Learn about the FOO token model in one article: How to solve the main problems and challenges faced by traditional liquidity mining?

The FOO model ensures high liquidity of tokens in the trading pool.

Written by: Go2Mars Research

*In this article, farmers refer to the group that conducts liquidity mining in the agreement, they provide liquidity for the agreement and obtain rewards from the agreement; while LP refers to the group that provides liquidity for the protocol token, and the income comes from transaction fees . *

Introduction

Traditional liquidity mining faces several major issues and challenges. First of all, the tokens rewarded by liquidity mining are often sold by farmers immediately after they are obtained, which causes the price of tokens to drop, thus harming the interests of token holders. Secondly, the reward mechanism will distort the interest rate and price of the agreement, crowding out real users, and reducing the actual use value of the agreement. In addition, the management mechanism of liquidity mining rewards is often opaque, the distribution and use of tokens are not clear, and the ownership is too concentrated. Finally, the reward mechanism may increase the security risk of the protocol, lead to the theft or loss of funds, and damage the reputation of the protocol.

The FOO (Fungible Ownership Optimization) model is a new token model that tries to solve these problems in a number of ways. First, it merges the roles of farmers and LPs so that they must hold tokens in order to receive rewards, thereby relieving the sales pressure of rewarded tokens. Second, it uses option tokens as reward tokens, enabling the protocol to collect cash and back the token price. In addition, the FOO model uses LP tokens as proof of voting rights, enabling token holders to participate in governance and obtain protocol benefits. Finally, the FOO model ensures high liquidity of tokens in the trading pool.

Start from Curve

Curve uses the Gauge system to incentivize liquidity

• For every cycle, CRV tokens will be released as rewards
• Reward tokens are distributed in different trading pools
• Voters vote to determine the emission ratio of reward tokens in different trading pools

Among them, the voting right comes from the veCRV obtained by locking CRV tokens. The voting right is proportional to the locking time and the number of locking, and as the number of veCRV in the hands of farmers increases, the reward multiple of CRV they get will also increase, up to 2.5 times.

Core mechanism

In the rest of this article, use LIT as the protocol token

Merge the identity of Farmer and LP

In order to completely suppress the farmer's mining and selling behavior, in the FOO mechanism, a farmer without any voting rights will not receive any reward tokens, no matter how much liquidity it provides.

In Curve, the proportion of farmers getting token emissions is determined by the following formula,

in

b* is the weight of reward distribution‍‍

b is the liquidity it provides‍‍

B is the total liquidity of the trading pool‍‍

ω is the number of veToken owned by the farmer

W is the total veToken supply‍‍

This means that if a farmer has no veToken, their liquidity share will be multiplied by 0.4x when determining how much they actually get rewarded, and when they have enough veToken, their weight will increase from 0.4x to 1x , which is reflected in the actual reward share obtained is a 2.5x increase.

In the FOO model, the formula becomes of the form

This means that if a farmer has no veTokens, they receive 0 reward tokens, which forces farmers to become LIT holders, thereby dampening the sell-off at each round of LIT release.

Option Tokens as Reward Tokens

In the FOO model, the call option of LIT is used as the reward token instead of directly using LIT as the reward. The benefit of this is that the protocol can accumulate substantial revenue regardless of market conditions and allow loyal holders to purchase protocol tokens at a discount

For example, if the price of LIT is 100$, and there is a call option token oLIT, it gives the holder the permanent right to purchase LIT at 90% of the market price. The protocol issues 1 oLIT to farmer Alice, who immediately exercises his option to buy 1 LIT for $90 and sell it on the DEX for $100. The profit and loss statistics are as follows:

• Agreement: -1LIT,+90$
• Farmer Alice: +10$
• Dex LP: +1LIT,-100$

Compare this to regular liquidity mining where farmers pay no fees to the protocol:

• Protocol: -1LIT
• Farmer Alice: +100$
• Dex LP: +1LIT,-100$

After comparison, it can be observed that the FOO model has the following characteristics compared with the conventional liquidity mining model

• Cash redistribution: using oLIT instead of LIT as a reward token effectively transfers cash proceeds from farmers to the protocol, and the LP of the token is not affected;
• Use incentive efficiency to exchange protocol cash flow. In the FOO model, farmers get less incentives, but relatively, the protocol gets more powerful cash flow
• Effectively stimulate the secondary market: Compared with the one-time issuance of tokens, the form of issuing options will reduce the pressure of secondary selling.

In FOO, the identities of farmer and LP coincide, and the profit and loss statistics become:

• Agreement: -1 LIT, +90$
• farmer-LP: +1 LIT,-90$

This means that when farmers are rewarded with oLIT, they have the right to buy tokens from the protocol at a discount and increase their ownership. Over time, protocol ownership will be optimized by transferring from non-liquidity holders to liquidity-providing farmers.

Summarize

The advantage of this model is that it can effectively suppress farmers' arbitrage behavior, enhance the consistency of interests between farmers and token holders, provide stable liquidity and cash flow for the protocol, and promote the long-term development of the protocol. The disadvantage of this model is that it may reduce the incentive efficiency of the farmer, increase the complexity and risk of the farmer, and limit the degree of freedom and flexibility of the farmer.