Citadel Tokenomics: A Deep Dive
This article begins with a prologue reviewing the socio-economic significance of Bitcoin and Ethereum as well as their respective Tokenomics. If you would like to skip the prologue, we invite you to begin at the section specific to Citadel’s Tokenomics.
Citadel DAO (referred to as Citadel hereinafter) has the tremendous ambition of taking the fundamental value of Bitcoin and escalating it with the innovations of Decentralized Finance. This will be achieved with a combination of excellent partners, incentive aligning Tokenomics, and an empowered community.
This is a steep mountain to climb. Before beginning, we review the landscape we are built upon. We learn from the overarching monetary policy landscape — these are the trails that have been paved to date. With that context, the path for Citadel’s success becomes clear.
A Brief History of Programmable Cryptographic Assets
Cryptography is subtly the most important science of the modern era. It offers the most capable opportunity to protect one’s freedoms, while simultaneously being un-chartered territory for pioneer engineers, artists, and socio-economic thinkers. We know the physical universe is about 13.3 billion years old, presumably incepted by the Big Bang. A mere 13 years ago, a digital cryptographic universe similarly appeared out of an empty void. Where did it come from? Why do we need it? What can we do with it? And how does it enable Citadel to be an explosive windmill of yield generation?
Cryptography enables a transformation of a something into a something else. If the sender of the something else sends a key with the something else, the recipient can effectively reverse the transformation. This is how the world’s information is safely and securely passed around the internet today.
Cryptocurrencies expand on this with one additional rule: once a something is sent, the sender isn’t allowed to send it again. To enforce this rule, a bunch of computers in the network frantically write down that you gave away your precious little bit of data. If you try again, they’ll ignore the subsequent attempt. This irreversibility is important.
No matter how much you beg, you cannot undo the done. There are no computers fast enough, there is no sword sharp enough, and there is no government omnipotent enough to undo the done.
That simple system — irreversibly moving around bytes which you cannot see, taste, smell, hear, or feel — is steadily decomposing the oldest power structures in the world.
The Problem: A Centralized Game
The base asset of the universe is not the US Dollar, or satoshis, or gwei. It’s not seashells either. The base asset of the universe is time. We convert our time into labor. And our labor creates value. If someone — or some entity — is siphoning your value, they are effectively siphoning your time.
Just over thirteen years ago, central and major banks mishandled money that was not theirs. In fact, they were likely borrowing and gambling with your money. They do this often. When they win, they keep the spoils. Once in a while they lose badly, like in 2008. This caused economic turmoil throughout the world. In moments like this, central banks, major banks, and governments collaborate to transform the economic problem into someone else’s problem. Specifically, they seek to make it our problem. In that moment, the hegemonies of the world picked from a cornucopia of financial tricks to steadily extract value from the rest of the world.
For the rest of us, this oft means being able to afford less, needing to work more, and transitively spending less time with loved ones. It means not being able to afford to see the world we sprouted from. For others, the repercussions are more dire. This can mean people going sick or hungry, or not being able to afford shelter or clean water or medicine. This can be the difference between life and death as well as war and peace.
That is their game. And those are their rules. But that isn’t the only game anymore.
The Solution: Bitcoin
On January 3, 2009, Bitcoin was born. Bitcoin was a techno-political response to central authorities (governments, banks, and corporations) coming after everyone’s value. In a moment of one-sided economic warfare, a simple digital store of value emerged. This technology, Bitcoin, represents value — and cannot be seized, censored, or trivially taken. If you can protect your thoughts, you can protect your Bitcoin.
Poetically, Bitcoin’s elegance stemmed from its simplicity. Fitting an ethos of anti-hegemonic global unity, that cryptographic system with that one extra rule — when a something is sent, the sender isn’t allowed to send it again — has revolutionary power. It created an alternative domain where central authorities cannot rewrite the rules. This is a world where one’s value and time are truly safe.
In defining it’s own simple economics in a digital landscape, Bitcoin also revealed something very powerful: there was an empty digital economic universe waiting to be defined. This sort of socio-economic playground was yearning for artists, economic thinkers, and innovators to come shape it. In this universe, the everyday people are the rule-makers. We manifest the colors. We shape the clay.
Monetary Creativity: Ethereum
Ethereum inherited many of Bitcoin’s key monetary properties, while also radicalizing the notion of value representation itself. Ethereum enables Turing-complete templated applications to run on its network. These Turing-complete applications are effectively boundless. Any sequence of operations can be run with deterministic output. Suddenly, this “money” could not only protect value. It could also be or do somethings. This allows us to abandon outdated notions instilled in us from traditional economies.
Not only can Ethereum applications be somethings. But they can also do somethings.
Ethereum — in this verb form — enables applications to do whatever we can think of. This unlocks a world of creative economic rulesets. Descending from this, a world of DeFi (decentralized finance) has evolved. At Citadel, we will channel Bitcoin’s immutable, revolutionary, and historical properties — and extend them with the infinite possibilities of DeFi.
Supply & Demand
Bitcoin and Ethereum differ in some key ways — but we believe they are at their best complimenting one another.
Bitcoin has variable demand based on macro sociological, political, and economic factors. Specifically, Bitcoin demand grows when traditional centralized currencies expose their flaws. On the other side of the supply-demand equation, Bitcoin’s supply schedule elegantly contrasts the extractive models of central banks. Bitcoin’s supply is deterministic, immutable, & the inflation rate is diminishing. That means after any given block there is at least a little more Bitcoin in the world than there was before (until 2140). Critically, the rate of that addition is diminishing over time.
Ethereum’s Tokenomics satisfy different properties than Bitcoin.
With EIP-1559, Ethereum twisted the conventional supply and demand relationship.
To use the Ethereum network, one must use Ether. As usage of the network increases, Ether is burnt. As Ether is burnt, the supply of Ether decreases. The result is that Ether’s supply is inversely correlated to demand to use the network:
In other words, the more the Ethereum network is used, the more Ether is removed from supply.
You may have just noticed a sharp contrast between the inflationary, value-extractive economic schemes of central authorities. While fiat systems take from those who create value, Bitcoin and Ethereum’s models flatten and reduce supply over time, effectively protecting value over time.
This differs from fiat:
Bitcoin has a concrete and deterministic distribution model, shaping it as the world’s best store of value. Ethereum has similar strength, increasing its scarcity and value with usage. These are interesting, but not the end. As was mentioned before, tokens can also be verbs. They can reward their holders.
Beyond this, DeFi has begun exploring and defining a Pandora’s box of Tokenomic models. Out of this box, Citadel defines supply and rewards via the best components of staking models while also drawing inspiration from Curve’s vote escrow and locking model. Citadel will not only reward users with staking and locking emissions, but also with bribes from partner protocols, and finally Bitcoin from yield strategies.
Protocols before Citadel have paved the way and created unique mechanics that helped them build massive communities, substantial revenue, and large treasuries. We took inspiration from Bitcoin, Ethereum, Curve, Badger, and many others to arrive at our proposed model. By leveraging the best components of these systems — as well as adding our own innovations —we propose a sustainable, scalable, and rewarding Tokenomic model for CTDL.
Citadel Tokenomics were designed weighing the strengths of existing Tokenomic models while also taking a fundamental look at what would be most rewarding for our holders. The following conclusions were made and became the basis of our proposed model:
- CTDL, xCTDL, and vlCTDL are supported by the DAO’s Bitcoin-denominated treasury.
- Citadel levers both staking and locking, offering boosted benefits to lockers. These two derivative tokens are xCTDL and vlCTDL.
- vlCTDL holders will receive three forms of rewards: CTDL APR, strategy yielding BTC, and bribes. xCTDL holders will receive CTDL APR.
- Yield from Bitcoin strategies will be shared between vlCTDL holders, and the treasury. The ratio will be governable.
- vlCTDL will dictate Funding as well as BTC delegation between treasury yield strategies.
- Emissions must motivate Treasury Funding while balancing dilution. For our purposes, the definition of Treasury Funding is exchanging CTDL for key assets like Bitcoin and key protocol tokens.
- Emissions should be heavier the first months to grow the treasury to generate yield flywheels quickly.
- Emissions should gracefully lower over time, similar to Bitcoin’s halvings.
- Emissions should be fixed for a given epoch.
- We introduce Elastic Emissions. This model adjusts the portion of emissions going to lockers & stakers vs. Funding based on two factors: (1) the percent of supply that is staked and (2) the ratio between the market cap and treasury value. This model allows emissions to respond to volatility.
We believe these properties best align partner protocols, the contributors, and most importantly the token-holding community. Furthermore, we anticipate the combination of staking, locking, and reflexive emissions will bootstrap Citadel’s powerful treasury. Naturally, this treasury will be comprised of and denominated in Bitcoin. This treasury will also obtain supporting assets such as Convex to accelerate accumulation. This is great in the short term, but it’s also critical to continue to benefit CTDL holders over time.
CTDL can be either staked or locked. Users who prefer their CTDL to be more liquid can stake their CTDL for xCTDL. Those who are comfortable with longer term alignment can lock their CTDL for vlCTDL, which has several additional perks.
To receive xCTDL, users will deposit CTDL into the xCTDL contract, which effectively functions as a vault. At its inception, 1 xCTDL will be equal to 1 CTDL, but as emissions are allocated to stakers and lockers, more CTDL will accumulate in the vault. This means that 1 xCTDL will be worth an increasing amount of CTDL over time. To withdraw from xCTDL there will be a one week vesting period that is triggered on withdrawal. Since this is a community-oriented project, the duration of the vesting period will of course be governable.
Holders of xCTDL will also have the option to lock their xCTDL for a fixed period of 7 epochs (each epoch is 3 weeks, so this amounts to 21 weeks). In return for locking xCTDL, lockers will receive the following rewards:
- 2x boost on CTDL emissions (for example, if a user was receiving 1% of CTDL emissions when staking xCTDL, they would receive 2% with vlCTDL).
- Share of Funding revenue generated — paid out in BTC every 7 epochs
- Share of treasury yield — paid out in BTC once per epoch
- Governance rights to vote on Treasury Funding and Treasury Deployment Strategies
Strategies & The Meta Game
Citadel’s yield strategies are the cornerstone of Citadel’s utility. The founding team and partners are considering many Treasury strategies, many of which are of course enabled by Badger and partner protocols.
It is clear that the more Bitcoin is accumulated, the more value protocols will find from the treasury. A vision of a meta layer to CTDL Funding as well as Citadel’s Bitcoin liquidity will be shared the coming weeks. To scratch the surface, we envision a meta game which:
- Enables the brightest individuals from the ecosystem to put their strategies on stage, creating yield for token holders and the protocol.
- Improves DeFi protocols throughout the space to optimize liquidity, create new vaults, and truly integrate Bitcoin’s deep liquidity in DeFi in novel ways.
- Utilizes vote escrow models (to determine Funding and distribution of key assets) to provide additional intrinsic value to CTDL.
A byproduct of the above qualities is that CTDL’s value should tightly couple with Bitcoin’s value. The more Bitcoin liquidity is desired in DeFi (which we expect to correlate to BTC price), the more motivation there will be to have strategies funded in the Citadel Meta Game. In a sense, this makes CTDL an expanded bet on Bitcoin immersion throughout DeFi.
Emissions & Supply Curve Calculus
Citadel will follow a fixed emission schedule, where each epoch (3 weeks) has a predetermined amount of CTDL emissions. For our emissions, we have created a method that aims to mitigate dilution of xCTDL and vlCTDL holders, while still providing ample opportunity to bootstrap and grow the protocol’s treasury.
The generalized calculus is shown here:
Based on our current models, we propose a system with the constants shown below:
An important and novel key to Citadel’s Tokenomics is the elastic distribution of CTDL emissions. At the start of each epoch, CTDL emissions are minted and distributed to three buckets: locked CTDL, staked CTDL, and Treasury Funding. To balance treasury growth with rewarding token holders, emissions are allocated based on a combination of the percent of supply Staked and the current Market Cap to Treasury ratio (M/T Ratio). For simplification, the ratio will be calculated in USD.
Within each epoch, the allocation of emissions between the three buckets will be calculated and distributed multiple times per day.
Utilizing the M/T ratio to elastically distribute emissions, we can have desired distributions in all market climates. When Citadel’s market cap greatly outpaces it’s treasury value, more emissions will be allocated for Funding (which is how the DAO acquires treasury assets). When the market cap is relatively slumping, more emissions will be allocated for stakers and lockers. Making emissions reflexive to M/T will support long term growth while minimizing the effect of negative macro market conditions.
The key parameters in the emission split equation are:
- Current Market Cap relative to Treasury (MT)
- % of current token supply staked (S%)
- Low Target MT (ltMT) — The lower bound of the target MT ratio range.
- High Target MT (htMT) — The upper bound of the target MT ratio range.
- Max MT (xMT) — MT at which stakers & lockers receive 0 emissions
- Min MT (nMT) — MT at which stakers & lockers receive 100% of emissions
The elastic emissions allocated to stakers & lockers for a given epoch can be calculated as follows:
MT ratio in target range:
if MT > ltMT and MT < htMT
% emissions allocated = % supply locked
MT ratio above target range:
if MT > htMT
% emissions allocated = %S - min(1, ((MT - htMT) / (xMT - htMT))) * %S
MT ratio below target range:
if MT < ltMT
% emissions allocated = %S + (min(1, ((MT - ltMT) / (nMT - ltMT))) * (1-%S))
1 - % allocated to stakers & lockers
Let’s walk through an example, assuming:
- MT Ratio range of 1.1–1.5
- 50% of the supply is staked
- xMT = 3; nMT = .5
- Current MT is 1.2
Since the current MT is in the “target range”, this would mean that 50% of emissions allotted for that period would be distributed to locked & staked CTDL holders. The other 50% would be allocated to Funding activities. Since locked & staked CTDL holder’s balances increase proportionally to Funding emissions, their % share of supply will remain constant — meaning they are not diluted.
Now, let’s assume the parameters above hold constant, except current MT rises to 2. The amount of emissions allocated to lockers and stakers is now approximately 33%. This is calculated as follows:
% allocation to stakers & lockers = 50% * min(1, ((2 - 1.5) / (3 - 1.5))) * 50%
The benefits of allocating emissions based on a combination of percent of supply staked and current market cap / treasury is threefold:
- When M/T is in a “healthy range”, determined by the community, lockers and stakers will have minimal dilution while a share of emissions are still allocated to expanding Citadel’s treasury.
- When Citadel’s market cap is at a large premium to the treasury value, more emissions will be diverted towards Funding (selling CTDL at a premium to grow the treasury). This will have the effect of reducing APY for lockers and stakers, at the cost of slight dilution, potentially leading to price depreciation, while simultaneously growing the treasury — which will drive the market cap to treasury ratio back in range.
- When Citadel’s market cap is at a discount to the treasury value, more emissions will be distributed to lockers and stakers. Higher APY should incentivize more people to lock or stake their CTDL, pushing M/T back into the target range. This has the added benefit of avoiding selling CTDL when it’s trading below or near its “intrinsic value”. In certain situations concentration may even occur where lockers and stakers relative percentage ownership of the supply increases.
At the start of every cycle, market cap, % staked, and % locked will be calculated and applied to the formula detailed above, and the CTDL minted for that cycle will be distributed accordingly:
- Newly minted CTDL allocated to Funding will be sent to a multisig, where it will be deployed for Funding activities.
- Emissions allocated to stakers will be auto-compounded into the xCTDL vault on a per block basis over the course of a cycle.
- Emissions allocated to lockers are used to mint xCTDL and are distributed to lockers pro rata in a “claimable” form.
The particularly astute reader may have noticed that treasury value was left out from the list of parameters calculated per cycle, even though it’s required to determine the allocation breakdown in a given cycle. Due to the complexities of calculating an accurate treasury value in real time, average treasury value will be updated in the allocation equation every seven days. We intend to use a moving average for smoother adjustments.
Another expected result of this system will be generating a strong correlation between the price of Bitcoin and CTDL. When Bitcoin price increases, not only will the treasury value increase, but demand for the treasury’s BTC will. In turn, this will make participation in strategies more lucrative for our partners, which strengthens the aforementioned meta game and desire to bribe vlCTDL holders for both emissions and existing treasury Bitcoin.
To discuss this emission model, we are opening an RFF (Request for Feedback) today. We also will be making some of our internal modeling sheets available to work alongside the community. We look forward to this collaboration, which begins in the Discord.
Citadel is excited to allocate its initial tokens in a fair way which prioritizes the health of key stakeholders like the community, partners, and the contributors who manifest the DAO’s vision. Accordingly, initial allocation is defined accordingly:
- Community Sale to DeFi Users: 60%
- CitadelDAO Treasury: 20% (15% LP & 5% Operations)
- Badger DAO: 10%
- Partner DAOs: 5%
- Early Contributors: 5%
First, the most important and largest cohort are DeFi Users. We have whitelisted users of partner protocols which align with the Citadel ideology. Those whitelisted will be granted the opportunity to swap wBTC for CTDL before the inaugural block. The price will be equal to $21 per CTDL (in wBTC; ETH and stables will also be accepted and swapped for wBTC). This cohort will be allowed to buy as much as they want. Based on the quantity purchased from the whitelist, the next four cohorts will be allocated amounts relative to that.
For instance, if 2,000,000 CTDL were purchased during this initial phase, 666,667 would be allocated for the DAO Treasury (used for Operations and Liquidity Provisioning, which are managed via governance). Similarly, 333,333 CTDL would be allocated for Badger, 166,667 CTDL for Partners, and 166,667 CTDL for Early Contributors.
The core of Citadel is the DAO and the DAO Treasury. The tokenholders from the other cohorts collectively manage this.
One initial and key use of this CTDL is of course liquidity provisioning, which provides price support and generates recurring revenue for the protocol. An additional use case will be operations, such as hiring and salaries. Of the initial 20%, 15% is dedicated to liquidity providing and 5% for continuous operations.
This is also an invitation to those who want to get involved in Citadel. This is an opportunity to make your mark early in the project and have rewards for such.
Citadel is a sub-dao of Badger and will be leveraging resources (like contributors, vaults, and infrastructure) from the Badger ecosystem as well as Badger’s proven yield systems. Accordingly, to align incentives, 10% of the initial supply will be allocated to the Badger treasury, and managed by the Badger DAO.
Citadel is excited to have a partner-first launch, with many of the most exciting and interesting projects in DeFi aligned with Citadel’s core mission. We’ll dive deeper into this throughout the ongoing Knighting rounds. So far, Convex, Tokemak, Alchemix, Redacted Cartel, Ren, and Frax have been announced.
Early Contributors of Citadel will receive 5% of the initial supply. This includes current contributors as well as contributors who join the coming weeks to help the project launch. This rewards them for early work and aligns incentives to ensure the project has a successful launch and fruitful progression.
These tokens will be locked and vested over the first three months. More will be shared about how you can become a CitadelDAO Early Contributor this week!
At Citadel, the goals are bold. The path to the top of this mountain is built upon taking the best components of Tokenomic models as well as leveraging yield generation expertise from partners, Badger, and the community. With this foundation and knowledge, we are only missing one component to reach great heights — an empowered like-minded community who seeks to reach the same peaks we do. We look forward to the adventure.