Cadabra Improvement Proposal №1

At Cadabra we were always transparent since the beginning, so we want to propose a significant change to the Cadabra tokenomics that we think will be beneficial both for the holders of ABRA token and for liquidity providers in Cadabra strategies. The goal of the change is to make ABRA more valuable and to significantly increase overall TVL of the project.

We’ve been working on improving our core product: strategies. In the near future, we will introduce our next iteration of strategies that will bring our original vision to life — we'll be able to create risk-adjusted strategies with any possible combination of underlying yield sources. This will allow us to extend the possible yield sources for our existing “conservative” strategies, as well as allow creating narrowly focused strategies.

Along with the release of the new generation of strategies we want to make a revamp in our tokenomics, because while the current tokenomics is certainly very novel and the project can exist with our original vision, we see that in the current market conditions we might achieve significantly better results with the changes to our tokenomics.

So there certain issues that stem from the current tokenomics that we want to overcome:

• ABRA is deflationary, which has its pros and cons. When we were designing the tokenomics we were basing our designs on the assumption of bear markets, when most of the crypto tokens were falling in price. So we hoped that in bear markets having deflationary tokenomics would allow us to kickstart the project, despite the fact that it's more challenging to initiate a project with such tokenomics. However, in the current situation, we see that the original idea of having deflationary tokenomics alone is not enough to attract value to the project. Despite being deflationary, ABRA's price hasn't kept pace with other highly inflationary tokens. For example, THE token has grown 4x, STG 2x, VELO 2x, and CRV 1.5x. So, in the current market conditions, simply being deflationary doesn't necessarily guarantee that the token will outperform inflationary counterparts.

• Deflationary tokenomics imply that there will be no rewards for providing liquidity, so the only option to establish Automated Market Maker (AMM) pools with the token is Protocol Owned Liquidity (POL). The entire ABRA supply was split among a few pools where all liquidity belongs to the protocol itself: ABRA/USDT, ABRA/ccUSD, ABRA/ccUSDT, ABRA/ccUSDC, ABRA/ccETH, ABRA/ccBNB. This means that if you want to buy ABRA, you buy it from the POL (Cadabra protocol), and if you want to sell, you sell to the POL. As such, the configuration of the POL controls how much you need to spend to move the price of ABRA to a certain level. When designing the POL, we operated under certain assumptions about potential ABRA buys and sells. If the real market conditions differ from the original assumptions, we need to fine-tune the POL for it to be effective. For example, reducing ABRA liquidity can make the price easier to increase with new buys. But changes to the POL may appear like changing the original tokenomics.

• Locking incentives aren't effective enough. The only current incentive to lock ABRA is to gather the yield that comes from POL. Current lockers don’t directly benefit from the growth in the TVL of strategies. This TVL, while generating more buying pressure on ABRA, doesn’t necessarily translate to the growth of the POL. The POL grows only when there is a net positive inflow of token buys versus sales. Therefore, while an increase in TVL indicates constant buying pressure and the entry of new audiences into the project, liquidity providers may sell each earned token if they perceive a lack of project momentum. For example we’ve been in the strange situation when our TVL has increased, but the POL has dropped and therefore the lockers profit.

• Our referral system, which is based on locking, doesn't work as intended. Partially because of the general problem with the locking, described above, partially because the referral system based on locking is more risky than the regular one. We knew about the risks of such a referral system, but in the context of deflationary tokenomics, this was our only viable option.

• But the most important part, and as we think the crucial one, is that liquidity providers aren’t motivated enough to enter strategies because the yield generated by the strategies is only marginally better than in original protocols. From a liquidity provider’s perspective Cadabra is a new protocol that bears additional risks, and they don’t receive a fair premium for these risks. Again, in bear markets when most projects gave 5-10% APR at max, having an additional premium of 1% to 3% (which we currently offer) may have played its role in attracting liquidity providers. But in the current conditions where you can get 30%, 40%, or even 50% and higher yields, these additional percentages are not motivating enough.

While we believe that there is nothing inherently wrong with the original concept of ABRA as a project with deflationary tokenomics, we just think that in the current bull markets, it will be nearly impossible to gain enough traction. Without traction, our deflationary flywheel will not gain sufficient momentum.

So to get the project off the ground we need to adapt, and therefore we want to introduce the change in the tokenomics that will address the issues we currently facing and align incentives of ABRA holders/lockers with the growth of the TVL of the strategies.

We propose transforming Cadabra’s tokenomics into battle tested and proven ve(3;3) tokenomics. The past year (2023) witnessed the rise of ve-tokenomics, demonstrating its effectiveness. Currently, almost all DeFi projects launched incorporate the principles of ve-tokenomics.

Solutions:

• Introducing emission-based battle tested ve-tokenomics, where emission is directed to reward strategies’ liquidity providers, AMM pools with ABRA token, and referral program.

• The rate of emission, as well as its distribution, is decided each week (a.k.a epoch) by conducting a vote among ABRA lockers. ABRA lockers use their voting power to cast votes for a strategy or a specific yield source of the strategy, receiving a share of the underlying profits generated by that strategy during the current epoch. The vote determines the emission rate that goes to the strategy — the more votes the strategy collects, the more emission it will receive the following week. This emission will go to the strategy’s liquidity providers as rewards. This approach aligns lockers' incentives with those of liquidity providers: the higher the yield generated by a strategy, the more votes it attracts. Voters are financially motivated to fully capture this yield, creating demand for locking ABRA and directing emission towards strategies that generate higher yields. This, in turn, increases the strategy's APR and attracts more liquidity providers in a self-reinforcing loop.

• The voters also determine when to rebalance the strategies: the more votes an underlying yield source receives, the higher its allocation will be the following week. Therefore, ABRA lockers will have control over the underlying yield sources and their allocations within each strategy. This approach is more transparent, as each strategy will essentially be balanced by the free market dynamics of voter preferences. Since voters are financially motivated, this approach aims to maximize strategy returns.

• Eliminating Protocol Owned Liquidity (POL). Instead of POL, which currently determines both the bid/ask liquidity, we will use standard AMM pools where users provide liquidity and receive rewards in ABRA. The choice of tokens paired with ABRA will be decided through self-governance: the community will decide which pools to create and where to distribute the emissions.

• Burning all unsold supply of ABRA. Currently, POL is the only source of ABRA tokens. Users can only buy ABRA from the POL, and all of the current unsold supply of ABRA is allocated there. If we introduce emission it automatically means that we must get rid of this ABRA supply. At the same time USDT liquidity in the V3 pools will remain untouched, guaranteeing a certain floor price for all tokens on hand. So, at the time of the transition (X-hour), nothing will change if you want to sell ABRA - liquidity that is currently backing the ABRA price remains the same, but liquidity denominated in ABRA will be liquidated. At this point we’ll start our liquidity mining program and new AMM pools will be created. This essentially will eliminate ALL ABRA tokens from the POL, leaving only users that have ABRA on hand as potential sellers, unlocking upward price movement for ABRA token.

• Changing referral system. We plan to change the referral system to reduce the risks for the referrals, and increase its attractiveness, therefore attracting more users to the platform through word of mouth. The referral system will be changed to a binary referral system where referrals will receive a share of yields of the users they have referred, while keeping the current referral structure intact.

Objectives:

• Reduce selling pressure and unlock price movement. By eliminating ABRA tokens in POL, introducing user provided liquidity, and aligning incentives, we aim to reduce selling pressure and create upward price movement for ABRA.

• Increasing strategies TVL. Emission-based rewards and attracting external liquidity to ABRA pools will likely lead to notable higher APRs than originally offered. This will attract liquidity providers, increasing TVL. Higher TVL will increase demand for ABRA and attract lockers - there is direct conjunction in these 3 points.

• Giving additional utility for ABRA token. We want to drive demand for ABRA token as it will be used as:

  • A governance token.

  • A token that has powers over liquidity allocations of strategies.

  • Profit generating token.

• Rebooting referral program. To attract new users and increase ABRA utility and demand. This incentivizes them to evangelize the project within their communities, building a loyal and engaged user base. A strong community is critical for any DeFi project's long-term success.

• Launching the mechanics where ve-lockers will be directly interested in increasing the TVL of the project, as higher TVL translates to more profit for ve-lockers, making them ambassadors of the project.

• Overall, we expect that with the new tokenomics we can attract much more liquidity and gain popularity as a project, which is beneficial for all current ABRA holders.

Transitioning from deflationary to inflationary tokenomics may raise concerns, as there might be a fear that inflationary tokenomics could lead to rapid depreciation of the token. However, examining the experience of existing projects shows that this is not necessarily true. The price of the token depends on several factors, including the rate of emission, the alignment of token lockers with the protocol rewards, and the real yield generated by the project.

Cadabra strategies' yield is always backed by the yield of underlying protocols, and we plan to introduce a small rate of emission that will not cause a sudden inflow of a large ABRA supply. This approach should help maintain stability. Additionally, inflationary tokenomics are analogous to the world of traditional finance, where controlled inflation contributes to economic growth and development.

If this proposal is accepted, we will publish another proposal detailing the transition procedure, emission numbers and schedule, and various options that can be executed during this transition. For instance, we will address how to handle current lockers, with potential options including leaving them as is, unlocking them, or unlocking and retaining voting power, among others.