Hats Protocol Economics — Part I

Long-term sustainability and token utility

Summary

• Hats.Finance presents the new tokenomics for Hats Version 2
• Using the “voting escrow” token model it will be possible to lock $HATS for governance rights and additional utility using the protocol
• When locking $HATS the staker can boost vaults to reduce fees and increase liquidity incentives
• Part II of this article will elaborate on a new concept around fees and how the protocol earns revenue

Introduction

Our roadmap for HatsV2 will bring new features and introduce new tokenomics, giving the Hats token more utility. Based on the “Voting Escrow Token” or short “veToken” design popularized by the decentralized trading protocol Curve.Fi, we will create a system that rewards long-term supporters of the protocol by giving them benefits while using Hats.

The core design behind V2 is the possibility for token holders to lock their tokens for different periods of time and get rewarded depending on the lockup period. In exchange for locking their $HATS token, holders will get a non-transferable token called $veHATS that represents their voting power. The longer the locking period the more $veHATS the token holder will receive.

It’s important to reward those who are the biggest supporters of the protocol. Therefore $veHATS will be applicable for liquidity mining incentives additionally to the vaults. Since emissions are based on the amount of $veHATS held, the reward grows proportionally to the locking period.

Ve-Tokens As A Governance Mechanism

$veHATS will be the governance token of HatsDAO and will be used to vote on all decisions we as a community need to make, from protocol upgrades to treasury management. We want to attract a community that wants to grow the Web3 ecosystem and make it safer for everyone.

Using $veHATS to vote on proposals will put the governance power into the right hands since community members who are willing to lock their tokens show conviction and long-term orientation.

The locking mechanism will mitigate any concerns around rogue voting. Rogue voting is when bad actors are acquiring governance power for a short period of time to influence decisions for personal benefit, not necessarily benefitting the Hats protocol.

In the future, we plan to utilize assets within vaults for meta governance and play an active role in other DAOs. Having robust governance mechanisms in place will increase trust from our partners that we will govern in good faith.

Gaining Utility By Locking Tokens

Stakers will get additional utility when using the Hats protocol. Once a community member locks their token in the voting escrow they can choose to boost a vault or to split up the boosting power between multiple vaults. Boosting has great benefits for a vault, it reduces protocol fees, increases the liquidity mining incentives, and helps to promote the vault to more white hat hackers and liquidity providers.

In HatsV1 vaults are free to use, only a small fee is taken once a bounty is paid out. In HatsV2 we will introduce a new concept around fees to ensure the sustainability of the Hats protocol.

Boosting a vault will reduce those fees and give stakers the opportunity to keep using the protocol without any additional costs. Until incentives end, each vault has the chance to earn enough $HATS via liquidity mining to achieve the highest level of boost and reduce the fees, potentially even to zero.

Part II of this article will do a deep dive into the new fee model and its effect on the tokenomics.

The boost level will influence the amount of liquidity mining incentives that will be allocated towards the vault. It’s a great way to attract more liquidity and reward community members that take part in securing a protocol. The level of boosting power allocated towards a vault will automatically determine the amount of liquidity mining incentives, therefore there is no additional voting needed to decide on the distribution. This is a difference from other veToken models where the governance votes on the emissions for each pool and therefore the same voting power can be utilized to have an impact on multiple pools simultaneously.

Lastly, the accumulated boost will determine a vault’s visibility in the Hats UI. The list of vaults will be sorted by the amount of allocated $veHATS and vaults with the highest boost will be displayed most prominently on the front page. This will increase the vault’s attention from white hats and liquidity providers alike. And we have further new features in the pipeline to channel awareness into specific vaults like special promotions for fully boosted vaults, coverage of new smart contracts, and hacking challenges.

Benefits Of The VeToken Model For The Hats Protocol

The aspects of rewarding supporters of the Hats protocol and making governance more robust were already highlighted. Now let’s investigate the benefits the ve-model has for tokenomics.

Since each DAO has a strong incentive to fully boost their vault and unlock all described utilities, each new vault is increasing the demand for the $HATS token. The Hats protocol is creating more value for its participants the more vaults are being opened. With the ve-model we are able to reflect this in our tokenomics in a very natural way.

The whole economic design of Hats is focused on gaining more bounties, more white hats, and more liquidity. These factors are amplifying each other and create an economy of scale which can only be achieved by a decentral protocol that allows participants to have control and security without a central party that needs to keep up with scaling.

A Potential Outlook

To explain how the different mechanisms work we want to calculate a scenario with work in progress numbers. These numbers are not final and we reserve the right to change any parameter based on future conditions and the feedback we will receive from the community.

In our example, we introduce three vesting periods that provide different amounts of governance power in form of $veHATS proportionally to the time $HATS is locked.

To fully boost a vault and get the maximum benefits 4,000 $veHATS are required. While the liquidity mining is running every DAO with a vault will be able to acquire the needed $HATS token to fully boost their vault.

If the DAO owns 40% of the liquidity in the vault it will take on average 56 days to earn enough $HATS to boost the vault completely. And if the community is joining the effort of locking $HATS to increase liquidity mining incentives, the maximum boost could be achieved even earlier.

For projects that opened their vaults before or while the liquidity mining, the new fees could never come into effect as long as they are not exiting their stake at Hats.

Additionally, once the new fee concept will be deployed, assets within a vault will be used to generate yield. This yield can be handed down to liquidity providers completely once a vault is fully boosted, reducing the opportunity costs for participating in a vault and therefore making the vault even more attractive.

Final Remarks

The effect we as a core team are aiming for by introducing this concept of voting-escrow tokens is to empower the community. This design will give community members a clearer understanding of what they can expect when getting involved and owning a share of the protocol.

The Hats token shouldn’t be limited to some obscure claim of decentral ownership but rather a gateway to a community including utilities that are reserved for long-term supporters.

Tokenomics is a rapidly evolving field and together with our plans to decentralize governance we, as a community, will continue to explore new possibilities to make Hats more decentralized and sustainable.