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 â but at a costâŚ.
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 (âburntâ), 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:-
âSovryn 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 usersâ 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 donât 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 didnât 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
- 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.
- This list does includes four stablecoins, however this is an insignificant amount for this discussion.