The Unlock Protocol Flywheel

What is a flywheel?

In mechanical systems, a flywheel is a rotating disk that is used to store energy. The momentum of the flywheel helps to sustain and stabilize the system against fluctuations in input power and output load.

In onchain systems, the term flywheel is used in a similar manner to capture the essence of a sustainable onchain economic model. For onchain systems, a flywheel is set in motion when a growing community leads to demand for a protocol, which creates stronger incentives for ecosystem participants to support the protocol’s functionality, which further encourages developers to build useful applications, which creates utility for users, who then feed back into the community. (source)

The illustration above touches on the primary concepts in the Unlock Protocol ecosystem flywheel. At the next level of detail, the following two specific concepts are true for the Unlock Protocol ecosystem.

• Unlock Protocol implements a protocol fee to capture a small amount of value for each transaction that uses the protocol. This enables the network itself to be valued in proportion to the value it brings to network participants — the more value the network facilitates, the more valuable the network itself becomes. The protocol fee is set to 1% at the current time.

• Anyone who initiates (or ”refers”) a transaction to be executed using Unlock Protocol — typically a creator (onchain subscriptions), event organizer (onchain tickets), or developer whose platform implements Unlock Protocol (onchain memberships or other use cases) — has an opportunity to participate in the flywheel as well. Referrers can receive governance tokens to participate in decision-making toward the future of the protocol itself, as well as a percentage of transaction value. These are called referrer rewards.

The protocol fee capture mechanism and referrer rewards are two mechanisms that help sustain the Unlock Protocol flywheel.

The protocol fee captures value indirectly by way of a burn mechanism connected with the protocol’s governance token. Protocol fees are collected in the Unlock Protocol smart contract in a number of currencies. Those collected protocol fees are then swapped using Uniswap and exchanged into the Unlock Protocol’s governance token (UDT). The governance tokens received are then sent to the burn address and burned, reducing the supply of UDT in circulation.

This Unlock Protocol burn mechanism is similar to the approach that Ethereum itself uses.

Onchain transactions include an exchange of value. Examples include…

• A fan purchases a subscription from a creator

• A conference organizer sells tickets to an event

• An expert sells a course that provides a credential for completion

• A community offers a season-pass membership

• Etc.

Every transaction that includes an onchain transfer of value that is facilitated by Unlock Protocol includes a referrer parameter.

The referrer gains two benefits from every value-exchanging onchain transaction that uses Unlock Protocol.

• The referrer gets a protocol reward in the form of UDT governance tokens from the protocol itself

• Additionally, the referrer also gets a portion of the sale value as an affiliate fee for the transaction if a referral percentage has been set

At a technical level, this referrer parameter is the wallet address of the organization or individual who should receive benefits as a result of them being involved in the transaction. (In the offchain world, the referrer could be thought of as an “affiliate.”)

Let’s go back to the flywheel we discussed earlier.

In the Unlock Protocol ecosystem, the protocol fee and referrer rewards are the mechanisms that keep the flywheel spinning.

The protocol fee captures value for each transaction, proportionate to the value the network facilitates. Referrers, who initiate transactions, receive governance tokens and a percentage of the transaction value.

As the flywheel spins, each successive participant in the network — creator, event organizer, developer, etc. — contributes to its momentum. This adds to a self-sustaining cycle, reinforcing the utility and value of the Unlock Protocol ecosystem.

As more participants continue to join, the network effect grows, further strengthening the protocol’s resilience, robustness, and sustainability.