Tokenomics Evolution: From Voting Governance to Profit Sharing

In Web3, the core of Tokenomics is using Token incentives and rules to expand the scale and upper limit of decentralized economic benefits. Currently, Web3 projects creating continuous income and value are mainly concentrated in public chains and DeFi, and DeFi project economic models typically involve lending, liquidity provision, and trading. The design goal of the economic model is to encourage users to provide liquidity, participate in lending and trading activities, and provide corresponding interest, rewards, and returns for participants. In the DeFi economic model, the design of the incentive layer is crucial, such as how to guide token holders to hold tokens instead of selling, and how to coordinate the interest distribution between LPs and governance token holders. As a protocol focused on liquidity staking, Bifrost currently covers about 60% of the LST market in the Polkadot ecosystem and is gradually expanding cross-chain scenarios. Centered around vToken minting and cross-chain liquidity design, Bifrost is about to launch Tokenomics 2.0, transitioning from a voting governance model to a buyback and dividend model. From the development of Tokenomics, DeFi economic models are mainly divided into two types: the first is the governance model, where owning tokens represents governance functions of the protocol; the second is the staking/cash flow model, where tokens can generate continuous cash flow, continuously burning tokens or conducting buybacks/staking dividends. As early as 2021, most DeFi project Tokens could only be used for governance. For example, UNI's main utility included managing community treasury and adjusting fees, but the actual value empowerment for token holders was relatively low, unable to realize value and reward early LPs and users who bore greater risks. Bifrost's original economic model also had such issues. BNC was mainly used for Bifrost OpenGov voting, transaction fees in the Bifrost network, fiscal expenditure, liquidity incentives, and compensation from the insurance fund's BNC funds in case of Slash losses, lacking value empowerment. After DeFi Summer, the market had a clearer understanding of the limitations of the token governance model: tokens that only provide governance rights are difficult to carry long-term economic value without substantial returns. Some protocols attempted to redesign incentive mechanisms by introducing the "flywheel model", driving token buybacks and dividends through protocol income, thereby attracting more users and expanding protocol usage. Curve was an early representative of this approach, introducing the veCRV mechanism that deeply binds governance voting and liquidity incentives, enhancing protocol TVL and token holder stickiness. Similarly, projects with stable income are gradually changing Tokenomics. For example, GMX introduced a Peer-to-Pool model and user fee-sharing mechanism, generating revenue from transaction fees and conducting buybacks; dYdX v4 is building its own public chain to introduce 100% fee sharing. Bifrost Tokenomics 2.0 is also gradually trying to use the flywheel model and fee sharing, using 100% of protocol profits for BNC buybacks, with 90% allocated to bbBNC holders and 10% burned. By increasing BNC's market value through protocol profit buyback and burning mechanisms, higher market value and higher yield will attract more users to mint vTokens. Then, through liquid staking fees directly driving protocol income, and using protocol income to reward bbBNC, more users are encouraged to lock BNC, reducing BNC's circulating supply and forming a positive value closed loop. Specifically, how to obtain bbBNC? Mainly by liquid staking BNC to obtain vBNC, then locking vBNC to obtain bbBNC. Due to the ve model design, the longer the lock-up period, the higher the bbBNC weight. bbBNC is non-transferable and can be redeemed for vBNC upon expiration, which can then be redeemed for BNC. Early unlocking may face confiscation mechanisms, with confiscated assets counted as protocol income for further buybacks. The core mechanism of ve is that users obtain veToken by locking Tokens, with veToken being a non-transferable and non-circulating governance token. The longer the lock-up period (usually with an upper limit), the more veToken can be obtained. Users receive more Tokens or voting rights based on their veToken weight, with bbBNC quantity depending on the amount and duration of locked vBNC. bbBNC is non-transferable and can be converted to vBNC upon expiration, then unlocked to BNC. However, early redemption may face confiscation, ensuring locked TVL stability and reducing BNC's circulating supply. Confiscated amounts will be fully counted as protocol income, participating in BNC buyback, burning, and bbBNC incentive plans. Income sharing and buybacks have become a trend for DeFi projects, but the effectiveness of buybacks largely depends on the protocol's income to maintain the importance of burning. Without stable income streams, this mechanism cannot be sustained. As of now, Bifrost has achieved relatively stable protocol income and is exploring more sustainable Tokenomics based on "protocol profits". Under the buyback + dividend mechanism, BNC is no longer just a governance and incentive mechanism. By redistributing profits, combining governance attributes with value reflux mechanisms, and stimulating user participation through stable income, token flywheel models, and token rewards, the entire system's development is promoted, attempting to enhance long-term participation value for Token Holders.