The Power of Overlay's Tokenomics: Aligning Incentives and Shaping the Future of Scalar Data Markets

Special thanks to Tokenomics DAO (specifically Mason Fasco) for their insightful views on Tokenomics, which were incorporated into this article.

Overlay Protocol offers a unique and sustainable approach to tokenomics, aiming to revolutionize how we trade streaming data.


Before we dive deep into Overlay’s Tokenomics, first we need to actually define what tokenomics means. It seems there are 100 definitions for “tokenomics”. Most of them talk only about the specific numbers involved: supply, mint, burn, fees, incentives, distribution, and utility. While these are of course important, most protocol tokenomics fail to discuss the large and much more important implication of Tokenomics: the alignment of incentives between the protocol (i.e. the code) and the community that uses and maintains that code.

Tokenomics is the narrative of how a protocol works. It should have the ultimate goal of aligning incentives between the protocol and its users. As the crypto space evolves, it becomes increasingly important to create sustainable systems for the long term, and aligning incentives is critical to the heart of Overlay Protocol.

Overlay's Tokenomics: Aligning Incentives for Longevity and Sustainability

The dynamic nature of Overlay's tokenomics ensures that the incentives between users and the protocol remain aligned. The OVL token serves as both the governance token and the means for users to enter and exit positions. As users make successful positions, their net worth in OVL increases, giving them more influence over the future of the protocol.

The OVL token serves as the liquidity, the volume, and the governance of the protocol. As OVL grows in popularity, it will be up to OVL holders (the DAO) to enact policies that keep the monetary policy (The Risk Framework) in check. Strict parameters on markets means less risk of inflation, however this decreases the user experience and may drive users away from using the protocol. Loose parameters on markets means more risk of inflation, but makes the protocol easier to use. A balance must be found, and this should be one of the DAO’s core missions.

One argument we’ve heard a couple of times against Overlay is that OVL holders are incentivized to make the general community lose on their positions because they don’t want the token supply to increase. This is, in fact, correct, however an incomplete assessment of the protocol. If the general community always loses, then no one owns OVL and therefore OVL loses its value. It is actually in the best interest of OVL holders to keep a balance to control inflation of OVL and to get it in as many hands as possible. Some inflation could be beneficial to the protocol as long as inflation stays below demand. Periods of inflation above demand are also potentially beneficial, as long as these periods are not prolonged.

It is in the best interest of the DAO and the community to fund initiatives that drive the protocol forward and promote the protocol. Conversations and decisions should be made in the community Discord and Commonwealth pages, and votes should be brought to Snapshot on what these proposals should be and how they should be funded. To incentivize participation, the DAO should propose allocations from the treasury for participation in all forms of governance, as well as participation in building, and promotion of Overlay.

The Risk Framework is a critical component of Overlay’s Tokenomics. Overlay is a new model that has not been seen before in DeFi. The code essentially serves as liquidity for users who are profitable in their positions, as a profitable position mints new OVL. Thus, the liquidity problem which besets all perpetual markets does not apply to Overlay. However, the primary risk to the protocol is inflation risk, since the token can be dynamically minted. So one naturally comes to understand that Overlay’s Risk Framework is of crucial importance to the proper functioning of the protocol.

Governance is a key aspect of Overlay's tokenomics, as it empowers OVL holders to propose new markets and determine per-market risk parameters. This community-driven approach ensures that the protocol remains relevant and adapts to the ever-changing crypto landscape.

Monetary Policy and Token Supply

Overlay Protocol's native token, OVL, had an initial minted supply of 8,000,000 tokens at its Token Generation Event (TGE). As the protocol relies on dynamic minting and burning, there is no defined maximum total supply. The token supply is allocated as follows:

  • DAO Treasury: 58.80%

  • Initial Developers: 15%

  • Early Stakeholders: 26.13%

Of the 58.80% in the DAO Treasury, 7% should be allocated to Dev Fund and Community Incentives. This and all future allocations must be voted on and approved by the DAO. For example, the DAO could aim to fund community initiatives such as further Litter Box competitions, Referrals and Ambassador programs, and future Liquidity Mining Rewards. 

The initial developers' tokens are subject to a vesting schedule (1 year cliff for 25%, 75% linear after that) starting from TGE, while stakeholder tokens have a 2-year linear vesting schedule starting from January 2023.


Overlay Protocol's tokenomics is an example of how to align incentives between users and the protocol while promoting sustainability and longevity. The protocol's innovative approach to data stream trading, combined with its focus on community-driven governance, makes it a promising platform for DeFi. As global data sources continue to grow, Overlay has the potential to become the go-to platform for trading streaming data, removing the need for traditional counterparties and offering unparalleled financial instruments in the DeFi space.

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