By Shahmir Chowdhury, Co-founder and CEO of Fluidity
In the years since bitcoin first emerged, many other cryptocurrencies and tokens have arisen, each attempting to solve a different problem or solve a different use case. But like building a beautiful solution to a problem that doesn’t exist, crypto still suffers from the problem of use despite a surprising degree of innovation.
While blockchain technology offers an attractive set of incentives and the potential for inclusivity that other systems cannot replicate, many promises, such as banking services for unbanked populations, have yet to materialize. Even stablecoins, which are cryptocurrencies pegged to stable assets like the US dollar or the euro, have not been able to realize their full potential outside of speculative trading environments.
While the perfect tool for commerce and transfer of value without the volatility characteristic of most other cryptocurrencies, those who currently hold stablecoins are more attracted to depositing them in savings-like vehicles rather than spending them. In this context, wallet is the process of holding a certain amount of cryptocurrency in order to participate in the maintenance and verification of the blockchain network in exchange for a reward.
An important reason why stablecoin holders are attracted to staking is that staking ensures a sure way to earn a return on their stablecoin without having to sell it to anyone. Furthermore, if the yield generated is higher than that available through other options, such as traditional interest-bearing accounts or loans, then placing the bet becomes more attractive.
The question arises, how to encourage usage, and what needs to be done to change the existing habits of traders, so that incentivizing usage becomes the driving force of their actions?
current market situation
A protocol, in the context of blockchain and cryptocurrency, is a set of rules and standards that govern how a particular ecosystem operates.
In order for a protocol to gain widespread adoption and establish itself within an ecosystem, it typically needs to offer some sort of unique value proposition or solve a problem that existing protocols do not effectively address. unable to address. In addition to the value proposition, a thriving protocol seeks to tokenize velocity, or the movement of tokens through its ecosystem, usually a byproduct of an accompanying product, service, or functionality.
However, many protocols end up attracting users through short-term incentives such as airdrops (free tokens) and promises of high yields (in the form of APY) for depositors, leading to a lack of long-term stability. This has resulted in a phenomenon whereby users are more satisfied to buy crypto, stake them, and generate returns, rather than encourage their use in transactions.
Users holding large amounts of cryptocurrency rush to stake their coins in these protocols because they are only interested in short-term rewards and the high yields they can generate from their assets. Therefore, users are reluctant to spend cryptocurrencies because they believe that hoarding their crypto will yield more returns than partaking in the protocol’s transaction fees. As returns diminish over time, and users have no incentive to keep their deposits, they eventually switch protocols.
At the same time, retailers are hesitant to accept these tokens as payment, especially stable coins, as they are not widely used in commerce. In order to accept crypto, retailers must invest in the infrastructure needed to process digital currency payments without any guarantees that customers will actually use the system. It’s a risky proposition that many retailers and service providers are hesitant to take.
Together these issues form the crux of crypto’s usability problem: If people have no real reason to use the protocol beyond incentive schemes, platforms die when incentives disappear. This has extended to use in commerce as well. Without willing spenders and willing takers, the usefulness of stable coins as a medium of exchange becomes even more limited.
Utility mining offers a powerful response
Incentive mechanisms need to be reworked so that the utility of protocols becomes the core value proposition, ensuring that protocols can attract capital and promote utility equitably and sustainably.
While the central idea of Web3 is to ensure a fair system of rewards for actual users by aligning incentives with certain activities, yield generation does not always align with the goals of the protocol, as it does not incentivize protocol use. Utility mining can change that at stake by adopting a network model that incentivizes token velocity through the ecosystem.
Unlike staking tokens directly into a staking mechanism to generate returns, utility mining involves swapping one crypto asset for another at a 1:1 ratio. The swapped assets are known as “wrapped tokens” and the process is known as “wrapping”.
One of the main advantages of wrapping assets is that it provides a dual-use route for a single token: depositing unwritten tokens and transacting in wrapped tokens simultaneously. By following this model, protocols can deposit users’ native “unwritten” tokens into a staking pool to generate yield. In the meantime, users can take the “wrapped” tokens and use them in on-chain transactions.
When transacting in wrapped tokens, the sender and recipient split the on-chain transaction fee. In addition, the amount of rewards distributed to these users may fluctuate depending on the staked, unwrapped tokens. Yields can fluctuate based on various factors such as gas fees, platform fees, transaction volume and APY, but this model provides token holders with a two-way yield generation mechanism: yield from transactions and yield from stake.
Together, these utility mining features address the on-chain activity dilemma and, by extension, the velocity question by closing gaps in existing incentive programs. By sustainably incentivizing participation in on-chain transactions through a reward mechanism, the utility mining model effectively creates a circular economy, ensuring a more equitable and sustainable yield distribution that incentivizes use.
About the Author
shahmeer chaudhary is the co-founder and CEO of fluidity, a blockchain incentive layer. Shahmir was first introduced to bitcoin in 2013 and later became active in arbitrage trading. A recent graduate of the University of Adelaide with an advanced computer science degree, Shahmir is highly active within the blockchain space, guiding the long-term strategic vision for Liquidity while navigating and engaging with key players and partners. He previously served as a board member at the Blockchain Acceleration Foundation, helping to formulate the organization’s roadmap.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.