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In-depth analysis of the AO economic model—step by step, uncovering the exciting aspects of AO!
Navigating Web3 tides with focused insightsAuthor: Fishery, Core Contributor of Biteye
Editor: Crush, Core Contributor of Biteye
*Approximately 4,500 words, estimated reading time: 10 minutes
As a decentralized computing system built on the Arweave platform, AO supports high-concurrency computational tasks and is particularly well-suited for big data and AI applications. Its unique narrative across the entire network has attracted significant attention from crypto participants. However, AO’s appeal extends beyond just its narrative—there are several other intriguing highlights worth exploring:
How does AO leverage a clever DeFi economic flywheel to create healthy token distribution and generate real profit opportunities?
With DAI mining yields more than twice those of stETH, how can users participate in cross-chain mining on AO?
Win-win dynamics between projects and users, unparalleled network-wide storytelling, top-tier innovation within the DeFi space—just how many standout features does AO truly offer?
In this article, Biteye will answer these questions and provide an in-depth analysis of AO's economic model, unveiling step by step what makes AO so promising.
01 Project Background: What is AO?
AO is a decentralized computing system built on the Arweave platform that adopts an Actor-Oriented Paradigm (AOP), aiming to support highly concurrent computation tasks.
Its core objective is to deliver trustless computing services, enabling an unlimited number of parallel processes with high modularity and verifiability. By integrating storage and computation, AO offers a superior alternative to traditional blockchain architectures.
On June 13, 2024, AO unveiled its tokenomics—a fair issuance mechanism inspired by Bitcoin’s economic design while innovating upon DeFi liquidity incentive concepts.
The innovative aspects are particularly elegant, making post-mainnet performance highly anticipated. With a standout economic model, AO ranks among the most pioneering designs in the DeFi landscape.
02 Token Issuance Rules
The total supply of AO tokens is capped at 21 million—the same as Bitcoin—emphasizing scarcity.
Token emissions follow a halving schedule every four years but use a smoother release curve through distributions every five minutes. The current monthly emission rate is 1.425% of the remaining supply, which gradually decreases over time.
In an industry plagued during this bull market by massive VC token dumps, AO stands out by adopting a 100% fair launch model, completely avoiding private sales or pre-allocations.
This decision ensures equal access for all participants, aligning perfectly with the foundational principles of decentralization and fairness in cryptocurrency, reflecting exceptional vision and integrity.
AO’s token distribution unfolds across several key phases, each with distinct characteristics and goals:
Initial Phase (February 27, 2024 – June 17, 2024): This phase can be understood as an airdrop to AR holders. AO implemented a retroactive minting mechanism where, starting February 27, 2024, all newly minted AO tokens were allocated 100% to AR token holders, providing additional incentives to early supporters. During this period, each AR token entitled holders to receive 0.016 AO. If readers held AR on exchanges or custodial platforms during this time, they should inquire about claiming their AO after the official circulation date around February 8 next year.
Transition Phase (Starting June 18, 2024): Beginning June 18, AO introduced a cross-chain bridge. Newly minted AO tokens are now split into two portions: 33.3% continue to go to AR holders, while 66.6% incentivize assets bridged into the AO ecosystem. Currently, users can deposit stETH (with plans to add more asset types in the future) to participate in this phase. This component forms the centerpiece of participation in the AO ecosystem, discussed further below.
Maturity Phase (Expected around February 8, 2025): This phase marks the maturity of the AO token economy. Once approximately 15% of the total supply (~3.15 million AO tokens) has been minted, AO tokens will begin circulating. This timing ensures sufficient liquidity and participant engagement before trading commences. Distribution rules remain stable: 33.3% to AR holders and 66.6% to bridge incentives.
In total, about 36% of AO tokens will be distributed to Arweave (AR) token holders (100% prior to June 18 plus subsequent 33.3% emissions), reinforcing the deep integration between AO and the Arweave ecosystem.
The remaining 64% incentivizes external yield and asset bridging, driving economic growth and enhanced liquidity within the ecosystem.
03 The Economic Flywheel
AO’s economic model includes a novel treasury allocation mechanism: users who bridge qualified assets via the AO Bridge continuously earn AO token rewards. Essentially, performing a cross-chain transfer grants ongoing DeFi yield—an extremely attractive proposition for most users.
This bridge is the core of AO’s economic flywheel and serves as the primary revenue source for the project team under the fair launch framework.
This represents a fresh approach worth detailed examination. In this section, we clarify how it works.
To qualify for AO rewards through cross-chain bridging, assets must meet two criteria:
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High-quality assets: These must have strong market liquidity, typically originating from major blockchains. This ensures bridged assets enjoy broad market recognition and utility on the AO network.
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Yield-bearing: The assets must generate annualized returns. Currently, stETH is a prime example, with stSOL planned for future inclusion.
These two requirements are precisely what allow AO to maintain fair token distribution while ensuring sustainable development and profitability for the project team.
In simple terms: while users keep these yield-generating assets on the AO chain, the interest generated is paid to the project team, and in return, the team mints AO tokens for the users.
In the diagram, PEDG (Permaweb Ecosystem Development Guild) receives all stETH yield.
Take stETH as an example: depositing 1 ETH into Lido earns 1 stETH. A key feature of stETH is that its balance grows automatically over time based on staking rewards. It can always be redeemed 1:1 for ETH or traded near-parity on secondary markets.
Assuming a 2.97% annual yield, one stETH left untouched on Ethereum would grow to ~1.0297 stETH after one year—equivalent to 1.0297 ETH.
However, when 1 stETH is bridged to AO, the Ethereum-side bridge contract receives 1 stETH, and the user receives 1 aoETH on the AO chain. Crucially, aoETH does not accrue interest over time like stETH.
A year later, the stETH balance on Ethereum exceeds the aoETH supply on AO by exactly the amount of accrued yield. Even if all aoETH were redeemed back to Ethereum (worst-case scenario), the stETH contract would still retain surplus tokens—this surplus becomes the project team’s revenue.
To date, 151,570 stETH have been deposited into AO’s bridge. On-chain monitoring shows the team uses bots to collect yield daily, earning approximately 12 stETH per day.
This creates a win-win: fair AO distribution without the unsightly VC-style dump, while also generating meaningful revenue for the team.
At a 3% stETH yield, the team could earn roughly 4,500 ETH annually from stETH interest alone, plus over 50 million DAI deposited into DSR at 6%, totaling multi-million USD in annual revenue.
This is undoubtedly an exemplary model of fair value distribution—one future projects should study closely.
But AO’s economic flywheel doesn’t stop there.
The non-interest-accruing aoETH mentioned above isn’t a supporting actor—it plays a central role in the flywheel.
Holders of aoETH receive newly minted AO tokens, making aoETH itself a yield-generating asset. Moreover, aoETH maintains a 1:1 peg with ETH. Thus, aoETH combines the liquidity and price stability of a mainstream asset with the ability to generate AO tokens—highly desirable in the eyes of many investors.
Flow of Yield Distribution
Naturally, such a high-quality yield-bearing asset invites new innovations.
AO introduces a groundbreaking “developer minting” model, redefining traditional project funding and token distribution. This model provides developers with new capital sources, offers investors low-risk exposure, and promotes healthy ecosystem growth.
When developers build DeFi apps on AO, they must lock AO native tokens and bridged assets to provide liquidity.
Here, aoETH and similar bridged assets become preferred liquidity instruments. When users lock aoETH in a developer’s smart contract, they not only boost the app’s TVL but also trigger AO token minting directed to the developer’s contract.
This enables “developer minting,” offering developers continuous financial support. One can imagine that once stSOL becomes eligible for AO minting, AO’s DeFi prospects will brighten even further.
As a result, teams become less reliant on VC funding, leading to healthier token distribution. As projects grow and more aoETH gets locked, developers receive increasing amounts of AO.
This creates a virtuous cycle: strong projects attract more capital, gain more resources to improve products, and ultimately drive ecosystem expansion. Thanks to this, AO’s overall ecosystem health surpasses that of typical chains, fostering genuine profit opportunities.
This innovative model simplifies traditional fundraising, allowing market demand—not VCs—to determine capital flow. Truly valuable applications will naturally attract more aoETH deposits and thus more AO support.
The mechanism tightly aligns developer incentives with ecosystem success, motivating continuous creation of high-value applications.
This is a clear multi-party win: from an investor’s perspective, supporting projects using only yield income (not principal) drastically reduces risk, encouraging greater participation.
Developers, meanwhile, can focus entirely on product development instead of spending excessive time on fundraising and token allocation.
04 Participation Opportunities
Currently, using the official AO bridge for cross-chain mining is the most reliable way to acquire AO.
On September 5, DAI officially became the second asset (after stETH) eligible for AO mining.
The following sections analyze optimal participation strategies for different risk profiles, focusing on cost-efficiency and security.
05 Cost-Efficiency Analysis
Since AO has not yet launched publicly and lacks a market price, APR cannot be calculated—participants are currently in a “blind mining” phase. Blind mining is often more appealing than predictable DeFi yields.
Suppose you allocate $1,000 each in stETH and DAI to cross-chain mine AO. We compare their relative efficiency by projecting final AO acquisition.
The results are astonishing!
September 8: DAI Mining Reward Forecast Table
September 23: Updated DAI Mining Reward Forecast Table
Comparing data from September 8 and September 23 reveals a jaw-dropping insight:
Just three days after DAI mining began on September 8, early-stage DAI yields were already 10.53579 / 4.43943 = 2.373x higher than stETH. For a legitimate project, having stablecoin yields exceed those of volatile assets by multiples is extremely rare in recent DeFi history.
At the time, we noted this anomaly and considered two possibilities: either the market hadn't caught on yet due to early stage dynamics, or hidden risks existed.
Now, nearly 20 days into DAI mining, the market should have adjusted—but DAI still yields 8.17534 / 3.33439 = 2.452x more than stETH, even higher than before. This is baffling.
With market inefficiency ruled out, only one explanation remains—risk differentiation.
06 Risk Consideration
From a financial standpoint, stETH carries significantly higher price volatility risk compared to DAI. Even staunch ETH believers could theoretically borrow DAI against ETH collateral to arbitrage the yield gap. Yet, the market hasn’t done so. This is irrational.
Beyond financial risk, smart contract risk emerges as the primary concern.
As previously explained, AO’s stETH mining mechanism is sophisticated and well-designed, allowing the team to capture full stETH yield. While complex, the core code is derived from MorpheusAIs’ Distribution.sol, battle-tested over time—relatively secure.
In contrast, the DAI mining contract is a heavily modified version of Distribution.sol, now integrating DAI deposits into MakerDAO’s DSR (Dai Savings Rate). This adds multiple layers of complexity compared to stETH handling.
Comparison: DAI Mining Contract vs. MorpheusAIs Contract
Thus, from a code security perspective, stETH mining is considerably safer than DAI mining. However, this difference still fails to fully justify DAI’s more than 2x better yield-to-risk ratio. This discrepancy remains debatable. (Shameless plug: feel free to join our group chat to discuss!)
07 Conclusion
In summary, AO impresses across multiple dimensions—from its fair launch mechanics to its revolutionary “developer minting” model. No VC dumping, elegantly designed DeFi incentives—it represents a new paradigm in project structuring.
For Web3 participants, experiencing cutting-edge innovations is essential. But when faced with counterintuitive phenomena like DAI’s outsized yields, caution is paramount. Ultimately, we must respect and understand market choices—even when they defy immediate logic.
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