Cobie discusses the ApeCoin staking proposal in detail: creating new value is far more meaningful than playing shell games

Author: Cobie

Compiled by: Mars Finance

Recently, a member of the ApeCoin board reached out to me, asking for my feedback on some proposals, and I shared my thoughts over the phone.

I want to discuss them publicly because I think they are interesting topics.

Before I begin, I want to clarify: I do not hold any ApeCoin, nor am I shorting ApeCoin. I used to own BAYC, but I currently have no intention of having any long-term or short-term exposure to anything related to the Yuga Labs ecosystem. I am not a financial advisor, and in fact, there have long been rumors in the industry that I am an idiot.

The Death of Staking

Staking used to have some meaning. I believe Peercoin was one of the first protocols to introduce a proof-of-stake (PoS) mechanism, around ten years ago. Since then, PoS mechanisms have become increasingly popular in new blockchains, with all newer ecosystems built on PoS blockchains.

For Peercoin and the PoS networks that followed, staking was purposeful. Owners would provide their tokens as collateral for a chance to validate blocks, and they would earn rewards for doing so. Thus, staking rewarded users who took risks with their collateral and contributed work: it was a necessary function for the ongoing operation of the network or protocol.

But somehow, over time, the term staking has been redefined. Modern staking seems to imply that if you don’t sell your currently held tokens, we will give you more tokens as a reward, rather than rewarding you for contributing to the security of the blockchain.

These modern staking mechanisms have no function within their ecosystems. They do nothing practically or technically; they do not strengthen the ecosystem; they are merely a shell game that uses different names to obscure their actual purpose, which is to encourage reduced selling.

When PoS protocols issue rewards to stakers, they are purchasing the security of the blockchain. When DeFi projects offer liquidity mining programs, they are purchasing growth and TVL. It seems worthwhile to exchange something to make the protocol more sustainable, larger, or safer.

However, these new "staking" mechanisms do nothing but reduce the liquidity of potential sellers.

If you do not stake, your share in the network or protocol will be diluted by new emissions. Moreover, new staking is risk-free! You won’t lose your tokens because staking does nothing! So, lock up your tokens! Move them off the market immediately… in fact, we will pay you!

Simply using rewards to encourage users not to sell, and paying them in the same asset that users choose not to sell, seems like a late-stage Ponzi scheme.

ApeCoin

Alright, let’s quickly go over the situation with ApeCoin.

Its total supply is 1 billion, and it will not mint or burn new tokens, so the total supply will always be 1 billion APE.

The distribution of ApeCoin token ownership is as follows:

1. 47% belongs to the ApeCoin DAO "Ecosystem Fund"
2. 15% for community airdrops
3. 15% belongs to Yuga Labs
4. 14% belongs to "launch contributors" (investors?)
5. 8% belongs to founders
6. 1% for charity

In terms of unlocking, it seems that Yuga Labs, founders, and investors will be locked for a year, but there seem to be exceptions where some tokens will unlock immediately, and some will unlock after 6 months.

The remaining unlocking schedule seems to be in the range of 1-3 years, with the entire supply being 100% unlocked over 4 years.

Anyway, back to the point.

Staking for ApeCoin

There is currently a proposal for a staking program for ApeCoin, written by Animoca, which appears to be a mix of a crypto gaming VC and software company, with its founder being a member of the ApeCoin board.

In the words of the proposal's author, the goal of this proposal is: to make ApeCoin the preferred token of web3 by incentivizing early NFT adopters and existing and potential ecosystem participants to engage in activities beneficial to the APE ecosystem.

The proposal itself seems quite complex, but I can summarize it for you:

We should pay holders of ApeCoin 17.5% of the total supply over the next three years, and if they also hold BAYC/MAYC/BAKC, we should give them different reward rates.

I am unclear how issuing APE tokens to those who already hold APE is "incentivizing early NFT adopters and existing and potential ecosystem participants to engage in activities beneficial to the APE ecosystem."

Isn’t this just paying ApeCoin holders more ApeCoin?

In fact, if we were to be honest about this proposal, it really means "let’s pay some token rewards to those holders who do not sell when the founders/investors/contributors unlock, so we can fake some utility before actually building anything."

$2.6 Billion in Staking Rewards for Just Air

ApeCoin currently has an overall valuation of about $15 billion, which means its DAO treasury holds about $7 billion worth of tokens.

Animoca's proposal suggests giving away $2.6 billion worth of tokens (about 37% of the remaining DAO tokens) to APE holders for free over the next three years.

Since this staking does not actually do anything practically or technically, you can simply think of it as a means to bribe users not to sell. The proposal states, "If you don’t sell your APE or BAYC, we will give you more APE tokens!"

The DAO will use the remaining 37% of tokens for bribery, so it must consider the importance of bribery.

Considering these tokens could be spent on many things, after all, they are currently worth $2.6 billion! They could create significant value for ApeCoin, build a sustainable ecosystem, and attract new external capital.

From an external perspective, it seems the DAO is spending over 1/3 of its remaining tokens to bribe people not to sell during the early unlock phase for early contributors.

However, when you consider the supply-demand dynamics that this staking program will bring, it seems more like a conspiracy rather than a genuine malicious strategy.

Currently, about 15% of ApeCoin tokens are in circulation, and this inflation/emission plan will increase the supply in the market by about 75% in the first year alone, but I do not believe this will increase the demand for ApeCoin by 75%, so the isolated staking plan could harm the economic interests of locked token holders.

However, ApeCoin does have a real problem: how does it provide additional supply to the market so that the upcoming founders and investors do not become the largest share of liquidity supply upon unlocking?

Personally, I think it’s good to spend this special fund, but it should be spent on growth purposes and move towards the original goal they proposed: to become the currency of web3. It should not be used to reward those who already hold tokens.

ApeCoin DAO

The remaining assets of ApeCoin DAO should focus on solving real problems for users.

I don’t know what it means to achieve the mission of "becoming the primary currency of web3," but I know there is "user demand" in the NFT ecosystem that ApeCoin DAO can fund or build.

Why is OpenSea the primary trading place for Bored Apes? Last year, traders of BAYC and MAYC spent about 20,000 ETH in fees on OpenSea, which means $60 million leaves this ecosystem every year.

BAYC holders, or typical NFT holders, may want to gain credit for their NFTs while retaining ownership. Can ApeCoin DAO create a major NFT lending market?

Why are Bored Ape users constantly being hacked? What educational resources are needed to help people self-custody their assets more effectively? Can ApeCoin DAO launch an attractive custody service?

And so on. I believe the community will come up with some better ideas.

The DAO should be committed to creating new value for APE ecosystem users and potential users, and it should address the real problems faced by users within the NFT community.

These funds should be applied to acquiring and incubating utilities, establishing revenue streams, and creating a sustainable DAO.

Should There Be a Staking Program?

I have a reasonable argument that 15% of "retail" ownership is too little, and a staking program for about the first year (with the only eligible staked token supply coming from retail) could raise it to a more meaningful level.

I can also see an argument for a 10-15 year emission plan: APE tokens have no minting function and cannot increase their own supply. If the DAO consumes all APE tokens in the initial years, it will have no more firepower to incentivize activity or capture future value. Additionally, over time, you will achieve a broader and more ideal distribution by extending the time someone must be a participant in the ecosystem.

I can see an argument for why BAYC NFTs should be staked: to allow users not to have to choose between joining the community by purchasing BAYC or buying ApeCoin. Moreover, newcomers are more likely to enter the APE community through NFTs rather than fungible tokens, as this is how everyone currently operates in the APE community.

I can also see an argument for why BAYC NFTs should not be staked: ApeCoin is a brand new entity that was created by the BAYC community but is no longer directly attached to the NFTs.

In reality, these arguments have little basis because it’s hard to say: what is the point of this staking program? What is this plan trying to achieve?

This proposal says some nonsense about "incentivizing participants to do things in the APE ecosystem," but the staking proposal itself seems disconnected from that goal.

If ApeCoin DAO wants the goal of the staking program to be to acquire new members for the DAO, then a credible staking program might include issuing ongoing rewards to NFT holders within the APE ecosystem. The APE ecosystem could even acquire other NFT collections and issue APE tokens to members of those communities.

If the goal of the staking program is to support the liquidity of the BAYC ecosystem, then APE token emissions should be provided to LPs in the APE/WETH market, as well as to those providing liquidity for pools like NFTX.

If the goal of the staking program is merely to pump prices, then it needs to lock assets and provide higher rewards for longer lock-ups, stifling supply outside the market for as long as possible.

Without established goals regarding the purpose of the staking program, it is difficult to design a staking program that can achieve those goals. Allowing more supply into the market, bribing users not to sell, or providing "false utility" are not credible goals for a staking program.

Personally, I would design a small program to incentivize bringing more newcomers into the Ape ecosystem over the next decade, and I would reward existing holders for continuing to participate in the ecosystem. I personally believe that new users will join the NFT community rather than fungible assets, so rewards should be given to NFT asset holders rather than holders of these tokens.

I would supplement this staking program with a radical, larger purchasing value plan.

Governance

ApeCoin is now a multi-billion dollar organization that needs a long-term plan that is sufficiently lengthy. There should be a good answer to the question: how do we turn this $7 billion APE treasury asset into $100 billion over the next ten or twenty years?

However, crypto investors do not always have a long time horizon; on average, I think they care less about what their token projects will do in two months, let alone a ten-year plan.

So if you tell the community, "Hey, we’ve decided there will be no staking program, and we will invest in growth by paying builders to contribute to the ApeCoin DAO ecosystem," they might be very unhappy.

"I’m not getting any free tokens anymore? And outsiders can get tokens worth millions of dollars? Just to build a lending market? What the hell is this?"

Retail investors are unlikely to strictly consider the impact of "OHM-style supply inflation" on existing holders, nor do they consider the chain reaction caused by price charts dropping.

Thus, governance of complex and multifaceted issues is a strange environment that quickly enters the political realm.

I hardly believe that retail investors' token votes will yield the best mid-term results; in fact, they are more likely to vote for destructive mid-term outcomes.

I read an article today stating that Sushi's treasury funds shrank from $1 billion to $30 million in one year. I don’t know if this is exaggerated or fictional, but I think this will be a common story for many failed DAOs.

Conclusion

The design of staking mechanisms should support ecological goals; they should be used to incentivize parts of products, communities, or networks that require people to work or take risks.

ApeCoin DAO currently has $7 billion in funds, and it should use these funds to incentivize people to take risks, work, and develop the community, rather than using it as an interest bribe to existing holders to reward them for not selling.

Without utility or value capture, spending 37% of the treasury on emissions is not only worthless but could actually harm the long-term prospects of the APE ecosystem.

We should have refused to change the meaning of the term "staking," but it may be too late now. The term is now essentially misleading and could mean several different things.

I really hope we do not live in a world where the primary currency of the internet is called "ApeCoin," but I hope to avoid this article exhibiting such obvious bias, which is relevant to any DAO that finds itself in a similar situation.

How Bad is the ApeCoin Staking Proposal?

The Bored Ape community is known in the crypto space for its continuous failures in self-custody.

In response, the ApeCoin committee suggests that BAYC NFTs will actually "contain" your APE tokens.

How does Staking work for NFT holders?

If a holder of a BAYC ecosystem NFT wants to stake in Pool 2, 3, or 4 (depending on the NFT), they will pair the NFT with their ApeCoin to enter the relevant staking pool. The NFT itself is not staked; it merely serves as the key to access the vault holding staked ApeCoin. NFT holders still retain the ability to sell their NFTs. By default, if you sell an NFT that is actively staking ApeCoin, you are effectively selling the key to access the related staked ApeCoin.

If you want to sell the NFT without selling the related staked ApeCoin, the NFT seller will unstake the ApeCoin before listing the NFT.

This means that if you lose your BAYC, you also lose your APE tokens!

You cannot separate your NFT and your APE tokens into different wallets, meaning that if someone steals your BAYC, they do not need to do anything extra to take your APE tokens. By default, APE and BAYC are used together! How wonderful!

This design seems intentionally confusing, and the bad outcomes outweigh the good ones. Even forgetting that you have staked APE behind a specific NFT could be a huge financial mistake; it’s a terrible design.

The ApeCoin board also made the following statement:

"Why can’t I just stake a BAYC ecosystem NFT?

We believe that everyone in web3 should control their own assets, and to provide this right to NFT owners, the NFT itself will not be staked in the staking pool. Additionally, by staking ApeCoin instead of NFTs, ApeCoin DAO incentivizes and promotes the long-term development of the ApeCoin holder community."

This seems like a straightforward double entendre. Everyone should control their own assets, so you can’t put those assets in a contract. But you can put other assets into a contract!

This really makes no sense; I can only conclude that they are treating users like fools.

Anyway, what will happen after three years of staking?

"What happens at the end of the three-year staking period?

"A new AIP will need to be drafted and voted on to determine the future staking mechanism, and that decision will be handed over to the community. Ideally, at the end of the three-year staking period, the DAO will have ongoing revenue to continue incentivizing staking and rewarding ecosystem participants."

"Ideally"? Wouldn’t it be better to establish a revenue plan before the staking program? What if a reliable revenue plan takes 5 years instead of 3? Designing a staking program without understanding the product and revenue plan, and that the program was initially just for subsidies, seems crazy.

Regardless, it doesn’t matter because in this case, staking will not serve any purpose; it is merely to bribe people to continue being community members.

Oh, the current staking proposal also includes a token emission of $1.3 billion next year (at current market prices). Assuming all holders are under a reasonable "Western" high tax regime, this alone would create $700 million in selling pressure. How cool.

Having written this, I don’t want to write anymore.