Since the emergence of DeFi, experts have been discussing ways to incentivize the creation of public goods. Public goods, such as core infrastructure and services, play a crucial role in creating a more efficient ecosystem for users. However, their development has been hindered by the lack of proper financial incentives.

Historically, protocols have accrued value through the launch of a governance token or by charging user protocol fees. However, these methods are misaligned with the nature of public goods. Governance tokens rely on speculation rather than usage to generate value, and user fees make accessing the protocol more expensive.

Builders who aim to create protocols for the common good, without relying on these methods, lack a viable way to be compensated for their work. Currently, they are limited to non-scalable and unsustainable options such as community grants.

In order to create an ecosystem that encourages builders to develop public goods, a new mechanism for incentivization must be introduced. Canto contributors have introduced Contract Secured Revenue (CSR) to achieve this.

What is CSR?

CSR is an opt-in module that allows a portion of the gas fee spent on a smart contract interaction to be collected in a CSR NFT designated by the smart contract developer. The CSR NFT’s owner can redeem the accumulated Canto at any time, and can specify how much of the available Canto they desire to withdraw.

Initially, 20% of the base fee will be allocated to the designated CSR NFT, but this can be adjusted through governance. An individual CSR NFT can accumulate fees from multiple smart contracts, but each smart contract can only direct its transaction fees to one CSR NFT.

We are excited for the launch of CSR because it enables developers to focus on maximizing good for the ecosystem by providing them with a sustainable form of compensation that does not involve playing token games or imposing protocol fees on users. Instead, developers can solely concentrate on promoting usage and enhancing their products.

Furthermore, unlike community grants, CSR scales with a protocol's growth. As the protocol becomes more successful and attracts more usage, the revenue generated from CSR will also increase.

Potential Applications of CSR:

We believe CSR opens up a new set of opportunities in protocol development, along with improving incentives for developers. Let’s dive into a few.

CSR creates a new structure for financing and investing in protocols. CSR NFTs can be fractionalized and sold, allowing the community to support protocols they believe in. CSR benefits public goods specifically because they can directly generate revenue through gas fees, making them a much more appealing investment opportunity. Additionally, CSR NFTs can be wrapped in ways that allow free flowing customizability, such as adding governance powers, voting escrow and gauges, and any other complex token mechanism. Here is an example of how a CSR NFT’s ownership might be fractionalized:

We expect this to drive a significant increase in capital investment for protocols and public goods projects. To determine the value of CSR NFTs, investors will have to consider various factors such as the projected price of Canto, the projected average cost of gas, the projected number of transactions on Canto, and the projected usage of the specific protocol.

The use of CSR NFTs as collateral can open up a range of lending opportunities and enable liquidity. For example, a protocol can lock up a CSR NFT and allow the owner to borrow against the predicted future earnings of it. Interest rates for this type of loan will likely be high due to the level of risk, but well-established blue-chip protocols will have access to better rates and greater borrowing power. A new lending market centered around providing leverage for CSR NFTs is entirely possible. The broader impact of this will be an increase in liquidity across the ecosystem, especially for developers.

CSR also provides an easy way to share compensation amongst a team working on a protocol. One CSR NFT can accrue revenue from multiple different smart contracts, allowing a team to more easily pool its revenue from multiple protocols. Furthermore, when Canto is withdrawn from a CSR NFT, the recipient can be specified, creating an easier means for sending and tracking compensation across multiple stakeholders.

CSR lowers the barrier to entry for protocol development. CSR enables key pieces of infrastructure to generate revenue while also being free and publicly available to other users. This allows builders to utilize existing infrastructure to develop their own protocols at a much lower cost. Additionally, as teams no longer need to compete for liquidity, we will see an increase in the development of integrations and infrastructure across Canto. Teams can utilize freely available liquidity from FPI, and will be incentivized to build on top of existing FPI versus competing for liquidity. This will create an ecosystem where liquidity is less dispersed and used far more efficiently.

These are just a few of the endless possibilities created by CSR. We are excited to see how developers will implement CSR across a plethora of other use cases!

How to use CSR?

After learning about various potential use cases for CSR, it might be helpful to give a general overview of how to implement CSR in your protocols. When a smart contract developer wants to enable CSR for a protocol, they need to register the desired smart contract with the CSR Module Store. The CSR Module Store is a Cosmos SDK module that holds a registry of all the deployed CSR contracts and CSR NFT IDs.

Since the CSR Module Store exists on the consensus layer (Canto Native), we need a way to interact with it on the Canto EVM during contract deployment. To solve this issue, contributors developed the Turnstile.sol smart contract which registers contracts on behalf of the CSR Module Store. To do this, contract deployment transactions need to call the register function from Turnstile.sol and specify the address of the CSR NFT (a new one is minted if not specified).

Once this is done correctly, the transaction flow for a smart contract registered with CSR will look like the following:

When a smart contract interaction occurs, the Ethermint module will process the transaction and check if that smart contract is registered in the CSR Module Store. If it is, 20% of the base fee paid will be sent to the CSR NFT.

To learn more about implementing CSR, check out the Canto documentation. Contributors plan to release more documentation soon on using CSR to make it as easy as possible for developers to implement.

We are excited to see how CSR will impact the Canto ecosystem and are eager to see the protocols that will be launched with this technology! To read more about CSR click here.

About Plex

Plex is a group of builders with backgrounds in HFT, mechanism design, and software development. We are currently exploring the intersection of decentralized finance and social coordination. If interested in collaboration, please reach out at twitter.com/Plex_Official.