In an effort to kickstart a conversation about JTO utility and tokenomics, I put together a research doc that I hope will help frame some of the possible opportunities and decisions the DAO can make going forward regarding JTO.
I hope this thread can serve as a public forum for discussing tokenomics, which has already begun to percolate naturally, and look forward to seeing how the community believes the DAO should proceed.
Great article Andrew, one of the best overviews of fee utilisation for demand side value accrual Iâve seen and some really excellent ideas for where this can go.
Iâm relatively new here, but Iâve been in the DAO trenches for years now and Iâve been blown away by how strong a position that Jito DAO is in. Itâs one of the most stable and impressive economic value generating systems Iâve seen (anywhere). We have not one, but multiple mechanisms that generate real REV feeding the DAO and generating economic alignment across validators and stakers. Itâs rare that you get a genuinely sustainable fee generating system in crypto (full stop), but even more so one that doesnât extract that value into a centralised entity where itâs ruthlessly dumped into the market. Super impressive and itâs exciting that we can have the conversation in public about what we do with that value.
I think thereâs real merit to all of the mechanisms youâve outlined. The reality is that, yes no one really knows what theyâre doing, but thatâs both a function of a) this all being totally new frontier crypto economics (so itâs understandable) b) the volatility in crypto makes it incredibly difficult to know whether these things work or not. In bull markets even blindly stupid mechanisms can work (or at least look like they are) and in bear markets even good mechanisms flop.
A few thoughts on a few of the mechanisms discussed that immediately come to mind. Buy backs are the thing to do in bear markets, not bull markets. Iâve seen several buy back strategies effectively buy the top of their own token and simply provide quick exit liquidity for opportunist degens and arbitrageurs. Hard to get right especially in a decentralised fashion since you essentially have to telegraph the trade into the market in advance. As you said though, some kind of programatic âsinkâ for the token is definitely something to explore.
The prospect of a âreal yieldâ liquidity mining system is incredibly exciting. Generally LM schemes are hyper inflationary and hard to balance right without over paying since the yield is generally endogenous collateral, which can be profitable but can eat you alive on impermanent loss so no one really knows how to price it and consequently most will dump. So a real yield version of that, and potentially a mix of that with JTO could be serious rocket fuel for boosting JitoSOL liquidity. Which does feel like it should be a high priority spend of DAO capital. As you know I like the gauge idea, mainly because itâs a governance minimised DAO action that can drive buy-side demand into JTO if executed right. Iâve never really thought the veTOKEN mechanism is an optimum though, it needs some iteration.
Iâm with you on skepticism around standard ecosystem grants stuff, theyâre a nightmare to administer and attracts grifters like moths to the flame. Having said that, one of the things Iâve always wanted to see is a DAO do is be âpro-activeâ and actively find ways of pursuing strong opportunities. As in, not waiting for people to hawk around the grant tap, but empowering the DAO to go and attack good opportunities and bring in high quality builders to the ecosystem. Done right, a DAO is a way to activate the kind of human capital that doesnât necessarily want long term salaried work (or perhaps needs some persuading to jump from somewhere else).
Your buy back and barter idea definitely falls into âpro-activeâ DAO action, I love it honestly. One of the true DAO dreams in my mind was that weâd have DAO-to-DAO deals go down, kind of like feudal kings doing deals for weapons and riches. This is truly in the âno one knows what theyâre doingâ realm, but itâs definitely on my would love to see it happen list.
On POL, I do think DAOs should be liquidity providers of last resort (DAOs donât care if they eat impermanent loss) and they most certainly should be bullish on their own token and as youâve said itâs revenue generating. Definitely worth exploring.
Some kind of DAO holdings in stable / non protocol assets is a good idea, thatâs what unlocks the deep bear market buyback possibility. Generally, also some kind of surplus reserve is a good idea before doing distributions and yield boosting exercises. On that front, itâs worth measuring up the impact of the action. If you distribute $10m, to 10k people they get $1k each, but $10m well spent could be an ecosystem game changer. Also a matter of timing, in IRL trad world switching on dividends too early can kill you and as in the previous example you can throw out tonnes of money without making anyone seriously happy. I think optimising for growth at this early stage of the protocol is more of an optimum, but thatâs just me.
What youâve effectively landed on at the end is a framework for a kind of âmeta-mechanismâ that invites the DAO to be able to play a number of those potential strategies. Potentially switching between modes at different phases of the protocol lifecycle, or even market phases e.g. buy backs in a bear, yield boosting when running for growth, liquidity incentives when we want to minimise JitoSOL slippage and attract new asset pairs etc.
As a side note, iâm one of the people that still cares about decentralisation in the space so Iâd have a preference for these mechanisms to be actually be mechanisms and maintain the governance minimised efficient machine vibe that Jito has already. So worth noting that done properly some investment in the âmetaâ aspect of this would be required e.g. augmenting the governance to be able to switch between mechanisms for example and building the mechanisms themselves (if they donât already exist).
Super interested to hear other peopleâs thoughts!
These are my totally independent thoughts and opinions produced without consultation with anyone.
Andrew deserves a ton of credit for putting in the work to lay out all these options for how the fees being generated could be used. His post should be turned into a treatise for future reference by any project.
I firmly believe that, in this case, the simplest answer is the best answer: the TipRouter fees should primarily be used to buy and burn JTO.
The real question is how much of the fees should be used for this purpose, vs for some other purpose. Or to rephrase â what alternative provides so much value to the Jito Network and JTO holders that it warrants diverting funds from buying and burning JTO.
Thatâs a very high bar! Dollar-for-dollar, buying and burning JTO provides the most direct and sustained support for the strength of JTO, which is central to the governance and decentralization of the Jito Network.
Imagine every other option framed as follows: âShould the DAO sell millions of its JTO in the open market to finance [insert alternative here]?â Personally, I donât think the community would support the idea of market selling JTO to fund any of the alternatives (with the exception of supporting the restaking business).
If you wouldnât pay for something by selling JTO, you shouldnât pay for it by diverting funds that could be used to buy (and burn) JTO. Itâs two sides of the same coin, no pun intended.
With that said, I also firmly believe big decision are best made incrementally, so the consequences can be observed and that additional information can be used to help improve implementation details over time.
As such, I have drafted a JIP (link below) that proposes using half of the TipRouterâs fees (1.5% of the 3%) to buy and burn JTO. That would still leave 1.5% to potentially be used for some other purpose, like the various alternatives outlined in Andrewâs post. I think when the community sees the impact of using fees for the buy and burn program, it will be obvious how high the bar is for judging any other alternative, and ultimately I believe the only other purpose that will meet this standard is further supporting the restaking business (which is already being supported with 0.3% of the 3%; perhaps that should be increased).
As is often said, action produces information. Debate and discussion is important, and I donât want to appear to be cutting off debate by formally submitting my proposal as a JIP. But I want to motivate debate to action, so I have submitted a draft JIP and welcome input on the implementation details. If after reading about potential alternatives, others want to submit their own draft JIP advocating for an alternative, then hopefully we can focus our attention on the couple of best options and move forward to a vote expeditiously. Accelerate
Chapeau bas andrewt for thatâ wellâ actual research.
Two quick questions:
"I donât think the Jito DAO has the same structural need for an insurance fund as the stablecoin projects, but thereâs multiple circumstances under which having a reasonably big pot of stables in the DAO treasury would be useful.â
In the context of Jito, do you have any specific scenarios in mind?
âThese types of alignment deals are arguably the direction the space is headed. Both Arbitrum and ZKsync are spending lots of tokens on exclusivity deals with DeFi projects.â
What initiatives do you exactly refer to?
Hello Jito Community & thank you Andrew for kicking off this conversation.
My name is Marlowe, Iâm Head of Onchain Integrations at M^0 Labs. Weâre currently in the process of deploying our infrastructure to Solana and are looking for the best ways to participate in the ecosystem and build with the community.
As Jito has begun the commentary process for how to manage the fee switch and tip distribution and create utility and value for JTO, we at M^0 wanted to present what we believe the optimal path for fee distribution is: to recycle it and to reward holders of the JTO governance token in the form of a native stablecoin for the Jito ecosystem. The stable would be minted from fees and thereafter earn a proxy for the risk free rate, making it attractive to retain and/or utilize in DeFi to further enhance the ecosystem.
About M^0
M^0 is a platform allowing builders and developers easily embed and control their own stablecoins, called $M-extensions, into their applications.
These extensions are built atop a permissionless, immutable wholesale stablecoin called $M that is (currently) exclusively backed by short term t-bills (0-180 day maturity). The M^0 protocol is capable of passing protocol yield to governance-approved parties, as a function of the underlying collateral yield and governance parameter, currently at a rate of 4.15 % APY.
High-Level Proposal
Building on top of this, Jito could quickly deploy a robust, custom, purpose-built stablecoin (referred hereafter as jitoUSD) to absorb the distribution from fees and tips and provide value and consistent yield to JTO holders.
Our guideposts are that the process is i). beneficial to JTO holders and ii). recycles value into the ecosystem.
Our high-level proposal is as follows:
jitoUSD would be a fully functional stablecoin on Solana that would accrue the full Earner Rate from t-bills (currently 4.15%). Working with the Jito team, we would drive integrations for jitoUSD to Solana venues where we can unlock additional utility â as margin collateral, as deposits to lending markets, for looping and leverage strategies. Alternatively jitoUSD can function as a store of value for holders, simply accruing the base rate.
If the community finds this to be of interest, we will proceed to a full proposal and technical scope. Please find additional information on M^0 below:
One further thought coming out of the call yesterday - there was this idea that Jito is âtoo youngâ to start a programatic buy program for JTO. Essentially the idea was that this use of fees being earned is something that older, more mature projects do when they ârun out ofâ ways of reinvesting fees to continue growing the project.
I think this is a fundamentally flawed way of looking at the situation. By way of example, take Uniswap. They launched the UNI token in Sept. 2020. That token peaked in May 2021, and has been down only ever since (currently about 85% below that peak 4.5 years later, theyâve never even gotten to 50% of their prior value in the past few years). Uniswap the product is awesome and constantly improving, but UNI the token has been a failure thus far IMO.
When UNI launched, there were many attempts to turn on a âfee switchâ so that value could start accruing to the UNI token. Time and again, that was shot down, likely for perceived legal reasons (though no reason was ever given).
I donât believe that Uniswap the product/project would be any less awesome if UNI tokenholders did end up implementing a fee switch 2/3/4 years ago. The fee switch and the awesome things Uniswap shipped are not connected to one another. I.e., Uniswap V4 would not have been inferior, nor taken longer, if the fee switch were flipped years ago. Uniswap X and Unichain would not have been slowed down by the implementation of the fee switch.
Uniswap was more than able to fund all of the awesome things it wanted to do with the funds it had (at Uniswap Labs), and the fee switch was completely irrelevant. Iâm fairly certain that with legal clarity, UNI tokenholders would absolutely have voted to implement the fee switch many years ago, UNIâs price would be much much higher, and the Uniswap products would not be any worse for it. In fact, I would venture to say that the tanking token price probably hurt Uniswap unnecessarily, as it likely affected their ability to recruit/retain top talent (since comp packages often include token grants).
So bringing this all home, if thereâs some awesome project(s) Jito Labs (or others) want to do, and Jito Labs doesnât really have the funds to do it, I completely understand and support not implementing a programmatic buy program at this time and having the DAO pick up the project(s). I think the reality is Jito Labs has plenty of funding to keep shipping awesome stuff, and thereâs no real plan for what to do with fees accumulating in the DAO. The one exception I believe is the restaking product, which I believe could use an increase in fees to support continued growth, and I have another JIP in the works on that topic, but that doesnât interfere with this JIP at all (since this only affects 1% of the 3% of fees).
Do we really need to knee cap JTO the token for the next few years, like Uniswap knee capped UNI by not implementing some sort of fee switch, just because the project is âtoo youngâ? As I mentioned yesterday, there are a number of benefits to having a strong token, including things like recruitment, marketing/PR, ânerd snipingâ etc all easier with a strong token. Even the DAO itself would have more resources available to it for âspecial projectsâ, given how much JTO it holds. As I mentioned yesterday, having a programmatic buyer constantly hitting the figurative âbuyâ button doesnât guarantee a strong token, but itâs certainly better than not having such a buyer, and just the message that value does accrue to JTO is invaluable IMO - just ask UNI holders
Thank you, Andrew, for putting together such a detailed document. Your breakdown of Jitoâs current utility and revenue mechanisms, along with the exploration of recycling versus rewards strategies, provides a great starting point for community discussions. Your framing of the choice between ârecycling value within the network ecosystemâ and ârewarding value to ecosystem participantsâ is particularly interesting.
We really like the JitoSOL subsidy strategy. It seems like the most straightforward and effective approach within the ârewards and recycleâ framework. Subsidising JitoSOL yields could help maintain its leading 45% market share in Solanaâs liquid staking space, especially, like you mentioned, with competition from the likes of jupSOL. Higher yields will naturally attract more stakers, boosting protocol revenue and strengthening the DAOâs treasury. It would be helpful to see thoughts from you and others experienced in onchain financial modelling on how to frame an optimal yield subsidy. One option could be a dynamic adjustment based on the amount of SOL staked - this could create a more efficient system.
Another idea we thought was great was the Real Yield Gauges - incentives based on real yield that are consistently given out without inflating token supply can be thought of as a form of a âmarketing budgetâ, and can make user retention stickier. This could also be used to incentivize key user actions that align closely with the DAOâs priorities, similar to the approach taken by Aaveâs Merit program, one of the rare examples in DeFi where incentives are based on real revenue.
Weâd love to hear your perspective on the essential avenues and functions that should be prioritised for the DAO at this stage. Aligning on key priorities will provide a clearer understanding of which strategies are most suitable.
At Areta, we focus on sustaining a growing ecosystem while allocating resources wisely to ensure every token spent generates real value. Protocols like JitoSOL and TipRouter offer unique opportunities for builders, and we believe supporting top-quality teams early with targeted, consistent funding can drive exponential value as these protocols mature. With the network still in its early days, preparing now for these initiatives will lay the groundwork for long-term success.
This is a solid start to the discussion, and weâre excited to hear more perspectives soon.
The UNI ecosystem is an interesting one. I wouldnât call that token a failure tbh, itâs a kind of marvel to me that it does so well. It currently sits at a $7bn valuation (it was $20bn in December), despite having next to no material control over the protocol at all (apart from the un-switched fee switch). The DAO wasnât consulted about Unichain at all (they had no idea it was happening in fact) and Uniswap Labs decided to extract hundreds of millions of dollars from front end fees from the economy instead reflowing that economic bandwidth back into the ecosystem. If anything itâs a text book principle agent problem, where token holders are actively sidelined at the expense of a centralised entity. Itâs a useful example mainly because weâre in a very different scenario here.
I think the âtoo earlyâ point is rational. There are plenty of examples of entities paying out dividends or executing buy backs when there were vastly better uses of the money. My current favourite example is Thames Water in the U.K (since my water bill has trebled in 3 years) they paid out ÂŁ3bn in dividends instead of investing in their infrastructure and are now in ÂŁ20bn of debt and begging for a government bailout. Kodak, Blackberry and Radio Shack all paid out dividends and did buyback schemes to the tune of billions instead of adapting to the market context and died.
Having said that, totally agree with your point that crypto systems are entirely different and it is possible here to have programmatic mechanisms that are tied to the economic bandwidth and REV of the system. And in fact unlike the systems Iâve mentioned, the financials and performance of the system are transparent and open.
I take your point âUNI was differentâ - I wasnât implying UNI and JTO would be the same, I was using UNI as an example of the price dynamics when an ecosystem has zero value accrual to a token. There are many such examples, but I thought UNI was a good one because it would have been so simple and easy to have value accrue to the token (fee switch), and I donât think it would not have affected Uniswap the product(s)â development at all.
To your many examples of companies paying dividends/doing buybacks and dying - there are countless more examples of companies not paying dividends/not doing buybacks and dying. For many/most of the examples you gave, the dividends and buybacks did not cause the eventual death. Kodak didnât die because it paid dividends, it died because of the Innovatorâs Dilemma - i.e., itâs very hard for incumbents to disrupt themselves, NOT because they donât have the money to disrupt themselves (they often have plenty), but because the social institution is not suited for disrupting itself. Kodak holding more cash in its Treasury would not have saved Kodak.
Similarly, as I said in my prior post, nothing about implementing the proposed programatic buy-and-burn would make Jitoâs the projectâs success less likely. Thereâs nothing Jito may want to do that it is incapable of doing if the programatic buying program is implemented. On the contrary, as I said, the positive impact from this program on the price of JTO could have numerous helpful impacts on Jito the project (see prior post).
One final request/plea - I still havenât seen anyone draft an alternative JIP to the one I put forward. If folks feel strongly about an alternative, please carpe diem and put forward a proposal. The worst alternative in my opinion is just âdo nothingâ - thatâs where the Kodak analogy really comes into play.