KIP-35: Streamlined tokenomics

kip: 35
title: Streamlined tokenomics
author: @hazard
status: sophon review
category: protocol 
created: 2022-10-22
replaces: N/A
dependencies: N/A

Proposal

Align Rook’s tokenomics to reflect user and partner preferences by:

  • Replacing ROOK with wETH for bids and rebates, and
  • Streamlining the bid distribution to 90% user and 10% to the DAO Treasury.

Background and Rationale

Orderflow through the Rook Coordinator is by far the most important metric for the long-term sustainability of our ecosystem. Until Rook technology is processing a substantial volume of orderflow, we cannot call the project or its products a success in any way. The orderflow landscape is evolving rapidly, and the next 6-12 months will be crucial.

For a system like Rook, the technology must fit the exact needs and specifications of its integration partners. Today, it does not. For nearly everyone we talk to, our tokenomics presents a major barrier to integration. Potential partners are uncomfortable with ROOK as the bid token for a neutral auction, and they unanimously do not want to receive MEV rebates in ROOK, a sentiment shared by average users. They also do not like the distribution of the bid and the way it is split between so many different parties.

The key to our mission is orderflow, and so we must update our tokenomics to reflect the new information we have gathered from these potential partners, which is today limiting any impact we can have.

Proposal Detail

Bid wETH, not ROOK

We talk to users, searchers, researchers, and potential integration partners constantly, from the largest of the large firms down to individual user stories. They are all unanimous: they do not want us to bid ROOK, and they do not want to receive MEV rebates in ROOK.

We hear many variations of the same sets of concerns, ranging from worries about neutrality, not wanting to appear biased to customers, not wanting them or their users to handle a strange token, not wanting to hold ROOK in their inventory, and also not wanting to liquidate the ROOK, and so on. But using ROOK for bids or rebates is always a no-go for them, and the larger the amount of orderflow they handle, the more likely it is that the preferential use of ROOK in the system will absolutely kill the integration.

What they want us to do is to bid wETH, and what they want to receive is wETH or ETH. When we ask potential integration partners whether they would feel more comfortable if the token were wETH or ETH, their eyes light up. They smile again. “Oh, that would be awesome!” they say. This happens every. single. time. If we want to succeed, moving to wETH or ETH is a required change, full stop.

Untitled(3)

From a technical perspective, this is not a difficult change to make. The Coordinator is capable of handling any ERC20 as the bid token and redistributing the same as the MEV rebate. As part of this proposal, we have prepared upgrades to the relevant smart contracts that would not only allow the use of wETH for searchers to stake and bid with, but would allow users to claim either wETH or ETH, as desired. The work is already done and can be made live very rapidly.

Set the bid distribution to 90% user, 10% DAO

The other major concern they have is our complicated bid distribution, which carves some out for burning, some for the DAO treasury, some for stakers, and some for the user. There may also be some for the partner if they program part of the user distribution as a fee. The searcher is also taking some. This is all just far more complicated than it needs to be, and turns every conversation into a math exercise. We got this wrong — simplicity is best and always was.

We care about orderflow and helping users get better transactions. Today, this complex tokenomics is not helping anybody. We need to walk before we can run, and that means streamlining this tokenomics into something clean and easy to understand.

The proposal is for a simple 90/10 split between the user and the DAO Treasury. Why? The other categories, burn and user staking, have been completely ineffective and would continue to be.

  • Even under optimistic models, the total ROOK supply burned would be very minimal, especially if a “flywheel” was in full effect. As the value of a ROOK token increased, the effect of the burn would vanish.
  • The current APR for user staking is less than half of the deposit fee - there is no incentive to stake ROOK as a user and even after we begin to drive orderflow, this would not be certain to change. Market forces would compress the amount of ROOK returned to the user through staking. And the incentives do not work out. If the value of a ROOK token increased, the APR would decrease, leading stakers to unstake and liquidate. This would decrease the value of a ROOK token, leading APR to increase, leading others to buy and stake. Rinse and repeat. A volume-pegged MEV stablecoin.

Neither of these mechanisms drive orderflow through the Coordinator in any way. Neither of them contribute to increasing volume, and in both the added complexity and reduction of user reward, they in fact stand in the way of adoption. They should be removed from the bid distribution.

Where does that leave us?

If we make these changes, it allows us to make a very stark and simple proposition to users and potential partners: “Rook is a neutral system that runs on ETH. Use Rook, and you will automatically earn ETH. The system will always return 90% of the MEV to you.” This is a powerful message that we already know excites every user and partner we speak to.

The ROOK token will remain a crucial part of the DAO’s infrastructure, and its tokenomics will continue to evolve. As the governance token of the Rook DAO, it will grant staked tokenholders the ability to vote on key matters and decisions of the DAO, and on all proposals, such as this one. This is a solid starting point from which we can explore some of the new ideas and directions we have in mind for the token and its role in the ecosystem. In the short-term, orderflow is the most important thing, bar none.

Specification

  • Following ratification, deploy an updated Coordinator smart contract allow wETH staking and bidding, rather than ROOK.
  • Update all relevant associated software and documentation to reflect the change.
3 Likes

This proposal should be split into two kips—one about changing the coordinator bid token and another about cutting rook stakers out of revenue distribution. These are two entirely different suggested changes. I am taken aback by the latter not only because I am a Rook token holder, but it also disrupts incentives for the stewards of the protocol aka Rook holders.

This proposal should be split into two kips

Yeah that might be a good idea.

cutting rook stakers out of revenue distribution

Note the distributional change proposed doesn’t necessarily mean cutting Rook stakers out of the distribution. It does direct that revenue into the DAO Treasury. At that point, it can be used as decided by governance, which might include being distributed to stakers to incentivize stewardship.

But that would be a “DAO matter,” for the DAO to decide about what to do with its revenue. Whereas if it is packaged as part of the top-line tokenomics like it is now, then potential users and partners are forced to try and understand all of this distribution, when really all they want to care about is how much they are getting versus how much is going to the protocol (and from there, it’s up to the protocol where it goes). What we’ve learned is that what might be exciting for tokenholders is the opposite of what is exciting for users. And mixing those messages has been a problem.

Agreed the two points should be split, it’s easy to say the DAO receiving ROOK is equivalent to stakers receiving ROOK but this would only be true if there was a strong track record of the DAO returning treausry funds to token holders/stakers either via buybacks, dividends, etc. I don’t think this track record has been established yet.

On the WETH bids: currently keepers have to buy ROOK which users receive which most often than not ends up being sold I’m guessing. So having ROOK in this whole process is just an unnecessary complexity bringing no value to the token but making both the keeper and the user experience more difficult.

+1 to splitting the proposals and +1 to moving to WETH

It seems to me that it would be a huge mistake not to listen to very clear feedback that’s been provided by users and potential partners. As Hazard outlined orderflow is absolutely key here and if the ROOK tokenomics are a blocker to order flow then it is absolutely not serving its purpose. I am in full support.

My attention now turns to what can we do to ensure ROOK remains an engine for tokenholder value accrual in the ecosystem. Like many in the DAO I am a large tokenholder of ROOK, moreover many of ROOK’s early investors received ROOK token for their investment. What are you telling them to assure them their investment retains a strong value accrual mechanism?

One idea would be to continue to distribute some amount of protocol cash flows to stakers. Since participants will now bid in ETH, could we not begin to do ETH cash flow distributions? Whis imo would be a major value driver.

1 Like

What does this mean for the GMX integration? Will it delay it until 2023 or is it just around the corner?

We will be hosting a DAO wide call on this topic at 4PM EST in our Discord for those that would like to discuss with the author of this KIP.

discord.gg/rook

1 Like

This proposal has now been discussed in two open DAO forums - one Town Hall dedicated to the KIP, and a second time during the Nov. 1 Treasury Tuesday. Both meetings ended with soft consensus in support of the proposal in its current state. We’ll be posting Rookbase links soon.

UPDATE: The Rookbase recap for Treasury Tuesday is here

1 Like

So we are saying:

  • We don’t need any more ROOK as a way to win auctions, because people don’t want it
  • We are not gonna burn anymore ROOK, because the burning rate is ridiculous
  • Staking of ROOK is not working, because staking APR is less than the deposit fee

What is the utility of ROOK?
Just to continue to vote on governance proposals?

Excited for this KIP to go through, but maybe the distribution of the bid should consist of 3% buyback & burn of the Rook token. Hope the team doesn’t leave the Rook token with zero utility…

Staking and holding ROOK should be rewarded and this should be incorporated here.

90% back to user, 5% to stakers and 5 % to treasury (exact split could be voted on). If rook then catches volume, people would like to be part of the network, buy, hold and stake rook. Staking rewards also in wETH or ETH. Doesn’t that make sense and make ROOK really attractive?

Staking runs the risk of being deemed a security by the SEC. I think for the time being, investors will feel safer if we are letting the treasury get all 10%. (Worst case scenario maybe we do ROOK buybacks occasionally?)

That does not mean staking will not return IMO. I think testing the coordination game, staking, and rook tokenomics on mainnet has been EXTREMELY beneficial. It proves it resiliency, safety, and effectiveness.

Now well have a “Wen staking” meme to attract new community members as well.

This applies to the US only as far as I know, doesn’t it?

I think rewards attract more community members than memes. Both is perfect.

1 Like

Yes but im pretty sure the team is US based. Also idk if its true that rewards attract the biggest community. UNI is the biggest defi protocol yet has no rewards. Sushi had rewards at the same time but failed to grow bigger.

Even with buybacks, the question is whose going to do the buybacks? cause previously it was rookhog who did it, so whose going to do it now?