the sxene DAO: Using bonding curves to model a hypothetical token-based economy around a community

Introduction

We are not an advanced civilization. Our technology might be advanced, but our civilization is not. We’ve certainly progressed since the times of conquest and world wars. But there’s still a lot to be done. We still have not found a way to achieve mass human co-ordination where:

• people are productive members of society;

• basic human needs are fulfilled by default;

• joy is abundant and stress is not.

Economic systems are a means of co-ordinating humans so that we can all co-exist and share resources. The internet solves the problem of human co-ordination far better than anything we’ve known before. As of 2022, 69% of the world's population actively uses the internet. It would be exceptionally daft for us not to explore how the internet could evolve capitalism and create better societies where humanity flourishes.

How economies work today

A nation’s currency is at the centre of its economics. Let’s take a quick look at the basics of currency and capitalism so that the solution we propose in this paper is easy to grasp.

Utility

We begin by giving our currency some utility so that people will hold it. The basic utility of most currencies are:

• The ability to transact in a geographical location

• The ability to paying taxes in the currency and hence reside lawfully

Some currencies like the USD have additional utility like:

• Ease of international trade

• Buying oil (the USD is the default currency for trading oil)

Price Growth

Since there’s utility for the currency, people, businesses and other governments start to hold it rather than selling it for another asset. Taxpayers also pay the government with the currency. This increases the demand for the currency which in turn keeps the price stable or causes it to rise.

Inflation

Now’s where it gets interesting. Since the price of the currency rises, the nation’s reserve bank (aka central bank) can print more money. In simple terms, this allows more money to enter the economy so there’s more wealth in the nation.

This is called inflation. Printing more money means that the currency will lose value, so the amount of money printed needs to be in-line with the demand that the currency is seeing. Too much money printing will cause too much devaluation.

Wealth Creation

Now the most important part. What do we do this newly printed money? The reserve bank tells all banks in the nation that they are to disburse all this money as loans (to individuals, businesses and the government). This enables funding of public goods like roads and healthcare, various sectors of business and personal aspirations like houses and cars.

Now banks begin writing more loans, but it doesn’t stop there. Most economies follow the Fractional-reserve system. Banks are able to lend not only this new money from inflation, but also ~90% of all of their customers’ deposits.

Let’s say a bank gives a business a loan of $1M and the business deposits that money in the same bank. The bank technically now has an additional $900k (90% * $1M) that they are allowed to disburse as loans. They’re operating on a 10x leverage.

Although this does boost the economy and enables wealth creation at a faster pace, there are 2 problems with this system:

• Problem 1: House of cards

However, there are some dicey assumptions that these loans are based on. They are:

• Problem 2: What direction is society headed?

For the most part, banks decide where all this money goes and who gets funded. They’re motivated by profits and do not have to be aligned with how citizens of their nation would like progress. They can fund arms manufacturers, highly polluting conglomerates or a government surveillance program and citizens can’t do anything about it.

Network Effects

Problems of the banking system aside, the nation is prospering. This causes more people to come enter the nation, adopt the currency, become taxpayers and build businesses. As more people begin to do so, the flywheel kicks off as the utility of the currency gets stronger.

How can we evolve this?

With the internet and web3, we can imagine sector-based or interest-based self-sustaining economic units with their own currencies and funding mechanisms completely run via code and governed by core contributors to that economic unit.

Balaji Srinivasan’s take on the future of such societies is detailed in his book The Network State. Informally a network state is defined in one sentence as:

“A network state is a highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.”

In order for such a community to truly exist, we would need sound economics that aligns the actions of all network participants with one core moral premise (aka the one commandment).

the sxene - a network state for the “Artist Economy”

the sxene is a network state with its one commandment being, “Art for art’s sake”. The goal is to create a self-sustaining economic unit that encompasses every touchpoint of the global music scene. the sxene state has 4 participants.

Our network economics hypothesis

Let’s apply the same currency flywheel framework from the previous section to the native SXN token as the unit of currency in the network.

Utility

We begin by giving SXN utility so that people will hold it. We do this in 2 ways:

1. Stakescription

Fans in the network can stake (lock-up) SXN and pledge the staking rewards (that arise from token inflation) to artists of their choice. In return they get exclusive access to artist communities, exclusive content, discounts, merchandise and other perks that artists can offer.

1. The ability to transact with other network participants

2. The ability to use network apps
• Artists can hire enablers (like managers, labels, venues, videographers, etc.) via the ”enabler marketplace”.
• the sxene DAO (and potentially external developers) launch apps for every touchpoint that network participants have with the music industry. For example:
• SaaS tools for Artists & Enablers
• B2C apps (like ticketing, music streaming, artist education, or even a dating app)
• Marketplaces (like Artists <> Brands deals)
• D2C stores (like streetwear, instruments, sneakers, etc.)
• NFT projects
• DeFi, GameFi, SocialFi, etc.

Price Growth

Since there’s utility for the currency, all network participants hold SXN rather than selling it for fiat. This can be seen as holding money on the network to transact within the network state, just as one would hold money in a national currency so as to transact within the nation state.

Inflation

Since the price of SXN rises, more tokens can be minted (inflation), which allows more money to enter the economy so there’s more wealth in the network state. The inflation rate needs to be in-line with the demand that the SXN is seeing to avoid too much deflation as we noted in the previous section.

We also need to keep in mind price stability of SXN. National currencies like the USD or INR have such large supply that it would require a lot of capital to manipulate its value through massive sell-offs or purchases.

SXN on the other hand could be prone to market manipulation by whales especially in its early days if it openly tradable on exchanges. This isn’t ideal because we would like the value SXN to be determined by the value it creates. This can be mitigated by using a token bonding curve contract with certain restrictions on buying and selling SXN.

• A primer on token bonding curves

The concept of token bonding curves was first introduced in a 2017 article by Simon de la Rouviere. Since then its applications have been studied and used in a range of web3 projects.

 

A token bonding curve is a concept where actors are able buy and sell a token whose price is deterministically determined by a mathematical function based on various parameters. Actors engage in buying and selling the token with the curve directly, and do not need to interface in secondary markets.

 

A simple token bonding curve deterministically determines the price of a token based on its supply. For example, let us defined a token bonding curve with the mathematical function,

where:

The graph above depicts the price-action of the token. When 100M tokens are minted, the token price at that specific point would be $1. When 200M tokens are minted, the price would be $2. Tokens are typically minted by “buying” tokens from the curve by depositing money.

 

Similarly, tokens are burnt when they are “sold” to the curve. At 200M token supply (price = $2), if 100M tokens are sold, the token price at right after the sell action is completed would be $1.

Hence, token bonding curves are:

It is important to note that the price of every token is always more than the previous. Let us illustrate this with an example using the same curve described above.

• Reserve Ratio (RR)

RR defines the mathematical function that is used for a token bonding curve (and hence shape of the curve). It largely determines the price-sensitivity of SXN when the token is bought and sold, especially in large amounts.

The Bancor whitepaper defines the Bancor formula with proofs and can be found here. We begin by defining the Reserve Ratio (RR) as,

where

We use these equations to help us ascertain the shape of our curve defined by the following equation,

where f(x) is price and x is tokenSupply. The variable n can be derived by setting a RR. Here’s the relationship between n and RR

So for example, if we set our RR = 33%, we get n = 2. Which leads us to the function

• Inflation Rate (I)

The curve will mint new tokens every epoch according to a yearly interest rate I.

Inflating a token means tokenSupply increases. When this token is governed by a bonding curve, we have to decide whether RR or price should change to adjust for the increase in supply. Our goal is to always ensure solvency, and hence we would want to keep RR constant and let price get marginally reduced at every epoch of inflation.

At a given tokenSupply or s for simplicity, since RR and reserves(s) are constant, it follows that marketCap(s) needs to be constant as well because,

In order to assess the impact of inflation on price, we define a Price Deceleration Factor, d. When inflation occurs, the number of new tokens minted is a percentage of the current s that we have set as inflation. Here’s how we derive d .

where

this simplifies to,

where d is the Price Deceleration Factor denoted by,

Setting inflation = 30% for example leads to d = 0.23. If the inflation epoch is hourly, this means that the price is reduced by 0.0026% every hour and cumulatively price is reduced by 23% every year.

📔
We will be tracking user behavior against various token bonding curve simulations to determine a set of rules for how RR can be set. Metrics to track:

Wealth Creation

The inflated tokens need to reach the right network participants in order to fulfill the network’s goal. In our case, money needs to go to Artists. There are a few ways for a network state to do this by setting up a funding contract based on the nature of output the beneficiaries. Some possible ways are:

• The fractional-reserve system with a decentralized jury who gets to decide which network participants/projects get funded.

• Equity funding into projects instead of loans (similar to Islamic finance)

• Stakescription (as introduced in “Utility”)

the sxene implements stakescription.

• A primer on stakescription
• Fans stake SXN and pledge the corresponding staking rewards to artists of their choice in return for exclusive access, benefits, perks, etc.
• The token boding curve inflates the token supply by a certain defined percentage every epoch. The newly minted tokens go to the funding contract.
• Artists get paid from the funding contract per epoch pro-rata on the value of the pledges the have received.

• Implementing stakescription

We initially assign 100% of tokens arising from inflation to go toward artists. This can change as we start designing rewards for fans and enablers.

 

Staking rewards (%) are calculated as,

where

Artists will approximately have an annual revenue of the yearly inflation % APY times the value of all the pledges that they have received (pledgeBaseValue).

where

• Example calculation of artist earnings

Let us suppose that the network decides inflation = 20% for a given year, depending on market behavior and insights.

 
• Assumptions
• Projected Earnings

The token bonding curve contract and the funding contract together form the sxene Protocol which is the economic engine that runs the network state.

Network Effects

the sxene offers artists exactly what they want:

This will cause strong acquisition and retention of artists, which propels the network flywheel and enables a “Scenius”.

With all this distribution and access built to a strong and devoted community of artists, fans and enablers, businesses and apps can be built for the network that use SXN as the transaction currency.

• Enablers can earn:

Now that the artists have the money, the music industry flips.

• Developers can earn:

The “Developer” network participant will build apps and businesses using the sxene Protocol as the transaction layer for other network participants who would like to leverage the community. For example:

Similar to how governments collect tax revenue, the sxene DAO will charge fees on 4 types of transactions.

Drawing a parallel

Basis economic roles that we are concerned with, let us compare institutions of nation states and network states.

The structure of the sxene network state finally looks like this: