Web3 version of Nvidia? A deep analysis of the AO economic model

Original author: Biteye core contributor Fishery

Original translation: Biteye core contributor Crush

As a decentralized computing system based on the Arweave platform, AO can support high-concurrency computing tasks and is particularly suitable for big data and AI applications. Due to the uniqueness of its narrative in the entire network, it has attracted the attention of many players. However, AOs highlight is not only its narrative, but also the following curious highlights, such as:

How does AO create a healthy chip distribution and bring about a money-making effect through the clever DeFi economic flywheel?

The mining revenue of DAI is more than 2 times that of stETH. How can users participate in cross-chain mining AO?

A win-win situation for the project and users, a unique narrative for the entire network, and top-notch innovation in the DeFi track... How many noteworthy outstanding performances does AO have?

In this article, Biteye will answer the above questions and deeply analyze the AO economic model to reveal the surprises of AO for you step by step!

01 AO Project Background

AO is a decentralized computing system based on the Arweave platform that adopts the Actor-Oriented Paradigm and is designed to support highly concurrent computing tasks.

Its core goal is to provide trustless computing services, allowing an unlimited number of parallel processes to run, and having a high degree of modularity and verifiability. Combining storage and computing, AO provides a solution that is superior to traditional blockchains.

AO announced its token economic model on June 13, 2024, which is a fair issuance mechanism. This mechanism follows the ancestral system, draws on the economic design of Bitcoin, and innovates the concept of DeFis liquidity incentives.

The innovation part is particularly clever, and its performance after the mainnet circulation is worth looking forward to. It has an eye-catching economic model, and its innovation is also one of the best in the DeFi world.

02 Token Issuance Rules

The total token supply of AO is set at 21 million, the same number as Bitcoin, highlighting the scarcity of AO.

The token issuance adopts a halving mechanism every four years, but a smoother issuance curve is achieved by distributing tokens every five minutes. The current monthly issuance rate is 1.425% of the remaining supply, and this rate will gradually decrease over time.

In this round of bull market, VC coins are launched in huge quantities and the industry chaos is in chaos. Ao is very commendable. It adopts a 100% fair issuance model and abandons the common pre-sale or pre-allocation mechanism.

This decision is intended to ensure that all participants have equal access opportunities. It does not follow the original principles of decentralization and fairness pursued in the cryptocurrency field, and the pattern is very large.

AO’s token distribution rules can be divided into several key stages, each with its own unique characteristics and goals:

Initial stage (February 27, 2024 to June 17, 2024) : In this stage, it can be understood as an airdrop of AO to AR holders. AO adopts a retroactive minting mechanism. Starting from February 27, 2024, all newly minted AO tokens are 100% discharged to AR token holders, providing additional incentives for early AR holders. During this stage, one AR can get 0.016 AO token incentives. If readers hold AR in exchanges or custodians during this period, they can consult about the collection of AO after AO is officially circulated on February 8 next year.

Transition phase (from June 18, 2024) : Starting from June 18, AO introduced a cross-chain bridge. In this phase, the newly minted AO tokens are divided into two parts: 33.3% continues to be distributed to AR token holders, while 66.6% is used to incentivize asset bridging to the AO ecosystem. Currently, users can participate in the token distribution of this phase by depositing stETH (more asset classes will be added in the future). This part is the highlight of participating in the AO ecosystem, which will be discussed below.

Maturity phase (estimated around February 8, 2025) : This phase marks the maturity of the AO token ecosystem. AO tokens will begin to circulate when approximately 15% of the total supply (approximately 3.15 million AO tokens) are minted. This time point is designed to ensure that there is sufficient liquidity and participation in the market before the tokens begin trading. During this phase, the distribution rules remain stable, continuing to follow the model of 33.3% to AR holders and 66.6% for bridge incentives.

In general, approximately 36% of AO tokens during the entire emission process will be distributed to Arweave (AR) token holders (100% before June 18 + 33.3% of subsequent emissions). This design strengthens the close connection between AO and the Arweave ecosystem.

The remaining 64% is used to incentivize external earnings and asset bridging, aiming to promote economic growth and liquidity in the ecosystem.

03 Economic Flywheel

AOs economic model also includes a very novel ecosystem funding allocation mechanism. Users will continue to receive AO token rewards by using the AO funding bridge to cross-chain qualified assets. This is equivalent to being able to continuously obtain DeFi income by cross-chain, which is very attractive to most people. This funding bridge is the core of the AO economic flywheel and the source of income for the project party under the fair issuance mechanism.

This is a relatively new way of playing, and it is worth studying in detail. This section will explain the principle for you.

We must first clarify that obtaining AO assets through cross-chain requires meeting two requirements:

• High-quality assets: These assets must have sufficient liquidity in the market. Usually refers to assets from large public chains. This requirement ensures that the assets that cross the chain to the AO network have wide market recognition and use value.

• Have annualized returns: These assets must be tokens that can generate annualized returns. Currently, stETH is a typical example. In the future, the team intends to introduce stSOL.

It is precisely the above two requirements that can ensure the fair issuance of AO and are the key to the sustainable development and profitability of the project party.

To put it simply, the user pays the interest generated by these interest-bearing assets during the period when they remain on the AO chain to the project party, and in return, the project party mints AO for the user.

The PEDG (Permaweb Ecosystem Development Guild) in the figure received all the interest on stETH.

Specifically, taking stETH as an example, if a user stakes 1 ETH on Lido, he will get 1 stETH. A key feature of stETH is that its balance will automatically increase over time, and the amount of increase depends on the income generated by the staked ETH. Correspondingly, stETH can also be redeemed for ETH at a 1:1 ratio, or traded back to ETH at a price close to 1:1 through the secondary market.

Based on an annualized rate of return of 2.97%, after one year, if this 1 stETH is left on the Ethereum mainnet without any operations, the balance will increase to approximately 1.0297 stETH, and can be exchanged back to 1.0297 ETH.

However, when this 1 stETH is cross-chained through the AO asset bridge, the cross-chain bridge contract of the Ethereum mainnet will receive 1 stETH, and the users AO chain address will receive 1 aoETH. It should be noted that aoETH does not increase its balance over time like stETH.

After one year, since the amount of aoETH itself does not increase automatically over time, the amount of stETH in the Ethereum mainnet cross-chain bridge contract will be more than the total amount of aoETH on AO by one year’s interest. Therefore, even if all aoETH on the AO mainnet is crossed back to the Ethereum mainnet (in extreme cases), the stETH in the mainnet contract will still have a surplus, which is the profit of the project.

At present, 151,570 stETH have been deposited in AOs cross-chain bridge. According to on-chain observations, the project party uses bots to collect profits on a regular basis every day, with daily income of approximately 12 stETH.

This will be a win-win deal, as it will achieve fair issuance of AO without the ugly situation of high FDV and low circulation VC coins, and it will also benefit the project parties.

Based on the 3% stETH interest rate, the team will earn about 4,500 ETH in interest generated by all stETH in one year, and more than 50 million DAI deposited in DSR at 6% interest, totaling more than 10 million US dollars in profit.

This is undoubtedly an excellent fair distribution mechanism, worthy of study for subsequent projects.

But the design of AO economic flywheel is more than that.

In fact, the aoETH mentioned in the first half, whose balance will not increase automatically, is not a supporting role, it is also an indispensable protagonist in the economic flywheel.

You should know that aoETH holders will receive minted AO, so it is also an interest-bearing asset, and its price is 1:1 ETH. In this way, aoETH not only has the liquidity and price stability of mainstream currencies, but also can generate interest on AO, which many people are optimistic about.

The context of income attribution

Such high-quality interest-earning assets naturally require new ways to play.

AO Network proposes an innovative developer coinage model that subverts the traditional project financing and distribution methods. This model not only provides developers with a new source of funds, but also creates a low-risk investment path for investors, while promoting the healthy development of the entire ecosystem.

When developers create DeFi projects on the AO network, they need to lock up AO native tokens and cross-chain assets to provide liquidity.

At this time, cross-chain assets such as aoETH become the preferred liquidity targets. Users lock aoETH in the developers smart contract, which not only increases the total locked value (TVL) of the application, but more importantly, the AO tokens minted by these locked aoETH will be transferred to the developers contract.

This realizes developer minting and provides developers with continuous financial support. It is not difficult to imagine that after stSOL is eligible to mint AO in the future, the DeFi prospects of AO will be brighter.

Because of this, the project will no longer be overly dependent on VC funding, and the distribution of chips will be healthier. As the project develops, the locked aoETH increases, and the AO tokens obtained by developers also increase.

This will create a virtuous circle: high-quality projects attract more funds, which in turn obtain more resources to improve products, and ultimately promote the development of the entire ecosystem. Thanks to this, the ecology of the entire AO chain will be healthier than the ecology of the chain, and a money-making effect will emerge.

This innovative model not only simplifies the traditional investment process, but also allows the market to more directly determine the flow of funds. Truly valuable applications will naturally attract more aoETH locks, thereby gaining more AO token support.

This mechanism effectively aligns the interests of developers with the development of the ecosystem, motivating them to continuously create valuable applications.

This is undoubtedly a win-win situation. From the perspective of investors, using the annualized returns of their assets (rather than the principal) to support projects greatly reduces risks, which will further increase investors investment efforts.

Developers can focus on product development instead of spending a lot of time and energy on financing and chip allocation.

04 Opportunities to participate

Currently, cross-chain mining through the AO official bridge is the most stable way to obtain AO.

On September 5, DAI officially became the second asset that can mine AO after stETH.

The following will analyze how people with different risk preferences can participate in cross-chain mining AO from the perspective of cost-effectiveness and security.

05 Cost-effectiveness

AO is not in circulation yet, there is no price, so the APR cannot be calculated, and it is still in the blind mining stage. Generally speaking, blind mining is more attractive than deterministic DeFi.

Assuming that 1,000 US dollars of stETH and DAI are used to cross-chain mine AO, we compare the cost-effectiveness of the two by predicting the final number of AO obtained.

The result is unexpected!

September 8, DAI mining AO income forecast table

September 23, DAI mining AO income forecast table

Between September 8 and September 23 we made a jaw-dropping discovery:

September 8th was the third day of DAI mining. It was still in the early stages. The mining income of DAI was 10.53579/4.43943 = 2.373 times that of stETH. As a legit project, the income of stablecoins was not less than that of risky assets, but multiples. This is very rare in the DeFi market in the past few years.

At that time, I also noticed this phenomenon and had two considerations. First, it was too early and the market had not yet reacted. Second, there were implicit risks.

Today, DAI mining has been open for nearly 20 days. Logically, the market has almost digested it, but the income of DAI and stETH is still 8.17534/3.33439 = 2.452 times, which is higher than September 8. Unbelievable!

Excluding the market reaction speed factor, there is only one consideration -

06 Risk

According to the attributes of financial assets, the risk brought by stETH price fluctuations should be much higher than that of DAI. Even if you are a complete believer in ETH and firmly hold ETH, you can mortgage ETH and borrow DAI for arbitrage, at least to equalize the interest rate difference between the two. But the market did not do so. It is very unreasonable.

Excluding financial risk, there is still contractual risk.

As mentioned above, AOs stETH mining has undergone a complex and sophisticated design, and the team can get all the benefits of stETH. Complex contracts bring risks, but fortunately, the core code of the stETH mining contract uses the code of the MorpheusAIs project Distribution.sol, which has been tested by time. It is relatively safe.

The DAI mining contract was modified by the AO team based on Distribution.sol, which enables DAI to be stored in DSR. It is several orders of magnitude more complicated than the function of collecting stETH.

DAI Mining Contract vs. MorpheusAIs Contract

Therefore, from the perspective of the contract, stETHs mining contract is much safer than DAI, but this does not fully explain why DAI is more than twice as cost-effective as stETH. This remains to be discussed. (This is an advertisement. Everyone is welcome to join the group discussion!)

07 Conclusion

In general, AO is very exciting from the perspective of fair issuance to the developer minting model: there is no VC dumping the market, and the clever design from the perspective of DeFi represents a new project form to a certain extent.

In terms of participation, Web3 is a must to experience new things. But when faced with incomprehensible situations (DAIs excess returns), we must be cautious and respect the markets choices.

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