The expected growth calls for the infrastructure necessary to mint, pool liquidity, and distribute social tokens — provided by social token issuers. With deep-dives on Roll and Rally, this article aims to inform future iterations of social token issuers on:
- How to capture value with their native token
- Token design: Fixed supply & Token Bonding Curves (TBCs)
Rally: Capturing the Market Cap of all Social Tokens issued
Rally captures the market cap of all social tokens issued on their platform by backing the social tokens’ liquidity using their native token, $RLY.
On the frontend, users seem to be able to purchase social tokens on the Rally platform through crypto or fiat seamlessly, but in the backend, users are essentially purchasing $RLY to receive social tokens issued by the Rally platform. The process is as followers:
- Using a CEX or DEX pools, users purchase $RLY using fiat or crypto
- The $RLY purchased is then supplied to the social tokens’ liquidity pools
- The $RLY is converted to the social token for the user on the private Rally sidechain
- Social tokens liquidity pools only hold $RLY, and the social tokens are minted relative to $RLY via their bonding curves
Social token purchases from the perspective of the user, and what’s really happening under the hood.
Hence, the Rally token captures value from locking its circulating supply, capturing the market cap of all social tokens issued.
Roll: Owning the CCs issued
Roll takes a more simplistic approach to value capture, owning 1% of every creator’s total social token supply at genesis. In other words, its token could capture 1% of the market cap of social tokens issued.
Importantly, the social tokens issued on Roll are issued directly on Ethereum rather than a private sidechain.
Comparing the mechanisms of value capture, it is likely that Rally’s mechanism will capture more value from its set of creators. While Roll owns just 1% of their social tokens’ genesis supply, the $RLY token captures the market cap of all social tokens on their platform.
However, social tokens issued on Roll are composable as they are issued on Ethereum rather than a private sidechain. They can consequently plug into DeFi protocols, tapping into opportunities ranging from creating money markets on Rari Capital (so fans can lend and borrow tokens to unlock tiered perks and memberships temporarily) to having creators own their own liquidity through Olympus Pro. These potential integrations with the money legos of DeFi could attract more Web 3-native creators.
In essence, the choice of an issuer’s value accrual model depends on the priorities. To capture high value, adopt the Rally model of a native token backing social tokens’ liquidity. To attract Web 3-native creators and leverage the composable money legos of crypto, adopt the Roll model of a small percentage of social tokens owned by the Roll treasury.
Future Opportunities for Value Capture
Today, anybody looking for passive social token exposure lacks the indexes to do so. On Set Protocol, only SuperGroup has created a social token index, with a lack of investors and a >90% weightage towards Friends with Benefits ($FWB).
There are opportunities for Rally and Roll to issue passive social token indexes containing social tokens issued on their respective platforms.
Roll, for instance, could tokenize the portion of its treasury that holds the 1% ownership of all social tokens issued on their platform, and issue it as a passive social token index. As a result, the future Roll token can capture fees from the management of the TokenSet fund. (As a private sidechain, however, Rally would not be able to leverage the tools created by Set Protocol, but can build the TokenSet themselves to capture further value.)
The risk is that anyone else can create a more comprehensive TokenSet across all social tokens, unrestricted to those issued only on Rally or Roll.
The issuers, however, are in unique positions to offer perks to owners of their TokenSets. The 1% ownership of the social tokens currently held by Roll, for example, can be decentralized to a future Roll DAO. Members of the Roll DAO and owners of the TokenSet could unlock the benefits associated with the social tokens that the index is composed of.
For instance, if you purchase some TokenSet tokens and more than 75 $FWB is “contained” within it, you can access the FWB Discord server (subject to your FWB application). Consequently, the user not only benefits from passive social token exposure, but the perks associated with holding the tokens within the index.
The opportunity for value capture through passive provision of index funds is substantial. In traditional finance, asset management holds more than $100 trillion in value. Set Protocol currently holds around $375 million in TVL, which has grown by more than 3 times since January 2021. When you imagine the potential of how any person, brand, or community can create their own social tokens, capturing even 1% of indexed exposure to these assets is an opportunity that cannot be ignored.
Rally: Token Bonding Curves
Rally has had two versions of their token bonding curves since their inception. Both versions featured a Genesis period, which allocates 24% of potential maximum supply to the creator, ensuring that the creator will always have sufficient skin in the game to align incentives with the community.
Rally token model V1: S-curve
The change came as a result of two issues which arose from Rally’s V1 S-curve, as communities entered Phase C of their TBC (when more than 150,000 social tokens are minted):
- High volatility, attracting speculators just as the community hits scale
- As excess demand drives prices up too quickly, it prices out a large cohort of fans
Hence, the linear bonding curve of Rally V2 aims to make Rally a more appealing platform for larger communities:
V2: Linear bonding curve backed by $RLY token
With the linear curve, Rally’s V2 TBC mitigates volatility as communities scale. It also rewards early adopters through its pre-sale period (between 5 to 7 million tokens minted) before the TBC dynamics take place.
Today, social tokens issued on Rally use the linear TBC by default, but communities have the option to use the S-curve if they wish.
Roll: Fixed Supply
Similarly with their value capture mechanism, Roll opts for simplicity with their token design. Social tokens issued on Roll will have a maximum potential supply of 10 million, with 2 million minted at genesis for the creator, and 8 million distributed across 3 years.
The pros and cons of the TBC and fixed supply designs are well-covered in this article by Coinvise, which is summarized below.
Most importantly for adoption, simplicity resonates with creators, who often find a fixed, simply divisible 10 million token supply more digestible than TBC dynamics. As Coopahtroopa explains, “99% of creators have no clue (and likely don’t care) what curve they are using.”
However, because Rally tokens are minted on a TBC, liquidity is guaranteed for traders. Roll’s social tokens, in contrast, require users to bootstrap liquidity. This makes their tokens more volatile than Rally’s and incurs high slippage on trades in their early stages.
Nonetheless, one can argue that social tokens need not have liquidity when communities begin to grow. Communities can start by distributing to existing, committed, long-term-oriented members before facilitating price discovery (attracting fewer speculators). Once a larger community is formed, members can bootstrap liquidity with DEX pools.
Due to the diversity of communities, no token design is one-size-fits-all. As we recommended to Grape Protocol during our accelerator program, future iterations of social token issuers should prioritize flexibility and customization.
Most creators, brands, and communities will migrate from Web 2, so opting for the easily- divisible, fixed supply model should be the default over the complexity of TBCs. It will be important, however, for existing crypto-native creators and communities to be able to choose TBCs for guaranteed liquidity.
From then on, customization can be implemented for both the fixed supply model and TBCs. Coinvise has allowed their creators and communities to customize their fixed supply, while meTokens allows creators to choose their own TBC. Beyond these, the distribution schedule for fixed supply and the pre-sale periods for TBCs can be customized as well.
In summary, future iterations of social token issuers can adopt two methods of value capture:
- Rally model: Capture the entire market cap of social tokens issued by having your native token back their liquidity
- Roll model: Own a small percentage of total potential token supply
To capture further value, consider capturing fees from managing an index of social tokens issued. The future members of issuers’ DAOs can also benefit from the perks of the social tokens held in the issuer’s treasury.
For token designs:
- Rally model: Linear token bonding curve with genesis and pre-sale periods
- Roll model: 10m fixed supply
With the Rally model, issuers can enhance flexibility by allowing creators to choose their own TBC and pre-sale periods. The Roll model can be further customized such that creators can choose their own supply cap and distribution schedule.
Issuers can decide on their token model by understanding the needs of their target creators, brands, and communities. The bottleneck to social token adoption is often education, and issuers hold responsibility in bridging the knowledge gap between Web 2 and Web 3.
This research was a product of our collaboration with Grape Protocol on their potential social token issuer design for creator coins. If you have any questions or if you would like to collaborate, please reach out on Twitter @0xEmerson.
LongHash Ventures is a Web 3 investment fund and accelerator collaborating with founders to build their Web 3 model and tap into the vast potential of Asia. In January 2021, we launched a DeFi-focused fund and invested in projects such as Balancer, Acala, Instadapp, and Zapper. We collaborated with their founders to develop their tokenomics, governance, and communities through Asia DeFi Network.
With our LongHashX Accelerator, we have partnered with Polkadot and Filecoin to build more than 40 global Web 3 projects which have raised more than $100m in the past 3 years. Through such investments and active collaboration, we are committed to realising our mission of catalyzing growth for the next generation of the Web.
Disclaimer: LongHash Ventures may hold positions in some of the assets mentioned in this article.