Implementing a Deflationary Mechanism for $SOMM Token

Governance
1

Introduction
The $SOMM token is the native asset of the Sommelier protocol, playing a crucial role in facilitating various operations within the network. To enhance the value and stability of $SOMM, we propose implementing a deflationary mechanism that will burn 50% of the $SOMM tokens used in auctions. This approach aims to reduce the total supply of $SOMM, decrease the sell pressure from staking rewards, and make $SOMM rarer and more valuable.

This proposal is a revised version of a previous proposal that did not reach a conclusion. We believe the deflationary mechanism is crucial for the long-term value and stability of the $SOMM token:

Proposal for SOMM Token Burn Mechanism Using Strategy Vault Fees - Governance - Sommelier Finance

Mechanics of the Deflationary Mechanism

Supply Dynamics
The proposed deflationary mechanism involves burning a portion of the $SOMM tokens used in auctions. Specifically, 50% of the $SOMM tokens utilized in auctions will be burned. This process will directly reduce the circulating supply of $SOMM, promoting a deflationary environment.
Burning Mechanism
After each Sommelier auction, 50% of the $SOMM tokens used will be burned. This deflationary mechanism will help in reducing the overall supply of $SOMM, thereby increasing its scarcity and potential value. Importantly, this doesn’t remove the auction mechanism, it simply burns the fees instead of distributing them. The burning process will be transparent and verifiable, ensuring that the community can track the reduction in supply.
Impact on Staking Rewards
Currently, the staking Annual Percentage Rate (APR) after auctions will be above 0%, allowing stakers to earn $SOMM as rewards. However, this also creates sell pressure as stakers may sell their rewards. By implementing the burning mechanism, we aim to:

  1. Reduce Sell Pressure: With fewer $SOMM tokens in circulation, the sell pressure from staking rewards will decrease.
  2. Decrease Staking APR: By burning $SOMM tokens, the staking APR will be directly impacted, making staking rewards less inflationary and contributing to the overall scarcity of $SOMM.

Long-term Benefits

Rarity and Value Appreciation
As the supply of $SOMM decreases, the token will become rarer, potentially leading to an increase in its value. This deflationary approach aligns with the principles of supply and demand, where a reduced supply can lead to higher demand and increased value.
Sustainable Growth
The deflationary mechanism will support the long-term growth and sustainability of the Sommelier protocol by ensuring that the $SOMM token retains its value over time. This approach will attract more users, traders and investors, confident in the token’s ability to appreciate in value.
Enhanced Auction Participation
While the Sommelier auctions are a key feature, the need to reserve $SOMM tokens for auctions can be a limiting factor. By implementing the burning mechanism, participants can buy $SOMM tokens closer to the auction time, knowing that a portion will be burned, thereby enhancing the overall auction experience.

Conclusion
The proposed deflationary mechanism for the $SOMM token aims to reduce the total supply, decrease sell pressure from staking rewards, and enhance the token’s rarity and value. By burning 50% of the $SOMM tokens used in auctions, we can create a more stable and valuable ecosystem for all stakeholders. This approach will support the long-term growth and sustainability of the Sommelier protocol, positioning $SOMM as a resilient and valuable asset in the blockchain industry. This change does not remove the auction mechanism, it simply redirects the fees to be burned rather than distributed, ensuring a deflationary impact on the $SOMM token supply.

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Natelee thanks for putting this up and iterating on the previous work.
I fully support this proposal. Would only suggest that the burning parameter could be changed in the future if decided by governance.

Would like to discuss the order of works for this to be implemented… As I see it:

  1. This prop would result in a gov prop, when consolidated, could be formally proposed as a “text proposal”;
  2. If 1 passes then a a on-chain proposal (or a protocol update one?) would have to be created (who would create it) and passed which would basically contain required methodology and implementation of the mechanism.

Could someone clarify on the implementation order and who should propose the implementation prop if community passes a text proposal?

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FSA, it totally makes sense to be that we should be able to change burning parameter in the future thought government. Regarding to the next 2 points, I think @Zaki can give us some suggestions about next steps?

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