As a decentralized computing system based on the Arweave platform, AO can support high-concurrency computing tasks, making it particularly well-suited for big data and AI applications. Its unique narrative, being the only one of its kind across the entire network, has attracted considerable attention from players. However, AO’s standout features extend beyond just its narrative, with several intriguing highlights, such as:

How does AO create a healthy token distribution through a clever DeFi economic flywheel, resulting in profitable outcomes?

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

With its win-win scenario for both the project team and users, a unique narrative across the entire network, and innovative edge in the DeFi space, how many notable achievements does AO have?

This article by Biteye will answer these questions and delve deeply into AO’s economic model, unveiling the surprises AO has to offer, step by step.

Introduction to the AO project background.

AO is a decentralized computing system based on the Arweave platform, using the Actor-Oriented Paradigm. It is designed to support 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. Combining storage and computation, AO offers a solution superior to traditional blockchains.

On June 13, 2024, AO announced its tokenomics model, which follows a fair issuance mechanism. This model adheres to the “ancestral system,” drawing from Bitcoin’s economic design, while also innovating on the liquidity incentives concept in DeFi.

The innovation, particularly in the liquidity aspect, is very clever, and the performance after the mainnet launch is highly anticipated. AO has a remarkable economic model, with its innovation being among the top in the DeFi space.

Token Issuance Rules

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

The token issuance follows a halving mechanism every four years, but with a distribution every five minutes, creating a smoother issuance curve. The current monthly issuance rate is 1.425% of the remaining supply, and this rate will gradually decrease over time.

In the current bull market, amidst the industry chaos of massive VC token issuances, AO stands out for adopting a 100% fair issuance model, rejecting common pre-sale or pre-allocation mechanisms. This decision is aimed at ensuring equal access for all participants, staying true to the decentralization and fairness principles pursued in the cryptocurrency space, showcasing a grand vision.

The AO token distribution rules can be divided into several key stages, each with its unique features and objectives:

Initial Phase (February 27, 2024 – June 17, 2024): During this phase, AO tokens were airdropped to AR holders. AO used a retrospective minting mechanism, starting from February 27, 2024, where 100% of the newly minted AO tokens were distributed to AR token holders, providing extra incentives to early AR holders. In this phase, for every AR held, users received 0.016 AO tokens as incentives. If readers held AR on exchanges or through custodians during this period, they can inquire about claiming AO tokens after AO officially circulates on February 8, 2025.

Transition Phase (From June 18, 2024): Starting from June 18, 2024, AO introduced a cross-chain bridge. In this phase, newly minted AO tokens were split into two parts: 33.3% continued to be distributed to AR token holders, while 66.6% was used to incentivize assets bridged to the AO ecosystem. Currently, users can participate in this phase by depositing stETH (with more asset types to be added in the future). This phase is key to participating in the AO ecosystem and will be explained further.

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

Overall, around 36% of the total AO tokens will be allocated to Arweave (AR) token holders (100% before June 18 + 33.3% after), reinforcing AO’s close connection with the Arweave ecosystem. The remaining 64% will be used to incentivize external yields and asset bridging, aimed at fostering economic growth and enhancing liquidity in the ecosystem.

Economic Flywheel

AO’s economic model also includes an innovative ecosystem funding allocation mechanism, where users can continuously earn AO token rewards by bridging qualified assets across chains via the AO fund bridge. It is similar to performing a cross-chain transaction to continuously earn DeFi profits, which is very attractive to most people. The fund bridge is the core of AO’s economic flywheel and serves as the source of the project’s revenue under the fair issuance mechanism.

This is a relatively new approach worth detailed study. This section will clarify the underlying principles.

First, it is important to note that assets eligible for AO rewards through cross-chain activities must meet two requirements:

• High-Quality Assets: These assets must have sufficient liquidity in the market. Typically, this refers to assets from large public blockchains. This requirement ensures that assets bridged to the AO network are widely recognized and have market value.
• Yield-Generating Assets: These assets must be tokens that can generate annualized returns. Currently, stETH is a typical example, and the team intends to introduce stSOL in the future.

These two requirements ensure that the fair issuance of AO can still allow the project to develop sustainably and generate profits.

In simple terms, the interest generated from users’ yield-bearing assets while they remain on the AO chain is paid to the project, and in return, the project mints AO tokens for users.

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

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

At an annualized yield of 2.97%, after one year, this 1 stETH, if left untouched on the Ethereum mainnet, will increase to approximately 1.0297 stETH, which can be exchanged for 1.0297 ETH.

However, when this 1 stETH is bridged across chains via the AO asset bridge, the Ethereum mainnet’s cross-chain bridge contract will receive 1 stETH, while the user’s AO chain address will receive 1 aoETH. It is important to note that aoETH will not automatically increase its balance over time, unlike stETH.

After one year, since the amount of aoETH does not automatically increase over time, the amount of stETH in the Ethereum mainnet’s cross-chain bridge contract will be greater than the total amount of aoETH on AO by the amount of interest accrued over the year. Therefore, even if all aoETH on the AO mainnet were bridged back to the Ethereum mainnet (in an extreme case), the stETH in the mainnet’s contract would still have a surplus. This surplus represents the project’s earnings.

Currently, 151,570 stETH have been deposited into AO’s cross-chain bridge. On-chain observations show that the project team uses a bot to regularly collect the earnings, with daily returns of about 12 stETH.

This will be a win-win transaction, as it achieves a fair issuance of AO without the unattractive high FDV and low liquidity VC tokens, while still allowing the project team to profit.

With a 3% stETH interest rate, the team will earn about 4,500 ETH in interest from all stETH over the course of a year, as well as over 50 million DAI deposited in the DSR at 6% interest, totaling roughly over 10 million USD in earnings.

This is undoubtedly an excellent mechanism for fair distribution, which other future projects should learn from.

Moreover, the design of the AO economic flywheel is not limited to this.

In fact, the aoETH mentioned in the first part, whose balance does not automatically increase, is not a secondary component—it is also an indispensable part of the economic flywheel.

It is important to note that aoETH holders will receive minted AO, meaning it is also a yield-bearing asset. Additionally, the price of aoETH is pegged 1:1 to ETH. Therefore, aoETH not only enjoys the liquidity and price stability advantages of mainstream tokens, but it also generates yield in the form of AO, which many people are optimistic about.

The context of profit attribution

Such high-quality yield-bearing assets naturally come with new innovations.

The AO network has introduced an innovative “developer minting” model, which disrupts traditional project financing and distribution methods. This model not only provides developers with new sources of funding but also creates a low-risk investment pathway 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.

In this case, aoETH and other cross-chain assets become the preferred liquidity assets. Users lock their aoETH in the developer’s smart contract, which not only increases the total value locked (TVL) of the application but, more importantly, the AO tokens minted from these locked aoETH are transferred into the developer’s contract.

This achieves “developer minting,” providing developers with continuous funding support. It is easy to imagine that once stSOL becomes eligible to mint AO in the future, the DeFi prospects for AO will become even brighter.

Because of this, the project team is no longer overly reliant on VC funding, and the token distribution becomes healthier. As the project progresses, with more aoETH locked, the developer will receive more AO tokens.

This creates a positive feedback loop: high-quality projects attract more funding, which in turn provides more resources to improve the product, ultimately driving the development of the entire ecosystem. As a result, the entire AO chain ecosystem will be healthier compared to other chain ecosystems, creating 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 to be locked, thereby receiving more AO token support.

This mechanism effectively aligns the interests of developers with the development of the ecosystem, motivating them to continuously create valuable applications.

This is undoubtedly a win-win situation. From the investor’s perspective, using the annual yield from their held assets (rather than principal) to support the project greatly reduces the risk, thereby encouraging greater investment.

Developers, on the other hand, can focus on product development rather than spending large amounts of time and effort on fundraising and token distribution.

Opportunities to participate

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

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

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

Cost-effectiveness

AO has not yet been in circulation and does not have a price, so APR cannot be calculated; it is still in the “blind mining” phase. Generally speaking, “blind mining” is more appealing than deterministic DeFi.

Let’s assume 1,000 USD worth of stETH and DAI are used for cross-chain mining of AO. By predicting the final amount of AO to be acquired, we can compare the cost-effectiveness of both assets.

The result is quite surprising!

September 8, DAI Mining AO Earnings Forecast Table

On September 23, DAI Mining AO Earnings Forecast Table

Through the September 8 and September 23 data, we made a surprising discovery:

On the third day of DAI mining, which was still in the early stage on September 8, the mining returns for DAI were 2.373 times those of stETH (10.53579/4.43943). As a legitimate project, the stablecoin returns not only did not fall behind risk assets but were significantly higher, which is very rare in the DeFi market over the past few years.

At that time, I noted this phenomenon and considered two things: first, it was still early, and the market had not fully reacted; second, there might be hidden risks.

Now, after nearly 20 days of DAI mining, the returns for DAI and stETH are still 2.452 times higher (8.17534/3.33439), even higher than on September 8. This is truly baffling!

Excluding the market reaction time factor, the only consideration left is—

Risk

From a financial asset perspective, the risk associated with the price volatility of stETH should be much higher than that of DAI. Even for those who are staunch believers in ETH and are committed to holding ETH, it is entirely possible to pledge ETH and borrow DAI for arbitrage, at least to offset the interest rate differential between the two. However, the market has not behaved in this way, which is quite unreasonable.

Excluding financial risk, another concern is contract risk.

As mentioned earlier, AO’s stETH mining involves a complex and sophisticated design, where the team can capture all the earnings from stETH. Complex contracts can introduce risks, but fortunately, the core code of the stETH mining contract uses MorpheusAI’s project Distribution.sol code, which has been time-tested and is relatively safe.

On the other hand, DAI’s mining contract is a modified version of Distribution.sol by the AO team, which has been adapted to store DAI in the DSR, adding several layers of complexity compared to simply receiving stETH.

Comparing the DAI mining contract to MorpheusAI’s contract,

From a contract perspective, the stETH mining contract is considerably safer than the DAI mining contract. However, this alone cannot fully explain the more than twofold cost-effectiveness of DAI compared to stETH. This still remains open for discussion. (Advertisement: Feel free to join the group for further discussion!)

Summary

Overall, AO is highly anticipated for its fair issuance method and the “developer coin minting” model. It avoids VC dumping while being cleverly designed from a DeFi perspective, representing a new form of project to some extent.

In terms of participation, Web3 is about experiencing new things. However, when faced with situations that are difficult to understand (such as the excessive yield of DAI), one must proceed with caution and always respect the market’s choices.

Disclaimer：

1. This article is reprinted from [Why?], All copyrights belong to the original author [Fishery]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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