Fundamental change needed in SOV token to secure future funding

I am an experienced CFO with over 25 years of experience in mostly financially distressed companies. Being a true believer in Bitcoin as an asset, and as a network where the new financial world is being build on, I am a big fan of the Sovryn project, and love the work the developers and the community are doing.

However, I do have a huge concern. Imo it is crucial to get the value of the SOV token up, as in 2 years time the Treasury funds are used, and what is left for funding the project is the value of the SOV tokens in Development/Adoption fund.

I think there is a fundamental problem with the value of the SOV token. And if we do not change it, it will be very hard to get the tokenprice up sufficiently in two years time.

Early on, we decided that we do not want to make SOV a utility token. We also did not introduce a token burn, as that tends to increase centralization. This has made us a more transparent and decentralized system – but at a cost….

Whereas other blockchain tokens are valued based on Fully Diluted Market Cap (FDMC), Sovryn is valued as an ordinary share with a far lower value compared to other blockchaintokens.

For other blockchain tokens there is often some kind of token burning which makes the token disinflationary. Also there is an inherent demand for the token as they are needed to use the ecosystem. These two fundamental aspects add to the value of the token, but are difficult to value. In practice, investors seem to value these tokens on the basis of FDMC across blockchains.

The SOV token however is not needed to use the platform and there is no token burning. Basically it behaves as an ordinary share: with revenue sharing (staking rewards) and voting rights. So it is being valued as an ordinary share.

These fundamental differences result in huge valuation differences.

For Sovryn to reach the same FDMC as for example Stacks, the platform fees have to increase enormously. Assuming an apy of 5% and staked SOV of 25 million in the long run. To reach the same FDMC as Stacks (566 mio usd), the SOV token price should be 5,66 usd. The platform fees should be 25 mio staked SOV * 5,66 usd * 5% = 7,1 mio (!!) USD per year, just to reach the same valuation as Stacks already has now.

To put this in perspective: current platformfees are appr. 500 usd per day, 180.000 usd per year. In two years time, assuming CAGR of 240% (as mentioned in the last community call), platform fees will be 1,0 mio usd. Not even close to 7,1 mio usd needed to reach the same FDMC as Stacks already has now.

This is the cost of our choice of not making the SOV token a utility token.

I think we have to realise we cannot afford this choice as we do need to get the token price up to secure future funding and to make the project a succes.

So imo, although we would rather not, we need to a) introduce some kind of token burning and b) to let users pay in SOV tokens to use the Sovryn platform.

A) Introduce some kind of token burning
Why not raise the one off generation fees for Zero from 0,5% to 1,0% (to be paid in SOV tokens) and to add the difference to the Adoption/Development fund?

Imo the hurdle to adoption is trust, not paying 0,5% or 1,0% in one off fees. Paying 1,0% one-off to get a loan against 0%, indefinitely, is a game changer, especially when interest rates are increased worldwide. Imo a small increase in one-off fees will have no impact on adoption as trust in the protocol is the relevant hurdle, and it will take time to build that trust. Imo paying a somewhat higher one off fee could even add to the quality image of Zero.

The SOV tokens added to the Development/Adoption fund will remain off the market (‘burnt’), only to be released again if they lead to further success of the Sovryn Platform. Investors will see this as some kind of token burning.

And adding SOV tokens to the Development/Adoption fund will help future funding of the project, as the amount of SOV tokens in these funds increases.

B) Let users pay in SOV tokens to use the Sovryn platform
My ideas around this topic are something like this:-

“Sovryn is the new financial platform of the world.

It is the most secure and highest quality platform as we want to keep the value of your money safe.

Therefore Sovryn platform is:-
-based on Bitcoin, the hardest and inflation free money;
-build on the Bitcoin blockchain, the most secure and battletested blockchain;
-24/7 secured by a team of outstanding developers;
-regularly audited by independent auditors.

The Sovryn platform is decentralized, open for anyone to use and open for anyone to invest in.

To use the Sovryn platform, fees are payed with the SOV token and are needed to:-
-compensate Bitcoin miners 1);
-compensate developers and auditors;
-compensate investors staking their SOV tokens;
-expanding the Adoption/Development fund (only to be released again if leading to further success of the Sovryn Platform)

Imo paying in SOV tokens will be easy to understand for users. In users’ portfolios they will now need to have some SOV tokens to pay for the fees using the platform. It will now be possible to transfer 100% of their Bitcoins, they don’t need to keep some amount for paying transaction fees (something maybe hard to explain to less sophisticated users).

Consequences of adding these two fundamental aspects to the SOV token
Adding these two fundamental aspects to the SOV token will make investors value the SOV token on the basis of FDMC. They will notice the Sovryn token is highly underappreciated with a FDMC of only 41,7 mio usd. The number 50 coin in the data of coinmarketcap, already has a market cap (not FDMC!) of 1,0 bio usd 2). So, investors will start buying the SOV token.

Users also will start buying the token as the need SOV tokens in their portfolio to pay for the fees to use the Sovryn Platform.

The SOV token has to be bought primarily from the SOV/rBTC pool. This is a very priceinelastic pool. I did some calculation as illustrated in the graph below.

So, if someone today buys 100 BTC worth of SOV tokens the price will increase from 0,40 usd to 3,15 usd. So an investment of 2,1 mio usd increases the FDMC of Sovryn with 275 mio (!) usd. Off course there will most likely be some additional inflow of SOV tokens after such a price increase, nevertheless it shows the high price inelasticity of the pool and that only a small investment in SOV tokens can already push the price significantly higher

Summary
I fully understand and appreciate we didn’t want to make the SOV token a utility token. However, imo we cannot afford this choice any longer.

If we do not change the fundamental value, and thus the valuation of the SOV token, I think it will be very difficult to raise the platform fees sufficiently to get the token price sufficiently up in two years time to secure future funding.

However, if we do make this change and investors start comparing Sovryn on a FDMC basis, with products like Zero, imo we should be able to get a FDMC valuation of at least 1 bio usd, a token price of 10 usd and with it, secure future funding.

Footnotes

  1. Part of SOV fee has to be transferred to rBTC and miners will likely transfer it to usd to pay for their costs. However, this is the same In other ecosystems where the miners/stakers will also sell the tokens received for usd (to pay for their costs/cash their staking rewards). So this has no impact on the valuation method chosen.
  2. This list does includes four stablecoins, however this is an insignificant amount for this discussion.
8 Likes

Thank you for this analysis, Bjorn. I think the financial data highlighted is noteworthy and concerning.
There is currently some activity here on the forum, it seems many community members are noticing that something needs to be done. There are all sorts of suggestions, but they are all largely based on the same problem.
Sovryn has very little capital left and generates very little revenue. The exploit has not helped with that. At the same time, the SOV token is in an everlasting downtrend. This severely limits the scope of the Adoption and Development fund and the effectiveness of liquidity mining incentives.

Something has to change. However, I am reluctant to change the SOV token as proposed here.

-If platform fees are paid with SOV, it takes us too far away from “Bitcoin DeFi” (Maybe i am too idealitstic here).
-If you need SOV for Zero, it’s not such a great product anymore and will scare off many Bitcoiners. It would also complicate third party integrations.
-If the Zero fee becomes too high, it will limit integration with wallets or other providers, as they will surely want to charge a fee as well. Growth should be the first goal here.

I think we need to have a debate on how to turn the tide. @Yago has already hinted at this several times, for example in the last community call.

A first step I can see would be: In the proposed SIP-51, the extra 0.05% AMM swap revenue does not go to stakers, but is used to buy back SOV tokens on the market and send them to the adoption or development fund. This is certainly just a drop in the bucket, but it is better than doing nothing. It would be a start.

7 Likes

Thanks for your comments Sacro.

I also would rather see users not needing to pay fees in SOV, I am also idealistic.

I just think we cannot afford SOV not being a utility token. The value has to increase significantly for the Development/Adoption fund have sufficient value to fund the project. Platform fees alone will not do the job imo.

Regarding your concerns about Zero. I think getting a loan against 0% interest rate without a payback period, and not having to sell your Bitcoins, is the real game changer. To pay once fees of only 1% in SOV, does not change that imo.

5 Likes

What do you think of the following version of the route you propose?

Let all fees continue to be in rBTC only, increase the rBTC fees (slightly, especially for features that are not available anywhere else), but use all rBTC revenue within the protocol to buy SOV from the rBTC-SOV liquidity pool and burn it. The rBTC-SOV pool has low liquidity and is currently easily moved. Use of features then translate to demand for SOV without requiring people to buy SOV. Don’t send SOV to a fund, but burn it so that there is both an increase in demand for SOV and a decrease of max supply (a number that is too high imo). Reward stakers through the issuance of SOV only, at the current rate.

2 Likes

Thanks Martin for your comments.

Imo what you propose will certainly help. However I am afraid it will take too long to get the price of the SOV sufficiently up. As Treasury funds are used in two years time, we need to increase the price of the SOV token by that time.

Referring to my proposal, it has two effects:-

First Effect , immediately after changing the fundamentals
By adding some kind of token burning and letting users pay fees in the SOV token we change the fundamentals of the SOV token and bring it in line with other blockchain tokens. Investors will start to value the SOV token based on FDMC and importantly, they will start doing so immediately from the moment those fundamental changes are implemented. As the number 50 coin in the data from coinmarketcap already has a marketcap (not fully dilluted market cap!) of 1 bio USD, the SOV token could easily be valued on let’s say 10 USD (FDMC of 1 bio USD). So (hopefully) Investors will start buying the SOV token until it is at this pricelevel.

Second Effect, graduall y as users need the SOV tokens to pay the platform fees
Users will have to buy SOV tokens from the SOV/rBTC pool and create upward pressure on the price. However as the current platformfees are appr 180.000 USD per year and the target is 240% CAGR (as mentioned in the last community call) the total platform fees would be 180.000 USD per year on t=0, 432.000 USD on t=1 and 1.036.000 USD on t=2. The total platformfees in the coming period of two years would be something like 1,1 mio USD.
Let’s assume no fundamental change in the SOV token and thus only buying pressure from users: looking at the graph in my first post, 50 BTC (20.000 USD per coin) is used in the coming two years to buy SOV tokens from the pool. The maximum price increase from users buying SOV tokens is appr. From 0,4 USD to 1,4 USD in two years time. And this is the maximum as their will also be inflow of SOV tokens in the pool when the price increases.

I think your proposal is mostly about using platform fees to buy SOV tokens form the pool (second effect) and only partly about changing the fundamentals of the SOV tokens (first effect) as you do introduce some kind of token burning, however users do not need to pay the fees in SOV token. So my concern with your proposal would be, the change in fundamentals is not enough to get the same valuation method as other blockchain tokens.

Off course this are all assumed figures. However the point I try to make is that if we do not change the fundamentals of the SOV token it will be very hard to increase the price of the SOV token sufficiently in two years time to secure future funding.

If we want to build Bitcoin Defi, we need the SOV token to accrue the value of what we are building, as we need the SOV token to fund future operations.

3 Likes

What seems to be missing to me is an argument that an FDMC valuation arises out of the use of the token for fees and a burn mechanism. I don’t see any obvious connection. Maybe Sovryn should be pointing out how undervalued we are in terms of FDMC and seeing if the market responds.

I do not agree with all of this proposal but I feel like a buyback programme is not very controversial and at a later date when volume increases we could put aside a percentage of fees accumulated and buyback or burn some SOV.

1 Like

I fully agree with you that there is no obvious connection between valuation on FDMC basis and use of token for fees and a burn mechanism. It is however the way how investors seem to value blockchaintokens who do have these two additional characteristics next to staking rewards income.

What is obvious to me is that the SOV token is right now (without use of token for fees and a burn mechanism) valued as an ordinary share, as the only income is a share in future platform fees and the right to vote. This is the same as an ordinary share (share in the organizations profits and voting right).

To simplify: the valuation of a share is:-
Price of the share= expected profit per share / required return.

For us it means:
Price of SOV token = [expected total platform fees / staked SOV] / required return.

Referring to the calculations in the first post: with the current valuation method of the SOV token as an ordinary share, our platform fees have to increase from currently appr. 180.000 usd to 7,100,000 usd (!), just to arrive at the same market cap Stacks already has now.

So imo, it will be very difficult with the current valuation method of the SOV token, to increase the tokenprice significantly.

However, what happens to the valuation equation, if you add to a blockchain token, next to staking rewards as mentioned above, also:-
-A burning mechanism.
The expected number of tokens (and thus staked tokens) would decrease over time. The expected platform fees per token would increase over time. This is very difficult to forecast and certainly very difficult to value.
-An additional need for the token to pay for the platform fees.
Now users need the token to use the platform. This additional characteristic is also very difficult to value. Certainly when you expect the use of the platform to increase over time.

In practice it seems investors handle the valuation of these two additional characteristics by comparing blockchaintokens on a FDMC. How else would Stacks have a FDMC of 566 mio usd and our platform only 40 mio usd?

I also do not like to make SOV an utility token. However as we need the token for funding future operations, I really think we have to reconsider this. The cost is just too high.

If we want to build Bitcoin Defi, we need the SOV token to accrue the value of what we are building, as we need the SOV token to fund future operations.

2 Likes

@Bjorn has raised an extremely important topic here. SOV is undervalued relative to other cryptoassets.

I agree with part of Bjorn’s core insight:

This has made us a more transparent and decentralized system – but at a cost….

SOV has a very clear value accrual mechanism, and this is a disadvantage because if the value is less speculative, thee is less room for speculation. I fact, I think if we follow Bjorn’s (correct) logic we will see that “utility” and burns do not actually increase fundamental token value - but they do make it harder to assess token value.

Ultimately, this is a question of supply and demand. Creating a narrative around a token is a demand side function and is easier when the token’s value is ineffable because then any story can be told.

On the supply side, burns have only a marginal effect, but lockups can create extreme scarcity.

I disagree that the solutions proposed by Bjorn will have the desired effect and I think they would likely be harmful. So what do do?

I think there are 2 paths. One which we are already on, and one more radical and speculative.

Path 1 - Sovryn Dollar & Zero

  • We are going to continue to grow Zero and will launch the Sovryn Dollar (DLLR) early next year.
  • 3’rd parties will integrate Zero, increasing growth even more and an ecosystem will develop around DLLR over the course of the coming year
  • This will increase revenue and trade volume, but even more importantly, it will provide the narrative push we need to start seeing significant SOV demand into the next bull market.
  • We can look to enhance the impact of this increased demand with greater scarcity on the supply side - this is the set up for a supply squeeze.

Path 2 - Platform
This path is separate from Path 1, can occur in parallel or not occur at all, without impacting Path 1.

As background, I have never thought of Sovryn as a suite of Dapps but rather as an OS or even more accurately, as an autonomous jurisdiction. We have been building dapps to kickstart the ecosystem, but the real value is Bitocracy itself. Even though SOV stakers can accrue value primarily through dapp revenue, I am increasingly convinced that this is suboptimal. It constrains our growth, forces us to focus on building product, instead of platform and make it more difficult to attract 3’rd party projects (since we are implicitly competing with them).

Our goal is to build a world, to build an economy around Bitcoin. The best way to do this is not by building every single business ourselves like some kind of state-run, command economy. Rather we should build a platform that attracts and incubates innovation and competition. In my view, we should evolve SOV staking to be equivalent to earning part of the growth of this Sovryn economy. To do so, we must evolve Sovryn from being a multi-dapp project to being the Development Institution of the Sovryn jurisdiction. Sovryn would help incubate projects, have part-ownership of them and SOV stakers would be the ultimate beneficiaries of this part-ownership (simplest mechanism bing token distribution to stakers).

This is a very different model from what we have to day, and has unlimited potential value. However, it does require that we free ourselves of the belief that ALL value should accrue to SOV or that there should be only one token. To me these ideas are echos of maximalist-type communism and are paradigmatically harmful.

8 Likes

we were on this path this time last year and we suddenly stopped.
Personally, I feel we have lost a year by not going for the SUB-DAOs idea.

I support this vision , indeed. I hate that we don’t have a functioning Origins Launchpad or any of the other proposed sub-dao.
I believe that my suspicion about how effective and efficient running every project under Sovryn Core is coming true. I believe the if we were to choose the SUB-DAO route we were much much further into the roadmap than we are today, with a wealthier treasury and more accomplishments

3 Likes

The community overall was not behind this view of Sovryn at the time. I think too many were caught up in viewing Sovryn as a dapp project.

The way we were structuring subDAOs at the time was also too complicated.

I think its time to revisit our plan around this.

3 Likes

I do not see how this is a path towards value increase of SOV, in particular, I don’t see the third point. Why would a narrative push for Zero create demand for SOV? The simple fact remains: one doesn’t need SOV to use Zero. TVL of Zero has been doing really well the last few months with little impact on SOV. I also don’t quite see why Zero would boost trading volume. I have a lot of faith that Zero will continue to do extremely well, but I do not see how or why this is a path towards a substantially increased value for SOV.

Becoming a L1/platform was the aim of many projects in 2019-2021, and by now there are quite a few of such platforms with which we would compete (BNB, Cardano, Avalanche, Polkadot, the list goes on). Builders are sparse and in demand, and therefore hard to attract. The more successful of these have really well-funded incubator programs, that are able to provide multi-year funding to promising projects (binance labs is an obvious example). I’m really not sure that steering towards fierce competition with projects that can throw much more funds at their incubation of development is wise.

6 Likes

Thanks you for your comments Yago.

“SOV has a very clear value accrual mechanism, and this is a disadvantage because if the value is less speculative, thee is less room for speculation. I fact, I think if we follow Bjorn’s (correct) logic we will see that “utility” and burns do not actually increase fundamental token value - but they do make it harder to assess token value”.

I disagree with this.

By adding token burns and ‘utility’ the fundamental value of the other tokens is increased. They create real value with it.

We can debate about the correctness of the valuation, as the two fundamental characteristics most other blockchain tokens added are difficult to value, but I don’t agree the difference in valuation with our token is only speculative.

I would like to join the discussions about the two paths you are suggesting and to think about how to increase the platformfees.

However as the comparison with Stacks showed, imo if we don’t make fundamental changes to our token (regardless if we like it or not), it will be very difficult to increase the platform fees sufficiently to get the tokenprice up significantly in two years time.

This thread started with:
“I do have a huge concern. Imo it is crucial to get the value of the SOV token up, as in 2 years time the Treasury funds are used, and what is left for funding the project is the value of the SOV tokens in Development/Adoption fund.

I think there is a fundamental problem with the value of the SOV token. And if we do not change it, it will be very hard to get the tokenprice up sufficiently in two years time.”

Unfortunately I still have this concern.

The suggestion raised to restrict the supply side (some kind of token burning) is a really good one imo.

2 Likes

Why would a narrative push for Zero create demand for SOV? The simple fact remains: one doesn’t need SOV to use Zero.

Needing a token is not usually the main driver, or even a significant driver of value. What matters is narrative momentum and scarcity.

Builders are sparse and in demand, and therefore hard to attract… I’m really not sure that steering towards fierce competition with projects that can throw much more funds at their incubation of development is wise.

It not a question of IF. This is the market we are competing in. So yes, so we have to offer something compelling and unique to offer - and we do. We are building a different kind of ecosystem, around Bitcoin. This is how we build traction and, yes, we will need to be able to deploy much more capital.

4 Likes

@Bjorn - if token burn is analogous to stock buyback, staking rewards are analogous to dividend payments.

They are, I think you will agree, financially equivalent. The only difference might be tax treatment.

Your deeper point is the important one - it’s a question of perception.

Fair enough. You might be right, there is something unique about the development platform that Sovryn could offer, I can see that. If there is indeed a way to deploy more capital, this might be enough to attract development.

Needing a token is not usually the main driver, or even a significant driver of value. What matters is narrative momentum and scarcity.

Hmm this really doesn’t seem obvious to me. Do you maybe have one or two examples where you think it is clearly the narrative that drives the organic value accrual, as opposed to the use one has for the token? The only examples I can think of (Chainlink perhaps) are cases where it just seems that it is the promise of a future use for the token that is driving things, and it is just speculative.

The industry is one big example:
XRP, Uni, ADA, BTC, Link, Sol … the counter examples are what I struggle with.

1 Like

Ah I see, we misunderstood each other. I thought we were talking value, not price. Sure, price is definitely driven by stories, speculation, people gambling on hypes, marketing, etc. When we talk value, I wouldn’t say that XRP, UNI, ADA and SOL have real value anyway near what their prices suggest precisely because of the little actual use there is for these tokens. But OK, clear, if we are just talking price, narratives can be powerful indeed.

3 Likes

Regarding token burn: next to perception, buy back when the token is undervalued and buying from a very price inelastic SOV/rBTC pool will certainly help the price prospects and thus its valuation.

Regarding ‘utility’: this is an additional fundamental characteristic adding additional value and increasing its valuation.

Blockchain tokens with above characteristics seem to be valued on FDMC. SOV is not.

I am a long term investor in Sovryn, I believe in the project, it’s developers and its community. And I don’t care so much for the price in the short term, where it not we need the SOV token to have sufficient value in two years time to secure funding for the ongoing operations.

If we don’t want to change the fundamentals (not my favourite options either) and are going to get valued on FDMC basis, how are we going to increase our platform fees immensely in two years time to secure funding in two years time. (see calculations in first post).

As long as SOV is being valued as an ordinary share:

How are we going to increase our platform fees from appr. 180.000 usd to appr 7.100.000 usd in two years time to get a value of appr 5,6 usd per SOV token and secure funding?

3 Likes

Nah, infinity tokens with no utility. Just makes appear like a shitcoin gambling casino.

Sovryn should be a place for sound finance.

3 Likes