Shell Governance and Tokenomics - Part 2

Shell Protocol releases Part 2 of their tokenomics, discussing the airdrop and token allocation.

(This post is the second installment in a multi-part series. Read Part 1 here.)

Shell Protocol was built to be a neutral, non-custodial, and open-source tool for making and composing financial services, from trading to lending to selling NFTs. In Part 1 of our introduction to Shell’s future governance and tokenomics, we shared how the $SHELL token and DAO have a positive impact on the core protocol, both in the short term and the long term.

Back in November, 2022, we held a community vote that determined that Shell Points would be a factor in the upcoming $SHELL community airdrop. In this post, we will share why we’re lifting the quota system within Shell Points, then explore the evolution of Points as Shell’s guarded launch draws to a close, and finally explain the distribution of the upcoming $SHELL airdrop (and how to be included).

Guarded Launch and Quota

When Shell launched on Arbitrum last year, it was the first time our new smart contract architecture had ever been used in real market conditions. Even though we had undergone an audit with Trail of Bits, we knew the only true test of security is time. For that reason, it was crucial to place limits on our TVL growth (and thus user risk) during the early months of Shell Protocol’s life on mainnet. However, we still wanted to encourage and reward our intrepid early users for taking on this risk and being the first to use the Shell contracts.

The Shell Points system was our answer to the question of how to track users’ contributions to Shell Protocol—and the quota system was our solution to limiting their risk, while still giving everyone a chance to participate. In short, users could provide as much liquidity to Shell as they desired, but would only earn points on the assets within their quota limit. To make sure everyone had a chance to get quota and earn points, we launched the Bro Kwon’s Booty event, which put quota expanders into circulation (among other artifacts).

Over time, quota has increased, and Shell has grown to over $16M TVL without a security incident. Because of this track record, we now feel confident enough to take the Ocean and Proteus smart contracts out of their quota-limited phase.

Sometime in the next two weeks, quota will be completely lifted for all wrapped tokens and standard Proteus pools. This means that anyone with a wallet will be able to earn Shell Points without restriction by wrapping tokens and/or becoming an LP.

Quota will still be used to limit points earned on experimental Shell features, such as the upcoming Proteus variants. Because of their inherent risk, these features will continue to carry the highest Shell Point multipliers. This means that quota-based access will remain valuable for Shell Points earners for the foreseeable future.

The Bro Kwon's Booty collection will remain active, and future crafting events will grant the items additional flexibility. More details on that will come at a future time.

Introducing Seasons and $CRAB

The removal of quota from wrapped tokens and standard pools will not be an isolated event. It will also mark the start of a brand new Shell Points season. What happens when a new season begins? First, everyone's Shell Points will be reset to zero. Next, all Shell Points earned in the previous season will be converted into Crabs.

Wait, what?

Yes, Shell is giving you Crabs. Specifically, Crabs you can't get rid of (yet). Crabs are the next step in the transition from Shell Points to $SHELL. In essence, $CRAB is a fungible, on-chain, non-transferable placeholder for future $SHELL allocation.

At the end of each season, users will be able to claim $CRAB based on the number of Shell Points earned that season. These Crab tokens will not be buyable, sellable, or tradable. When the Shell governance token ($SHELL) is released, $CRAB will become 1:1 redeemable for $SHELL tokens*. Every crab needs a shell!

Why Crabs? In short, Shell Points are computed off-chain based on users’ on-chain activity on the protocol. This makes them easier to calculate but also less "real" from a web3 perspective. With on-chain $CRAB allocation, your Crabs are yours. No one can take them away from you.

In addition, having $CRAB on-chain will allow us to practice more decentralized governance prior to the $SHELL token generation event. Unlike Shell Points, we will be able to use $CRAB with web3 governance platforms like Snapshot. These votes may help determine aspects of the future Shell DAO.

More broadly, the release and allocation of $CRAB will serve as a good intermediate step before the full launch of $SHELL. Like going to college before entering the real world, giving everyone Crabs will get us ready for the real deal when it happens.

$SHELL Distribution*

Now to the hard details. How will $SHELL be allocated? At the time of the token generation event (TGE), 200 million Shell tokens will be created. These will be apportioned as follows:

  • 80M - DAO Treasury
  • 70M - Cowri Labs
  • 40M - Early Community
  • 10M - Shell Foundation

The Shell DAO will have the power to mint more tokens beyond the 200 million supply apportioned above, but that would require a governance vote. As the TGE approaches, we will also provide an in-depth breakdown of the Investors, Core Team and Development Company allocations. Of course, this begs the question: Wen token?

The token launch is planned for later on in 2023, however at this time there is no exact date. That is due to a few practical bottlenecks. First, we must finalize the legal structure for the token launch. Second, we need to align on the structure and governance tools of the Shell DAO.

We are working hard on both these elements, and currently it appears that they will be completed in Q3 2023. However, it is too early to say with certainty.

$CRAB Distribution

As explained above, $CRAB will be redeemable for $SHELL. It is only necessary pre-TGE. Therefore, a total of 40 million Crabs will be created, split across seasons as follows:

  • Season Zero (Shell v1): 13M $CRAB
  • Season One (Shell v2 Guarded Launch): 11M $CRAB
  • Season Two (Upcoming): 9M $CRAB
  • Season Three (Tentative): ~7M $CRAB

The allocation for Season Three is tentative, depending on Shell’s timeline. The sooner we reach the token launch, the shorter the third season will be. It is even possible that we will reach the token launch so quickly, there won’t be time for Season Three at all. As such, the final 7M $CRAB allocation may be reduced prior to the start of Season Three, and any remaining $CRAB will be distributed as a bonus to existing holders. For example, if at the end of Season Three, 4M $CRAB is unallocated, then the remainder will be given to existing $CRAB holders pro rata. In other words, everyone’s $CRAB holdings would increase by 10% in this example (4M is 10% of 40M).

How to Earn $CRAB

As of today, it is currently possible to earn Shell Points by participating in Season One, which will soon be converted to $CRAB (although Season One ends soon)! Season Zero has already been closed.

The $CRAB distribution for Season Zero was calculated based on a formula tracking liquidity provision over time in Shell v1, from its launch up until September 1, 2022. This allocation has already been finalized. If you were an LP in Shell v1, congratulations and please don’t forget to migrate your tokens (Shell v1 is now retired)!

For Seasons 1–3, $CRAB will be distributed proportionally based on Shell Points. At the close of each season, we will tally the total points accumulated by all users. Then, $CRAB will be evenly distributed based on the percentage of total points earned by each user. Note that it’s not a 1:1 conversion.

For example, say 1 billion Points were earned across all users in a season. If Alice earned 10 million Points, she holds one percent of that season's total Points, which means she will get one percent of that season's $CRAB allocation. If the total $CRAB allocation for the season is 10 million, Alice will thus earn 100,000 $CRAB, which will become 100,000 $SHELL after the token launch.

As stated earlier, all Shell Points will be reset at the end of each season. In addition, the compounding points feature will be discontinued at the end of Season One.

Season Zero and One $CRAB will be made claimable at the same time, through the Shell app, shortly after the end of Season One.

Next Steps

Shell Tokenomics are beginning to take shape. We now know how the token will contribute to the core protocol. We also know the $SHELL allocation and also how the initial airdrop during TGE will be calculated.

There is still much more to discuss. In future installments, we will go into more detail about the DAO’s voting process, how we can incentivize stakeholders to hodl their tokens post-TGE, and also how community incentives will evolve once $SHELL is live.

*Cowri Labs (the company building the core protocol) is a US-based entity. Regulations in the US regarding cryptocurrency are currently unclear. Unforeseen restrictions may apply.

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