Incentives are the heart of many decentralized ecosystems. In order to grow, projects can opt to distribute incentives to their networks through staking rewards, contribution bounties and liquidity mining. But some models assume that demand will always be the same as demand at launch, which leads to disadvantages in the long term.
“Such an economic principle can lead to a high and unstable devaluation rate for all staking rewards and network incentives. It essentially makes hyperinflation one of the biggest challenges in the blockchain industry,” said Zain Rana, Founder of DAFI Protocol, which is pioneering a dynamic algorithmic rewards model that issues rewards based on network activity.
DAFI allows any decentralized project to create a synthetic version of its token that’s pegged to demand. Synthetic dTokens act as an intermediary rewards model that significantly reduces the number of native tokens released into circulation. This distribution mechanism helps projects maintain scarcity while increasing rewards for long-term users as the network grows.
“DAFI is the missing link between network rewards and network adoption,” Rana said. “By integrating DAFI, every network within the blockchain space can minimize the effects of low demand on their network valuation.”
Distributed like a standard token, dTokens algorithmically change in quantity relative to the underlying token’s demand. For example, low protocol usage results in an automatic reduction of rewards issued, mitigating inflation, while an increase in adoption automatically increases incentives, driving stronger network effects and incentivizing users to hold synthetics long-term before burning them for their native token.
Calculating accurate rewards based on supply and demand requires a high-quality source of asset valuations and network volume data. This is why DAFI integrated Chainlink’s Cryptocurrency Data Feeds to price all synthetic dTokens offered through DAFI’s premier reward distribution mechanism and obtain volume data from different blockchains and APIs.
“Chainlink will help DAFI fetch data from premium off-chain sources and transmit it on-chain in a tamper-proof and highly reliable manner, which is essential for our algorithmic rewards distribution model,” Rana said.
DAFI Protocol is accessible to new and existing projects that want to avoid the pitfalls of hyperinflation and favor long-term users by rewarding them later instead of sooner. “DAFI’s rewards model comes into effect during times of low demand by reducing the tokens in circulation and increasing incentives to stakeholders. By distributing staking rewards based on the network’s demand, decentralized networks will be relieved from hyperinflation,” Rana said.
DAFI Protocol’s ultimate goal is to facilitate better adoption, economies and token models that attract more long-term users. As a result, Rana sees the entire decentralized world on the cusp of monumental change. “The end of hyperinflation in the cryptocurrency industry is near,” he said.