Doge has seen an explosive growth in value and an influx of new comers after Elon Musk made his own purchase public. Traditional DEFI project is synonymous with complicated procedures and arcane logic, deterring new users from further engagement and sending them to other investing tools that are simple and easy-to-operate. Take liquidity staking and mining as an example. Users drawn to projects with high APY have to pay a series of service fees when purchasing tokens, providing liquidity, staking, etc., and often find themselves in a difficult situation where the price collapses due to over issuance. From this new wave of craziness comes SHIB which attracts loads of participants to launch a campaign called “Eliminating zeros”, the fewer the number of zero in decimal place, the higher the value, thus all attention is on the decimal point. This new logic along with the concept of deflationary token makes things even more interesting.
Deflationary tokens originated from Reflection Finance which issued RFI token with a unique reflection mechanism (also known as static reward mechanism), meaning certain percentage of service fees of each transaction is charged and evenly distributed to all holders. That is to say, users can enjoy yields simply by holding the asset without doing anything else. This is the so-called "holding equates mining".
Deflationary tokens captivate users who are risk averse and at the same time expect high yields by its foreseen deflation attribute. What’s more, the unit price of such tokens is extremely low, a few dollars for tens of millions or even hundreds of millions of tokens, and the dividends of static holding are also shown in the same way, in tens of thousands or hundreds of thousands which sends a direct sense of wealth growth to users. That explains why ordinary investors are willing to invest tens, hundreds, or even thousands of dollars to unlock a potential new password for wealth.
The principle is similar to the dynamic rebasing mechanism of Ampleforth, an algorithmic stablecoin in which the system subtracts each transaction’s service fee from the total sum (initially a very large sum) and then calculates the user’s share over the total, and resets his or her balance according to the rate of total sum over total supply of tokens, instead of sending airdrop transfers to users. Put it in formula: user share/user balance = total share/token supply.
The concept of deflationary tokens is exemplified in some sought-after projects like SafeMoon and PIG which maintain continuous deflation by manually transferring a certain amount of tokens to black hole addresses at the initial stage, or waiving the contract ownership altogether, or burning tokens after a project is launched.
Behind each transaction is a fixed percentage of tokens being distributed or destroyed, which means the price of tokens rises due to the declining supply. For sellers, each sale brings additional loss (a fixed percentage of tokens being deducted due to deflation-induced appreciation of the value); for buyers, tokens bought at the original price will immediately see the value increase. This mechanism encourages buying and holding and penalizes selling.
Unlike the incentive mechanism of FEI Protocol which deducts (burns) tokens from the seller’s account after the transaction, this model directly deducts service fees from the transaction amount and brings premium to buyers. Assuming a 10% service fee, a buyer receives 90 when purchasing 100 tokens.
The mechanism discourages holders from selling because of his or her attempt to profit from other people’s transactions, undermining liquidity providing, thus certain method is needed to provide liquidity and promote currency circulation.
Among the deflationary tokens recently launched by LBank (MEME series), there is a special one which can automatically provide liquidity to its pool, in addition to the existing static reward and dividend mechanism. Take SafeMoon as an example, each transfer deducts 10% service fee from the transfer amount, of which 5% is distributed to holders as dividend, and the other 5% is stored in the contract account as liquidity. When the amount reaches certain threshold, half will be swapped for BNB which pairs with SafeMoon and sent to PancakeSwap’s liquidity pool for "self-growth".
Pseudocode is shown as following:
half = balance of contract token (sfm)/2; //half of SafeMoon in the contract
otherhalf = half;
initialbalance = contract balance (BNB); //BNB balance in the contract
swap half(sfm) for BNB; //swap half of SafeMoon to BNB
newbalance = (contract current balance-initialbalance) BNB; //BNB balance after the swap deducts the previous
add liquidity (otherhalf(sfm), newbalance(BNB)); //pair SafeMoon and BNB to add liquidity
SafeMoon’s blacklist and whitelist mechanisms adapt to various business environment. Blacklist excludes some users from static rewards and dividends, and whitelist prevents addresses added to it from being deducted service fees in transactions.
Whitelist: If either party of a transaction is added to the whitelist, all service fees are exempted. The following is the code and screenshots of the contract:
1: The code shows if either of the transfer-in-or-out accounts belongs to isExcludedfromfee, the whitelist, is exempted from the fee;
2: This is the transfer function. If takeFee variant is false, all fees will be removed;
3: This is the function to remove fees in which taxFee means dividend and liquidityFee means added liquidity.
The above mentioned projects represent a whole type which has no real value support and whose price depends entirely on user consensus. Some projects try to dissolve the issue by painting ambitious blueprint shortly after the launch of its tokens such as establishing a decentralized NFT exchange, issuing on-chain games, engaging in charity and environmental protection, etc., to show that it’s a project with long-term vision rather than some malicious fundraising practice.
As some projects stated in their website and whitepaper that it, in essence, is an experiment. The whole world constructed around the idea of blockchain can be seen as a large-scale social experiment on economics of the virtual world in which human beings navigate through uncharted waters. Survival of the fittest theory, if you approach it from the opposite perspective, not only means losers got eaten, but also unfit ways of living are doomed to fail. The right way stands out after a great many rounds of evolution eliminates the wrong paths. Parallels can be drawn when it comes to blockchain. Efforts put by us will not necessarily yield positive results, but not to no avail, either, as failure underpins the value of this experiment. And let’s not forget perhaps some economic rewards will come along the way. Who knows?