Do you guys remember reflection tokens?
Yes, it is true, they were never "great" to begin with.
But that's just because nobody understands what they are good at.
This tokenomics model appeared and gained some popularity immediately after the DEFI 2020 craze started. The idea was pretty simple: stop printing money in a hyperinflationary manner and create hodl tokenomics what will send the asset to the moon. So instead of subsidizing liquidity pools with 2000% APRs these reflection tokens had 0% inflation and garnered all their income from exorbitant fees. I believe the number was something like a 5% fee anytime anyone wanted to buy or sell the asset. Obviously this number is a variable and could be changed to whatever based on the code, but for now we'll go with 5%.
I called out this dogshit idea immediately and urged people not to invest in such a thoughtless boondoggle of an asset. Essentially, imposing a tax of 5% is so abysmally high that it's guaranteed to seize the engine of commerce. In many cases the 5% was being used to buy and burn the asset to intentionally make the token unstable and unpredictable. But don't worry fam... number will go up!
No, actually they all crashed to zero because it was a dumb idea. I called this out immediately when the protocol was gaining some fledgling popularity after all the hyperinflationary tokens were crashing to zero and degens were looking to hop into the next thing.
I've always kept this idea of reflexive tokenomitry in the back of my head because certainly there is at least one situation where they would be effective; I just wasn't sure what that something would be. However, I think I've finally figured out when it would be a smart decision to employ this strategy. I've made a list of the factors that need to be true in order to make it work.
If you were to ask most people in crypto they'd automatically vote for zero inflation over some inflation. Largely this is due to Bitcoin's hardcapped supply combined with the fact that it's had the best long term success over the years. I don't agree with this assessment (that inflation is always bad) and would argue that inflation is an investment that may or may not pay off. Still, it's a very easy sell to make the argument that not is better.
The main fatal flaw with DEFI 2020 reflection tokens was this idea to use all that money to buy and burn the underlying asset. In reality all of this "real yield" should have gone to the liquidity providers to make the LP exponentially more stable and flush full of cash with low slippage (not counting the 5% of course). If the asset doesn't care about number-go-up this is a very easy decision to make (more on this later).
This means the asset in question has to have high demand outside of basic speculation. AKA it has to be a "utility token" that does something.
This asset does not need investors or other outside resources to have success.
The asset that I am describing doesn't even sound like crypto, does it?
How many cryptocurrencies out there don't care about number going up?
How many cryptocurrencies have actual utility?
How many cryptocurrencies don't care about outside investors?
I am speaking, of course, about fungible video game assets like digital gold. Actual digital gold not Gold 2.0 or gold derivatives. Taking World of Warcraft as a prime example:
Gold is already inflationary and doesn't need more inflation to make a market.
A good liquidity pool paired to a crypto makes the entire game interoperable with that network and every network connected to that network (aka the entire crypto ecosystem with the use of exchanges).
A high 5% fee is irrelevant to both players looking to buy and looking to sell gold. No one is speculating on the price of gold: just like fiat it goes down because you earn it from playing the game. Everyone understands number will go down, but that doesn't lower demand to buy it. Demand is actually quite high depending on what gold can buy you within the game.
Nobody wants scalpers looking to buy gold low and sell high. Nobody needs this. There is no need for outside investment because the only utility of gold is for players in the game to use it as the currency. There is no expectation of turning a profit on speculation alone. Everyone trying to turn a profit on gold should instead pivot to being a liquidity provider while farming the 5% fee. This behavior benefits the entire platform.
As a bonus, a 5% fee on digital in-game assets also greatly lowers the chance that illicit crypto money would attempt to wash itself through the system to launder money. Thorchain was recently admonished for this exact thing a few weeks back due to the North Korean hack that stole over a billion ETH and slushed it through streaming-swaps. Of course the fee to trade on Thor is under 1%, making it much more viable for bad-actors to use it for this purpose (whereas the fee on a reflexive token would be 10%; 5% to enter and 5% to exit to another asset; assuming another asset even exists).
A 5% exchange fee is warranted for assets that have a high demand without the expectation of speculative profits. This includes both fungible and non-fungible assets. Using RPGs as an example gold (fungible) and weapons/armor/items (non-fungible) sales can both be charged 5% on an internal auction house and the cost would be justified and sustainable. In fact the WoW auction house has had a 5% fee since the game started... so it's already a proven strategy. Reflection tokens can absolutely work, but only within this very narrow scope.
