Dan Larimer’s New Vision for Token Liquidity

Dan Larimer is proposing new changes which could affect the way tokens are created. We look into the detail and what they might mean.

By Bywire News
By Bywire News
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LONDON (Bywire News) - Is it a DAC or DAO? Whichever way you choose to call it, Dan Larimer’s proposals for token liquidity have got plenty of people talking. But how will it actually work? And is this something the community wants?

Larimer coined the phrase decentralised autonomous company (DAC) back in 2014. Each of these companies has at least one token associated with it and a governance process to manage those tokens. Today, most people refer to these as decentralised autonomous organisations (DAOs) and they are crucial to the future of EOS.

He’s talked of a vision in which EOS becomes DAO of DAOs based on the creation of multiple EdenOS communities each with their own token allocated by weekly meetings via Zoom. Each of these tokens will be connected to the EOS ecosystem. The more people who participate the more it will be necessary to stake EOS and the more it will fuel demand. However, the way in which tokens are created, he believes, needs to change.

“Since the beginning (EOS) has supported multiple contracts,” he said in an online discussion.

“However, only the owner of the contract can issue any other type of tokens which would be the EOS block producers. What I’m proposing is that we create a system to allow people to leverage that functionality, by allocating premium symbol names… and when you allocate symbol names you can have your token managed by the EOSIO token contracts.”

This, he believes, will have considerable value in that it will allow tokens to be compatible with other tokens on EOSIO and to be upgraded with new features as and when they are able such as Pay to Keys and contract pays allowing users to transfer tokens without buying RAM.

Under the current system, he says, projects have deployed a new contract for every token they want to create. The problem is this creates a security issue and makes it much more difficult for block explorers to discover the available tokens. It is difficult to combine an immutable monetary policy and governance-controlled contract upgrades. Even if a developer divided their code into two contracts and made one of the contracts immutable, there would still be no standardized way to express and compare the issuance constraints across various tokens.

The system would be open to fraud, but even without malicious behaviour, a bug could corrupt the token issuance algorithm and violate inflation variants.

To solve this problem, he is proposing an update to the eosio.token contract maintained by the EOS block producers along with a new contract eosio.symbol which would auction off the token names. The contract would sell off token SYMBOL names in a similar manner to EOS premium names.

Three-letter symbols would be sold at a maximum of one per week. There may be a number of three-letter symbols under auction at any one time but only one will have the highest price. Bidders must maintain their position as having the highest price for seven days before the symbol name is allocated.

All others will wait for the highest-priced symbol to close before getting their turn to be the highest. Four letter symbols would be sold every three days while five letter symbols would be sold once a day. Releasing them in this schedule should theoretically stop someone from just buying everything up. It doesn’t matter how fast you are you can’t get a monopoly on anything.

Concern in the community has focused on the price, which some believe adds another cost and could be too high. With this process, users will no longer need to rent CPU/NET or buy RAM in order to use any tokens. Instead, they will pay a minimum fee on all transactions of any token which would be set around 100 EOS. This, he believes, would be just high enough to prevent frivolous tokens from being created while still being low enough to outdo other blockchains.

The bidding process will also include money back for each previous bidder. Each consecutive bidder will have to raise the price by 10% with the previous bidder receiving 38.2% (Phi Ratio) of the increase. This will encourage people to get involved earlier.

As for the other 60%, that is still up in the air. Responding to questions online, Larimer suggested two options.

1. The remaining tokens are burned.

2. They go to fund the liquidity in that token relevant to EOS. This would offer more value. Even though users are bidding a high price, they are getting liquidity.

All tokens need token liquidity. Having an official EOS contract for creating and funding an automated market maker would allow the EOS network to capture fees and free projects using tokens from any liquidity associated with their own market maker. Having the market maker built into the eosio.token contract will allow the token contract to easily convert fees from other tokens into EOS. Transfer fees are used to incentivise participants to provide liquidity to market makers above and beyond a trading fee.

The ability to add tokens to one side of a relay will also give DACs the ability to subsidise liquidity in a cost-effective manner. This would create a significant differentiator over other network provided liquidity implementations in which the network owns the tokens within the pools. The net result should be an amplification of the liquidity provided.

Using a traditional approach, a DAC would auction off tokens to fund a market maker. However, this new approach will give an incentive to market participants who provide the liquidity minimising downside risk and preventing one DAC from having a treasury stolen or mismanaged. It could also reduce the chances of the DAC being considered a collective investment scheme because they don’t have any assets under management. That’s no small bonus with the SEC said to be eying up the crypto world closely.

He likens it to the difference between renting and buying:

“Suppose you want to build a big house (relay) and you have an income of $1,000 per month to purchase building resources,” he writes. “In this case, you must live in a small house and build it over time. Now suppose you took that same $1,000 per month and used it to rent an existing house. Free market competition would lower the cost of the housing allowing you to rent the biggest possible house for the money. Now you could afford to live in a house worth hundreds of thousands of dollars immediately. More importantly, you are not responsible for maintaining the house nor insuring it against fires.”

The same is true with this. A DAC that buys inequity in their market maker takes a long time to build liquidity, but a DAC which pays the same sum to rent the liquidity can have much more liquidity available immediately.

These proposals are still in the developmental phase. One of the key reasons why they are holding consultations with people online is that they are keen to get feedback from the community. It is crucial, from their point of view that they find a way to build consensus on anything they introduce. The days of imposing a system on the community, whether they like it or not, are hopefully at least, behind us.

(Written by Tom Cropper, edited by Klaudia Fior)

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