Depth analysis of the AO economic model: How to create excess returns through the clever Decentralized Finance economic flywheel?

Author: Biteye Core Contributor Fishery

Editor: Biteye Core Contributor Crush

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. Due to its unique narrative across the entire network, it has attracted a lot of followers. However, the outstanding feature of AO is not only its narrative, but also the following intriguing highlights, such as:

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

DAI Mining revenue is more than double that of stETH. How can users participate in Cross-Chain Interaction Mining AO?

How much outstanding performance is worth noting by the project party, which wins with users, has a unique narrative across the entire network, and leads the innovation in the DeFi track....AO?

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

01. Background Introduction of AO Project

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, allowing for an unlimited number of concurrent processes and offering high modularity and verifiability. By combining storage and computation, AO provides a solution that surpasses traditional blockchain.

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

Especially the innovation part is very clever, and the performance after Mainnet circulation is worth looking forward to. It has a brilliant economic model, and its innovation in the Decentralized Finance industry is also among the best.

02, Token Issuance Rules

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

Token issuance adopts a 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 Market, ao is very commendable in the industry chaos of the massive issuance of VC coins, adopting a 100% fair issuance model, and abandoning the common pre-sale or pre-allocation mechanism.

This decision is aimed at ensuring equal access for all participants, and the original intention of pursuing decentralization and fairness in the cryptocurrency field is of great significance.

AO's Token allocation rules can be divided into several key stages, each with its own unique characteristics and goals:

Initial Stage (February 27, 2024 to June 17, 2024): In this stage, it can be understood as Airdrop AO to AR holders. AO adopts a retrospective minting mechanism. Starting from February 27, 2024, all newly minted AO Tokens will be 100% distributed to AR Token holders, providing additional incentives for early AR holders. During this stage, one AR can receive an incentive of 0.016 AO Tokens. If during this period, the reader holds AR on an exchange or with a custodian institution, they can inquire about receiving AO after its official circulation on February 8 next year.

Transition Phase (Starting from June 18, 2024): Starting from June 18, AO introduced cross-chain bridges. During this phase, newly minted AOTokens will be split into two parts: 33.3% will continue to be allocated to ARToken holders, while 66.6% will be used to incentivize asset bridging to the AO ecosystem. Currently, users can participate in this token distribution phase by depositing stETH (more asset categories will be added in the future). This is a major highlight of participating in the AO ecosystem, which will be further discussed below.

Mature Stage (expected around February 8, 2025): This stage marks the maturity of the AOToken ecosystem. When approximately 15% of the total supply (approximately 3.15 million AOToken) is minted, AOToken will begin to circulate. The timing of this point is designed to ensure sufficient Liquidity and participation in the market before the Token starts trading. At this stage, the allocation rules remain stable, continuing to follow the 33.3% for AR holders and 66.6% for bridge incentive mode.

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

The remaining 64% is used to incentivize external returns and asset bridge, aiming to promote economic rise and liquidity improvement in the ecosystem.

03, Economic Flywheel

AO's economic model also includes a very innovative ecosystem fund allocation mechanism, where users will continue to receive AO Token rewards by using the AO fund bridge for Cross-Chain Interaction with qualified assets. It is equivalent to conducting a Cross-Chain Interaction and continuously receiving Decentralized Finance returns, which is very attractive to most people. This fund bridge is the core of the AO economic flywheel and the source of project party's earnings under the fair issuance mechanism.

This is a very new way of playing, worth studying in detail. In this section, we will clarify the principles for everyone.

First, it is necessary to clarify that there are two requirements for obtaining AO's assets through Cross-Chain Interaction:

• High-quality assets: These assets must have sufficient Liquidity in the market. This typically refers to assets from major public chains. This requirement ensures that assets for Cross-Chain Interaction to the AO network have wide market recognition and utility value.
• Annualized Return: These assets must be Tokens that can generate annualized returns. Currently, stETH is a typical example. In the future, the team intends to introduce stSOL.

It is the above two requirements that are key to ensuring fair issuance AO while allowing the project party to sustainably develop and profit.

In simple terms, users keep these interest-bearing assets on-chain and pay the interest generated during the AO on-chain period to the project party. 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 on 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 into ETH, or traded back to ETH at a price close to 1:1 through the Secondary Market.

According to the Annual Percentage Rate of 2.97%, after one year, this 1 stETH, if left on the Ethereum mainnet without any action, the balance will increase to approximately 1.0297 stETH, which can be exchanged for 1.0297 ETH.

However, when this 1 stETH is Cross-Chain Interaction through the AO asset bridge, the Cross-Chain Interaction bridge contract on the Ethereum Mainnet will receive 1 stETH, and the user's AO chain Address will receive 1 aoETH, but it should be noted that aoETH will not increase balance over time like stETH.

One year later, because the amount of aoETH itself will not increase automatically over time, the quantity of stETH in the Mainnet cross-chain bridges contract of the Ethereum Mainnet will be more than the total amount of aoETH on AO by the amount of Interest for one year, so even if all aoETH on AO Mainnet are crossed back to the Ethereum Mainnet (extreme case), 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 regularly, with daily earnings of approximately 12 STETH.

This will be a win-win transaction, achieving fair issuance AO, without the unattractive appearance of high FDV and low circulation VC coins, and also benefiting the project party.

Based on the 3% stETH interest rate, the team will profit approximately 4500 ETH in interest generated by all stETH in one year, and over 50 million DAI deposited into DSR at 6% interest, totaling approximately over 10 million USD in income.

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

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

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

Keep in mind that holders of aoETH will receive minted AO, making it a yield-generating asset. Additionally, aoETH has the advantages of Mainstream Token liquidity and price stability, with a 1:1 price ratio to ETH. Therefore, aoETH not only possesses the benefits of Liquidity and stable pricing of Mainstream Tokens, but also generates the highly regarded AO.

The context of vesting income

Such high-quality income-generating assets naturally come with new ways to play.

The AO Network has proposed an innovative 'developer coin casting' model, which has subverted the traditional project financing and distribution methods. This model not only provides a new source of funding for developers, but also creates a low-risk investment path 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, aoETH and other Cross-Chain Interaction assets have become the preferred Liquidity target. Users lock aoETH in the developer's Smart Contract, which not only increases the total Lock-up Position value (TVL) of the application but, 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 in the future, after STSOL is eligible to mint AO, the outlook for AO's Decentralized Finance will be even brighter.

Therefore, the project party will no longer rely too much on VC funding, and the chip distribution will be healthier. As the project develops, the locked aoETH increases, and the AO Token obtained by developers also increases.

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. Thanks to this, the ecological environment of the entire AO chain will be healthier compared to that of the chain, resulting in 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, thus gaining more support from AO tokens.

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) significantly reduces the risk, which will further increase the intensity of investor investment.

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

04, Opportunity to Participate

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

On September 5, DAI officially became the second asset that can be mined for AO after STETH.

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

05, Cost-effectiveness

AO has not yet been circulated, so there is no price, so the APR cannot be calculated, it is still the "blind mining" stage. Generally speaking, "blind mining" is more attractive than deterministic Decentralized Finance.

Assuming we use 1000 USD worth of STETH and DAI respectively to mine AO through Cross-Chain Interaction, we compare the cost-effectiveness of the two by predicting the amount of AO obtained in the end.

The result is unexpected!

September 8th, DAI Mining AO Revenue Forecast Table

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

On September 8 and September 23, we had a jaw-dropping discovery: 01928374656574839201

On the third day of DAI Mining, which started on September 8th, it is still in the early stage. The mining yield of DAI and other amounts is 2.373 times that of stETH (10.53579/4.43943). As a legit project, the yield of stablecoins not only doesn't lag behind risky assets, but also has a multiple, which is very rare in the Decentralized Finance market over the past few years.

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

And now, DAI Mining has been going on for nearly 20 days. In theory, the market should have already digested it, but the returns of DAI and stETH are still at 8.17534/3.33439 = 2.452 times, which is even higher than September 8th. Unbelievable!

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

06, Risk

In terms of the attributes of financial assets, the risk brought by the price fluctuation of stETH should be much higher than DAI. Even for those who have complete faith in ETH and firmly hold ETH, they can also collateralize ETH, borrow DAI for Arbitrage, and at least offset the interest rate differential between the two. But the market did not do so. It's very unreasonable.

Excluding financial risks, there is also contract risk.

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

The Mining contract for DAI was modified by the AO team based on Distribution.sol, which implements depositing DAI into DSR, making it several orders of magnitude more complex than collecting stETH.

DAIMining 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 still does not fully explain why DAI has more than double the cost-effectiveness compared to stETH. It remains to be discussed.

07, Summary

Overall, AO is very promising 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, representing a completely new project form.

In terms of participation, Web3 must experience new things. However, when facing situations that cannot be understood (excess yield of DAI), one must be cautious and respectful of the market's choices.