[Circle of Tokens] Fundamental SOV value, Liquidity Mining and Inflation Rate

Hello Sovryn’s,

before our circle shows the first data analyses from the Subgraph, we would like to use this post to stimulate a discussion with regard to liquidity mining, the available supply and the fundamental value of the SOV token. We would like to use this post to prepare you for the discussions to come and to get you thinking.

We are very interested in your opinions. It makes little sense for our Circle to make suggestions that are met with majority disapproval in Bitocracy.

Of course, there are many nuances to this topic, but in this post we would like to present the problem as abstractly and simply as possible.

What gives the SOV token any value at all?

  1. The Sovryn protocol charges fees. Since we are on a bitcoin layer, these are paid in btc. These fees are paid to SOV token stakers on a weekly basis. Staker revenue IN BTC determines the fundamental SOV value.

  2. Further, control over the protocol code and proportional “ownership” of it also gives value to the SOV token (Governance power).

For now, all other incentives to give value or increase the value of the Sovryn token are speculative or a Ponzi.

This post is limited to point 1.

In simple terms, you can draw up an equation with the following declarations:

SOV token value ~ Staker revenue

Staker revenue = protocol revenue * staker share

SOV token value ~ protocol revenue * staker share


People will buy SOV and stake it because they expect a weekly return in BTC. If this return is high enough, the demand for SOV will rise and with it, the token price.

Staker revenue: weekly bitcoin payout for a staker.

Protocol revenue: weekly protocol revenue from fees

Staker share: Staker SOV / total staked SOV

So let’s give this formula a thought:

SOV token value ~ protocol revenue * staker share

Assuming that protocol revenues are beyond our control, the only lever left is the staker share. If you increase this, the fundamental value of the SOV token increases. As the staker share depends on the total SOV that’s being staked, the SOV supply side comes into play. And with it, token inflation rate.

Next, I would like to give 2 abstract examples of how the token price is affected by a high (example 1) or moderate (example 2) token inflation rate and how the inflation rate plays into this scenario.

Example 1: Death spiral (invented numbers)


Assuming a total of 10 million SOV are staked. Bob owns 100,000 staked SOV, i.e. 1% of the total number. We will leave the voting power formula aside. Bob receives 1% of the protocol revenue.


Unfortunately, the SOV token is subject to a high rate of inflation, flooding the market with SOV. The Sovryn protocol borrows liquidity for their AMM pools by paying SOV rewards. After one month, there are no longer 10 million, but 20 million staked SOV tokens. Bob receives only 0.5% of the profit, his APY went down 50% because there is more staked SOV.


He could buy more SOV to add to his weekly profit but he knows that in another month 30 million SOV will be staked. His weekly return will continue to decrease if the platform revenue does not skyrocket as much as the token supply. He decides to give up his position and sells the SOV.


The selling pressure causes the token price to drop. Since SOV is also used to borrow liquidity for the platform, as the SOV price falls, the yield in the pools decreases and liquidity is withdrawn. As a result, the platform volume falls and stakers receive fewer weekly rbtc payouts. More stakers give up their positions and sell their SOV. The price falls, the AMM pool liquidity falls because the liquidity mining rewards become less attractive, the platform volume falls due to lower liquidity. The protocol is caught in a death spiral. Caused by a high token inflation rate. The fiat system sends its regards.

High token inflation => More SOV getting staked => reduced staker revenue => reduced token price => reduced AMM APY => reduced liquidity/volume => Higher SOV borrowing cost for AMM liquidity => higher token inflation

Example 2: The flywheel


A total of 10 million SOVs are staked. Bob owns 100,000 staked SOVs, i.e. 1% of the total number. We will leave the voting power formula aside. Bob receives 1% of the protocol revenue.


Due to liquidity mining rewards, there is a moderate token inflation rate. It is expected that by the next month, there will be 11 million token staked instead of 10. Bob really likes his weekly btc payouts and he wants to keep his 1% of total fee share. He decides to buy 10000 SOV from his btc staker payouts and other capital in this month so that he keeps his 1% fee share. The token price increases slightly because the good rewards provide demand for the token.


With a relatively stable or increasing SOV token price that’s backed by good staking rewards, liquidity mining on the protocol is really profitable. A lot of people want to farm valuable SOV tokens. The liquidity pools increase in size and with good marketing, the platform volume grows. SOV stakers receive even higher rewards which increases demand for the token. The high token price lets the AMM pool APY’s rise. The SOV rewards for the pools get adjusted so the APY stays at good but not insanely high levels.


A reduction of SOV rewards for liquidity mining is possible while growing/keeping the liquidity. It reduces the token inflation rate and the potential amount of staked SOV while maintaining competitive AMM pool APY’s. This makes SOV a valuable and scarce asset due to it’s underlying promise of high weekly btc payouts.

Higher staking rewards => Increasing token price => increasing AMM pool APY => reduced amount of SOV used to borrow AMM pool liquidity => Reduced token emission => Less staked tokens => higher staking rewards.


Higher staking rewards => Increasing token price => increasing AMM pool APY => AMM pools grow => higher volume => higher staking rewards

The flywheel takes off.


The liquidity mining reward program pays out 450.000 SOV per month in order to attract/borrow liquidity. (Some of this SOV gets sold on the market, some of it gets staked. The circle is working to provide the accurate data.)

With relatively constant Dapp volume, staker revenue in btc dropped significantly throughout 2022 because there is more SOV staked. Note week 7 and note the week 16 top.

staked sov

sats per vp

Let’s compare this with our Example 1:

More and more SOV gets staked, but the average return for a staker is down a lot in recent weeks. Example 1 Point 2 has taken place. According to the voluntarily staked SOV chart, we cannot say if Example 1 Point 3 is already taking place but we could be close to it. The AMM and lending pool liquidity remains relatively constant for now (Circle is working on providing this data) even though the APY in the pools is in a downtrend (Circle is also working on this data). The death spiral is not here yet because the pools are still looking good. But there is a significant risk!

We have a high token inflation rate from liquidity mining already and yet, the pool APY continues to slowly bleed down. In addition, we have a significant reduction of staker btc revenue which is only going to get worse with more SOV hitting the open market.

The million dollar question: How do we get out of Example 1 and enter Example 2?

To enter Example 2, these things have to happen:

-Staker revenue stops going down and starts increasing.

-Token inflation rate needs to go down or at least does not lead to reduced staker revenue.

-SOV token price must increase.

What are the hurdles?

-Simply cutting off LM rewards and reducing token inflation has a high risk of losing liquidity and with it, platform volume/staker revenue.

-Reducing inflation rate may not directly increase token price or staker revenue while having a direct impact on liquidity.

-Staking revenue will take a lot to get to attractive levels again with all the SOV that’s already staked. The amount of staked SOV is not very high compared to overall already liquid SOV supply that can potentially be staked.

What are the options to reach Example 2?

-Increased platform revenue: This may happen with Zero/Perps/limit orders. IF this happens, we may have a chance to start the flywheel. We have to be prepared to react with regard to LM rewards if we see an uptick in platform revenue. We must have the data analysis ready and we must have plans that can be executed and monitored/adapted.

-Create a supply shock by locking up a significant amount of SOV for a long time. According to Example 2 Point 2, Bob would be inclined to add to his stake instead of selling off if he knows that there is not going to be much more SOV available for staking in the next years.

-Create a hype and surge in token price. Reduce LM rewards and token inflation so that AMM pools remain on a reasonable APY while reducing token inflation rate. Example 2 Point 3+4. A hype can also be created by the announcement of locked up or even burned tokens. An impulse to make the wheel turn in the right direction.

-Reducing LM rewards but give LM providers attractive options to keep their liquidity on the AMM pools. Liquid rewards, no vesting schedule could be an option.

-Reducing LM rewards by reducing unprofitable pools on purpose. ETH/BTC or BNB/BTC are very unprofitable and pay high SOV rewards. We could cut rewards in half and be happy with half the liquidity in these pools. Tighten and focus the liquidity on profitable pools. IF we reduce LM rewards by 50% and as a reaction, 50% of liquidity gets withdrawn, the remaining liquidity still enjoys the same APY as before such measure. According to recent trading volumes in these pools, there’d not be much risk of losing volume due to lower liquidity because the volume is much lower than available liquidity. (I know, the Circle also has to provide this data and we’re working on it but it’s a lot of work to do.)

Please add thoughts and critics!

Stay Sovryn!


This is an amazing post.
All the reasoning is absolutely top notch and I can only hope for SOV token’s sake that the core team, with his huge and concentrated voting power, as well as his influence on the roadmap and protocol decisions, will see at least this time that they are backed by numbers, that concerns about the tokenomics are really strong, and if ignored will lead to the downfall not only of the token, but the entire protocol. We all know how much they care about Zero, as we all do, but without the liquidity that the rest of the protocol provides it is never going to happen, one of the most exciting and visionary project on BTC will slowly fade away, and it would be really a tragic outcome.

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The balancing act / tension is primarily between maintaining liquidity in the AMM and reducing the emissions of SOV.

Near term, concentrating liquidity in the USD and SOV pools as well as making SOV LM rewards liquid seems like a way to both reduce the overall emission schedule and boost liquidity in the most important pools. However, it should be noted that in the immediate term, liquid rewards will increase the liquid circulating supply.


Hi Yago,

During your back and forth with D man it was discussed locking founder tokens and perhaps some additional tokens for over 10 years to try and offset the slaughter of token price. Since then i havent really heard anything about the lockup going ahead. Just the start of this circle. Is there any updates on this front? Will there be a lockup? Or is the circle trying to take this issue forward? Also have you given any thoughts on perhaps implementing gimps sip? Thanks


I think you picked the absolute worst scenario possible here! making LM rewards liquid at this stage will further plunge the price. As someone that has lots of LM rewards waiting to be unlocked I think this is a really bad idea for now and at this time of the market. We are trying to limit the circulating supply not add to it.

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Making rewards liquid should compensate the downside of reducing rewards overall. In the medium and long term, it will reduce circulating supply greatly. Obviously, the first weeks will see a bit of higher selling pressure. We could calculate how the liquid supply would behave in the short term and from what week onwards will be less than the current state of LM rewards. We can run some numbers and come up with a reasonable solution.

We would not have to do it on every pool at the same time. We can pick 1 pool to try it out and analyze how selling pressure/pool liquidity reacts to these measures. Once the selling pressure of that pool is below the current selling pressure, we can choose the next pool.

Example: Reduce the BNB/BTC pool weekly rewards to 5k SOV instead of 15k SOV and make it liquid. I would expect something like 5% more overall selling pressure in the first month, so it could be a viable option.

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I can only speak for myself…I have a considerable amount of BTC in the lending pool, yielding low return. I would move probably 25% into the SOV/BTC LP if the rewards were liquid, even if they would be reduced by 1/3 to 10000. For me, having liquid rewards would outweigh the lowered APY. Since I cannot imagine being the only one thinking like that, I definitely think making rewards liquid and lowering the amount of SOV rewards simultaneously would definitely help TVL. It might be an idea to start trying that in just one of the AMM pools first and see what happens.


Also i would like to add that going from lock up agreement to a plan that in ‘the immediate term will increase liquid circulating supply’ is quite the 180 on what people from dman, bcw, other community and even gimps proposal is asking for.

I want to say that if we make the LM rewards liquid before any improvements to tokenomics and staking most of the LM rewards will be sold off and leave the system. If we could make staking more attractive and also the LM worth it then make the LM rewards liquid we can get people to stake their LM rewards or put them back to work in liquidity mining and we will have less sale pressure. Making LM rewards liquid as first step seems wrong and it will put more pressure sale for SOV.

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Yes, it’s a chicken and egg problem basically. Do you have a suggestion on how to make staking and LM worth it?

Liquid SOV rewards will not come without reducing rewards at the same time, this would be a bad shock with regard to liquid supply. Liquid SOV would be a bonus to make the reduced rewards not hurt too badly for pool liquidity. I will have a calculation for it available today or tomorrow and i’ll share it in the forum. I think from a supply side it could be possible to get it work without impacting short term liquid supply too much.

I’d add that we will not do it for all pools simultaneously. In our circle we favour the BNB/BTC pool for testing this out because according to

the cost of liquidity is high there while volume is low. Bringing 1 pool from 15k SOV vested per week to 5k liquid SOV per week does not harm overall liquid supply (450.000 LM SOV per month) too much.

I haven’t given it too much thought yet, but for now what I had in mind to increase the staking rewards from SIP 24 only for long term stakers, 24 months and up. Like I think there should not be any staking reward for 1-10 month stakers, but the rewards should be much higher for those who lock up their coins for 2 years+. That would encourage people to go long term and because long term staking has more slashing penalties they would less likely unstake early.
I wil try and spend some time to see if I can come up with any good idea.

Full disclosure: I have long and short term stakes, and I have LM in RBTC/SOV and RBTC/BNB and RBTC/ETH

I can only speak for myself, but i don’t think changing LM rewards to liquid will change my behavior that much. I’ve been providing liquidity in the SOV/rBTC pool since day 1 (and other pools on and off), and claiming every two weeks. So, at this point, i’m basically getting liquid rewards. Every two weeks I claim, and also have a vest mature. I suspect a lot of other LM providers are in a similar situation.

update I posted this before I read the ‘Liquid SOV rewards study’, but will leave it up in case it adds any value or directs anyone to read that thread as well:

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Is the general hope/conventional wisdom that the General Catalyst potential investment is the hype impulse necessary to make the wheel turn in the right direction in Example 2?

No i don’t think so. It think it is amazing for Sovryn to get GC on board. But this effect will not be visible in the short term. In these market conditions, i doubt that any measure will have a large impact.

The first impulse i can see happening is Zero beta and increased staker revenue.
Or increased liquidity in say the btc xusd pool and larger trades happening on the protocol.

But we can make a plan and change tokenomics now in order to see it’s effect when the bear market is over and we have all the fancy products ready. It will take time to play out. Now is the time to prepare for it.


The basic dilemma for the Sovryn tokenomics seems to me to be the following. On the one hand, we don’t want to force people to acquire SOV to be able to use the platform. This comes from the DeFi for Bitcoin vision, but this severely decreases the utility of SOV. On the other hand, Sovryn needs to draw non-SOV liquidity in for the features to work smoothly, and can only incentivize this with SOV rewards. SOV ends up flowing through features that do not directly add utility or value to SOV the token, the best example of these are the non-SOV AMM pools (which may now be slashed, a good thing I think, but that doesn’t solve the basic dilemma).

So the puzzle seems to me to be this, how to make SOV flow only to those who want SOV, either by having a use for it (wanting to compound by LM or staking), or having an investor’s interest in it. Currently it also flows to those who have no interest in it (best example again the non-SOV amm pools).

One solution for the AMM pools still seems to me to make all AMM pools paired with SOV and to create composite swaps: a BTC to ETH swap, would be composed of a BTC->SOV and a SOV->ETH swap. All pools give utility to SOV, there is no compounding by selling all of the reward SOV. The question is how compatible this is with the ‘no need for SOV’ slogan.

So I was wondering about another construction. Would it be possible to create a hard separation in SOV rewards and non-SOV rewards within the platform, and make people choose what kind of rewards they are interested in? From a user’s perspective, for example, say I enter the SOV-BTC pool, I need to make a choice: do I want the SOV rewards, or do I want the rBTC revenue? If more people pick SOV rewards, more people foreclose on their share of rBTC rewards which gets distributed over a smaller pool of people, and hence may become, well, rewarding. Ideally, the SOV ends up going to those who want it, and who actively choose to increase their SOV stack. Given that those interested in SOV foreclose on their rBTC, this may become higher and so more attractive to those only interested in stacking sats. There will be an altcoiner’s path and a rBTC-only path within the platform. Probably not easy to create, and costly in dev time and resources, but still wanted to put it out there, as it seems it might be a possible solution to the more fundamental dilemma that Sovryn faces.


If I choose rBTC revenue where is that coming from?

Depends, but the most natural option would be from the transaction fees? Choose SOV and one get’s no share of the transaction fees, pick rBTC and one gets a share of the rBTC transaction fees but no SOV.

I’m not sure that would be viable. The platform isn’t generating any fees revenue, so there really is no rBTC fees to pay out. However, if we took the very tiny amount of fees we do generate and re-direct them from AMM swaps or trading either makes IL even worse for LP’s or it reduces the fee revenue to Bitocracy stakers. By lowering the fees to Bitocracy the lower the fundamental value of SOV is which perpetuates the problem of people being less incentivized to want $SOV as rewards.

One would create an open market for the rBTC option. So when there is little revenue, few are expected to pick that option. Until it finds an equilibrium. The limit case is someone putting a tiny amount into the AMM and getting 100% of the relevant pool of rBTC. In other words, can’t say anything about whether it would make IL worse or not, only thing one can say is that when revenue is low, only a small percentage of liquidity will be provided by people who pick that option (assuming people are rational).

One could think of doing the same for staking, and the other features. The idea is that, by splitting streams, the SOV option becomes more of a standard DeFi protocol, with standard DeFi tokenomics; and this would have to be the basis for growing the Bitcoin DeFi stream (note that SOV altcoiners pay rBTC fees without getting a share of the fees, effectively funding the Bitcoin DeFi stream).

Just brainstorming out loud.

To be honest, I’m not sure I am following. Is there a way to emulate this with minimal development changes?

I still think the fundamental issue is the rBTC fees have to come from somewhere and that likely is the Bitocracy revenue, which I think above all else we have to prioritize.