1) Suprised that no-one has pointed out that the two-token model pioneered by @gnosisPM, and adopted by many other projects (e.g. @SpankChain) is broken and its stability is extremely susceptible to external market volatility
2) The token system is based on $GNO - the primary ICO'd token that is locked up to generate $OWL, a token used to pay fees. Gnosis claims $OWL to be stable as it is pegged to $1. Essentially, $GNO is a fee credit generation machine.
3) but is $OWL really a "stablecoin" able to retain a value of $1? If we take a deeper look at the pegging mechanics, the only lever used to define a value for $OWL is its acceptance for $1 in fees in the Gnosis ecosystem.
4) This lever, does not necessarily dictate that the value of 1 $OWL should be $1 USD, but instead defines a maximum price for the $OWL token. There is no reason for someone to pay more than $1 for an $OWL token as there is no way for someone to derive more than $1 in value.
5) On the flip side, what prevents the value of $OWL on the open market from dropping below $1? There is no collateralization. Instead Gnosis is trying to use an algorithmic central bank in order to manipulate the monetary supply to retain the price of $OWL
6) Intense criticism has been seen by Basis for using a similar approach. Unfortunately, Gnosis's approach to maintaining a peg is even poorer. In their system, monetary supply does not shrink in direct response to price, but instead to fees collected by the system.
7) The idea is that if price starts to fall, there is much more supply than demand of $OWL. This is reflected by fewer total fees collected by the system, and as a direct response, the system will generate less $OWL to $GNO holders to reach equillibrium
8) This simply would not hold up in a real world environment where it is completely normal for token prices to see double digit intraday price drops. Let's play out a scenario where we see the system collapse.
9) Imagine a point in time where the Gnosis network processes 50,000 OWL in network fees a month, and thus has 1,000,000 OWL in existance. This is based on the emission rate algorithmically adjusting to maintain the total OWL supply at 20x monthly average OWL use.
10) The next month, the Gnosis platform suffers a 30% drop in activity, and thus the network takes 30% less $OWL in fees. There are now 965,000 $OWL in the supply, but only demand for 35,000 OWL a month.
11) Monetary supply is outsized compared to monetary demand. The monthly velocity multiple has increased from 20 to 27.5, a 38% increase.
12) No more $OWL will be emitted to $GNO holders in order for equilibrium to be met. If network activity stays exactly the same, it will take 8 months of 0 $OWL emission for the 20x ratio to be met.
13) 0 $OWL emissions for 8 months is obviously not good for $GNO token holders. The $GNO buyback mechanism still exists, but its effect in the context of overall $GNO liquidity is minimal. A subsequent large sell-off of $GNO will take place.
14) Given the high discount rates in the crypto space, $GNO price will drop much further than 30%. This is compounded by the fact that short-term activity declines signal longer-term activity declines, which would have investors fear for an even longer period of "rebalancing"
15) We should also consider the fact that even in a stable network, it's unlikely $OWL will maintain a value of $1, and will instead trade within a range discounted from $1. The same market mechanics are what cause gift cards to sell at a rate discounted from their stated worth.
16) There is without a doubt that many of the "stakers" and investors of $GNO will generate more $OWL than they would intend to use themselves. Many $GNO investors might not even be users of the Gnosis platform.
17) This segment of the ecosystem will more likely than not be willing to sell their $OWL on the open market for less than the "pegged" $1 valuation.
18) Gnosis claims that $OWL can be used as collateral in prediction markets, given its expected stable value. If $OWL prices collapse, then so well the markets collateralized in $OWL.
19) The bright side of all of this is that Gnosis has not built the platform to be dependant on $GNO or $WIZ. As described, it can function perfectly fine without these tokens. So even if token prices collapse, the markets not made in these coins will remain viable.
20) To summarize, sudden decreases in Gnosis network activity can result in a corresponding catastrophic effect on the network token system. The current tokenomic model pioneered by Gnosis and adopted by others should be reconsidered, taking into account potential failures.
@koeppelmann what is the advantage of creating a convoluted two token system where the main token generates essentially discount tokens (discounts subject to market demand), as opposed to making the main token a discount token ala BNB? Both would grow parallel to network usage
The simpler one token model would better withstand short term network activity issues and not be subject to the death spiral
