Polymath Burn Mechanism Proposal

[FutureBlok]

pip: title: Polymath Burn Mechanism Proposal status: Draft type: Utility author: Kevin Rego Ricoy futureblok@gmail.com created: 2018-04-22

POLY Burn Mechanism for Polymath Services

An economic deflation mechanism that increases the utility of POLY by requiring tokens to be burned to execute the creation of a token; thereby instilling intrinsic value to their necessity in the tokenization process, and also incentivizing participants in the ecosystem to use and save POLY tokens for their intrinsic value.

Abstract

POLY is a proprietary transfer of value utility token that is used within an ecosystem of developers, lawyers, and service-providers. A burn mechanism could further augment the utility of POLY by giving it intrinsic value. This would also increase the value proposition of the POLY token further driving demand and liquidity, which is vital for its ability to be used.

Motivation

While Polymath is building a marketplace of service providers for security tokens, beyond its optional use for STO fundraising, POLY’s utility as a transfer of value token does not offer any specific incentive to exist or be saved other than speculation once transactions have taken place; and could therefore be seen by clients as a less appealing fundraising currency than alternatives like ETH, due to its embedded acceptance and additional utility. While Polymath could attempt to leverage its position as the top service provider in the security token space to forcibly corner STOs into using POLY, incentivization design being taken into account would continue to allow clients to use POLY as their currency of choice for STOs over other alternatives for its inherent value proposition, which could be augmented via a burn mechanism; in addition to being the proprietary currency of the highest quality security token protocol and STO service provider. A burn mechanism could provide the following multi-faceted benefits:

-Gives POLY intrinsic value, and critical utility -Incentivizes more clients to choose POLY tokens for STO fundraising. -Incentivizes participants of ecosystem to save POLY for capital appreciation. -Allows for free-market approach whereby Polymath remains competitive. -Incentivizes community to use and save POLY to invest in STOs. -Incentivizes participation in the developer community via POLY. -Drives demand, increasing both volume and liquidity for Polymath clients.

Rationale

Since POLY is used to transfer value, having a decreasing supply and rising price does not affect its utility. For example, if a client had to pay a percentage of their fees in POLY to a burn address, theoretically, it makes no difference if it was 1M POLY or .0001 POLY; since the amount is determined by market value, it would effectively be the same at time of purchase. Clients can send the POLY to a designated public address whereby they are sent to a burn address to be destroyed forever, which can be verified publically.

Unlike Polymath offering a straight discount to clients for using POLY, which is indeed a viable concept for a short term, finite period of time, a burn mechanism eventually pays for itself, at least in part, by raising the value of existing POLY supply.

The better long-term value proposition that POLY provides, the more clients will choose it as the currency for STO fundraising of their own volition, which allows Polymath to remain highly competitive while further supporting the POLY token. This increased value proposition will also encourage more participation in the network by developers and investors via economic incentive. The magnified network effect will synergize with increased scarcity to provide more demand, support, and thus utility for the token.

Backwards Compatibility

There is nothing that needs to be changed about the POLY or ST-20 protocols.

Functional Example

BNB - Both discounts for using BNB and quarterly burn. RVN - Ravencoin asset layer is planned to require RVN burn in order to create tokens. XCP - Counterparty has value because BTC was burned in order to receive it.

Implementation

Theoretically, a percentage of POLY could be required to be burned for any actionable part of the Polymath services sequence. Whether it be in order to create a security token, upon each purchase or transaction in POLY, or to launch an STO, a logical and well thought out mathematical implementation of a burn mechanism is only one of many ways to improve on the economic design of the POLY token; and could even be used in conjunction with other features later on. It would have to be designed as such that the number burned could be adjusted over time, which might even be able to be done simply by pegging it as a percentage of the fee paid, which would automatically correlate to market price at the time.

Copyright

Copyright and related rights waived via CC0.

[FutureBlok]

Hey, been a while and no one's said anything. Kinda shy about this idea, but ultimately this would give POLY an intrinsic value by becoming integral to the tokenization process. There are pros and cons to this idea but it adds important utility, and keeps POLY fundraising optional for competitive viability, so it compliments the proprietary fee currency model well. Also, the more useful POLY becomes, the more desirability it gains as a fundraiser currency, which also lends more utility to the general public which helps grow the Polymath development beyond just clients and speculators. @pabloruiz55 what do you think?

[AdaptiveQuant]

The team is very sharp judging from Polymath's actions so far and the actively advancing codebase. That said, I think we're going to see some clever and interesting incentive innovations from the team as the platform finds success and the market rewards their efforts by people increasingly using the platform/protocol. Initially, copying what has been done before is often useful and prudent. The simplest initial mechanism is commonplace, a hard cap on the number of tokens ever to exist, which POLY has. Another is periodic planned airdrops, and perhaps if a project like MTC (Docademic) finds value in using a periodic monthly airdrop approach, it will be a useful incentive for Polymath to consider as well in the future (particularly with the final large supply chunk in January 2022).

One consideration is that if the current incentives to use POLY don't sufficiently dampen the POLY price volatility with respect to USD (particularly on the downside), this may create an adoption headwind for the aspects of Polymath that require POLY. That is because of increased uncertainty for the core users of the platform. It's the same idea as countries with extremely volatile currencies vs. stable currencies---it's much harder to do business with a volatile currency. ETH/USD suffers the same problem and because it is subject to a much broader array of market pressures than POLY and may not be stable for many years, it would be helpful to optimize the incentives to use POLY in order to help POLY find price equilibrium faster. Imagine a situation where POLY/USD is stable because of signficant demand from the underlying incentives to use and hold it, even when BTC/USD, ETH/USD, and the broader crypto market falls in USD terms.

Ideally a utility token (certain security tokens can also serve as utility tokens of course) would be fairly stable with respect to the dominant currencies since we still live in a fiat dominant world. If stablecoins gain traction, these could be a useful alternative for the platform in the future, but strategically giving more incentives to use POLY is naturally more sensical for building network effects. Having more significant incentives to hold POLY will help POLY/USD find stability sooner than later. There is an aysmmetric phenomenon where if the system provides an incentive that can only rationally contribute to the price staying stable or rising, it will help buoy the price and reduce downswings (or in the least, attract market makers and traders to push up downswings quickly) by giving market partipicants a genuine economic desire to hold the token for a set of unique benefits (even those not using POLY to issue tokens).

Additional incentive mechanisms like this proposal of a small, slow token burn as a portion of fees / fund raise can assist in this regard. Perhaps one of the tokens mentioned, BNB, is the most successful example of this approach so far. The BNB burn mechanism is undoubtedly playing a strong role in the token's value preservation and appreciation. With more users interested in simply holding BNB, it gets more eyes on Binance and helps build Binance's network effects, as we've seen in how quickly it has accelerated onto the scene in less than a year.

Another interesting model is KuCoin's KCS token, which directly rewards holders with a percentage of the exchange's trading fees generated directly from the collected token trading fees themselves.

If the Polymath team is hesistant to introduce a burn mechanism as in this proposal, then fee sharing is a related concept for consideration (summarized concept below). It keeps all of the 1 billion POLY tokens in existence and provides a net addition to the incentives to use POLY over alternatives given the choice (in short, raise funds or get paid in POLY, keep holding some POLY to immediately take part in fee sharing, instead of immediately dumping the POLY for BTC or ETH).

Alternative Idea: POLY Fee / Fund Raise Sharing

Based on the Polymath plans to have a fee/bounty marketplace, the core of this fee sharing concept is: share a portion of POLY fees / user bounties / fund raise amounts with all POLY holders above a minimum amount threshold proportionally.

Whether the shared portion should be static or dynamic is an open question, but ideally a small percentage like 0.1% or 1% or even higher is not unreasonable.

The minimum POLY amount held threshold is necessary to account for precision limits and dealing with gas fees to distribute a proportional amount of every fee transaction share or final fund raise share to all the addresses passing the threshold. Hopefully a relatively small number like 1000 POLY or even lower could realistically work to encourage "decentralized holding", but this would have to be analyzed against historical and probable free-floating gas fees. My unfamiliarity with the full mechanics of gas fees may make this a moot point if bundled transactions like the POLY airdrop can still use super cheap gas fees even for thousands of bulk transactions.

Pragmatically, it may also be best to apply a filter and have fees below another POLY amount threshold not subject to fee sharing. Ideally that would be the smallest number realistically possible as well. If need be, the thresholds could be made dynamic depending on certain factors like gas price. Simplicity is important, so static may be best at least to start off.

If we figure 90%+ of the POLY transaction volume throughput with such an incentive mechanism will be the final fund raise amounts and not the relatively small fees, then perhaps it would be reasonable to only subject the final fund raise amounts to POLY sharing. Just sharing from the final fund raise amounts may make this a much easier concept to integrate, perhaps considering doing the same with fees later on.

Another idea if practical would be to collect such fee shares into a single special Polymath contract address to aggregate them over some period, say a week or a month, and then distribute them at this periodic interval (let a single "coffer" fill up somewhat and then distribute less often to save gas fees).

Another useful concept is that releasing locked-up POLY more smoothly across time would help reduce volatility. This is because when there is less unlocked POLY supply to dump in a short period of time, there's less POLY to add selling pressure in a sharp decline. An example of how to do this taking the developer's contract creation fee example mentioned in the whitepaper---provide the developer a few fee release schedule options (instead of just one where the fee gets fully unlocked at one point in time): -90 day (3 months), fee locked for full 3 months, has to pay 6% of earned fee at the beginning to the global POLY sharing mechanism -120 day (4 months) , 1/4 of fee released every 30 days, has to pay 4% of earned fee at the beginning to the global POLY sharing mechanism -150 day (5 months), 1/10 of fee released every 15 days, has to pay 2% of earned fee at the beginning to the global POLY sharing mechanism -175 day (bit under 6 months), 1/25 of fee released every 7 days, has to pay 0% of earned fee at the beginning to the global POLY sharing mechanism (those are just some random numbers off the top my head, there are many schemes possible)

A burn mechanism, POLY sharing, periodic airdrops, and/or clever mechanisms that result in smooth release of locked-up POLY across time would not gurantee a reduction in downside price shocks, but these mechanisms are useful ideas toward helping to reduce them by encouraging holding as opposed to dumping---providing more stability for users of Polymath.

It may be difficult to imagine direct value added to the platform since adding burn or fee sharing mechanisms has the effect of rewarding early holders significantly, and the fee payers and fund raisers are paying an additional cut, so it's a bit of a mind twister to think of how this benefits platform users. It would be more indirect. The goal is mechanisms like these can help Polymath users want to keep at least a small portion of the POLY they earn through the platform instead of quickly dumping it for BTC or ETH.

[FutureBlok]

Great thoughts, thanks for sharing. I think it's important to note that the burn function gives the POLY tokens real utility, as they become required in order to be able to create ST-20 tokens. It is actually instilling more intrinsic value. It also works as an anti-DoS model that makes it consequential to perform spam-attacks or reserve all the ticker names.