Jan 18, 2022
Proposal to Revise Haven Protocol Tokenomics
Introduction
Since the successful launch of Haven 2.0 in November, the Haven Protocol team and community have discussed potential changes to improve the protocol’s tokenomics. These ideas have included new unlock times, fees, and protocol tools.
Last month the team and several contributors formed a tokenomics working group with the goal of refining this discussion and presenting a proposal to the entire community that could be implemented quickly. This proposal is the result of that discussion and reflects the input of many different community members.
We will solicit feedback from the community on this proposal with comments due by January 12. Comments should be submitted in the Discord #tokenomics-proposal channel. Based on that feedback, we will revise the proposal if needed and initiate a community vote to be conducted using a whitelisted Discord process by January 19.
If the proposal is approved, the team will work quickly to deploy these changes and begin testing, with the goal of conducting a hard fork by February 9.
Contributors to this proposal are: Madlentil, Rarecommons, AHawk, Fang, Harlequin, DougieWatts, Vorados, Kleinroy, GreyWolf, Dweab, and xMattyk. Thanks also to Enzodellasiglia for his input into the asymmetric locks.
Proposal Summary
- Change XHV and xUSD unlock times to an asymmetric model and eliminate priority options:
- Offshore (XHV to xUSD): 21 days
- Onshore (xUSD to XHV): 12 hours
2. Streamline conversion fees to a flat 0.5% for all conversions
3. Eliminate delta advantage between spot and MA price for XHV <-> xUSD conversions
4. Implement “change unlock” feature which allows funds used as change in a conversion transaction to unlock in the standard 10 blocks (20 minutes)
Rationale
Haven Protocol allows anyone to privately protect their wealth by minting xUSD and other private assets while burning XHV. The protocol was always intended to be used for private asset storage. It was not intended to be used primarily as a trading tool.
However, the protocol’s current tokenomics make it possible for large holders to use it as a trading tool by taking advantage of the protocol’s 24-hour Moving Average (MA) and low exchange liquidly for XHV. Many large holders have been able to use XHV’s recent volatility to their advantage and use the infinite liquidity of the Haven Vault to make frequent, repeated, and successful trades. This has resulted in additional supply inflation.
Since the launch of xUSD and xAssets in 2020, Haven Protocol has used a dynamic supply for XHV that fluctuates (inflating and deflating) based upon the minting and burning of assets on the network. However, it is clear that traders currently have a distinct advantage. Without new mechanisms in place, this could lead to additional inflation of XHV supply well beyond what might be considered safe or beneficial for the network. The result could be a loss of confidence, devaluation for XHV holders, and limited growth for the project in the future.
The Haven Protocol community has proposed a number of changes to address these issues. After discussion, we believe that creating an asymmetric unlock structure, in combination with eliminating the delta advantage for conversions, would significantly reduce the advantage for traders while incentivizing use of the protocol for private asset storage.
Asymmetric unlock times
There are several things clear to us as it relates to current usage of the protocol:
- There is almost zero use of the 6-hour unlock option
- A majority of users choose a 7-day unlock
- A large number of conversions using the 48-hour unlock option realize significant trading gains
- The current model incentivizes XHV price suppression as large holders use these tools for trading
Asymmetric unlock times would allow XHV to xUSD conversions (“offshore”) to be longer while making xUSD to XHV (“onshore”) conversions significantly shorter. This would provide a degree of additional security to the network by making it more costly (in both risk and time) to manipulate the system for profit.
A longer 21 day unlock for offshoring xUSD combined with a much faster 12-hour unlock for onshoring XHV strikes us as an appropriate balance to encourage xUSD use, disincentivize Haven Vault trading, and improve xUSD’s external peg.
The addition of the “change unlock” feature will also increase flexibility for users during the time their funds are locked.
Given other priority unlock options are used almost exclusively by traders, we believe there should be a limited choice of priorities for both onshore and offshore conversions. Most of this working group favor just a single option with low fees for each.
By eliminating priority options and their associated higher fees, we propose a single 0.5% fee on XHV <-> xUSD conversions, bringing these fees into line with xAsset conversions and making things simpler for users.
Delta advantage
The protocol’s 24-hour MA is critical to reducing exchange-based manipulation and mitigating against black swan events. However, the delta between spot price (as reported by Chainlink) and the MA provides a significant advantage to traders by allowing them to “see the future” and benefit from low XHV liquidity to successfully execute trades in the Haven Vault against the MA. Eliminating this advantage would require conversion transactions to be conducted at the XHV spot price whenever the MA would give an unfair benefit.
Here’s how it would work: if the XHV 24-hour MA gives a beneficial rate compared to the XHV spot price, the spot price would be used in a conversion transaction.
- Example: the price of XHV has just dropped from $6 to $4. A user decides to offshore 100 XHV. The MA remains at $6 while spot price drops to $4. In this case, the spot/MA delta is $2, and currently the user would receive 600 xUSD. By eliminating the delta advantage, the user would instead receive 400 xUSD from the transaction, similar to a trade made with spot price on an exchange.
Eliminating the delta advantage would allow for XHV’s price to remain volatile without that volatility directly causing additional inflation (from trading gains) or negatively impacting xUSD’s external peg on exchanges.
Conclusion
As the protocol evolves and grows, we view its tokenomics (primarily the structure of fees and unlock times) as an iterative part of Haven’s development. This is an opportunity to address two primary issues of concern to the community — advantage for traders and excessive inflation — and quickly deploy improvements. This structure is likely to change again over time as Haven grows in the future.
As a final note, we also believe that further growth of the xUSD and xAsset ecosystem is critical to addressing many of these issues. This includes improving XHV liquidity, launching new exchange pairs, integrating with DEXs (like THORChain), and creating new DeFi applications for xUSD.
We’d be happy to answer any questions or discuss the proposal in more detail in Discord. We’re looking forward to feedback from the Haven Protocol community as we all work to ensure the long-term growth and success of this innovative privacy project.
