As of July 15th, over $500 million in stETH has been staked into the AO network. AO introduces a developer-centric token minting model, differing from Bitcoin and Ethereum, which are miner-centric. Developers can mint AO tokens by locking aoETH through smart contract development. This model offers developers a new financing method, attracting investors with aoETH to join projects and fostering the AO ecosystem's growth.

Author: outprog

Translator: outprog

Reviewer: Tina XU

Source: Content Guild Translation

Let's start with the conclusion: Bitcoin and Ethereum mint tokens for miners, who secure the network and provide computational power in exchange for newly minted tokens. In contrast, AO has created a token minting model oriented towards developers, shifting from miner minting to developer minting. This article will outline AO’s economic model and explain how developers profit throughout the token minting process.

Economic Model

Overview of the economic model:

AR Holders

With a total supply of 66 million AR tokens, if you hold 1 AR in your wallet, the estimated mining rate of AO tokens is:

33.3% * 1 / 66,000,000

Bridged Assets

Not all bridged assets qualify for AO token minting. AO defines strict criteria for eligible assets, which must meet the following two criteria:

Using stETH as an example, as of now, AO's lockup contract on Ethereum holds approximately $530 million worth of stETH, equivalent to 159,580 stETH.

If you bridge 1 stETH, the mining rate can be roughly estimated as:

66.6% * 1 / 159,580

For current staking details, please check Etherscan:

https://etherscan.io/address/0xfe08d40eee53d64936d3128838867c867602665c#tokentxns

After bridging stETH, it converts to aoETH on AO, with 1:1 mapping to stETH. Users holding aoETH can bridge back to Ethereum to retrieve stETH at any time. Holding aoETH allows the wallet to receive minted AO tokens every 5 minutes.

It is important to note that aoETH generated from bridged stETH does not accrue the native yield of stETH, which means that it will not automatically increase in balance like stETH. The value of bridged aoETH is equivalent to ETH but includes additional AO minting capacity.

For example, a user holding 1 stETH on Ethereum with a current annual yield of 3.2% will witness his stETH balance automatically increase to 1.032 after one year (for simplicity, compound interest is not considered), where 1 stETH is the principal and 0.032 stETH is the annual yield. After bridging to aoETH, the yield of 0.032 stETH is forfeited. aoETH loses the native yield of stETH but gains the AO token minting capacity. Curious about where the stETH yield goes? Please refer to the following diagram:

In the diagram, the yellow circles represent stETH, the green circles represent aoETH, and the orange circles represent the annual yield assets.

When stETH is staked and bridged, an equivalent amount of aoETH is mapped out. After bridging, the yield of stETH is allocated to the Permaweb Ecosystem Development Guild (PEDG), which decides its usage. The AO tokens minted by aoETH are then distributed to aoETH holders’ wallets.

Introduction of PEDG from the AO whitepaper:

The PEDG is an organization within the AO ecosystem and builders alliance dedicated to developing, growing, and maintaining the infrastructure necessary for the AO network. Its funding comes from the native yield generated by bridged assets used on the AO network. Rather than funding a single core team, this yield is distributed amongst a diverse set of teams and builders contractually committed to the growth of AO. At the time of AO token release, PEDG consists of 5 ecosystem partners who collaborated on the launch of the AO network, with more partners expected to join as the protocol matures and grows.

AO's minting and distribution can be visualized in the following mind map:

When the economic model was first announced, many criticized that AO token minting benefits stETH holders rather than the AR/AO ecosystem. Most people believed more minting rights should be allocated to AR holders instead of stETH holders. Here is the author's perspective:

More importantly, AO is creating a new token minting model, which is the focus of this article: developer minting. Please continue reading 👇

Developer Minting

From the above discussion, we have learned that AO token minting is closely related to the bridged assets. This process creates aoETH, a bridged asset circulating within AO (with more assets like aoSOL expected in the future). During the AO token minting process, 66.6% of the tokens are distributed to the holders of the bridged assets, such as aoETH. So, is AO just a bridged farming system? It's crucial to understand that aoETH is liquid. Where will this circulating aoETH go?

The answer is: up to $500 million worth of aoETH will flow to ecosystem developers!

This flow does not mean that aoETH will be paid to developers directly but rather that the AO tokens minted by aoETH will flow to developers.

In DeFi, the Total Value Locked (TVL) is a key metric used to measure the total value of assets that are locked or staked in a particular decentralized finance (DeFi) platform or decentralized application (dApp). It indicates the scale and health of a DeFi protocol. The higher the TVL, the more trustworthy the platform or dApp is perceived to be.

When developers create a Uniswap-like trading system on AO, liquidity needs to lock AO's native tokens and various bridged assets. Native tokens must establish liquidity with bridged assets to assign value. High-quality bridged assets will enhance the liquidity and value of AO native tokens. As mentioned, AO bridged assets must be mature, with a diverse and liquid market. aoETH and similar native bridged assets will become preferred liquidity targets. When users establish liquidity with aoETH and AO native assets, aoETH will be locked into the developer's smart contracts, and the AO tokens minted by aoETH will also flow into the developer's contracts. Ultimately, developers can decide how to use these AO tokens. This is the developer minting emphasized in this article.

Currently, the $500 million stETH lockup is continuously growing and is expected to reach several billion dollars in the future. After the AO mainnet officially launches in February next year, these bridged assets will circulate formally. It is foreseeable that billions of dollars in bridged assets will need to be utilized and consumed on AO, with smart contracts developed by developers serving as the consumption scenarios for these bridged assets. Throughout the circulation and locking of aoETH and other bridged assets, the minting rights of AO tokens will ultimately fall into the hands of AO developers. Only by continuously creating more valuable applications can AO developers drive the rise of the AO ecosystem.

An Alternative Investment Method?

For a project to secure investment, it needs not only a good idea but also a compelling deck and a persuasive pitch. Venture capital firms face significant risks when selecting projects (that’s why they are called "venture capital"). A project with a great idea, deck, and pitch does not necessarily guarantee product realization, nor does it ensure the product will meet market demand. The traditional investment process is lengthy and inefficient.

Now there is a better option: as an investor, you can use your annual yield for investment rather than your principal. Developers do not need to rush to perfect their ideas, create a deck, or learn marketing skills like how to pitch. Instead, they can start building their project from a prototype or MVP (minimum viable product). From the beginning, developers should consider staking to involve investors holding aoETH to join their project. As the application prototype begins to take shape, developers will receive financial support from the AO tokens minted by aoETH.

If the project grows, the amount of aoETH staked will increase, leading to greater earnings for the developers. Isn't this a new way of investing? Investors do not risk losing their principal, and developers can build projects incrementally. This approach aligns perfectly with the principles of agile development, making it an agile investment.

An application with real market demand will never lack funding. The market will decide where aoETH flows and where it is staked or locked. Finally, please refer to the diagram above for readers to ponder. This could be an opportunity for AO projects and developers.

References

The AO Protocol: A Decentralized Open-Access Supercomputer：https://www.notion.so/permadao/Developer-Minting-An-Interpretation-of-the-AO-Economic-Model-c70f853618f944eab42a74d2fc68298e?pvs=4#da0d0baa0a8345119a220a75a9fa5bd1

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Disclaimer: This article does not represent the views of PermaDAO. PermaDAO does not provide investment advice or endorse any projects. Readers should comply with their country's laws when engaging in Web3 activities.

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