Positive Externalities Token

A PET's core function is to internalize positive externalities—benefits like increased security, liquidity, or network effects that a user's actions provide to others. It does this by minting and distributing tokens to users whose contributions (e.g., providing liquidity, staking, generating fees) demonstrably enhance the overall protocol value. This transforms uncaptured ecosystem value into a quantifiable, claimable asset for the contributor.

Distribution is typically retroactive, rewarding past contributions after their value is proven. A common method uses a Merkle root to commit to a snapshot of eligible addresses and their token allocations. Users can then claim their tokens by submitting a Merkle proof, a gas-efficient technique that avoids costly on-chain calculations for every user.

• Example: A protocol may snapshot liquidity providers from the past 6 months, calculate rewards based on fees generated, and publish a Merkle root for claims.

A primary use case for PETs is bootstrapping Protocol-Owned Liquidity. Instead of relying on mercenary capital, the protocol uses its treasury (funded by fees or newly minted PETs) to provide deep, permanent liquidity pools. This aligns long-term incentives, reduces reliance on external liquidity mining programs, and creates a sustainable flywheel where ecosystem growth funds its own liquidity.

PETs create a virtuous cycle or flywheel: valuable user actions → token rewards → increased protocol ownership and alignment → further valuable actions. By giving users a direct stake in the protocol's success metric (e.g., total value locked, fee revenue), it aligns individual incentives with collective health. This is a shift from simple transaction-based rewards to value-creation-based rewards.

PETs differ from standard utility or governance tokens in their issuance trigger.

• Utility Token: Grants access to a service (e.g., gas fee payment).
• Governance Token: Confers voting rights.
• PET: Is minted and distributed specifically in response to measurable, value-creating actions that benefit the broader ecosystem, making it a tool for capital formation and community alignment.

A foundational use case where a protocol uses its treasury to seed and own its own liquidity pools. The PET (e.g., a protocol's governance token) accrues value from the trading fees generated in these pools. This creates a self-reinforcing flywheel: more treasury assets lead to more liquidity, which generates more fees for the treasury, enhancing the token's fundamental value and protocol security. Examples include OlympusDAO's (OHM) bond mechanism and Frax Finance's liquidity AMOs.

PETs can directly fund essential infrastructure and commons that benefit an entire ecosystem. The Ethereum Name Service (ENS) is a prime example. A portion of the revenue from domain registrations and renewals is directed to the ENS DAO treasury, which funds public goods within the web3 space. Holders of the ENS governance token thus have a claim on the value generated by a critical piece of internet infrastructure, aligning incentives for its maintenance and improvement.

In optimistic and zk-rollup architectures, sequencers profit from bundling transactions. A PET model can be designed where a portion of these sequencer fees is directed to a shared treasury or used to buy back and burn the L2's native token. This directly links the token's value to the usage and economic activity on the chain, benefiting all token holders as network adoption grows. This model is a core consideration for many emerging L2 tokenomics.

Maximal Extractable Value (MEV) is often captured by validators and searchers. PET frameworks can be designed to capture and redistribute a portion of this MEV back to the token holders or a community treasury. For instance, a protocol could use MEV-auction mechanisms or dedicated blockspace to generate revenue that benefits the collective, turning a potential negative externality (value extraction from users) into a positive one for the ecosystem's stakeholders.

Algorithmic or hybrid stablecoins can employ a PET model. When the protocol generates a surplus (e.g., from minting fees, interest on collateral, or trading profits), that seigniorage revenue can be distributed to holders of a governance/utility token. This makes the token a direct claim on the protocol's profitability and stability, incentivizing holders to support mechanisms that ensure the stablecoin's peg and adoption.

A critical conceptual use case for PETs is solving the free-rider problem in decentralized networks. Without a PET, individuals have little incentive to contribute to public goods (like core development or security) because they cannot capture the value they create. A well-designed PET internalizes these positive externalities, creating a financial vehicle that allows participants to invest in and benefit from the collective growth and health of the network they rely on.

A Positive Externalities Token (PET) functions by algorithmically minting and distributing tokens to users whose on-chain actions create measurable, positive spillover effects for the protocol or network. This is distinct from simple usage rewards, as it specifically targets behaviors that increase total value locked (TVL), liquidity depth, network security, or developer activity. The goal is to internalize the value of these externalities, aligning individual incentives with long-term ecosystem health.

Effective PET models rely on several critical components:

• Verifiable Metrics: Quantifiable on-chain data (e.g., liquidity provided to a new pool, referrals of active users, contributions to core infrastructure) that serve as the basis for rewards.
• Minting Schedule: A transparent, often algorithmic, rule set that determines token issuance in response to verified positive actions.
• Value Accrual: Mechanisms, such as fee sharing or buybacks, that ensure the token itself captures a portion of the value generated by the externalities, supporting its price floor.

A classic application is rewarding liquidity providers (LPs) who deposit assets into new or underserved trading pairs on a decentralized exchange (DEX). By providing liquidity, these users reduce slippage for all traders—a positive externality. A PET system would mint tokens to these LPs based on metrics like impermanent loss risk taken or the novelty of the asset pair, going beyond standard trading fee rewards to bootstrap critical market infrastructure.

Protocols can use PETs to reward developers who build essential tools, integrations, or sub-protocols that enhance the main network's utility. For instance, a blockchain might issue tokens to the team behind a widely adopted block explorer, wallet integration, or oracle service. This formalizes and incentivizes the often-uncompensated work that significantly boosts ecosystem adoption and usability.

PETs differ from standard governance tokens or fee tokens. While governance tokens confer voting rights, they don't automatically reward value creation. Fee tokens (e.g., for gas) are required for usage but don't reward positive externalities. A PET specifically targets and subsidizes high-value, non-mandatory behaviors that have a multiplier effect on the network's growth and resilience.

Designing a robust PET system presents significant hurdles:

• Metric Gaming: Preventing users from manipulating the system to earn rewards without creating genuine value (e.g., wash trading).
• Sustainable Emissions: Balancing reward generosity with long-term tokenomics to avoid hyperinflation.
• Accurate Measurement: Defining and programmatically verifying what constitutes a 'positive externality' can be complex and subjective, requiring sophisticated oracle or governance systems.