Navigating the landscape of open source revenue models is no small feat, especially when it involves pioneering services and integration methods that are breaking new ground. Communities utilizing Shutter stand at the forefront of this exploration, offering a unique encryption service that is both innovative and essential to crypto, finance and governance. This blog post, penned from the perspective of a core developer of Shutter, aims to shed light on the economic underpinnings of such a groundbreaking endeavor.

As a spoiler: We think Shutter’s encryption/decryption scheme has the potential to be extraordinarily valuable, because it can help solve some of the most important problems in crypto such as front-running, censorship resistance and information asymmetry. 

This post is structured to separately discuss overall economics/value capture, core revenue model and revenue streams, tokenomics and token distribution.

Let’s dive in:

Core Revenue Model: Users Pay Fees For encryption/decryption

At its most fundamental level, Shutter is destined to operate on a simple yet effective revenue model: users pay for encryption services through network fees in ETH (or potentially another native token of the chain that Shutter integrates with). 

This direct approach demarcates the primary, core revenue stream from the topic of tokenomics, which we'll delve into later. 

Community initiatives like Shutter DAO 0x36 are positioned well to take an intermediary role in this and also to govern and decide on fee distribution, incentives and other economic parameters in their Shutter protocol.

The Value of encryption/decryption

In the digital frontier, two colossal challenges loom large: malicious MEV (Miner Extractable Value) and censorship. These are not mere technical hurdles but significant economic and ethical dilemmas. Shutter positions itself as a solution to these pervasive issues, with a particular focus on encryption's role in safeguarding information integrity and accessibility. The economic implications are vast, because these challenges directly affect the security and efficacy of cryptocurrency transactions.

“Put more simply: In a world where information = money, encryption and key generation will be infinitely more valuable than they are today and not just focused on privacy.”

Malicious MEV

This phenomenon represents a lucrative but ethically questionable opportunity within the blockchain ecosystem. By enabling a service that mitigates the risks and losses associated with MEV, Shutter taps into a significant demand for secure transaction processing. The exact financial impact of MEV is challenging to quantify, though estimates suggest it could extend into the billions annually. The role of a community running Shutter in this context is not just providing a service but becoming a guardian of transaction integrity.

Censorship Resistance

Arguably the cornerstone of cryptocurrency's ethos, the fight against censorship underpins much of Shutter's value proposition. While harder to measure in economic terms, the importance of censorship resistance cannot be overstated. It's a critical factor for the widespread adoption and trust in crypto platforms, offering a direct pathway to securing the free flow of information and transactions.

Information Symmetry 

Ensuring all market participants have equal access to information is pivotal in maintaining the efficiency and inclusivity of financial markets, including the dynamic world of cryptocurrency.

Information symmetry facilitates informed decision-making across the board, leading to more accurate price discovery and increased market efficiency. In crypto, where volatility can be high, this equal access to information helps stabilize prices by ensuring they reflect all available knowledge.

By leveling the playing field, information symmetry boosts market participation. It attracts a wider range of investors, from individuals to institutional entities, by assuring them that they are not at a disadvantage due to information asymmetry. 

Potential Revenue Streams

As we delve into potential economic frameworks of Shutter implementations, it's essential to recognize the complexity and variability of predicting specific revenue figures in the fast-evolving crypto space. Instead of providing exact numbers, which could be misleading, we offer two conceptual approaches to understanding potential revenue streams, grounded in current market dynamics and observed trends.

Approach 1: Insurance Analogy for Understanding Market Size

Drawing parallels with the insurance sector can offer valuable insights into Shutter's overall potential market size. In the traditional financial world, insurance premiums are determined by the measurable risk and potential loss to the insured party. Similarly, Shutter's encryption service can be viewed through the lens of "insurance" against the financial risks associated with front-running in crypto transactions. This risk, while clear and quantifiable in terms of potential losses to users, justifies a fee for Shutter’s protective services, laying the foundation for estimating market size and revenue potential.

We can assume that the fee market size for MEV protection scales with the amount of MEV extracted. MEV represents a significant, albeit challenging to quantify, opportunity within the blockchain ecosystem. Estimates suggest that MEV-related activities could generate hundreds of millions to billions of dollars annually. From an economic perspective, users (or DEX aggregators making this decision for them) should be willing to pay up to as much as the amount of MEV extracted that they would otherwise lose, if they weren’t protected.

With Shutter designed to mitigate the adverse effects of MEV, the growth in adoption of encryption services based on Shutter could lead to a substantial increase in revenue, scaling in tandem with the overall expansion of the crypto market.

Approach 2: A transaction fee based framework for Estimating Revenue

While specific revenue calculations are beyond the scope of this discussion, a hypothetical approach could involve estimating the volume of transactions protected with Shutter and applying a standardized transaction fee. This model, although simplified, provides a basis for understanding how revenue could scale with the adoption of encryption services based on Shutter technology, especially as DeFi transactions continue to evolve and expand on L2 platforms.

The Role of L2 Transactions in Revenue Projections

The expectation that DeFi transactions will increasingly migrate to Layer 2 solutions plays a critical role in forecasting the market potential for encryption services leveraging Shutter. L2 solutions are poised to become the backbone of DeFi activities, offering scalability, reduced transaction fees, and enhanced security. This migration not only broadens the scope of Shutter's applicable market but also signifies the growing demand for services that can secure transactions across these more efficient networks.

Tokenomics

On top of this core revenue model, a strategic implementation of tokenomics can significantly influence a project's adoption and growth trajectory. A Shutter DAO could implement a multifaceted approach to leveraging its native token to incentivize participation, secure the network, and enhance user experience. It's important to note that these ideas are prospective and not yet in execution, offering a conceptual framework for future development.

Token Incentives for Users and Keypers

A cornerstone of Shutter tokenomics could be the provision of token incentives to both users of the encryption service and the keypers who play a critical role in maintaining the network's security and integrity. Rewarding users for engaging with the service and keypers for their crucial contributions can foster a vibrant ecosystem where all participants are motivated to support and grow the platform.

Governance Lock-up Mechanisms

Implementing governance lock-up mechanisms can encourage long-term commitment from token holders. By locking tokens for a certain period to participate in governance, token holders would likely become more invested in the project's success, leading to more thoughtful decision-making and a stable governance environment. This mechanism also serves to align the interests of the participants with the long-term goals of the DAO.

Keypers Staking and Delegated Staking

Staking is a powerful tool to ensure the security and reliability of decentralized networks. Allowing keypers to stake tokens can create a system where keypers are rewarded for their service reliability and penalized for any malfeasance. Delegated staking could further democratize participation, allowing token holders who are not keypers themselves to delegate their tokens to a keyper of their choice, sharing in the rewards generated through service provision.

Another interesting topic in this regard is the potential integration of Shutter with Eigenlayer. Eigenlayer ETH restaking could be utilized on top of primary staking within the Shutter system itself.

Staking Tokens to Reduce Fees

To make the service more attractive and accessible, a Shutter DAO could introduce a mechanism where users can stake tokens to reduce their fees. This not only encourages the holding and utilization of tokens but also makes the encryption service more competitive and appealing to a broader audience.

Paying with Tokens for a Discount on Fees

Offering discounts on service fees when payments are made with the platform's native token can significantly increase the token's utility and demand. This approach incentivizes users to purchase and hold the token, enhancing its circulation within the ecosystem and supporting its value.

Low complexity implementation: While these tokenomics strategies outlined above are not yet in place, their implementation is generally trivial and can be proposed to the DAO at any point in time. We’re excited to see the community come up with proposals and implementations in this regard!

Token distribution

Our strategic approach to the genesis allocation was crafted to ensure a stable foundation for the network's future growth and activities. This allocation is divided among key stakeholders to achieve a balanced representation and active involvement from all community segments.

More info: https://blog.shutter.network/a-proposed-blueprint-for-launching-a-shutter-dao/ 

Conclusion

Embarking on the journey with Shutter is to be part of an ambitious endeavor to redefine open source revenue models within the crypto space. By addressing critical issues like MEV and censorship through its encryption services, Shutter not only proposes a viable economic model but also champions the core values of privacy and security in the digital age.

Note: The ideas and projections discussed herein are speculative and serve as a foundation for future discussions and developments. They are not financial advice or guarantees of specific outcomes.

This detailed exploration into Shutter's proposed economic model highlights the project's innovative approach to encryption services, aiming to solve some of the most pressing issues in the crypto world today. As the landscape evolves, so too will the strategies and models proposed for Shutter, always with an eye towards fostering a secure, inclusive, and economically viable digital ecosystem.

We welcome everyone from the community to submit ideas or even concrete implementations for Shutter or Keyper economics!