VEC Supply Control
The tokenomics of VEC are designed to ensure a balanced and controlled supply. The issuance of VEC tokens is carefully managed, taking into account the long-term value and stability of the token balanced against the desire to increase deposits into the protocol. At launch there are two primary mechanisms to control supply; a 3/3 buy and sell tax on the VEC token, and discounted bond issuance.
Taxation
The VEC token initially implements a taxation strategy to deter sales post-rebase and to encourage bond inflows. Note that the intention is to reduce or remove the tax entirely when the ecosystem reaches a tipping point that ensures long-term sustainability. The distribution of the 3% tax taken on buys and sells is structured as follows:
0.75% to VEC backing - to increase VEC backing.
0.75% to svETH reward distributor - to boost staked vETH yield.
0.75% to the protocol treasury - as an operational/emergency fund.
0.75% to vETH and VEC AMM incentives - to boostrap liquidity for both tokens.
This taxation mechanism ensures that the majority of taxes are reinvested into the protocol, which not only supports its growth and sustainability but also acts as a deterrent against rebase farming. Rebase farming, a practice where bots exploit the timing of rebases to sell at peak values right after epochs, as seen in protocols like OHM and Wonderland, becomes less attractive due to the higher tax implications. This approach helps in maintaining stability and encouraging long-term holding among participants.
Another benefit to taxation is that it enables a wider spread between bonding price and market price, as bonding is excluded from taxes. Therefore, even if bonds were sold at the same price as the market, they would have an implied 3% discount because of the lack of taxes. Therefore the minimum bond discount rate is 3%.
Supply Control
In addition to the tax, discounted bonds and controlled inflation sit at the heart of Vector as core mechanisms designed to balance boostrapping incentivization with long-term sustainbaility. These mechanisms work as follows.
Discounted Bond Issuance for Growth: VEC tokens can be minted at a discount, provided they trade above their intrinsic backing, encouraging growth while maintaining value, and simultaenously growing the treasury and VEC backing
Controlled Inflation: The supply of VEC and VEC bonds are managed to prevent excessive inflation, protecting the token's value over time as the price floor increases. VEC's transaction tax helps create a greater discount for bonds without creating greater inflation along with it.
Ensuring Profitability
The Vector Reserve ensures sustainable VEC circulation with a treasury comprising LP positions, managed by a fixed asset ratio, governed by the following formula:
VEC is issued at a discount to incentivize liquidity, spinning a profitable flywheel for the protocol and users. The time until the discounted VEC offering becomes profitable is calculated by:
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