TIP42 - LON Tokenomics 1.0 Retirement, Initialization of 2.0

Background

Since the official launch of the LON economic model on April 1, 2021, the Tokenlon protocol has gone through multiple market cycles. During the genesis mining phase, the model played a constructive role in bootstrapping, liquidity provisioning, and increasing ecosystem participation.

As the DeFi has matured and market conditions evolved, the price of the LON token has gradually diverged from the protocol’s actual capability. The marginal effectiveness of the existing economic model—both in incentivizing ecosystem participants and encouraging LON lock-ups—has continued to decline. Current mechanisms, including trade mining, buybacks, and staking incentives, have increasingly revealed structural misalignment with real market dynamics, and overall outcomes have fallen short of original expectations.

💰 Protocol Metrics Overview

Since the launch of the LON economic model, the Tokenlon protocol has continued to accumulate trading volume and fee revenue, forming a relatively resilient operational foundation:

• Cumulative protocol fees: $75,376,217.78
• Total LON repurchased: 30,047,072.9 LON
• Staking returns: 1 LON → 2.04 LON
  (Stakers participating since 2021 have more than doubled their returns)
• Community treasury reserves: approximately $25 million

These figures demonstrate Tokenlon’s ability to generate sustained cash flow and accumulate shared public assets, providing a concrete foundation for subsequent governance evolution and economic model restructuring.

⚠️ Key Challenges

Despite continued value capture at the protocol level, the current economic model and governance structure have surfaced several issues in practice:

Buyback execution relies heavily on the core team
Buyback decisions and execution involve long coordination paths and delayed market feedback, making it difficult to establish an efficient and predictable value-return mechanism.

Referral incentives fail to drive sustainable growth
Incentives are largely converted into short-term behavior, with limited impact on new user acquisition and long-term retention, resulting in inefficient capital allocation.

Insufficient competitive pressure in market-maker incentives
The incentive structure is not effectively tied to quote quality and has not consistently driven more competitive pricing behavior among market makers.

Staking behavior is largely passive
For most participants, staking functions primarily as a reward-collection mechanism rather than an active pathway to protocol contribution or governance participation.

Community governance remains core-team-led
Depth and breadth of community participation remain limited, and the governance system has not yet fully activated community-driven innovation and co-creation.

Proposal Objectives

This proposal seeks to empower LON holders through DAO governance, to manage and decide on the allocation of the community treasury, thereby participating directly in shaping the long-term direction of the Tokenlon protocol.

The proposal recommends retiring the existing LON economic model and initiating a comprehensive evaluation and iteration process for a next-generation LON token incentive framework.

Proposed Changes

1. Termination of the Existing LON Trade Mining Economic Model

Effective January 19, 2026, the current LON trade-mining reward mechanism will be discontinued, and LON staking rewards will be halted.

2. Initiation of Next-Generation LON Economic Model

(Community governance, decentralized decision-making, dynamic evolution)

This phase will center on community governance, adhere to decentralized decision-making principles, and aim for dynamic evolution, exploring incentive and value-capture mechanisms better aligned with Tokenlon’s long-term interests.

Specifically, discussion and design will focus on the following directions:

Ideas may first be freely proposed and discussed on the Tokenlon open forum to gauge sentiment and test consensus. Once preliminary alignment is formed, community members or the core team may initiate formal governance proposals and progressively advance execution.

✅Consolidation of Protocol Fees and Expansion of the Community Treasury

• Current community treasury size: approximately $25 million
• Phase-one treasury growth target: $50 million

Tokenlon trading fee revenue will no longer be directly used for buybacks or LON reward distribution. Instead, all fees will be consolidated into the community treasury, forming a sustainably accumulating pool of DAO-controlled assets.

Subject to community consensus, treasury assets may be deployed into on-chain investments and asset allocation strategies to generate returns and enhance overall asset growth.

Use of treasury funds may include, but is not limited to: treasury allocation, investments, buybacks, incentives, and other on-chain strategic deployments.

Community Treasury Asset Allocation (Preliminary Preview)

Note: The above represents an early-stage preview of potential treasury allocation. Specific ratios, asset scope, and execution mechanisms will be determined through DAO governance proposals and community voting.

✅ DAO Governance: A Decentralized Community-Led Model

With adjustments to the incentive structure, LON holders will be granted explicit proposal and voting rights, positioning them as true stewards of the protocol:

• Authority over the use and allocation of the community treasury will be fully governed by the DAO.
• Governance focus will shift from “how incentives are distributed” to “how protocol resources are allocated and how long-term direction is defined.”

✅ Exploration of LON Economic Model 2.0

The next-generation LON economic model will explore a bidirectional adjustment mechanism centered on the community treasury as the value core. Through governance parameters, a clearer and reversible value-mapping relationship will be established between LON supply (burn/mint) and protocol-owned assets.

In essence, LON Economic Model 2.0 enables LON holders, via DAO governance, to jointly govern the protocol and control the community treasury—thereby collectively determining the future direction of the Tokenlon protocol.

Under the new LON Tokenomics 2.0, LON holders will have 4 core ways to participate in the protocol:

1) BURN — Burn & Redeem (Exit and Value Recovery Mechanism)

LON holders may choose to actively burn LON and redeem a corresponding share of assets from the community treasury, based on predefined parameters.

This mechanism provides LON with a clear and predictable exit path, directly anchoring token value to the protocol’s accumulated assets.

Note:
Redemption ratios, time windows, and redemption caps will be determined through DAO governance to ensure treasury safety and long-term sustainability.

2) MINT — Deposit & Mint (Low-Cost LON Acquisition Mechanism)

Participants may deposit assets into the community treasury and mint LON at a governance-defined discounted rate, with mint prices set below secondary market prices.

This mechanism offers long-term supporters of the protocol a lower-cost entry and holding path, while continuously injecting capital into the treasury.

Note:
LON minted through this mechanism will be subject to a vesting schedule to prevent short-term arbitrage and ensure alignment with the protocol’s long-term value creation.

3) VOTE — Governance & Ownership

LON holders possess both voting rights and proposal rights, enabling them to directly participate in decisions regarding:

• Core protocol parameters
• Treasury allocation strategies
• The evolution of the LON economic model

Governance rights are positively bound to token ownership, transforming LON holders from passive incentive recipients into co-owners and decision-makers of the protocol.

4) EARN — Contribute & Earn (Value Creation as Rewards)

Participants may earn rewards by contributing tangible value to the protocol, including but not limited to:

• Governance participation
• Liquidity support
• Product co-development
• Community operations and ecosystem building

Rewards may take the form of:

• Capital-based returns (e.g., treasury distributions, incentives), or
• Labor-based compensation,

encouraging diverse, long-term, and sustainable ecosystem participation.

LON Tokenomics 2.0 Execution Timeline

Phase 1: Treasury Portfolio Setup

Q1 2026

• Completion of community treasury asset inventory, reconciliation, and initial asset allocation

Phase 2: DAO Launch

Q2 2026

• Completion of DAO governance framework design and final governance approval

Q3 2026

• Completion of governance contract audits and official DAO launch

Phase 3: LON 2.0 Go Live

Q4 2026

• Launch of data dashboards and the governance portal