Mechanics Part 1: Safe Harvest of Rewards & Intrinsic Value
This is the first of 4 “juicy” posts on mechanics.
For anything that is not clear, jump into our Discord and join the discussion.
Safe Harvest of Rewards, eh?
From our last post, hopefully you’re beginning to see that TempleDAO lands differently. The concepts are familiar, but reimagined.
We do not mint infinite rewards for farmers. We conduct a Safe Harvest of $TEMPLE rewards in an innovative way.
Let’s explore this with the most basic mechanism of $TEMPLE: buying and staking.
There are two ways for Believers to enter the Temple:
- The automated market maker (AMM)
- The TempleDAO dApp
Here are the differences between these two pathways to the $TEMPLE:
1- Buying on the AMM is a time-honored DeFi tradition that is trust less and familiar. However it incurs slippage and swap fees, but worst of all, the capital you bring to the ecosystem gets locked in the AMM and can’t be put to work to benefit the Temple community.
At the same time, buying on the AMM drives price appreciation. This is “good” — everyone likes the price to go up — but if the increased premium in the token can be captured by the next seller, the incentive to sell eventually becomes irresistible.
The AMM dynamic is like a game of chicken — hold on as long as you can, letting the price rise, but get out first, and don’t be left holding the bag.
2- Buy $TEMPLE from TempleDAO. This is one of the TempleDAO mechanisms designed to mitigate the inherent volatility in utilizing AMM pairs. This frictionless OTC pathway does not impact the AMM price and there is no slippage — you buy at a price that is pegged to a modest multiple of the current intrinsic value of protocol reserves and $TEMPLE is sent to your wallet.
Thus the funds used to purchase $TEMPLE are retained by the protocol in its own reserves and deployed immediately to generate yield instead of stagnating in the DEX pool. Money from new $TEMPLE stakeholders plus the net inflows from current deployments further grows the protocol reserve assets.
And growth in protocol reserves mean growth in protocol-controlled intrinsic value.
This is where the simple yet powerful concept lands: Safe Harvest of $TEMPLE Rewards.
Rather than just minting an arbitrary amount of tokens or giving some second freebie governance token, we believe that rewards should not dilute intrinsic value. Excessive minting of $TEMPLE rewards would dilute the value of the token and create a negative feedback loop of endless dumping. With our Safe Harvest of $TEMPLE rewards feature, $TEMPLE can only be minted when there is growth in protocol reserves and intrinsic value.
This is a simple but revolutionary idea.
How does it work?
Let’s run an example.
Every epoch the protocol calculates the increase in the intrinsic value of reserves.
If today the reserves are $100 and there are 50 $TEMPLE tokens. This would mean that intrinsic value is $100 / 50 = $2 per token.
Later if reserves increase by $30, this means that intrinsic value will have increased to
$130 / 50 = $2.60 per token.
Intrinsic value has increased by $0.60.
If we mint new tokens, this will decrease the intrinsic value from $2.60 down to .. something less.
If we do some math, we can figure out exactly how many tokens we would need to mint to bring the intrinsic value from $2.60 down to $2.00 again.
In this example, that number is 15 tokens.
Because $130 / (50 + 15 = 65) = $2.00 per token.
In this case, if reserves increased by $30 we could increase token supply by 15 tokens and intrinsic value would remain flat.
So 15 tokens is the upper limit of $TEMPLE rewards that we are able to share with the community without diluting the intrinsic value of $TEMPLE.
We do not want to dilute intrinsic value, so our $TEMPLE rewards are constrained by growth in reserves, so the staker will not be diluted. This protects and ensures the long-term value for $TEMPLE holders even though we are minting and providing rewards.
This will mean stakeholders won’t get a 100K% APY inflation yield tokens that are about to get dumped. You are getting a safer yield, backed by real growth in intrinsic value: Safe Harvest of Temple Rewards.
How does this play out in reality?
Here’s another twist: we won’t actually give away all of the Reward Harvest, because we want intrinsic value to rise. If we gave away the maximum Rewards, intrinsic value would stay flat.
In the prior example, if we gave away only 10 (not 15) of new token mints, we would see intrinsic value rise by $0.17 as well as having plenty of tokens available to give a healthy Harvest of Rewards to stakers.
Here’s the run sheet of what will happen in each epoch:
Remember, if we gave out all of the Harvest as $TEMPLE Rewards, intrinsic value would stay flat. This is better than declining, but we want it to rise over time. So we sacrifice some of the Harvest (ie, we do not distribute the maximum amount of $TEMPLE rewards) so that intrinsic value is always increasing.
This begins to highlight what we find appealing about our first product, $TEMPLE:
- Safe Harvest of $TEMPLE Rewards gives confidence about rewards & supply
- $TEMPLE’s intrinsic value rises over time
- $TEMPLE’s price has reduced volatility (see next articles)
Want more detail? Find something confusing?
Let us know in Discord.
Next post coming: Mechanics Part 2: Safe premium & bonus rewards.
Talk more soon fam.
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