New Economic Framework for App Tokens Introduced by a16z Crypto
a16z Crypto Unveils Groundbreaking Economic Model for App Tokens
a16z Crypto has introduced an innovative economic framework designed to revolutionize cash flows in application tokens. This new approach seeks to create more flexible, compliant, and value-enhancing fee structures for protocols, while addressing regulatory requirements across different jurisdictions.
Addressing Challenges in App Token Models
While infrastructure tokens, such as those on Layer 1 networks, benefit from well-established economic models based on the demand for block space, application tokens face unique challenges. These tokens, which operate within smart contract protocols on blockchains, cannot rely on gas fees and must develop distinct economic models. Additionally, application tokens often facilitate activities subject to regulation, requiring governance by token holders and navigating complex legal landscapes.
Governance Considerations
Governance rights tied to application tokens can pose risks, especially when Decentralized Autonomous Organizations (DAOs) control protocol revenue or economic activities. To mitigate these risks, a16z recommends either reducing DAO governance or adopting the Decentralized Unincorporated Nonprofit Association (DUNA) model from Wyoming, which provides a legal framework that aligns with U.S. tax laws.
Distribution of Value
One of the significant challenges is how to distribute value to token holders while complying with U.S. securities laws. Traditional financial practices, like pro-rata distributions or token buy-and-burn mechanisms, can raise regulatory red flags. Instead, a16z advocates for a stakeholder capitalism approach, where token holders are rewarded for contributions that directly benefit the project, such as running a frontend or engaging with the protocol.
Ensuring Compliance in Regulated Activities
For applications that facilitate regulated activities, it’s crucial to ensure that value accrual mechanisms comply with legal standards. Protocols should collect fees only from compliant frontends or APIs, helping to avoid regulatory issues and ensuring that token holders do not benefit from unlawful activities.
Fee Traceability and Compliance
a16z emphasizes the importance of fee traceability to maintain compliance without increasing censorship risks. They propose a two-step app-token staking system that identifies the frontend generating the fees and routes these fees according to custom logic. This ensures that token holders receive income only from compliant sources, thus avoiding potential legal complications.
Mapping and Routing Fees
To implement fee traceability, a protocol could map domains to public or private key pairs, ensuring accurate attribution of fees to compliant frontends. These fees could then be directed to staking modules associated with each frontend, allowing token holders to choose compliant fee sources.
Implementation Strategy
The proposed implementation involves creating a registry smart contract for frontend registration, validating transactions, and distributing fees through a FeeCollector contract. This approach aims to minimize governance complexities and ensure regulatory compliance.
Additional considerations include tailored fee models for different types of applications, such as Layer 1/Layer 2 applications, appchains, and application rollups. Each of these may require distinct strategies to ensure compliant fee collection and distribution.
With this innovative economic model, a16z Crypto seeks to provide application tokens with a solid economic foundation comparable to that of infrastructure tokens, addressing the specific challenges faced by application protocols.
