Web3 version of NVIDIA? Depth analysis of AO economic model

Original author: Biteye Core Contributor Fishery

Original Compilation: Crush, core contributor of Biteye

As a Decentralization computing system based on the Arweave platform, AO can support high-concurrency computing tasks, especially suitable for big data and AI applications. Its unique narrative has attracted many followers. However, the highlight of AO is not only its narrative, but also its other curious features, such as:

How does AO create a healthy chip distribution through clever Decentralized Finance economic flywheels to bring about the effect of making money?

DAI Mining income is more than 2 times that of stETH, how can users participate in Cross-Chain InteractionMining AO?

How many remarkable performances does AO have that are worth noting? It's a win-win situation between the project party and users, a unique narrative across the entire network, and innovative performance at the forefront of the Decentralized Finance track....01928374656574839201

This article will answer the above questions, and analyze the Depth of the AO economic model for you step by step to uncover the surprises of AO!

01 AO Project Background Introduction

AO is a Decentralization computing system based on the Arweave platform, which adopts the Actor-Oriented Paradigm and aims to support high-concurrency computing tasks.

Its core goal is to provide trustless computing services, allow an unlimited number of parallel processes to run, and have a high degree of modularity and verifiability. Combining storage and computation, AO provides a solution that is superior to traditional blockchain.

AO announced its Token economic model on June 13, 2024, which is a fair issuance mechanism. The mechanism follows the 'ancestral system', drawing on the economic design of Bitcoin, while also innovating the concept of Liquidity incentives in Decentralized Finance.

Especially the innovation part is very clever, and the performance after the Mainnet circulation is very promising. It has a bright economic model, which is also one of the best in the Decentralized Finance sector.

02 Token issuance rules

The total supply of AO tokens is set at 21 million, the same as BTC, highlighting the scarcity of AO.

Token issuance adopts the mechanism of Halving every four years, but achieves a smoother issuance curve through distribution every five minutes. The current monthly issuance rate is 1.425% of the remaining supply, and this rate will gradually drop over time.

In this round of the bull run, ao is very commendable in the industry chaos of the massive VC coin issuance, adopting a 100% fair issuance model and abandoning the common pre-sale or pre-allocation mechanism.

This decision is aimed at ensuring that all participants have equal access to opportunities, without losing sight of the principles of Decentralization and fairness that are pursued in the field of Crypto Assets. The scope is very large.

The Token allocation rules of AO can be divided into several key stages, each of which has its own unique characteristics and goals:

Initial Phase (February 27th to June 17th, 2024): In this phase, it can be understood as an Airdrop of AO to AR holders. AO adopts a retrospective minting mechanism, starting from February 27th, 2024, all newly minted AO Tokens are 100% allocated to AR Token holders, providing additional incentives for early AR holders. In this phase, one AR can receive 0.016 AO Tokens as incentives. If during this period, readers hold AR on an exchange or custodial institution, they can inquire about receiving AO after its official circulation on February 8th next year.

Transition Phase (From June 18, 2024): Starting from June 18, cross-chain bridges have been introduced to AO. During this phase, newly minted AO Tokens are divided into two parts: 33.3% continues to be allocated to AR Tokenholders, while 66.6% is used to incentivize asset bridging to the AO ecosystem. Currently, users can participate in this phase of token allocation by depositing stETH (more asset categories will be added in the future). This is a major focus of participation in the AO ecosystem, which will be elaborated below.

Mature Stage (expected around February 8, 2025): This stage signifies the maturity of the AO Token ecosystem. When approximately 15% of the total supply (around 3.15 million AO Tokens) is minted, AO Token will start circulating. The timing is set to ensure sufficient liquidity and participation in the market before token trading begins. During this stage, the allocation rules remain stable, with 33.3% allocated to AR holders and 66.6% allocated for bridge incentives.

Overall, about 36% of the AO Token will be allocated to Arweave (AR) Tokenholder during the entire emission process (100% before June 18th + 33.3% emission afterwards), which strengthens the close connection between AO and the Arweave ecosystem.

The remaining 64% is used to incentivize external revenue and asset bridge, aiming to promote economic rise and Liquidity enhancement in the ecosystem.

03 Economic Flywheel

AO's economic model also includes a very innovative ecosystem funding allocation mechanism, whereby users who qualify for Cross-Chain Interaction with AO funds will continue to receive AO Token rewards. Similar to earning Decentralized Finance profits through Cross-Chain Interaction, this is very attractive to most people. And this funding bridge is the core of AO's economic flywheel, as well as the source of project party revenue under a fair issuance mechanism.

This is a very new way of playing, worthy of detailed study. In this section, we will clarify the principles for everyone.

First, we need to clarify that there are two requirements for obtaining AO assets through Cross-Chain Interaction:

• High-quality assets: These assets must have sufficient Liquidity in the market. It typically refers to assets from major public chains. This requirement ensures that assets for Cross-Chain Interaction to the AO network have widespread market recognition and utility.
• Annualized Yield: These assets must be tokens capable of generating annualized yield. Currently, STETH is a typical example. In the future, the team intends to introduce STSOL.

It is the above two requirements that are the key to ensuring the fair issuance AO and enabling the sustainable development and profitability of the project party.

Simply put, users leave these interest-bearing assets on AO on-chain to generate Interest payments to the project party, and in return, the project party mints AO for the users.

The PEDG (Permaweb Ecological Development Association) in the picture has received all the Interest of 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 will automatically increase over time, depending on the yield generated by staking ETH. Correspondingly, stETH can also be redeemed 1:1 for ETH, or traded back to ETH through the Secondary Market at a near 1:1 price.

According to an Annual Percentage Rate of 2.97%, after one year, this 1 stETH will have a balance of approximately 1.0297 stETH if left untouched on the Ethereum mainnet, which can be exchanged for approximately 1.0297 ETH.

However, when this 1 stETH is cross-chain interacted through the AO asset bridge, the Mainnet's Cross-Chain Interaction bridge contract of Ethereum will receive 1 stETH, and the user's AO chain Address will obtain 1 aoETH. It is worth noting that aoETH will not increase in balance over time like stETH.

After one year, due to the fact that the amount of aoETH itself will not increase automatically over time, the quantity of stETH in the Ethereum Mainnet cross-chain bridges contract will be more than the total amount of aoETH on AO by one year's interest. So even if all aoETH on AO Mainnet are crossed back (in extreme cases) to the Ethereum Mainnet, there will still be a surplus of stETH in the Mainnet contract, which is the profit of the project party.

Currently, 151,570 STETH have been deposited into AO's cross-chain bridges. According to on-chain observations, the project party uses BOT to harvest crops at regular intervals, with daily earnings of approximately 12 STETH.

This will be a win-win trade, achieving fair issuance AO, without the unattractive appearance of high FDV and low circulation VC coin, as well as benefiting the project party.

Based on the 3% stETH Interest Rate, the team will profit approximately 4,500 ETH generated by stETH Interest in a year, and over 50 million DAI deposited in DSR with a 6% Interest, totaling approximately 10 million US dollars of income.

This is undoubtedly a very excellent mechanism for fair distribution, which is worth learning for subsequent projects.

But the design of the AO economic flywheel is not just that.

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

Please note that holders of aoETH will receive minted AO, making it an interest-bearing asset, and its native currency is priced at 1:1 ETH. Therefore, aoETH not only has the advantage of liquidity and price stability of Mainstream Tokens, but also generates many AO that are highly regarded.

The context of vesting profit

Such high-quality income assets naturally have new gameplay.

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

When developers create Decentralized Finance projects on the AO network, they need to lock AO native Token and Cross-Chain Interaction assets to provide Liquidity.

At this time, assets such as aoETH in Cross-Chain Interaction become the preferred target for Liquidity. Users lock aoETH in the developer's Smart Contract, which not only increases the total Lock-up Position value (TVL) of the application but also, more importantly, transfers the AO Tokens minted from these locked aoETH to the developer's contract.

This realizes the 'developer minting', providing continuous financial support for developers. It is not difficult to imagine that after stSOL is eligible to mint AO in the future, the prospect of AO's Decentralized Finance will be even brighter.

As a result, the project party will no longer rely too much on VC's funds, and the distribution of chips will be healthier. As the project develops, the locked aoETH increases, and developers receive more AO Tokens.

This will create a virtuous cycle: high-quality projects attract more funds, thereby obtaining more resources to improve products, and ultimately promote the development of the entire ecosystem. As a result, the entire ecosystem of the AO chain will be healthier compared to the ecosystem of the chain, resulting in a money-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. Naturally valuable applications will attract more aoETH locking, thus gaining more support for AO Token.

This mechanism effectively combines 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 perspective of investors, supporting projects with the annualized return on their holdings (rather than the principal) greatly reduces the risk, thus increasing the intensity of investor investment.

Developers can focus on product development, rather than spending a lot of time and energy on financing and chip allocation.

04 Participation Opportunities

Currently, the most stable way to obtain AO is through the official bridge Cross-Chain InteractionMining.

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

The following will analyze how different risk preferences should participate in Cross-Chain Interaction mining AO from the perspectives of cost-effectiveness and security.

05 Cost-performance ratio

AO is not yet in circulation, so there is no price and it is not possible to calculate APR, it is still in the "blind mining" stage. Generally speaking, "blind mining" is more attractive than deterministic Decentralized Finance.

Assuming we use 1000 US dollars of stETH and DAI respectively for Cross-Chain Interaction mining AO, we compare the cost-effectiveness of the two by predicting the final amount of AO obtained.

The result is quite unexpected!

On September 8th, the DAI mining AO revenue forecast table.

On September 23rd, the DAI mining AO income forecast table

On September 8th and September 23rd, we had a jaw-dropping discovery:

On the third day of DAI Mining, which started on September 8th, it is still in the early stage. The yield of DAI and other amounts in Mining is 10.53579/4.43943 = 2.373 times that of stETH. As a legit project, the yield of stable coins is not only not less than that of risky assets, but also has a multiple, which is very rare in the Decentralized Finance market in the past few years.

At that time, the author also noticed this phenomenon, with two considerations, one is that it is too early, the market has not responded yet, and the other is the existence of hidden risks.

And now, DAI has been Mining for almost 20 days, theoretically the market has already absorbed it, but the returns of DAI and stETH are still 8.17534/3.33439 = 2.452 times higher than September 8th. Unbelievable!

Excluding the factor of market reaction speed, there is only one consideration -

06 Risk

In terms of the financial asset properties, the risk brought by the price Fluctuation of stETH should be much higher than that of DAI. Even for those who have complete faith in ETH and firmly hold ETH, they can still collateralize ETH, borrow DAI for Arbitrage, at least to offset the interest rate differential between the two. But the market is not doing so. It's very unreasonable.

In addition to excluding financial risks, there is also contract risk.

The above mentioned AO's stETH Mining has undergone a complex and sophisticated design, and the team can receive all the income of stETH. Complex contracts will bring risks, but fortunately, the core code of stETH's Mining contract uses the code of MorpheusAIs project Distribution.sol, which has been tested over time. Relatively safe.

The Mining contract of DAI, on the basis of Distribution.sol, was modified by the AO team to realize the function of depositing DAI into DSR, which is several orders of magnitude more complex than charging stETH.

DAI Mining contract compared to the MorpheusAIs contract

Therefore, from the perspective of the contract, the Mining contract of stETH is much safer than DAI, but this does not fully explain the more than double cost-effectiveness of DAI compared to stETH. This is open for discussion. (Advertisement, welcome everyone to join the group for discussion!)

07 Summary

Overall, AO is highly anticipated in terms of fair issuance and the "developer minting" model: no VC dump, and cleverly designed from the perspective of Decentralized Finance, to a certain extent, represents a new form of project.

In terms of participation, Web3 is a must to experience new things. But when faced with situations that cannot be understood (such as the excess yield of DAI), one must be cautious and respectful of the market's choices.

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