Tokenomics
Equilibrium will have a native token called EQ. EQ token serves several functions within Equilibrium’s DeFi ecosystem:
Fees
Users pay EQ token to validators as a transaction fee.
Users pay EQ tokens for using native services (DEX trading fees, 3rd party DAPPs paying subscription fees for oracle feeds, e.t.c.).
Borrowers pay EQ token to lenders/ bailsmen as an interest fee.
Governance
EQ tokens are used as voting power, allowing EQ holders to express their opinion in governance decisions via referendums.
Equilibrium mints EQs to reward the nodes that run the consensus protocol, much like Polkadot does this itself with DOT tokens and their inflation.
As we’ve described previously in our token economy paper, 10% of initial EQ token supply will be reserved for rewarding users who bring liquidity into the ecosystem.
Resources in a blockchain network are limited. That includes for storage and computation. Transaction fees prevent individual users from consuming too many resources. Equilibrium uses Polkadot’s weight-based fee model.
Fees on the Equilibrium Substrate chain are calculated based on three parameters:
A per-byte fee (also known as the "length fee")
A weight fee
A tip (optional)
The length fee is the product of a constant per-byte fee and the size of the transaction in bytes.
Weights are a fixed number designed to manage the time it takes to validate a block. Each transaction has a base weight that accounts for the overhead of inclusion (e.g. signature verification) as well as a dispatch weight that accounts for the time to execute the transaction. The total weight is multiplied by a per-weight fee to calculate the transaction's weight fee.
Tips are an optional transaction fee that users can add to give a transaction higher priority.
Together, these three fees constitute the inclusion fee. This fee is deducted from the sender's account prior to transaction execution. A portion of the fee will go to the block producer and the remainder will go to the Treasury. At Equilibrium's genesis, this will be set to 80% and 20%, respectively.
Equilibrium DEX will charge trading fees. We are looking at fees presumably starting in the 0.03% - 0.06% range and then falling based on trade volume, so there will be a commission tier tied to average trading volumes per a specified period of time. The DEX is currently in the making, so actual numbers will be available after we perform some extensive unit and stress testing. The biggest challenge here is to figure out how to avoid transaction costs when placing an order, while at the same time discouraging network spamming by multiple orders. Equilibrium is developing a blended solution of unsigned transaction validation mechanisms and hard-set limits on tradable quantities of instruments.
Interest fees within Equilibrium are determined within the risk and interest rate modules and are based on each individual borrower’s portfolio of assets and the amount of debt/ liabilities this portfolio bears.
In short: the risk model increases borrower rates when bailsmen liquidity compared to collateral liquidity deteriorates and/ or entire system collateral becomes riskier, and vice versa: The risk model decreases borrower rates when liquidity from bailsmen picks up and/ or the entire system collateral becomes less risky.
The governance for Equilibrium will be driven by an on-chain process and will make use of the Democracy and Council pallets similar to how Kusama and the Polkadot chains are governed. The overall intent of these modules is to allow the majority of tokens on the network to determine the outcomes of key decisions around the network. These decisions come in the form of stake-weighted voting on proposed referenda and get enacted by an autonomous enactment system that ensures that user’s decisions are binding.
Some of the main components of this governance model include:
Council — A group of elected individuals who have special voting rights within the system. Council members are expected to propose referenda for voting and have an ability to veto publicly-sourced referenda. There are rolling elections for council members where EQ token holders will vote on new or existing council members.
Referendum — A proposal for a change to the Equilibrium system including values for key parameters, code upgrades, or changes to the governance system itself.
Voting — Referenda will be voted on by EQ token holders on a stake-weighted basis. Referenda which pass are subject to delayed enactment such that people that disagree with the direction of the decision have time to exit the network.
Initially, while developing, testing and finalizing our core logic, Equilibrium will run on PoA consensus with a centralized sudo approach used for applying changes to the network.
After Equilibrium delivers a minimum viable product, we will introduce a governing council which will make Equilibrium-related decisions and changes to be visible on-chain. Changes to the protocol will still be managed via a SUDO. Council members will be elected from nominees on a basis, similar to what Polkadot does but with Equilibrium-specific parameters.
After Equilibrium becomes a polkadot parachain, we will enable recurring council elections, public and council proposed referenda, tallying, adaptive quorum biasing. We will publish the detailed list of system parameters the governance will be able to monitor and change.
Currently Equilibrium operates under PoA on the Aura block production protocol. Validators receive rewards and fees for their participation in the protocol the way we have outlined in the previous section.
Equilibrium plans to migrate to NPoS in Q1 2021 and will introduce the inflation of EQ tokens at that time.
In a Nominated Proof-of-Stake consensus a natural opportunity cost arises when using EQ tokens for staking to secure the ecosystem (receive inflation rewards) compared to using EQ tokens as for bailsman liquidity (earn interest rewards).Equilibrium uses an inflation targeting mechanism to set EQ token inflation equal to the average interest rate the bailsman pool enjoys in aggregate. EQ token holders (Nominators) may vote for a validator set using a selection mechanism similar to the Phragmen election in Polkadot to choose a maximum of ~20 validators.
Equilibrium strives to attract liquidity to its parachain early and has put aside 10% of the initial EQ supply (12 million tokens) to encourage crypto users to bring assets into the DeFi money-market we are building. The Liquidity Farming pool will distribute EQ tokens to lenders, borrowers and bailsmen alike with the aim to distribute the entire 12M EQ token amount evenly throughout a period of 3 years. The distribution will follow an exponential decay with the aim to have 1.5M tokens in the Liquidity Mining pool by the end of the 3rd year (this sets the half-life exactly to one year). This 1.5M EQ token remainder will be used in further reward distribution plans based on DEX transaction volume, etc. Given the initial pool supply of 12M EQ tokens, we come up with the following daily distribution figures:
Equilibrium targets equal distribution of EQ tokens to Lending, Baislman and Borrower pools. Equality comes from following two considerations:
Bailout liquidity in a given asset should equal lending liquidity in that asset, otherwise there is a risk for a lender of not getting his assets back when borrowers default.
Without borrower demand there are no fees to pay to lenders and bailsmen, so borrowers should bring at least an equal amount of assets compared to lenders.
Given equal EQ token amounts flowing into each pool, the pool with lowest liquidity will have the highest effective EQ reward, potentially attracting more liquidity into that pool. To amplify this effect Equilibrium will gradually adjust equal distribution weights depending on deviations of average asset weights in each pool from equal (optimal) weights. We want the weights to change at most to 50% to any single pool over the period of 30 days. Equilibrium adapts similar train of thought here as Polkadot does in its transaction fees adjusting mechanism