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Introduction

Why fee-driven contraction?

Most staking systems pay rewards by printing more of the token being staked. Plouto does not, and the reason is arithmetic rather than ideology.

The emissions problem

When a protocol pays stakers in its own newly minted token, the reward is funded by dilution. Every unit paid out is a unit created. A staker earning 40% a year in a token whose supply grows 40% a year has, in the limit, earned nothing — they have merely avoided being diluted.

That model has two failure modes:

  1. It is self-terminating. Emissions must eventually stop, or the supply becomes absurd. When they stop, the reward stops.
  2. It is reflexive in the wrong direction. Rewards are usually sold. Selling pressure scales with emissions, which scales with the amount staked, which is what the emissions were designed to attract.

Neither is a moral failing. It is just what the arithmetic does.

What Plouto does instead

Plouto pays stakers in ETH, and the ETH comes from fees the market has already paid. There is no relationship between the reward and the PLOUTO supply, because paying a reward does not create a token.

This flips the reflexivity. Rewards are denominated in an asset the staker did not have to sell PLOUTO to obtain, and the 60% buyback share is buying rather than selling.

Why contraction rather than pure distribution

Plouto could have sent 100% of revenue to stakers. It sends 30%, and uses 60% to buy and retire.

The reasoning: a protocol whose only output is a cash flow to current stakers gives nothing to anyone who arrives later, and nothing to holders who are not staking. Retirement is the part of the mechanism that touches every holder, rather than only the ones with a position open right now.

The remaining 10% exists because a protocol with no reserve cannot pay for its own audits, keepers, infrastructure or liquidity. Funding those from revenue rather than from a token allocation means they do not come out of anyone's supply.

The honest limitations

Being fee-driven does not make the design risk-free. It makes the risks different.

  • Revenue is not guaranteed. Trading activity may be low or zero. Then rewards are low or zero. The contracts state this by their silence: there is no minimum, no floor, no promise.
  • Buybacks are visible. A predictable buyer can be traded against. This is bounded rather than eliminated — see slippage protection.
  • Contraction is not price support. Retiring supply changes the supply side of a market. Demand is not something a contract can manufacture.

Further reading