Tokenomics
Xylem DAO operates with a dual-token model similar to Maker DAO, with each token serving distinct functions within the ecosystem.
USDx
USDx is Xylem’s stablecoin, designed to maintain a soft peg to the US Dollar. Key characteristics:
- Overcollateralized: Each USDx is backed by at least 130% in BTC value
- Price Stability: Soft-pegged to 1 USD
- Utility: Functions as a stable medium of exchange and store of value in the Bitcoin ecosystem
- Minting: Created when users lock BTC collateral in vaults
- Burning: Destroyed when users repay their debt positions
XYM
XYM is the governance token that gives holders voting rights on protocol parameters and decisions. Key characteristics:
- Governance Rights: Token holders can vote on risk parameters, protocol upgrades, and treasury allocations
- Value Accrual: XYM captures value through system surplus
- Supply Dynamics: Deflationary mechanism through buy-and-burn model
- Protocol Security: Serves as recapitalization resource in extreme cases
USDx Utility
- Stability: Provides a stable unit of account within the Bitcoin ecosystem
- Liquidity: Enables efficient capital allocation and trading in BTC markets
- Transaction Medium: Facilitates easier commerce compared to volatile BTC
- DeFi Integration: Serves as building block for other Bitcoin-native DeFi applications
XYM Utility
- Governance Voting: Weight of votes proportional to token holdings
- Protocol Fee Accrual: XYM holders benefit from protocol revenues
- Economic Security: Final backstop for system solvency
- Protocol Upgradeability: Enables progressive enhancement of the system
Stability Fees
Users who create USDx by opening vaults pay stability fees, similar to Maker DAO’s model:
- Stability fees are charged continuously on outstanding debt
- Fees are collected in USDx
- A portion of stability fees (50%) goes to the Reserve
- Remaining fees are used to buy and burn XYM tokens, creating deflationary pressure
Liquidation Fees
When vaults are liquidated:
- 15% liquidation fee is applied
- Fees distributed between Reserve and liquidators
- Creates economic incentives for liquidators to maintain system solvency
Buy and Burn Mechanism
- Protocol revenue not allocated to the Reserve is used to purchase XYM tokens
- Purchased tokens are burned, reducing total supply
- Creates sustainable value accrual for XYM holders
Token Distribution
The initial XYM token distribution is designed to align incentives across all stakeholders:
- Core Contributors: 20%
- 3-year vesting schedule with 1-year cliff
- Xylem Foundation: 15%
- Reserved for long-term development and ecosystem growth
- Protocol Treasury: 10%
- Controlled by governance for future initiatives
- Initial Liquidity & Bootstrapping: 35%
- Incentivizes early adopters and ensures market depth
- Community Allocation: 20%
- Airdrops, grants, and ecosystem building
Governance Power
XYM token holders can vote on various protocol parameters (similar to MKR holders in Maker DAO):
- Risk parameters (collateralization ratios, liquidation thresholds)
- Technical upgrades to protocol components
- Onboarding new validators
- Treasury allocations
- Emergency shutdown authorization
Bootstrapping Strategy
The initial bootstrapping of the protocol involves:
- Liquidity Mining: Early vault creators receive XYM rewards
- Incentivized Liquidations: Extra XYM rewards for early liquidators
- Validator Staking: Rewards for validators who maintain the network
- Integration Partnerships: Allocations for protocols that integrate USDx
Long-term Sustainability
Like Maker DAO, Xylem is designed for long-term sustainability:
- Revenue Sharing: Protocol profits distributed between Reserve and token holders
- Treasury Diversification: BTC reserves maintained for system resilience
- Governance Minimization: Progressive decentralization of protocol control
- Risk Management: Continuous monitoring and adjustment of risk parameters
The Xylem tokenomics model builds on lessons learned from Maker DAO while adapting to the unique characteristics of the Bitcoin L1 environment.