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Author: Biteye Core Contributor Fishery

Editor: Biteye Core Contributor Crush

Community: @BiteyeCN

As a decentralized computing system based on the Arweave platform, AO can support high-concurrency computing tasks, making it particularly suitable for big data and AI applications. Its unique narrative, which is one-of-a-kind across the entire network, has attracted considerable attention from players. However, AO's highlights are not limited to its narrative; there are several other intriguing aspects, such as:

How does AO create a healthy token distribution through a clever DeFi economic flywheel, resulting in a profit-making effect?

DAI mining yields are more than twice that of stETH; how can users participate in cross-chain mining of AO?

With a win-win situation for both the project team and users, a unique narrative across the network, and top-notch innovation in the DeFi space… how many noteworthy performances does AO actually have?

In this article, Biteye will answer the above questions and deeply analyze the AO economic model, revealing the surprises of AO step by step! 01 Introduction to AO Project Background

AO is a decentralized computing system based on the Arweave platform, adopting an Actor-Oriented Paradigm, aimed at supporting high-concurrency computing tasks.

Its core goal is to provide trustless computing services, allowing an unlimited number of parallel processes to run, with high modularity and verifiability. By combining storage and computation, AO offers a solution superior to traditional blockchains.

On June 13, 2024, AO announced its token economic model, which features a fair issuance mechanism. This mechanism follows the "ancestral system," drawing from Bitcoin's economic design while innovating on the concept of liquidity incentives in DeFi.

The innovative aspects are particularly clever, and the performance after the mainnet circulation is highly anticipated. It boasts an impressive economic model, with its innovations ranking among the best in the DeFi sector. 02 Token Issuance Rules

The total token supply of AO is set at 21 million, the same number as Bitcoin, highlighting AO's scarcity.

Token issuance adopts a halving mechanism every four years, but achieves a smoother issuance curve by distributing tokens every five minutes. The current monthly issuance rate is 1.425% of the remaining supply, which will gradually decrease over time.

In this round of bull market, amidst the chaos of massive VC token emissions, AO deserves commendation for adopting a 100% fair issuance model, discarding the common pre-sale or pre-allocation mechanisms.

This decision aims to ensure that all participants have equal access opportunities, embodying the principles of decentralization and fairness pursued in the cryptocurrency field, showcasing a grand vision.

The token distribution rules of AO can be divided into several key phases, each with its unique characteristics and goals:

Initial Phase (February 27, 2024, to June 17, 2024): This phase can be understood as an airdrop of AO to AR holders. AO adopts a retrospective minting mechanism, starting from February 27, 2024, where all newly minted AO tokens are 100% distributed to AR token holders, providing additional incentives for early AR holders. During this phase, one AR can earn 0.016 AO tokens as an incentive. If readers hold AR on exchanges or custodians during this period, they can inquire about claiming AO after its official circulation on February 8 next year.

Transition Phase (Starting June 18, 2024): From June 18, AO introduces a cross-chain bridge. In this phase, newly minted AO tokens are divided into two parts: 33.3% continue to be distributed to AR token holders, while 66.6% are used to incentivize asset bridging into the AO ecosystem. Currently, users can participate in this phase of token distribution by depositing stETH (more asset categories will be added in the future). This part is the highlight of participating in the AO ecosystem, which will be elaborated on below.

Mature Phase (Expected around February 8, 2025): This phase marks the maturity of the AO token ecosystem. When approximately 15% of the total supply (about 3.15 million AO tokens) has been minted, AO tokens will begin to circulate. This timing is set to ensure that there is sufficient liquidity and participation in the market before the tokens start trading. In this phase, the distribution rules remain stable, continuing to follow the model of 33.3% for AR holders and 66.6% for bridging incentives.

Overall, approximately 36% of AO tokens will be allocated to Arweave (AR) token holders (100% before June 18 + subsequent 33.3% distribution), reinforcing the close connection between AO and the Arweave ecosystem.

The remaining 64% will be used to incentivize external yields and asset bridging, aimed at promoting economic growth and liquidity enhancement within the ecosystem. 03 Economic Flywheel

AO's economic model also includes a novel ecosystem funding allocation mechanism, where users can continuously earn AO token rewards by bridging qualified assets through the AO funding bridge. It is akin to earning DeFi yields simply by bridging assets, which is very attractive to most people. This funding bridge is the core of the AO economic flywheel and the source of project revenue under the fair issuance mechanism.

This represents a new way of playing that deserves detailed study. This section will clarify the principles.

We must first clarify that the assets eligible for obtaining AO through cross-chain must meet two requirements:

• Quality Assets: These assets must possess sufficient liquidity in the market, typically referring to assets from major public chains. This requirement ensures that the assets bridged to the AO network have broad market recognition and utility.

• Annual Yield: These assets must be tokens that can generate annual yields. Currently, stETH is a typical example. In the future, the team intends to introduce stSOL.

It is precisely these two requirements that allow the project to sustain development and profitability while ensuring the fair issuance of AO.

In simple terms, the principle is that the interest generated during the user's stay of these yield-generating assets on the AO chain is paid to the project team, and correspondingly, the project team mints AO for the users.

In the image, the PEDG (Permaweb Ecosystem Development Guild) receives all the interest from stETH.

Specifically, taking stETH as an example, if a user stakes 1 ETH in Lido, they will receive 1 stETH. A key feature of stETH is that its balance automatically increases over time, with the amount of increase depending on the yield generated from the staked ETH. Correspondingly, stETH can also be redeemed 1:1 for ETH or traded back to ETH at nearly a 1:1 price on the secondary market.

With an annual yield rate of 2.97%, after one year, this 1 stETH, if left untouched on the Ethereum mainnet, will increase its balance to approximately 1.0297 stETH, which can be redeemed back for 1.0297 ETH.

However, when this 1 stETH is bridged via the AO asset bridge, the cross-chain bridge contract on the Ethereum mainnet will receive 1 stETH, and the user's AO chain address will receive 1 aoETH. It is important to note that aoETH does not increase its balance over time like stETH.

After one year, since the quantity of aoETH itself does not automatically increase over time, the amount of stETH in the Ethereum mainnet cross-chain bridge contract will exceed the total amount of aoETH on AO by the amount of interest generated over the year. Therefore, even if all aoETH on the AO mainnet were to be bridged back (in an extreme scenario) to the Ethereum mainnet, the stETH in the mainnet contract would still have a surplus, which constitutes the project team's revenue.

Currently, 151,570 stETH have been deposited into the AO cross-chain bridge. On-chain observations show that the project team uses bots to regularly harvest, with daily earnings of about 12 stETH.

This will be a win-win transaction, achieving fair issuance of AO without the unattractive appearance of high FDV and low circulation VC tokens, while also allowing the project team to profit.

With a 3% stETH interest rate, the team will earn approximately 4,500 ETH from the interest generated by all stETH over the year, and over 50 million DAI deposited in DSR at a 6% interest rate, totaling about ten million dollars in revenue.

This is undoubtedly an excellent mechanism for fair distribution, worthy of emulation by future projects.

Moreover, the design of the AO economic flywheel does not stop here.

In fact, the aoETH mentioned in the first half, which does not automatically increase its balance, is not a supporting role; it is also an indispensable protagonist in the economic flywheel.

It should be noted that aoETH holders will receive minted AO, so it is also a yield-generating asset, while its native currency price is 1:1 with ETH. Thus, aoETH not only possesses the liquidity and price stability advantages of mainstream coins but can also generate yields from AO, which many people are optimistic about. The context of yield attribution

Such high-quality yield-generating assets naturally lead to new ways of playing.

The AO network has proposed an innovative "developer minting" model, which disrupts traditional project financing and distribution methods. This model not only provides developers with a new source of funding but also creates a low-risk investment avenue for investors, while promoting the healthy development of the entire ecosystem.

When developers create DeFi projects on the AO network, they need to lock AO native tokens and cross-chain assets to provide liquidity.

At this point, aoETH and other cross-chain assets become the preferred liquidity targets. Users lock aoETH in the developer's smart contract, which not only increases the total locked value (TVL) of the application but, more importantly, the AO tokens minted from these locked aoETH will flow into the developer's contract.

This achieves "developer minting," providing developers with continuous funding support. It is not hard to imagine that once stSOL becomes eligible for minting AO in the future, the DeFi prospects of AO will be even brighter.

As a result, the project team will no longer be overly reliant on VC funding, leading to healthier token distribution. As the project develops and more aoETH is locked, the AO tokens obtained by developers will also increase.

This will create a virtuous cycle: high-quality projects attract more funding, which in turn provides more resources to improve products, ultimately driving the development of the entire ecosystem. Thanks to this, the entire AO chain's ecosystem will be healthier compared to the chain's ecosystem, leading to a profit-making effect.

This innovative model not only simplifies the traditional investment process but also allows the market to more directly determine the flow of funds. Truly valuable applications will naturally attract more aoETH locking, thereby gaining more support in AO tokens.

This mechanism effectively tightly integrates the interests of developers with the development of the ecosystem, incentivizing them to continuously create valuable applications.

This is undoubtedly a win-win situation. From the investors' perspective, using the annual yield of their held assets (rather than the principal) to support projects significantly reduces risk, which will further increase investors' willingness to invest.

Developers can focus on product development rather than spending a lot of time and energy on financing and token distribution. 04 Participation Opportunities

Currently, cross-chain mining through the official AO bridge is the most stable way to acquire AO.

On September 5, DAI officially became the second asset that can mine AO after stETH.

The following will analyze how different risk preferences can participate in cross-chain mining of AO from the perspectives of cost-effectiveness and security. 05 Cost-Effectiveness

AO has not yet circulated, so there is no price, making it impossible to calculate APR; it is still in the "blind mining" phase. Generally speaking, "blind mining" is more attractive than deterministic DeFi.

Assuming we use $1,000 worth of stETH and DAI to cross-chain mine AO, we will compare the cost-effectiveness of the two by predicting the final amount of AO obtained.

The results are quite surprising!

DAI Mining AO Yield Prediction Table on September 8

DAI Mining AO Yield Prediction Table on September 23

From the observations on September 8 and September 23, we have a jaw-dropping discovery:

On the third day after DAI mining began on September 8, still in the early stage, the mining yield of DAI was 10.53579/4.43943 = 2.373 times that of stETH. As a legitimate project, the yield of stablecoins not only did not fall short compared to risk assets but exceeded it, which is quite rare in the DeFi market over the past few years.

At that time, I also noticed this phenomenon, considering two factors: first, it was too early, and the market had not reacted yet; second, there were implicit risks.

Now, nearly 20 days after DAI mining began, the market should have digested the information, yet the yields of DAI and stETH still show 8.17534/3.33439 = 2.452 times, even higher than on September 8. Unbelievable!

Excluding the market reaction speed factor, there is only one consideration left------ 06 Risks

In terms of financial asset attributes, the risk brought by the price volatility of stETH should be much higher than that of DAI. Even for staunch ETH believers who firmly hold ETH, they can still stake ETH and borrow DAI for arbitrage, at least to balance the interest rate difference between the two. However, the market has not acted this way, which is quite unreasonable.

Excluding financial risks, there is also contract risk.

As mentioned earlier, the stETH mining of AO has undergone complex and clever design, allowing the team to capture all the yields from stETH. Complex contracts can bring risks; however, fortunately, the core code of the stETH mining contract uses the code from MorpheusAIs project Distribution.sol, which has been time-tested. Relatively safe.

On the other hand, the DAI mining contract is a modified version based on Distribution.sol by the AO team, which implements the function of depositing DAI into DSR, making it several orders of magnitude more complex than simply receiving stETH.

Comparison of DAI Mining Contract and MorpheusAIs Contract

Therefore, from the perspective of contracts, the stETH mining contract is significantly safer than DAI's. However, this alone cannot fully explain the more than double cost-effectiveness of DAI compared to stETH. This remains to be discussed. (A little advertisement, everyone is welcome to join the group for discussion!) 07 Conclusion

In summary, AO is highly anticipated in terms of its fair issuance method and "developer minting" model: no VC dumping, while being cleverly designed from a DeFi perspective, representing a new project form to some extent.

In terms of participation, Web3 is certainly about experiencing new things. However, when faced with incomprehensible situations (such as DAI's excessive yields), one must exercise caution and respect the market's choices.