Thoughts on L2 tokenomics

Why token?

It’s possible to operate a rollup chain without its native token — you simply charge a commission/L2 fees over and above the ETH paid to L1. But here are some ways a native token for the rollup helps.

Decentralizing the protocol with a governance token

With a governance token, you’re decentralizing the entire rollup chain in every way. Sure, a rollup can remain private, and their private investors can be issued dividends from the L2 fees, but it seems very much like most rollups will be fully decentralizing their systems.

Distribution

Token distribution has always been a challenge for blockchain protocols. We had the “fair mining” launch in the early days, but this usually ended up with a small number of people mining a significant proportion of the supply. We then had ICOs, but these have gone out of fashion for various reasons. Airdrops were sybil attacked and exploited. In 2020, we unleashed new forms of token distribution — targeted airdrops and usage incentives. UNI proved that a wide, targeted airdrop can be effective, while plenty of other protocols have usage incentives — mostly liquidity mining. Pretty much every new project/token since has followed this model, for good reason.

Usage incentives

It can go beyond just the initial token distribution — users can be gradually distributed tokens based on their usage. Polygon is already experimenting with this, with liquidity mining for MATIC on Aave. Partnerships with top blue chip projects is definitely an avenue to consider. But this can be expanded upon.

Treasury

In addition to native tokens, those L2 fees can continue piling up in the treasury. For most rollups this will be ETH, but it’s possible to collect fees in multiple tokens. At this point, it becomes like any governance treasury — we have plenty of examples from the DeFi space. A portion of these fees can be distributed to token holders, they could be used to buy back and/or burn the token. Governance can list proposals, and grants can be issued for continuing research, development and marketing of the platform.

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Polynya

Polynya

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Rants and musings on blockchain tech. All content here in the public domain, please feel free to share/adapt/republish.