The SPICE Fee Tokenomics
The tokenomics design of SPICE is closely tied to the index products it launches. The SPICE architecture is designed to drive demand for the SPICE token as the value of its indices grow, benefiting the community of index investors and the fund owners. Here is an introduction:
The SPICE token
The SPICE token has several use cases. Foremost, it is a governance token that enables the SPICE DAO and enables its holders to submit proposals and vote on proposals that pertain to issues surrounding the DAO itself as well as to governance of the index products that SPICE DAO launches.
The SPICE token has another utility: it acts as a substitute for management fees and integrates SPICE index products with the SPICE DAO. Management fees, as known from ETFs reduce the yield of the product and only benefit the issuer of the ETF. Holders of SPICE benefit from the value creation in SPICE indices and vice versa, SPICE indices benefit from an interest in SPICE. As a SPICE holder and SPICE index holder, you are rewarded by the success of the community.
This is why SPICE DAO’s index products always contain a fixed allocation of SPICE. This way, when SPICE performs well, it benefits the performance of the index, but also a good performance of the indices will benefit SPICE holders. This enables us to forgo heavy management fees that eat up investors gains and on the contrary, drives value creation for the entire community as index holders also hold a part of the organisation creating them.
How the tokenomics work
The idea is relatively simple, but bears a few implications. In short: Index funds launched by SPICE DAO contain a fixed allocation of SPICE tokens. What does that imply?
1. Profits for the many: If AUMs and products grow, so will the demand for SPICE.
The methodologies of the SPICE DAO’s index products define a certain weighting of the assets contained in them. As the value of the constitutes changes over time, we need to rebalance them periodically in order to restore that weighting.
For simplicity’s sake, imagine that a fund consists of only two assets that are defined to be equally weighted by the methodology, as well as a fixed allocation of 10% SPICE. If the value of the two constitutes rises more than the value of SPICE over time, then SPICE is proportionately underrepresented. To restore the weightings, some of the two constitutes is sold, and SPICE is market-bought, thus creating buy pressure.
This clip walks you through an example:
2. Generating long-term value: What if the SPICE value grows disproportionately?
An apparent question is what happens if the AUMs fall or if the value of SPICE increases a lot compared to other constitutes? The simple answer is: SPICE needs to be sold off and the other constitutes bought. However as this may cause adverse effects for the SPICE DAO community as well as the index token holders if a large amount of SPICE is sold off in one transaction, mitigation is required.
In order to mitigate this, the amount of SPICE that can be sold in rebalancing is capped according to the price impact it causes. In practice, this means that sell-off’s will only be done to the extent that the price impact caused by the sell-off amounts to a maximum of 2,5% of the current price at rebalancing.
We are exploring additional mitigation mechanisms for the future, such as rebalancing SPICE between all the SPICE DAO index products before leveraging market transactions and the option of moving potential “post-rebalance SPICE surplus” to a smart contract, where index holders may claim this surplus as a type of dividend. Both mechanisms are still in the research and planning phase.