GIP-13 Tokenomics Update Phase 1: Goldfinch Membership
Authors: @mikesall, @blakewest, and @alvinh
In this phase of the broader Tokenomics V2, we propose the Goldfinch Membership system whereby members can receive a share of protocol fees (“member rewards”) and greater voting power in governance. To participate, members must lock up both GFI tokens and invested capital (either in the Senior Pool or Borrower Pools) in member vaults. Member rewards will be distributed as FIDU, the Senior Pool USDC yield bearing token.
- When paired with locked up capital supply, GFI locked in a member vault will earn a share of protocol fees, aka “member rewards”.
- Capital supply and GFI can be locked for a maximum of 4 years. Longer lockup periods will earn more governance voting power and a greater share of member rewards.
- The percent of protocol fees allocated to member rewards will be managed by DAO governance voting
This proposal helps strengthen Goldfinch’s decentralization. By encoding voting power to be aligned with long-term members, it solidifies the protocol’s ability to continue operating in a fully decentralized manner.
We recognize that governance is the primary reason for people to hold GFI today, and the community has been vocal about their desire for GFI to have stronger utility. It is important for the GFI token to have value, because it is what we will use to reward and penalize participants as the protocol continues to grow and become more open and permissionless. A stronger GFI results in a more robust protocol, a more decentralized and happier community, and rewards all those who contribute to the growth and resilience of Goldfinch.
We propose this Phase 1 as the highest priority and highest value way to add utility to GFI. This proposal neatly aligns a few objectives:
- Add clear utility and value to GFI
- Encourage the single biggest lever for growth, which is increased TVL
- Move decentralized voting power to the most long term aligned and active participants, and away from short term oriented, or inactive holders who don’t actually participate in the protocol.
Members can choose to lock their GFI tokens for a maximum of 4 years, with no minimum. The longer that GFI is locked, the greater its weight in the calculation of both member rewards and governance voting power. Members can elect to extend their lockup period at any time to maintain or increase their weight. Any locked GFI will be truly locked — there will be no ability to withdraw.
If you lock GFI, but do not lock capital supply, you will still get increased voting power, but will not receive member rewards.
Members can choose to lock up their capital supply with the same lockup mechanisms as GFI. Any form of capital — whether in the Senior Pool or Borrower Pools — will count the same.
If you lock up capital supply but do not lock up GFI, there is effectively no change. You will continue to earn investor rewards , but you will not get member rewards or increased voting power.
Lockup period weighting
Based on the length of the lockup period selected, a linear scaling factor is applied to a member’s locked GFI or capital supply to calculate its weighted share. This is similar to how vote weighting works in Curve governance (CurveDAO Whitepaper). A max 4 year lockup period will have a scaling factor of 1.00 applied, and the scaling factor decreases linearly over time. There is also a minimum scaling factor of 1 / (52*4) = ~0.0048, so that there is no minimum lockup (ie. doing no lockup or a 1-week lockup will have identical weight).
This means a member who locks 1,000 GFI for 4 years will have the same weighted share as a member who locks up 208,570 GFI for 1 week. Similarly, a member who locks up $10,000 in capital supply for 4 years will have the same weighted share as a member who locks up $2.08M for 1 week. As these examples illustrate, lockup period weighting greatly encourages long-term participation in the protocol. A true believer in Goldfinch with a small amount of GFI and/or capital supply can increase their scaled weight to match short-term oriented whales. Members will have full control over their lockup periods and can extend their lockup periods at any time.
How are member rewards distributed?
Member rewards will be distributed in FIDU, which is the ERC20 token that represents USDC supplied in the Goldfinch Senior Pool (read more here). This means that Goldfinch will take the protocol fees (which are denominated in USDC), supply the percentage of them allocated toward member rewards into the Senior Pool in exchange for FIDU, and then distribute that FIDU to members who have contributed capital supply.
Distributing in FIDU is advantageous because it means that members will earn additional yield while continuing to support the protocol. The price of FIDU increases against USDC over time from interest payments, so these member rewards are automatically put to work for them. Additionally, Senior Pool capital will naturally grow over time, which further aligns incentives between participants and the protocol. Members will be able to claim their accumulated FIDU member rewards any time with no lock up.
Why require capital supplies?
Going back to the goals outlined above, it’s important to design reward incentives in a way that directly delivers value to the protocol and participants. We believe the best way to do that is to require members who wish to receive member rewards to actually supply some capital in the protocol. The share of rewards that each member receives relates directly to (a) the amount of GFI they have locked and (b) the amount of Goldfinch capital supply locked. This ensures that the protocol rewards members of the community who have strongly aligned incentives with Goldfinch.
- Member invests into the Senior Pool as an LP and/or in Borrower Pools as a Backer
- Member locks their FIDU and/or Backer position in a member vault and chooses a lockup period
- Member locks GFI in a member vault and chooses a lockup period
- Goldfinch periodically supplies a portion of USDC protocol fees into the Senior Pool in exchange for FIDU
- Goldfinch sends this FIDU to a shared member reward pool
- A Goldfinch Rewards Contract calculates what proportion of the member reward pool each member should have claims to based on their weighted amounts of GFI locked up and capital supply locked up
- Members can claim their accumulated FIDU member rewards at any time with no lockup
Member reward share calculation
A member’s precise share of member rewards is calculated by utilizing the Cobb-Douglas function, which is an equation commonly used in economic analysis to ensure stable relationships between two or more distinct inputs that generate an output. Crypto protocols such as 0x and The Graph have successfully utilized the Cobb-Douglas equation in the design of their fee share systems (see here). In order to ensure that all rewards are given out, we also suggest dividing each person’s Cobb-Douglas score by the sum of everyone’s Cobb-Douglas score.
It’s worth noting the overall incentives here. The Cobbs Douglas equation will encourage you to have each side (capital and GFI) proportional to it’s alpha param. Eg. if you have 1.2% of capital, you get the most rewards when you also have 1.2% of GFI. So you could have a lot of capital locked up and basically no GFI (or vice versa), but that wouldn’t be economically optimal. Intuitively, you can see this is true because you multiply the two proportions together. So if you have zero of one side, it doesn’t matter how much of the other you have, you will get zero rewards. And if you have a lot of one, and a really small amount of the other, you’ll still end up with a really small amount of rewards.
The calculation for fee sharing would thus look like this:
Where, over a set period of time:
Γ = Goldfinch total protocol fees
μ = Share of protocol fees sent to shared member rewards pool
Τ = Member’s locked capital supply weighted share
Φ = Member’s locked GFI weighted share
α = Capital supply amplification weight
The two variables in the fee share equation that are determined by governance are:
- μ = Share of protocol fees sent to shared member rewards pool.
- You can think of this as “What percentage of total Goldfinch protocol fees should be allocated to members?”
- Proposed initialization value of μ = 50%
- α = Capital supply amplification weight.
- You can think of this as “How much should we weight locked capital supply, versus locked GFI for fee shares?”
- Proposed initialization value of α = 0.50
The μ and α values can be changed by governance vote. We believe μ = 50% allows the protocol to build sufficient stablecoin reserves for future needs like community grants, and α = 0.50 is a good starting point to observe how dynamics play out between the balances of capital supply and GFI.
As an example:
- Goldfinch earned $3M in total protocol fees over a year
- Alice has a 0.00267% share of total weighted capital supply
- Alice locked up $500 in capital for 4 years, which is $500 total weighted capital supply
- A total of $150M capital was locked up, with an average lock up of 6 months (12.5% weighting), for $18.75M total weighted capital
- Alice’s share of weighted capital supply is $500 / $18.75M = 0.00267%
- Alice has a 0.04% weighted share of total locked GFI
- Alice has locked 100 GFI for 4 years, which is 100 total weighted GFI
- A total of 1,000,000 GFI was locked up, with an average lock up of 1 year (25% weighting), for a 250,000 total weighted GFI
- Alice’s share of weighted GFI is 100 / 250,000 = 0.04%
- Additionally, the Goldfinch community has decided through governance that
- μ = 50% of all protocol fees will be sent to the shared member rewards pool
- α = 0.50 capital supply amplification weight
So the variables in our equation would look as follows:
Γ = $3,000,000 in fees generated by protocol
μ = 50% of protocol fees allocated to members
Τ = 0.00267% member’s share of contributed capital supply
Φ = 0.04% member’s weighted share of locked GFI
α = 0.50 TVL amplification weight
Therefore over that year, Alice would earn:
$3M * 0.50 * .0000267^0.5 * .0004^0.5 = $155 in claimable FIDU
Therefore, if Alice had planned to supply $500 in capital for 4 years, she would earn an additional 31% automatically compounding APY on her USDC by locking 100 GFI as well. Alice can claim her FIDU reward as it’s being accrued and exchange FIDU for USDC, or do nothing and it will auto-compound.
You can play with this spreadsheet to get a feel for different reward amounts for different investments, and lockup periods.
How does locked GFI factor into governance?
With the introduction of Goldfinch Membership, GFI locked in membership vaults will have extra weight towards voting power in protocol governance. Weighted voting power will use the same linear scaling factor based on the lockup period, as described earlier. This is similar to how vote weighting works in Curve governance (CurveDAO Whitepaper). Locked capital supply will not factor into voting power in protocol governance – only locked GFI.
Benefits and Downsides
- Encourages holders of Senior Pool & Backer positions to become hodlers of GFI and vice versa, creating extra strong alignment
- Gives clear utility to holding the GFI token that also clearly benefits the protocol.
- Does not involve any GFI inflation or subsidy, so incentives are driven by fundamental protocol growth and sustainable sources rather than self-referential token prices
- Uses a significant amount of protocol fees on a continuing basis.
- Locking up your GFI would mean that it can’t easily be used as a collateral asset elsewhere in the DeFi ecosystem.
“Yes” - Implement this Tokenomics Phase 1: Goldfinch Membership
“No” - Do nothing.
Goldfinch docs: Senior Pool – FIDU
Spreadsheet playground for understanding fee share amounts
1 - Investor Rewards is the new term for “Senior Pool Liquidity Mining”, (which as also sometimes called “FIDU Staking”)