Hello Sovryns,
after much discussion about tokenomics in the past, this article takes a look at protocol revenue. The data presented here was collected via the Sovryn Subgraph and can be tracked here:
This analysis looks at the accumulated protocol revenue at the 2022 quarters. Namely at the blocks 3970000 (January), 4200000 (April), 4435000 (July) and 4700000 (October).
As you can see, the protocol revenue is somewhat declining. While AMM revenue for stakers was still 37k USD in Q1, it shrank to 13k USD in Q3. Measured in BTC, this decline is not quite as bad. Nevertheless, these figures should be taken as a warning.
Especially the borrowing, lending and margin trading fees are worrying. Of course, it is to be expected that these figures will be worse in the bear market. In addition, Zero may well be taking volume away from margin trading and also from lending.
Considering the fact that Sovryn has to be very careful with its budget at the moment, this protocol revenue should be examined more closely. Are there perhaps ways to improve the whole thing a little?
I would like to make a small comparison here: Sovryn currently pays 50k SOV per week to liquidity providers. After the termination of SIP-24 and besides trading rewards, these are the only incentive expenses that currently exist. The total incentives have already been significantly reduced. Nevertheless, at a token price of 0.4 USD, these incentives correspond to a quarterly issuance of approximately 250,000 USD. If you compare the protocol revenue of 43400 USD in Q3 and 54400 USD in Q2, you can see that there is still a fundamental problem.
Even without any development and personnel costs, the protocol runs on a deficit, the various products yielding significantly less profit overall than the platform incentives cost. I fear that this cannot be sustained for much longer.
There are some voices in the community that oppose further restrictions on liquidity mining rewards and I tend to agree. Without BTC/XUSD and SOV/BTC liquidity there is no platform to use. It can be discussed to lower the rewards by a few percent, but with the gaping deficit other solutions are needed.
Increased protocol revenue (and weekly btc payouts to stakers) will have a positive impact on fundamental SOV value. How can we achieve this with the current volume?
In the past there was SIP-31: Splitting AMM fees with stakers. On each Sovryn AMM use, the fees are as following: 0.25% of the swap sum goes to AMM pool liquidity providers, 0.05% of the swap sum goes to the protocol. In total, a swap has a fee of 0.3%. Right now LP’s receive 250,000 USD each quarter in SOV in addition to 0.25% swap fee. The protocol receives 0.05% in swap fees and pays an extra 250,000 USD for the liquidity providers.
What would happen if we increased the AMM fees to 0.25% for LP’s (unchanged) and 0.1% (0.15%) for the protocol? At constant volume, protocol AMM revenue would double (triple). The fees would be increased moderately and still be at competitive levels. A 0.05% (0.1%) fee increase would barely be noticeable.
As an example: For 2022, the protocol would have received 150k (225k) USD in swap fees instead of 75k. The btc part of the staking APY on current SOV prices would be closer to 5% (7.5%) instead of 2.5%. It could be a measure to stop the downtrend in the token price. And it could be a lever to increase AMM LP APY that’s based on SOV token value due to incentives, providing more room later on to reach a target level of 15k SOV/pool instead of 25k SOV/pool.
It would still not be enough to make up for the deficit, but it would be a step in the right direction. Based on q2 and q3, the quarterly protocol AMM revenue would be estimated at 35k (52.5k) USD. Together with the other revenue sources, we would still be in the red, but we would be able to sustain it for a much longer time than is currently the case. If the rebranding and all the new features like zero and perps bear fruit, i could see us on a good path with such a change.
This thread should serve as a basis for discussion. I am willing to present this as a SIP draft and in a further step I would ask for the delegation of voting power to bring this SIP on the way.
In summary:
This post proposes to change the AMM fees as follows: total fee from 0.3% to 0.35% (Option B: 0.4%). Divided into: 0.25% for LP’s (unchanged) and 0.1% (0.15%) for the protocol (increase by 0.05%/0.1%).
Stay Sovryn!
Sacro