Ep 67: Adverse Selection In Crypto | Valkyrie Protocol
Valkyrie Protocol
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TLDR below. This is not financial advice.
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Introduction: What Is The Valkyrie Protocol?
The Valkyrie protocol is what is called an activation protocol. This protocol wants to help other protocols on the Terra network to launch effectively by creating social campaigns and offering different kinds of referral programmes. They want to be the marketing arm for any protocol that is built on the Terra blockchain.
Benefits
Users get to participate in campaigns and get exposure to new projects as well as get new tokens. The people who are creating the awareness are the influencers and they get tokens as a result. This is basically a tool or an infrastructure to allow any protocol to design marketing campaigns to target a specific kind of outreach or to get different kinds of social activation or network effects in your system.
This is very important because in the Economic Design framework, market design is very important and part of the market design is the thickness of the market. What protocols want to do is to create enough thickness in the market and they definitely need people involved, which is where Valkyrie comes in to help them.
Three Key Highlights:
This is an innovative referral protocol because referral programmes are usually done internally within the protocol, but Valkyrie is trying to standardise it a little bit more and help with referrals for any ecosystem.
Each of these campaigns is defined by different parameters such as your budget, goals, different reward weightage, and reward distribution. This helps a user to come in and compare against the returns by all these different protocols and get to choose the best one.
There is a token involved and this $VKR token is required as a deposit fee when creating all these different campaigns.
Functions of The Valkyrie Protocol
Campaigns
Earn, trade, stake, and govern
Do We Really Need This Protocol And Are The Incentives Aligned?
All protocols have their internal token and, usually, this internal token or native token is used to help bootstrap the community. They do not have to pay anything and in the very literal sense you can print tokens out of nothing. However, of course, there are a lot of long-term implications arising from this.
When you want to bootstrap your community, you have yield farming and liquidity mining, and can just create tokens and give these to your community. There is no tangible cost that is reflective in your profit and loss. This is the existing model.
Valkyrie wants people to pay them to distribute the tokens. You have to start minting and accounting for it and then you have to pay that and the $VKR token as well. Now, this becomes something tangible in the account books and you can allocate it using a protocol. However, as a protocol or as a third party would you want to have a referral programme via a protocol or are you comfortable with just printing tokens out of thin air and rewarding your early bootstrappers?.
Economic Misalignment
In a system, there are two types of economic misalignment and we talk about them in our book:
Moral hazard
Adverse selection
Adverse Selection
The whole point of the Valkyrie ecosystem is for people to come in to speculate on which tokens could go up and then get their family and friends to come in to get more tokens and then sell the tokens.
As much as this can help with the cosmetic metrics like increasing the daily active users or increasing the wallet addresses in the ecosystem, they are not real value creators and are more like value extractors that take your tokens, dump them, and move on. On the other hand, value creators are people who are in your system for the long run, who are there because they are interested in the tokens or are interested in the platform and not just because of the token pricing. These are the people we want to incentivise. Valkyrie’s entire business model is very focused on the other kind of users who are interested in just getting free tokens, free gifts, and airdrops so as to sell the tokens and then move on to the next one.
The economic structure is designed in a way that it adversely selects or attracts people who are interested in free tokens. This might not be the best protocol for the Terra ecosystem moving forward. This is something very important to consider because before you even start talking about how to design tokens, you need to make sure that your economic model is sound. If your base economic model, or your base business model and revenue stream is not relating to value accrual or value creation but just value extraction (which is what we see in this model), then you can never build a good token mode,l because that kind of model will never help to buffer against the bad kind of moral hazard or adverse selection in the core business model.
Economic Model
Business Model: Step number one is to figure out your business model.
Value Creation: Step number two is to understand value accrual. If it is value extraction then you have to go back to step one and rethink your business model again. If it is value creation then that is good and we can move on to step number three.
Token Design: Step number three is designing the token model. The token model could be really interesting or innovative, but if your business model is about value extraction and not value creation then there is going to be a challenge in creating longevity in the system.
Opinions
Valkyrie protocol is one of the first protocols with the concept of share to earn. The largest risk of Valkyrie is the lack of utility. The $VKR token does not have much utility outside of the internal system which is fine, but there are problems even within the internal system.
The two major problems are:
It becomes a real expenditure for a protocol to start a referral programme with Valkyrie. They do not have that kind of real expenditure if they do it internally within the protocol.
The nature of the business adversely selects for value extractors as users instead of value creators.
A protocol definitely needs their value creation to be so much more than just doing a referral programme. Unfortunately, there is not that kind of value alignment within the Valkyrie protocol and, as a result, unless it can come up with a better use case for the $VKR token and reshape its underlying business model, this might be a challenge moving forward.
Conclusion:
The Valkyrie protocol wants to help other protocols on the Terra network to launch effectively by creating social campaigns and offering different kinds of referral programmes. The whole point of the Valkyrie ecosystem is for people to come in to speculate on which tokens could go up and then just get their family and friends to come in to get more tokens and then dump the tokens. A protocol definitely needs their value creation to be so much more than just a referral programme. Unfortunately, there is not that kind of value alignment within the Valkyrie protocol.
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TLDR: The Valkyrie protocol wants to help other protocols on the Terra network to launch effectively by creating social campaigns and offering different kinds of referral programmes. Valkyrie’s entire business model is very focused on the kind of users that are interested in just getting free tokens, free gifts, and airdrops so as to sell the tokens and then move on to the next one. The economic structure is designed in a way that it adversely selects or attracts people who are interested in free tokens.