Developer Minting: AO Economic Model Interpretation
Article introduction to the token model of AO and an interpretation of how developers profit throughout the token minting process.Abstract
AO has created a developer-oriented token minting model, which is different from the miner-oriented token minting of Bitcoin and Ethereum. Developers can lock aoETH by developing smart contracts and receive the minted AO tokens, thus achieving developer minting. As of July 15, the bridged $stETH deposited into the AO network has exceeded $500 million. This model provides developers with a new financing method, attracting investors with aoETH to join the project and promoting the development of the AO ecosystem.
To conclude: The token minting of Bitcoin and Ethereum is aimed at miners, who provide security and computing power for the network in exchange for newly minted tokens. In contrast, AO has created a developer-oriented token minting model, shifting from miner minting to developer minting. This article will briefly introduce AO's token model and interpret how developers profit throughout the token minting process.
Token Model
Overview of the token model:
- Total supply: 21 million tokens, the same as Bitcoin.
- Minting cycle: Every 5 minutes.
- Halving mechanism: Approximately every 4 years. Bitcoin undergoes a sudden halving every 4 years, while AO's halving mechanism is linear, meaning the minting quantity decreases gradually every 5 minutes.
- Distribution mechanism: 33.3% of the tokens are allocated to AR holders; 66.6% of the tokens are allocated to eligible cross-chain bridge assets.
AR Holders
The total amount of AR is 66 million. When you have 1 AR in your wallet, the AO token minting rate is roughly estimated as:
33.3% * 1 / 66,000,000
Cross-Chain Bridge Assets
Not all assets can obtain AO token minting rights through cross-chain. AO has strict definitions for cross-chain bridge assets that must meet the following two criteria:
- High-quality assets with sufficient liquidity in the market, such as assets from major public chains.
- Assets must generate annualized returns, such as tokens that have undergone rigorous testing and liquidity staking, like stETH.
Taking stETH as an example, as of now, AO has locked approximately $530 million worth of stETH in its Ethereum locking contract, which is equivalent to 159,580 stETH.
If you bridge one stETH, the AO token minting rate is roughly estimated as:
66.6% * 1 / 159,580
Current staking can be viewed on Etherscan: https://etherscan.io/address/0xfe08d40eee53d64936d3128838867c867602665c#tokentxns.
After bridging, stETH will generate aoETH tokens on AO, where aoETH and stETH have a 1:1 mapping relationship. Users holding aoETH can always bridge back to Ethereum to obtain stETH. Holding aoETH, the wallet will receive minted AO tokens every 5 minutes.
It is important to note that users will not receive the native yield of stETH after bridging to aoETH, meaning the balance will not automatically increase like stETH. The value of bridged aoETH is equivalent to ETH, and in addition, aoETH enhances AO minting capabilities.
For example, if a user holds 1 stETH on Ethereum, and the current annual yield of stETH is 3.2%, after one year, the user's stETH holding will automatically increase to 1.032 (not accounting for compounding for simplicity), where 1 stETH is the principal, and 0.032 is the annual yield. When the user bridges stETH to aoETH, the 0.032 yield will no longer belong to the user. aoETH loses the native yield of stETH and becomes the minting yield of AO. Readers may wonder where the yield of stETH goes. Please see the diagram below:
In the diagram, the yellow circle represents stETH, the green entity represents aoETH, and the orange represents annual yield assets. After staking stETH cross-chain, an equivalent amount of aoETH is mapped out. After bridging, the yield of stETH is given to the Permaweb Ecosystem Development Guild (PEDG), which will decide how to use these yields. The AO tokens minted from aoETH will be sent to the wallets of aoETH holders.
From the AO white paper, the introduction of PEDG:
PEDG is an organization and builders alliance dedicated to developing, growing, and maintaining the infrastructure needed for the AO network. The funding for PEDG comes from the native yields generated during the use of cross-chain assets on the AO network. These yields will not fund a single core team but will be distributed to a diverse group of teams and builders who commit to promoting the growth of AO. At the time of the AO token launch, PEDG consists of five ecosystem partners collaborating on the AO network, and more partners will join as the protocol matures and grows.
The mind map of AO's minting and distribution is shown below:
When the economic model was first announced, many criticized that the AO token minting favored stETH and was detrimental to the AR/AO ecosystem. The vast majority believed that more minting rights should be allocated to AR holders rather than stETH. The author's viewpoint is as follows:
- Cross-chain bridge assets are not limited to stETH; in the future, more assets like stSOL will emerge. As long as these assets meet the two requirements mentioned above, they will have the right to mint AO tokens after bridging. When other assets enter the minting system, the minting rights allocated to individual tokens will be diluted. In a scenario where the number of two tokens bridged is roughly equal, the minting rights for each token will be 33.3%, and in the case of three tokens being equal, the minting rights for each token will be 22.2%. As the number of token types increases, the minting rights will continue to be diluted.
- AO is an open global supercomputer and a unified blockchain computing protocol. The AO ecosystem has a broad landscape and should not be limited to the Arweave ecosystem. AO needs to embrace more existing high-quality public chain assets to develop and grow sustainably in the long term. If a large amount of incentives are used to reward the existing small-scale AR holders, development will be restricted.
More importantly, AO is creating a brand new token minting model, which is the focus of this article: developer minting. Please continue reading below 👇
Developer Minting
As we have learned, AO token minting is closely related to cross-chain bridges. In this process, a cross-chain asset aoETH (and more assets like aoSOL in the future) has emerged that circulates on AO. During the AO token minting process, 66.6% of the assets are distributed to holders of the cross-chain asset aoETH. In this sense, isn't AO just a cross-chain farming system? However, we need to understand that aoETH is liquid; where will this circulating aoETH go?
The answer is: up to $400 million of aoETH will flow to ecosystem developers!
This flow does not mean that aoETH will be paid to developers, but rather that the AO minted from aoETH will flow to developers.
We know that in the DeFi space, everyone pays attention to Total Value Locked (TVL). It is an indicator that measures the total value of all assets locked on decentralized finance (DeFi) platforms. TVL is typically used to assess the scale and health of DeFi protocols or platforms, reflecting the total value of all crypto assets locked in smart contracts on that platform.
When developers create a trading system similar to Uniswap on AO, liquidity needs to be locked in AO's native tokens and various cross-chain assets. The native tokens must establish liquidity with various cross-chain assets; otherwise, AO's native tokens will have no value. High-quality cross-chain assets will bring better liquidity and value to AO's native tokens. As mentioned earlier, AO cross-chain assets must be high-quality assets with sufficient liquidity in the market. At this point, aoETH and other native cross-chain assets will become the preferred liquidity targets. When users use aoETH and AO native assets to establish liquidity, aoETH will be locked into the smart contracts developed by developers, and the AO tokens minted from aoETH will also be transferred to the developer's contract. Ultimately, developers can have the usage rights of these AO tokens. This is what this article emphasizes about developer minting.
Currently, the locked amount of $400 million in stETH is still growing and is expected to reach billions in the future. After the official launch of the AO mainnet in February next year, these cross-chain assets will officially circulate. It is foreseeable that billions of dollars in cross-chain assets will need to be used and consumed on AO, and the smart contracts developed by developers will be the consumption scenarios for cross-chain assets. In the process of circulating and locking aoETH and other cross-chain assets, the minting rights of AO will ultimately come to AO developers. Only by continuously creating more valuable applications can AO developers help the AO ecosystem rise.
Another Investment Method?
For a project to receive investment, it not only needs a good Idea but also a good Deck and a good Pitch. Venture capital firms face significant risks when selecting projects (otherwise, why is it called venture capital?). A project with a good Idea, Deck, and Pitch does not necessarily mean it can truly deliver a product, and delivering a product does not guarantee that it will meet market demand. The traditional investment process is lengthy and inefficient.
Now there is a better option: as an investor, use your annual yield for investment instead of the principal. Developers also do not need to rush to beautify their Idea, create a Deck, or learn marketing skills; instead, they should start building the project from a prototype or MVP (Minimum Viable Product). From the beginning, developers should consider Staking and staking to attract investors with aoETH to join their project. When the application prototype begins to be built, developers will receive funding support, which comes from the AO tokens minted from aoETH.
As the project grows larger, the amount of aoETH staked will also increase, and the developers' earnings will grow. Isn't this a new investment method? Investors will not lose their principal, and developers can build lightly, all of which align with the principles of agile development; this is a form of agile investment.
An application with real market demand will never lack funding; the market will determine where aoETH flows, whether for Staking or locking somewhere. Finally, please refer to the "nested doll" diagram above for readers to ponder; this may be an opportunity for the AO project and developers.
