to four years on Cream Finance in exchange for passive returns. And the other main benefit, governance voting, allows CREAM holders to vote on the future of the protocol and any changes that will be made to it. 

At launch there were initially 9 million tokens created, however due to a community vote this number was reduced to 3 million through the burning of 6 million tokens. The token distribution and emission schedule is as follows:

  • 225,000 CREAM was allocated to the Seed round, over a two year period between 2020-2021
  • 574,000 CREAM to the team and advisors, over a four year period between 2021-2024
  • 225,000 CREAM to Compound Finance, over a two year period between 2020-2021
  • 450,000 CREAM to the Treasury (to be used for liquidity incentivises for future projects and for funding the protocol, as decided by user governance) 
  • 1,350,000 CREAM as a Governance Allocation for community members

There is a four-day voting period upon the launch of a proposal, where users can vote either for or against a motion. The choice with the majority of votes will be subsequently acted on.

cream image 1
Source: https://medium.com/cream-finance/

Benefit

  • Ability to vote on proposals that change the Cream Finance protocol
  • Stake your CREAM tokens to earn passive interest at a given rate
  • A fifth of the fees Cream Finance earns from their token swapping services is distributed to token holders, relative to the amount of tokens that are held
Celsius Banner

CEL

Overview 

To add some contrast to the other tokens that we have analysed, Celsius is a CeFi lending protocol that has created its own token to attract customers and rewards contributors. 

Token Utility

The token behind the Celsius Network is CEL, an ERC-20 standard token that incentivises the use and holding of the token. The following utility is given to CEL holders:

  • Celsius Network users can choose to earn interest in CEL, which boost yields when depositing assets 
  • Users can choose to payback debt in CEL to increase future borrowing discounts
  • Holding CEL provides membership through Celsius’ Loyalty Tiers 
    • There are four tiers: Bronze, Silver, Gold, and Platinum (see the below table for how to qualify for each tier)
    • The higher your tier the more bonus interest and loan discounts you receive
  • Hodling CEL will give users weekly rewards of 4.86% APY in CEL. The CEL distributed as interest is bought from Exchange by the Celsius network the week before. 

As of the 1st October 2021 a new measure came into effect, which makes CEL deflationary. An additional 10% of the weekly rewards total is to be bought from exchanges by the Celsius Network and burnt on a weekly basis. 

celsius loyalty
Source: https://support.celsius.network/
  • Provides membership to the celsius platform and community 
  • Allows holders to deposit cryptocurrencies into the Celsius wallet 
  • Allows holders to apply for dollar loans with cryptocurrencies as collateral
  • Provides holders with the ability to pay interest on loans at a discount 
  • Allows embers to lend cryptocurrencies in return for interest
  • Earn interest on cryptocurrencies lended
  • Provides users with seniority in the platform, which in turn impacts the interest rates gained
celsius exchanges
Source: https://whitepaper.io/document/524/celsius-whitepaper

Of the 650 million CEL tokens created, 50% were available for token sale and the remainder were distributed to the treasury, team and advisors. Specific allocations for all tokens were as follows:

  • 10% of the supply was available for crowdsale
  • 40% was available for presale 
  • 27% was allocated to the treasury
  • 23% was allocated to the team and advisors 
celsius supply
Source: https://messari.io/

Benefit

There are a host of benefits for holding CEL, which are as follows:

  • Get better returns and rates on the Celsius Network 
  • Earn weekly interest 
  • Hold a deflationary asset, which, if the growth of the platform continues, should in itself provide solid returns as an investment
Compound Banner

COMP

Overview 

Compound is one of the leading lending protocols on Ethereum.

Token Utility

COMP is used to vote on governance proposals in the Compound protocol. Furthermore, COMP holders can delegate their voting power to other addresses.

Proposals in Compound governance contain executable code, so COMP token holders actually have the ability to vote in changes to the protocol rather than just make suggestions, which is the norm for Snapshot voting based governance systems. 

  • 2,396,307 COMP were distributed to shareholders of Compound Labs, Inc., which created the protocol
  • 2,226,037 COMP were allocated to founders & team, and subject to 4-year vesting
  • 372,707 COMP were allocated to future team members
  • 4,229,949 COMP were reserved for users of the protocol
  • 775,000 COMP were reserved for the community to advance governance through other means
  • 0 COMP were sold or retained by Compound Labs, Inc.

All proposals are subject to a 3 day voting period, and any address with voting power can vote for or against the proposal. If a majority, and at least 400,000 votes are cast for the proposal, it is queued in the Timelock, and can be implemented after 2 days.

Benefit

  • Ability to vote on proposals that change the Compound protocol
  • Ability to delegate voting power to others so that they can change the Compound protocol
  • Can vote to add a new fee to Compound lending that is distributed to token holders
Aave Banner

AAVE

Overview

Aave is one of the leading lending protocols in crypto.

Token Utility

AAVE is the governance token associated with the Aave protocol. 

Benefit

Aave Governance enacts policies on key parameters which are determined within the protocol. A policy is defined as a set of governance-defined rules that control specific aspects of the protocol or the individual markets. These policies are voted up on AAVE holders.

aave 1

Policies Set the Governance-defined Rules

At the higher level of abstraction, the policies are classified as follows:

  • Protocol Policies: These policies govern the overall behaviour of the protocol and the entities belonging to it. They regulate specific aspects of the protocol related to safety, economics and expansion.
  • Market Policies: These policies are defined in the context of each market and, for markets belonging to the Aave ecosystem, they are specified within the boundaries identified by the Protocol Policies. A market participating in the Aave ecosystem needs to operate under safety policies that are not violating the protocol safety policies.

The governance of these Policies is the core function of Aave as a protocol for on-chain money markets.

Protocol Policies

Risk Policies

The Risk Policies define the set of rules that ensure the safety and protection of the protocol and the users participating in it. Risk Policies include, but are not limited to, decision-making for:

  • Assets compatible for integration within Aave: The list of assets for which risk is deemed acceptable for the safety of the protocol.
  • Modelling of the interest rates: Interest rates modelling is a key risk parameter as it determines the actual yield for depositors, the ratio between borrowed, available liquidity and the general the competitiveness of a market for a specific asset.
  • Base risk parameters for overcollateralization and liquidation: The risk parameters that are governed by AAVE affect all money markets and set global boundaries for those markets. The current methodology for the global risk parameters is presented in Aave’s risk documentation.
  • Configuration and behaviour of the Safety Module (SM): The Safety Module is one of the core components of the Aave Ecosystem which is regulated by a set of rules and behaviours.
  • Acceptance of new money markets: Anyone will be able to instantiate their own money market within the Aave Protocol. However, markets will be accepted under the Governance and secured by the Safety Module only if the Market Level Policies satisfy the constraints imposed by the protocol Risk Policies.

Improvement Policies

Improvement policies define rules under which ecosystem improvements are incepted, developed and applied to the ecosystem, including but not limited to:

  • Smart Contracts
  • Governance processes
  • Governance contracts
  • Safety Module
  • AAVE Token contract

Incentives Policies

Incentives Policies define the rules under which token incentives in Aave are generated. Financial incentives are used to shape behaviours within the ecosystem to achieve a common objective. For Aave, the common goal is to ensure the safety of the Aave Protocol, cost-efficient usage by the market participants, and proper ecosystem incentives to drive innovation and long-term growth of the ecosystem.

Safety Incentives (SI)

Safety Incentives ensure the safety of the protocol by incentivizing AAVE holders to participate in the Safety Module. This is achieved with a set of incentives pushing behaviour to naturally create a positive feedback loop within the Aave Protocol. In that sense, the essence of those systemic incentives is to materially fade away while having lasting impact on participants behaviour. This behaviour materializes with the birth of policy motivated agents that have incorporated the sustainability of the system they now belong to.

AAVE holders participating in the Safety Module earn both Safety Incentives in the form of AAVE and fees from the protocol.

Ecosystem Incentives (EI)

Liquidity Providers and Liquidators (in the form of a single user or as a DeFi end-user interface) are two key components of the sustainability of a decentralized finance protocol by enabling liquidity within the protocol. As stakeholders and maintainers of the Aave Protocol, they should be rewarded with governance power through the EI.

Market Policies

The Aave Protocol will eventually allow anyone to create a money market. However, to benefit from protocol incentives, the market parameters and assets selected must be within the realm of the Risk Policies.

The following list describes which parameters must be defined at inception by market creators in order to customize their own market:

  • Supported assets to provide liquidity and borrow from. The currency should be validated by the higher layer Protocol Governance.
  • Supported assets to use as collateral. In the whitelisting scenario, the currency should be already validated by the higher layer Protocol Governance.
  • Enable/disable borrowing modes of an asset. Variable, stable or any other mode included in the future in the protocol.
  • Market-specific components update. Smart contract updates for new versions already approved by the Protocol Governance or the addition of smart contract modules, optional per market.
  • Risk configurations per asset. Loan-to-Value, Liquidation Threshold, Liquidation Bonus and automatic liquidation parameters.
  • Interest rates model per asset. Adjustment of the curves which determine the relationship between the state of each asset’s reserve and its interest rates.

Stakeholder Roles

Aave will be secured by a Safety Module (SM), a staking mechanism for AAVE tokens to act as insurance against Shortfall Events. Stakers earn AAVE as Safety Incentives (SI) along with a percentage of protocol fees.

Staking will feature plain AAVE alongside an AAVE/ETH pair. The latter will leverage Balancer to incentivize market liquidity and earn BAL along with trading fees.

Staked AAVE will be freely tradable after a cooldown period. All rewards accrue in real-time and are distributed as AAVE is withdrawn or transferred from the Safety Module.

aave 2
Source: Aave

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