DeFiChain Tokenomics Discussion The DeFiChain Community 21 June 2025 1 Introduction Note to readers: this is a document in progress, and may not be the final version. Right now, DeFiChain’s main use case is enabling a decentralised real-world asset (RWA) system. With the blockchain, anyone can create RWAs any time, without limits. However, the RWA system operates with huge amounts of algorithmic, unbacked tokens, which contributes to a gap between the tokens’ intended and actual prices. In July 2024, a proposal was approved to restart the system with 10% of its original liquidity, with a clear plan to release the remaining liquidity back to its owners once the system demonstrates and maintains its health based on objective criteria such as the price of dUSD and the algorithmic ratio. The system underwent this change in November 2024, over six months since the restart occurred. The proposal can be found here: https://www.reddit.com/r/defiblockchain/comments/1d2e3em/repeg_ and_recollateralize_the_dtoken_system_as Considering the limits of the past mechanisms that have been approved, including the restart proposal, DeFiChain should implement a change in tokenomics by locking 99.99% of dUSD and tokenised asset liquidity , which will offer the community an opportunity to make our RWA system thrive, and revamp the mechanisms present in the system. 1 2 Mechanisms To clarify the discussed changes to DeFiChain and its features, this section includes the mechanisms DeFiChain already has, in addition to the proposed changes. 2.1 Stability Fund One major feature in the new system is the Stability Fund (abbreviated SF). The Stability Fund is a contract that assists in keeping dUSD close to $ 1 by providing arbitrage opportunities. Users can deposit stablecoins to receive dUSD or withdraw from the fund’s available stablecoins by providing dUSD. The stablecoin to be used is still to be determined. A 3% fee will be charged to users of the Stability Fund. For example, a user depositing $ 100 in stablecoins will receive 97 dUSD, and a user depositing 100 dUSD will receive $ 97 in stablecoins, if there is enough supply. This limits the dUSD to a range of approximately 3% from its par value of $ 1. If the dUSD is below $ 0.97, users can purchase 1 dUSD for less than $ 0.97 on the DEX and sell it for $ 0.97 with the Stability Fund. On the other hand, if the dUSD is above $ 1.03, users can purchase 1 dUSD with $ 1.03 using the Stability Fund and sell it on the DEX. The transaction fee charged by the Stability Fund is not fixed, it is an attribute that can be changed through future governance proposals (DFIPs). 2.2 Future Swap After these changes, the system will ensure no net algorithmic dUSD is produced. dUSD burned must always be greater than or equal to dUSD minted, so as long as the future swap maintains this condition, it can create new dUSD. Consider the following scenario. Jack and Jill both use the future swap to purchase shares of ABC company on DeFiChain. A share of ABC is currently valued at $ 100, so with the 5% FS fee, Jack spends 105 dUSD on 1 dABC, while Jill burns 420 dUSD to purchase 4 dABC. Later on, ABC appreciates to $ 200 and Jill wants to sell all of her dABC via FS. Her sale of 4 dABC would produce 4 · 200 · 95% = 760 dUSD. In this situation, the sum of dUSD burned is 105 + 420 = 525, which is less than the 760 dUSD minted, so her FS transaction will not execute. However, when Jack tries to sell his 1 dABC, producing 190 dUSD, his transaction will succeed because it is less than 525 dUSD, and now burned dUSD exceeds minted dUSD by 335. 2 Jill decides to wait a year, with ABC remaining at the same price of $ 200. Over the last year, the system collected 500 dUSD in fees and interest, which means that dUSD burned exceeds dUSD minted by 835. Now, Jill can use the FS to sell her dABC, because her sale of 4 dABC will only mint 760 dUSD. Besides this new change, the fee to use the future swap remains the same at 5%. The FS will also keep its pool size limitation, which states that the maximum number of tokens that can be swapped in a FS block is 10% of the number of tokens in the respective liquidity pool, in order to minimise the impact of loopholes with the FS. To quote this Reddit proposal: ( https://www.reddit.com/r/defiblockchain/comments/ylcc69/dfip_ limit_futureswap_volume/ ) Lets consider a pool like GME-DUSD with 2mio in liquidity. so 1mio $ worth of dGME and 1 mio DUSD. If someone would now swap 100 mio DUSD into GME, they would not move the market in any way, but this user now has a 100 mio long position ”against” the chain. This was clearly not to stabilize the DEX, but to prevent slipage and get a great entry price. Now GME pumps ”only” 100% ... and they swap the GME back to 200 mio DUSD. So they made 100 mio DUSD profit, created out of the chain. This also creates a massive amount of algo DUSD which again hurts the dToken system. If we limit the usage of FutureSwap to 10% of the average liquidity of this token in the corresponding DEX pool, this would be far less of a problem. In th example above, they could only swap 100k DUSD per week Overall, DeFiChain should not rely on the future swap. As one community member stated, it should be kept as ”more of a theoretical backstop rather than something that needs to be triggered regularly.” 2.3 Dynamic Interest Dynamic interest has been approved since June 2022, but has not yet been implemented. (See https://github.com/DeFiCh/dfips/issues/166 for more details on the proposal.) Conditions to activate dynamic interest have also already been established. (See https://www.reddit.com/r/defiblockchain/comments/13qm2ia/ dfip_activation_trigger_for_dynamic_interest_rates/ .) By effectively locking all tokens, the supply and demand curve for dUSD and the other RWA tokens are reset, decreasing the algorithmic ratio to a reasonable level, which are the two factors needed to activate dynamic interest. By the time the Stability Fund contract is activated, dynamic interest rates should also be implemented. Additionally, the stablecoin chosen for the 3 Stability Fund should match the reference pool for dynamic interest, i.e., if users deposit cUSDC to mint dUSD, the reference price for dynamic interest is dUSD/cUSDC. 2.4 Vaults High premiums on dUSD and tokenised assets showed DeFiChain that a 5% base interest rate was too high. To counteract this, the base interest rate will be reduced from 5% to 0.5%, encouraging investors to borrow more, increasing the supply which helps balance demand. 2.5 Burns Currently, the following features exist to burn tokens in the RWA system: • DEX Fee There is a 0.1% trading fee on all dUSD pools to burn dUSD. Post-implementation, the fee will first be redirected to the developer (up to a certain amount of dUSD). Afterward, the fee will burn dUSD, which will help reduce the algorithmic ratio. • Buy and Burn Bot (BBB) The BBB receives a portion of the block rewards which is used to purchase dUSD and burn it. Upon approval of these changes, the BBB will be sunset and its DFI saved for future activities, as the dUSD it burns will not make much of a difference after implementation. • The Stabilisation Fee Currently, there is a dynamic fee on gateway pools for dUSD, which is described in the restart proposal. https://www.reddit.com/r/defiblockchain/comments/1cvjzsi/ measures_as_deterministic_and_effective_as/ The Stabilisation Fee will not be present after the implementation of these changes. 2.6 Summary Overall, the usage of each mechanism intends to achieve two goals: it regulates the price of dUSD and collect fees, reducing the algorithmic ratio. The Stability Fund regulates the price of dUSD by allowing users to sell the token at $ 0.97 and buy at $ 1.03. The spread of six cents is the fee that it collects. The future swap regulates the price of tokenised assets by offering liquidity at ± 5% of the oracle price of the asset, and the 10% spread aims to generate 4 profit for the ecosystem. Dynamic interest and vaults work together to regulate the price of dUSD by reducing the interest rate when dUSD increases, making borrowing and selling more attractive, while increasing the interest rate when dUSD decreases, encouraging people to buy and repay their dUSD. The interest charged on loans goes toward reducing the algorithmic ratio. Finally, by streamlining the fees present in the ecosystem, users can more easily understand how DeFiChain makes revenue and redistributes it to supporters. 3 Unlocking Just as there is a plan to lock liquidity, there is a plan to unlock liquidity. Previous holders must be fully re-compensated for their investment as the system becomes healthy again. 3.1 Linear Unlock The linear unlock plan was proposed in the restart and will be used again here. The locked liquidity will be divided into 100 equal parts, or tranches. Assuming the system size is 20,000,000 dUSD, and we keep 0.01% which is 2,000 dUSD, there will be 20 , 000 , 000 − 2 , 000 100 = 199 , 980 dUSD per tranche. 3.2 Criteria for Unlocks The criteria for the unlocking of the tranches is similar to those proposed in the restart proposal. In the new system, dUSD cannot have an algorithmic ratio that is greater than 0% excluding the effect of liquidity unlocks. Therefore, it makes sense to only permit liquidity unlocks when the dUSD algorithmic ratio stays below 0% to prevent any chance of unbacking. The unlock should not be a supply shock event to DeFiChain. Unlocks should occur only if the amount being unlocked is less than or equal to 4% of the total supply. To release the tranche, the conditions are manually reviewed, so no hard fork is required. There will be at least 72 hours (8,640 blocks) between unlocks. The buffer ensures that too much liquidity isn’t released at once and that there is time to fix potential issues between unlocks. In the long term, how much the dUSD supply changes would not matter as long as the algorithmic ratio does not rise above 0% because the system’s mechanisms will protect dUSD from depegging. If dUSD fell under $ 0.97, traders would first use the Stability Fund to profit, which would push dUSD 5 back toward $ 0.97. If stablecoin supply is fully consumed, DeFiChain can still rely on dynamic interest rates, because it will increase the interest rate which pushes users to buy back and repay their dUSD. Every dUSD is guaranteed by a vault or the Stability Fund, which will eventually bring the price of dUSD back to $ 1. Besides keeping the algorithmic ratio under 0%, DeFiChain needs to keep the price of dUSD from changing too much during unlocks. Users may be concerned by large dUSD price drops, even if they are temporary. Limiting an unlock until the tranche is smaller than 4% of the system’s size will help reduce its impact. Consider the following scenario. 4% of dUSD’s total supply is unlocked, 5% of the original dUSD supply is in the LP, and 5% of the newly unlocked dUSD are sold immediately, without any buyers coming in. The 5% of supply in the LP assumption comes from observing past data and considering the current situation. Through the second half of 2023, there was around 10 million dUSD in the LP with a supply of 150 million, which is about 7%. In 2024, up until the restart, there was about 3 million dUSD in the LP, or 2%. Currently, we have a little over 3% of dUSD in the dUSD-DFI LP. Knowing that we encouraged users to remove liquidity to try to make it easier to achieve the peg, and that volume (and consequently, commissions) are reduced due to the stabilisation fee, it should be fair to say that a higher proportion of dUSD will be in the gateway pools after implementation. Even in this situation outlined above, dUSD would only fall by 7.5%, and it is more likely that if previous holders sold, the sells would be more spread out and absorbed by other traders, not happening all at the same block. 3.2.1 Wildcard The wildcard is the tokenised stocks and ETFs. Unlocking 4% of the supply doesn’t necessarily mean that the unlocking of a specific asset is 4% of its supply. Consider the following situation. Observing that there are 13,200 dMSTR in the system now, the first tranche in the linear unlock releases 130 dMSTR. DeFiChain, post-implementation, has grown to $ 100 million in total liquidity, which fulfills the size requirement. Later on, the system fulfills the other requirement by having a sufficient negative algorithmic ratio, and the first tranche is released. However, despite the $ 100 million in liquidity the system has, there was little demand for dMSTR in this system. Only 10 dMSTR was minted, so an unlock of 130 dMSTR is likely detrimental to the health of dMSTR, because its supply has increased 14-fold, and the LP will not be large enough to allow a future swap of the dMSTR. 6 3.3 Final Notes To reiterate the unlock proposed: The following criteria are manually checked to release one tranche. • dUSD Algorithmic Ratio After releasing the liquidity, dUSD’s algorithmic ratio must be less than or equal to 0%. • System Size The size of the tranche must be 4% or less of the size of the system. • Buffer The last tranche release must have occurred at least 72 hours (8,640 blocks) prior. The conditions described here will also apply to the tranches created in the restart proposal. When all of the 100 tranches above have been released, the same conditions will apply to release the other 100 tranches 4 Conversation Points 1. Discussion Name What is a better name for the discussion than ”Tokenomics Discussion”? Some ideas that have been suggested: • dUSD peg revamp v2 • dUSD peg vision 2 • dUSD next gen • dUSD gen2 2. Collateralisation Schemes Considering that more than 80% of the vaults on DeFiChain have a minimum collateralisation requirement of 150% and the decreased interest rates, is it optimal to have six schemes, instead of consolidating them into just one (the 150%)? 3. Unlocking Tokenised Stocks and ETFs Can the developers code a requirement to release a tranche only when the released liquidity is below a specific percentage of the total supply for every asset ? If so, what if a small pool, e.g. one that has only $ 200 in liquidity, prevents the unlocking of the other $ 200,000? How can DeFiChain resolve pricing issues with tokenised stocks and ETFs, if too much liquidity is released? See section 3.2.1. 7 4. Technical Resources (Developer) DeFiChain needs a developer who can code the new changes. What is fair compensation for the developer? 1 million DFI and up to 50,000 or 100,000 dUSD using the DEX fee? Any ideas for developers? 8