Placeholder Partners: A Brief Overview of the Token Economics of the Decentralized Governance Platform Aragon

This article was published on August 24, 2020, on the Feixiaohao website, with the original title "The Economics of Aragon (ANT)," authored by Chris Burniske, partner at the blockchain investment firm Placeholder.

Over the past three years, Aragon has built a set of governance tools that allow any organization to manage community voting, funds, organizational ownership, and contributor salaries in a legally transparent manner. Creating your own entity can be completed in just a few minutes and a few dollars, with six templates to choose from (as shown below), making entity management as simple as dragging and dropping. Brian Armstrong and Tim Draper have begun to pay attention to its practicality, and you can click here to try it out.

Organizations using these tools operate within Aragon's digital jurisdiction. Just like in the real world, participants in the Aragon virtual world also encounter disagreements. To further establish its jurisdictional rules and resolve conflicts both within and outside the organization, the team has established the Aragon Court, which is now located on the mainnet.

To manage jurisdiction, incentivize jurors, and process infrastructure transactions, Aragon has its own governance asset (ANT) as well as derivative capital assets designed for specific purposes (ANJ, ARA).

The current economy includes:

• ANT as a governance asset, designed to plan for future economics and enhance its store of value status within the Aragon jurisdiction.
• ANT can be staked using a joint curve calculation to mint ANJ.
• ANJ is a capital asset that jurors need to stake to the court system.
• ANT can be staked using a joint dashed line to mint ARA.
• ARA is a capital asset staked by validators to validate the Aragon chain, which is a high-throughput Cosmos zone aimed at alleviating the burden of low-risk transactions.

Here, Robert Greer's classification of asset superclasses is referenced (as shown below). For an in-depth overview of the relationships between crypto assets in the industry, see here.

I previously pointed out that "any crypto asset that wants to transcend the asset bubble and maintain value will need quantitative theory to persuade price." Once the theory is accepted, we can expect market participants to price assets based on that theory.

Cryptographic technology is still in its early stages, and most people dismiss quantitative theories and views on these theories. On the contrary, in most asset classes, the theory is widely accepted, and there are relevant disagreements surrounding its views. This section explores the theory of pricing ANT, leaving it to the reader to decide: 1) whether they agree with the theory, and 2) if they do, which theoretical perspective to use in context.

1. ANT as a governance asset, designed to plan for future economics and strengthen its store of value attributes

As the Aragon team wrote in February 2020, "The Aragon Network has always been managed by ANT holders." At Placeholder, we believe that managing a limited supply asset that continuously appreciates is what constitutes a store of value. In other words, we do not have a model to quantify this store of value, which differs from the other two value drivers of ANT. The store of value premium conferred by governance on the asset is similar to the store of value premium at which gold trades above its fundamental value, both of which are nebulous.

The concept of value management can be conceptualized by observing the seats in the U.S. Senate, House of Representatives, or the presidency. Over the past few decades, the number of these seats has remained fixed (as shown by the data for the House of Representatives). However, as many indicators show, as the value of the U.S. grows, the value of these seats has also increased, most notably the fundraising amounts to win these seats.

Source: https://en.wikipedia.org/wiki/HistoryoftheUnitedStatesHouseofRepresentatives#Numberof_Representatives

We expect that governance networks will provide increasing value to the world, and their assets will exhibit similar dynamics. Such crypto assets can quantify governance value, in contrast to the implicit value of political capital we see today.

Regarding Aragon, the community is still in transition, allowing ANT holders to manage various aspects of the network. Many networks claim they will "decentralize later," but only a portion have begun to practice this arduous process. Since May 2018, the Aragon team has been working to achieve this power transition, and we firmly believe they can accomplish this task.

2. ANT as collateral for minting ANJ; ANJ capital asset

Jurors need to lock ANJ to work for the Aragon court system. ANT is locked using a joint curve calculation (as shown below) to create ANJ. Thus, ANJ is backed by the value of ANT, with the ratio based on the price of ANT serving as the floor price for ANJ. You can stake ANT here to generate ANJ, and over 250 jurors have done so.

Profits come from active cases, as well as the monthly subscription fees paid by DAOs to enter the court. This subscription fee only flows to effectively staked ANJ, which may be drafted to adjudicate disputes when generating subscription revenue.

Since jurors need to lock ANJ to work for the Aragon court system, the potential upstream of ANJ is based on the cash flow of jurors (measured in DAI), making it a clear capital asset. As a capital asset, the value of ANJ is the net present value (NPV) of the jurors' future profits.

Estimating the future profits of jurors requires a lot of assumed data, but here we have compiled a simple model for ANJ. We suggest that this model be forked so that assumptions can be changed and the impact of each input can be observed. Additionally, this is a very basic model, so we hope to see people add the complexities they believe are missing or provide other models. For example, the provided model is built from the bottom up, while Aragon's opportunities can also be captured from the top down. One approach is to start with the addressable market size of small businesses and organizations (30.2 million small businesses in the U.S.) and use an adoption curve similar to the INET model to predict Aragon's penetration in that market (see paragraphs 29-34).

If the ANT underlying ANJ serves as the price floor, then the simulated NPV of jurors who have locked ANJ will serve as a reasonable market value for ANJ. If organizations densely subscribe and use the Aragon court, the reasonable market value of ANJ may exceed the floor of the ANT-ANJ bonding curve. In the short term, buying ANT and converting it to ANJ will be cheaper than directly purchasing ANJ. Thus, market participants have the incentive to buy ANT and convert it to ANJ, and it is expected that this incentive will catalyze the value of ANT until the "NPV-of-ANJ" and "ANJ joint value" align. This is an example of how the derivative asset (ANJ) drives the price discovery of the primary asset (ANT).

While the above model makes intuitive sense to traditional equity or bond analysts, we also expect that the value of ANJ will enter some form of market equilibrium compared to the yield markets of emerging crypto companies. Currently, the yield market for crypto companies has two forms:

• Financial yield: driven by lending markets that borrow crypto assets, primarily for trading purposes.
• Staking yield: earned by asset holders who lock assets to perform consensus work or provide other network services.

ANJ will fall into the staking yield camp, and the total profits of jurors divided by the actual capital rate of staked ANJ will yield the percentage yield of juror capital. For example, if jurors earn $8 million in profits per year while locking $20 million in actual market value, the yield for those jurors would be 40% (excluding costs of other capital expenditures and operating expenses in the denominator).

How does this yield compare to other available yields? For instance, the capital, labor, and risks required to achieve these yields are the sources of juror motivation. Next is the market dynamics detailed above.

3. ANT as collateral for minting ARA; ARA capital asset

The Aragon Chain is part of the community's efforts to expand its jurisdiction globally and improve the efficiency and responsiveness of its processes. The custody and transfer of ANT will remain on Ethereum, while lower-risk activities will be transferred to other lower-cost chains: "The project will also include a bridge to Ethereum to enable data and value transfer between the Aragon Chain and Aragon on Ethereum. Data transmitted through this bridge can trigger operations on the Aragon Chain via Aragon agents on Ethereum."

Below are the reasons the team has proposed for "why Aragon Chain," followed by their exploration of Polkadot and Cosmos, which they considered as two available building platforms, ultimately deciding to build on Cosmos while also providing specifications for Aragon Chain.

Similar to ANJ, ARA will be minted by staking ANT. As the fuel for the Aragon Chain, ARA will also have direct capital asset properties. Similar to ANJ, if the underlying ANT for ARA serves as the price floor, then the NPV of profits for ARA validators can serve as a reasonable price target. We expect similar yield and joint curve parity dynamics, as described in the ANJ section.

We have a question here: must the yield of ARA be higher than that provided by ANJ? The reason for higher yields is that staking ANJ, which serves as jurors, can provide value flows in DAI, while staking ARA to validate the Aragon Chain will provide inflation rewards in ARA, as well as transaction fees in ARA, ANT, or stablecoins (TBD). The higher the risk of the assets paid for the value flows, the more compensation validators may seek.

Due to too many parameters yet to be defined, we do not have a model for ARA at this time, but as the Aragon Chain is about to launch, we may establish an NPV model for validation flows similar to ANJ. From there, a comprehensive model will link the economics of ANJ, ARA, and ANT, which will be the final step.

5. The Future of Software-Based Jurisdiction

One of the founders of the Aragon jurisdiction, Luis Cuende, recently told me, "We have delivered everything outlined in the original white paper." Surprisingly, few crypto teams born during the 2017 frenzy can make similar claims—though many contributors to Aragon were involved in crypto before 2017—and Aragon's achievements demonstrate the community's commitment to its jurisdiction and ideals. Although all work has been completed to date, they believe they are just getting started.

Having known the Aragon team for so many years, we know that Aragon will continue to integrate its jurisdiction and economic factors over time until it finds the best fit for all participants. As a leader in pure software-based jurisdiction, Aragon is doing something significant, and if needed, we encourage you to get involved as well. Understanding Aragon's "priority activities" and contributing your thoughts, energy, or capital to enhance the legitimacy of the court is a great starting point.