- Q’s economic design has a clear value accrual mechanism: stakeholders that support the protocol’s security, including Q token holders, are rewarded with Q tokens.
- Q introduces the concept of governance fees, which are paid by projects that benefit from Q’s governance security.
- Governance fees create superior economics compared to protocols that rely purely on transaction fees.
- The more value is secured by Q, the greater the fees to Q stakeholders become, which increases the economic security offered by Q. This creates a positive feedback loop, since higher security attracts more projects that can benefit from Q’s shared governance security pool.
Value accrual to token holders – a pain point in crypto
A pervasive problem faced by many protocols is the lack of an economic connection between the native token and the protocol itself. This results in the project’s native tokens existing in a vacuum entirely disjointed from any value creation occurring on the protocol that it supports. The link between the protocol and its token is often purely memetic, which is why critics have called governance tokens “memecoins with extra steps”.
In practice, this means that many protocols struggle to generate meaningful and sustainable fee streams for token holders. Even for Layer 1 blockchains that generate transaction fees, fee income is often meager compared to the value of what is being built on the protocol. And many Layer 2 protocols do not even distribute fee income that they generate to token holders.
Some protocols wrongly use the pretext of regulatory concerns as the reason why value accrual mechanisms were not implemented. But that justification oftentimes does not withstand deeper examination into applicable regulations.
Q’s economics set the protocol apart from many projects that do not have an economic tie between the protocol and its token. Sound economics are the basis for Q’s growth.
Q’s economics: Value accrual as a basis for economic security
In stark contrast to many other protocols, sound economic design is at the heart of Q.
As outlined in the Q Whitepaper, value accrual and distribution mechanisms through a variety of fee streams are baked into the fabric of Q. This creates meaningful value for stakeholders who contribute to the governance security on Q through voting on decisions, running Validators, or exercising oversight as Root Nodes. The logic behind this design was to make it economically attractive for people to participate in Q and support the security of the Q Protocol as well as projects using Q’s opt-in governance features.
So far, the results speak for themselves: Q has attracted some of the most sophisticated and professional players in the industry to engage with and secure Q. As an example, readers can check out Q’s root node panel, which boasts top academics, lawyers, infrastructure providers and investors in the crypto space. These stakeholders are rewarded with Q tokens, creating a positive relationship between the fees generated by Q and the economic security of the Q Protocol. This close link is key to creating Shared Governance Security – a key feature unique to Q.
Introducing Governance Services
While the basic economics of Q have been in place since mainnet launch, they have recently received an upgrade: Fundamental Constitution Proposal #6 introduced a new source of sustainable fee generation to the Q Protocol in the form of governance fees paid by Integrated Applications on Q. Governance fees by protocols using Q’s opt-in governance features are thus added to other existing sources of rewards for Q stakeholders and push the concept of shared governance security even further.
The introduction of Governance Services allows projects to integrate their governance structure with that of Q, enhancing their governance security. In return, projects pay governance fees, which are distributed to Q stakeholders.
For instance, a DAO which seeks to further decentralize by giving members access to its treasury to fund specific tasks related to the DAO purpose can subject its treasury to oversight on Q and enjoy the same degree of governance security that Q currently does. Most recently, Startup Live DAO was successfully onboarded, and they asked for oversight of their treasury. Startup Live DAO formed the community of Startup Live, which is an initiative running accelerator and pre-accelerator programs to support entrepreneurs. They wished to use the DAO treasury to pay for DAO members’ travels to conferences but also wanted to prevent excessive spending in that area and spending for other purposes. This is where the Root Nodes come in.
Controversial treasury spending proposals can be appealed to and examined by the Q Root Nodes, who have fundamentally nothing to gain from harming the DAO in question and are incentivized to act correctly to avoid slashing of their stake and personal reputational damage. Further, the neutrality and functionality of the Root Node panel is secured through a variety of mechanisms on Q including so-called Layer Zero governance. Also, the panel is diversified so that its successful corruption would require efforts across 6 continents and multiple verticals including academia, lawyers and corporates. Because of this, projects can prevent internal governance exploits through recourse to a credibly neutral and credibly fair body with no vested interest in that project. For providing governance security, Q stakeholders receive additional tokens in the form of governance fees.
This concept allows applications to upgrade the governance security of applications building with Q, while the Q Protocol captures a percentage of the value created in this way. This in turn creates a sustainable fee source to governance participants and token holders.
Overview of Economics of Q
The following provides a high-level overview the economics of Q:
Some fees generated within the protocol and distributed to Q’s stakeholders are familiar from other types of protocols: transaction fees, an inflation subsidy, and Q Tokens captured from slashing penalties.
What sets Q apart is the provision of governance services for applications building on Q (or with Q’s cross-chain-capabilities that are currently in development, even on other chains).
Q token holders benefit from all of these by simply locking their Q tokens in a dedicated Q vault. This does not require a time-lock and enables Q token holders to participate in votes on Q. By simply depositing their tokens into a vault, Q tokens holders are rewarded for contributing to the stability of the Q ecosystem.
To receive even more rewards, Q token holders can delegate their stake to validators on Q. This entails a time-lock, where withdrawals are subject to a waiting period of 21 days. Q token holders can select validators based on personal preference and split their delegations between several validators.
Q community members who want to contribute even more to the system’s security may be elected as Root Nodes to exercise governance oversight within the Q ecosystem and for integrated applications. Root nodes on Q receive a compensation denominated in Q tokens.
For the more technically savvy Q Token Holders, spinning up a validator node can be an attractive option. Validators receive rewards for supporting transaction security on Q, whereby the level of rewards is determined by the total accountable stake of the validator.
Details of how fees are split between stakeholders of Q are laid down in Appendix 7, Part A of the Q Constitution.
Sound Economics: The Basis for Security and Sustainability
The philosophy behind Q’s economic model is that a share of the value created by Q accrues to the stakeholders that provide the underlying infrastructure and security: Q’s governance participants and Q token holders. This improves both transaction and governance security provided by Q, which in turn attracts top ecosystem participants. The result is a positive feedback loop: the more projects integrate with Q and the greater the value protected by Q, the more governance fees are generated; this attracts sophisticated and professional participants to Q as Validators and Root Nodes, which in turn strengthens shared governance security on Q.
The principle behind the positive impact of governance fees on governance security is similar to the principle behind transaction security through validators: transaction fees and inflation rewards are important in a proof-of-stake network because they incentivize people to spin up validators on the network. The more competitive the fees for validators, the more dedicated validators a network is likely to attract.
Thus, the logic here is that the more capital you put in as rewards, the better participants you will likely get. If the Q Protocol increases the sources for rewards and the amount of rewards for its participants, it can attract validators to run on it without having to scale up inflation rewards or rely on transaction fees. This results in a positive feedback loop.
Applying this same reasoning to governance security, rewards paid to Root Nodes through governance fees attract persons or organizations who are dedicated and specialized in governance. This in turn benefits the whole protocol broader ecosystem, since the unhealthy dependence on inflation subsidies or highly volatile transaction fees disappears. The result is an economic model which is sustainable in the long run, does not depend on subsidies and forms the basis for the governance security which Q provides.
Would you like to learn more? Explore how you can participate in Q
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