DeepBook (DEEP) tokenomics

DeepBook is a decentralized, permissionless, and on-chain central limit order book (CLOB) built on the Sui network. It serves as a foundational liquidity layer designed to provide wholesale liquidity for professional traders and DeFi protocols. The protocol's economic model, particularly with the introduction of the DEEP token in version 3 (V3), is structured to incentivize participation, ensure protocol solvency, and deter inorganic activity.

Issuance and Allocation Mechanism

The DEEP token is designed to align the interests of participants with the long-term success of the DeepBook protocol and the broader Sui ecosystem. The total supply is distributed across three primary "buckets":

• Community Airdrop (10%): Exactly 10% of the supply was set aside for the community, including an initial allocation claim for 101,968 DBClaimNFT holders and rewards for participants in the V3 testing phase.
• Core Contributors and Early Backers (~28%): Approximately 28% is allocated to the individuals and entities that supported the early development of the protocol.
• Future Grants and Community Initiatives (~62%): The largest portion, roughly 62%, is reserved for future ecosystem growth, community programs, and grants.

This allocation strategy ensures that over two-thirds of the total token supply is directed toward the broader community and ecosystem development.

Usage and Incentive Mechanism

The DEEP token serves as the primary utility token within the DeepBook ecosystem, facilitating trading and governance.

Token Usage

• Trading Fees: DEEP is used to pay for trading fees on the exchange. While future upgrades may allow fees to be paid in input tokens, holding and staking DEEP provides significant cost advantages.
• Governance: Staked DEEP tokens grant governance rights over pool parameters. To prevent governance capture by large entities, voting power increases at a sub-linear rate (square root) past a certain threshold, providing greater representation for smaller participants.

Incentive Mechanisms

DeepBook employs a "four core flows" model to maintain equilibrium:

1. Volume-Based Taker Fees: Fees for takers start at moderate levels and decline as a trader's volume in a specific pool increases during an epoch.
2. Maker Incentives (Rebates): Liquidity providers (makers) receive incentives that are countercyclical—highest when total liquidity is lowest and decreasing as aggregate liquidity provided by others increases.
3. Staking Benefits: Users who stake a predetermined minimum number of DEEP tokens in a pool receive:
   • Reduced Taker Fees: Fees can be reduced by half, dropping as low as 0.25 bps for stable pairs and 2.5 bps for volatile pairs once volume thresholds are met.
   • Maker Rebates: Only staked makers are eligible to receive rebates calculated at the end of an epoch.
4. Burn Mechanism: To protect against wash trading, the protocol ensures that tokens collected in an epoch are never less than tokens distributed. Residual fees are burned to provide economic security and a credible commitment against inorganic volume.

Locking and Unlocking Mechanism

The protocol utilizes staking and epoch-based cycles to manage token liquidity and participation.

Locking Mechanism

• Staking Requirements: Participants must stake DEEP tokens prior to an epoch to be eligible for fee discounts and maker incentives.
• Pool Creation: Creating a new trading pool on DeepBook requires a one-time fee of 100 SUI.
• Governance Staking: Minimum staking requirements are enforced to earn governance rights and incentives, which also serves as a defense against Sybil attacks.

Unlocking and Release

• Epoch Cycles: At the conclusion of an epoch, trade fees are processed, and rebates are distributed to eligible staked makers.
• Stake Release: Participants have the option to roll their stakes over to the next epoch or release them back to their original wallets.
• Launch Timeline: DeepBook V3 and the DEEP token officially launched on the Sui mainnet on October 14, 2024.