Skip to content

Failure Modes

This page covers the main ways a cobuild can "go wrong" from an economic/holder perspective, and how to design around those risks.

Ceiling Runaway

What It Is

The issuance price (ceiling) keeps stepping up, but market price can't keep up. Eventually P_AMM sits near the floor while P_ceil rockets away. Rational users stop minting from the contract (why buy at the ceiling if AMM is cheaper?), so issuance halts and new inflows go only to the AMM.

Why It's Bad

  • Treasury B stops growing from new sales.
  • Floor P_floor ∝ B/S only grows via redemptions and loan fees, not new primary inflows.
  • In a speculative-only system, a confidence shock can trigger exits → redemptions drain AMM liquidity → price gets more volatile → more exits (a liquidity spiral).

Guardrails

  • Match ceiling growth to real demand. For service-coupled systems, target ceiling growth loosely in line with expected revenue growth instead of "number go up" curves.
  • Stage AMM depth. Don't deploy huge AMM liquidity before you have recurring real activity. Shallow but healthy initial liquidity + steady service inflows can naturally pull P_AMM back toward P_ceil.
  • Monitor the gap. Track P_ceil / P_AMM. If the ratio stays very high for long periods, you're likely in runaway; future stages should be flatter.

Tax Too Low

Symptoms

  • Holders treat the token as fully liquid money.
  • During stress, everyone redeems instead of borrowing.
  • Floor growth relies mainly on volume rather than per-exit gains.

Design Facts

For rₖ well below ~19%, models show the system is exit-dominant in stress: rational actors pick redemption, not loans.

Guardrails

If you want sticky capital and loan usage, avoid very low taxes (e.g. <2-3%) unless it's a deliberate "currency" design.

Tax Too High

Symptoms

Rational myopic users avoid cashing out; large holders may borrow as much as possible, then default if long-term growth doesn't materialize (system is still solvent, but effective exits route through loans).

Design Facts

  • Around 39%, loans can give more immediate liquidity than cash-outs for big holders.
  • Higher rₖ raises the growth required to make borrowing worth it vs exiting.

Flat Issuance

In a "loyalty token" / business currency setup:

  • If issuance price stays flat forever, the floor converges to a fixed % of that price and then stops growing. At that point rational users have no reason to hold; they'll gradually exit.

Aggressive Auto-Issuance

Auto-issuance (pre-scheduled mints to team) always lowers the floor, because supply jumps but treasury doesn't.

Symptoms

  • Sudden drop in floor value at stage transitions.
  • Community perception of "stealth dilution".

Guardrails

  • Keep auto-issuance small and infrequent.
  • Schedule it after periods of strong organic growth so the floor hit is absorbed.
  • Prefer ongoing splits for builder funding instead of large one-time auto-mints.

Speculative Demand

If your cobuild has no real product or revenue and relies entirely on traders:

  • During good times, everything looks fine.
  • During bad times: Redemptions raise the floor but drain AMM liquidity, increasing volatility and discouraging new buyers.

Guardrails

  • Anchor the cobuild to real activity (fees, sales, usage).
  • Avoid over-sizing the AMM relative to real inflows.
  • Use periodic fundraising archetype (timed rounds, moderate tax) instead of an always-on, high-slope speculative curve.