COMMUNITY

Proposal 005 - Token Redesign (FLIP 2.0)

Simon Harman

May 19, 2025 • 6 min read

For community discussion, please head on over to the discussion on Discord:

18 months into FLIP’s launch, the vast majority of unlocks have taken place, network revenues have established a baseline, and the market has continued to evolve around the project. While in the first year of deployment, FLIP’s token design appeared to be serving the project, it is quite clear that the market now isn’t responding to the buy and burn, it is difficult for new investors to understand the emissions dynamics without a lot of reading, and generally view them to be undesirable. FLIP staking remains low, and utility for the token is very limited in its current form.

With greater network revenues (driven by more protocol volume), many of these issues would likely be overcome anyway, but that doesn’t mean we shouldn’t take a critical look at the token design to optimise it for current conditions.

We wanted to open up this community consultation process in order to collect ideas and feedback around the design of the FLIP token. We intend to use this consultation process to inform how best to adapt the system to have a greater appeal to potential network participants, achieve greater levels of economic security, and incentivise positive network behaviours.

REGULATION NOTE:

Although we have performed an initial regulatory analysis on some of these ideas, we have to pre-empt that further analysis will be required before any changes are locked in. At the end of this consultation process, we will deeply analyse the implications of proposed changes and make sure that they do not trigger any potential negative impacts as a result of prevailing regulations in relevant jurisdictions. Further changes might therefore be required in order to meet this requirement.

Potential Ideas

Without attempting to ‘prescribe’ a particular solution, I do have some key ideas, many picked up from the community chats in various times and places over the last few weeks and months, that I think could be a good starting point to kick off the discussion.

Remove Emissions (Fixed Supply)

Having a floating supply does appear to be a major turn-off for new buyers. We could simply turn off emissions altogether, as the network fees are the ultimate driving engine behind the validator revenue anyway. This is only possible now because the network has achieved a baseline level of recurring reliable revenue, which was not possible in the past.

Buy-and-Earn (Not Buy-and-Burn)

Instead of using network fees to buy and burn tokens, we could instead use generated protocol revenue to buy tokens, which are then distributed to stakers only. This would encourage much more staking and reward the most active participants, bringing greater utility to FLIP.
Alternatively, we could distribute network fees to stakers in USDC directly. There are a number of ways to do this, but the core idea here is that FLIP staking gets you “real” yield.
Or some combination thereof - stakers could nominate to receive their rewards in either USDC directly, or FLIP bought off the market.

Accelerate Native Delegation

In order to make staking accessible, we need to make delegating easier. We addressed and discussed this in Reform 3 of Proposal 003 (Validator Reform). We are now actively working on this anyway, but I thought it important to point this out during this discussion to make it clear that the ideas in this version of token redesign only works if we can make it accessible for token holders of all sizes to actively participate in the staking process.
stFLIP would likely still be a viable product in this paradigm, as it would give less sophisticated investors a proxy mechanism to access the staking system without having to go onto the state chain. stFLIP would likely also delegate in this scenario.

Stakers Receive Network Fee Discounts

Another way to bolster FLIP utility is to give network fee discounts to users which have FLIP staked in the network, based on the amount of FLIP they have staked.
This would include things like internal swap network fees, boost fee splits, and other upcoming network fee generating sources (already in development, though we aren't ready to go public with that yet to avoid losing competitive advantage).
This also makes sense economically, because if you are already contributing to the economic security of the network, you shouldn't need to pay the network for that security.
This makes arbitrageurs and other types of traders more profitable, but only if they buy into the network.

Reduce Set Size to Cut Overheads & Increase Validator Profitability

Without emissions to reliably cover Validator’s operator costs, we need to critically assess if the current network size is really helping. If we assume each validator costs $500 a month to run on average (with RPC connections being the most expensive part of this), a reduction to 100 active validators would mean the network saves approx $25k a month in overhead costs, and each validator can therefore charge a lower commission for staking delegation.
With delegation enabled, the reduction in set size doesn't impact anyone’s ability to contribute, and arguably helps decentralisation as smaller players can compete with the bigger staking firms by having a more active participation in the delegation market with lower overheads to contend with.
To put some numbers around it, recent current revenues: ~$350M a month in volume roughly equates to $300k a month in fees (boost fee split, etc) - $300k per month distributed across 100 validators is $3k in USDC per month, that's $2.5k in profit ($30k annual profit per node). With 150, the profit is only $1.5k, with 25% of all rewards being used just to cover costs.
Obviously, as network revenues grow, you can expect much better results that should scale linearly with revenues.
Backup Validators also currently play a very minor role in the network and arguably don’t help the auction dynamics as they encourage people to run validators that don’t contribute to economic security, but still collect rewards. We should consider their role in this future scheme.
TL;DR is that if we cut the set size to 100 and delete backups, FLIP is more profitable for everyone.

Getting Caught Up in the Details

I would like to try and avoid getting too distracted by the specific mechanisms for how these ideas work at this point in the discussion. Instead, I think keeping it high level, going through these ideas, adding new ones, and generally reimagining the role of FLIP in the Chainflip protocol is the stated goal of this discussion.

Once we seem to be converging on a set of ideas, we can formalise the exact mechanisms for how all of this might work at the implementation phase.

Discussion Timeline

We would like to get as much engagement on this topic as we can as fast as possible, so we can get started on any changes. We should not let this process and these changes impact the other important deliverables we have which target protocol growth, so leaving as much space and time for this at the engineering level as possible is desirable.

Once we see a particular consensus forming around a base of ideas, we will then formalise a more specific proposal with the changes and the technical details of those changes for another round of discussion.