[Circle of Tokens] Regarding protocol revenue

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:

https://subgraph.sovryn.app/subgraphs/name/DistributedCollective/sovryn-subgraph/graphql?query={ _meta { %20%20%20%20hasIndexingErrors %20%20%20%20block { %20%20%20%20%20%20number %20%20%20%20}%20%20 %20%20} %20%20protocolStats(id%3A%20"0"%2C%20block%3A{number%3A4700000}){ %20%20%20%20totalAmmStakerFeesUsd %20%20%20%20totalTradingFeesUsd %20%20%20%20totalLendingFeesUsd %20%20%20%20totalBorrowingFeesUsd %20%20} }

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

22 Likes

Hi Sacro,

As always, your work is as necessary as it is accurate. A great effort in the search for data, and better analysis of it to propose simple measures with real impact.

Of course, I agree with your appreciations and would vote yes to your proposals for revenue increases (for fees).

That said, we are just buying time. The proposed measures extend the life of the protocol while waiting for a magic bullet. Let’s say that reducing rewards (measure already taken) and increasing revenues (fees) (potential sip), are the oxygen to get to something that does not depend on the Circle of Tokens.

It is not up to the Circle of Tokens to explain why there is no volume, how to increase users, which products to improve, which to add, which blockchain to be on. However, the signals you share with the community are very valuable, and in my opinion should be rewarded.

Stay Sovryn!

11 Likes

A promising suggestion: but how might these sustainability calculations potentially be influenced by the (little-publicised) SOV trading rebate?

2 Likes

Great idea sacro, small steps like these can go a long ways! Especially like you said about the onboarding that is hopefully coming soon!

1 Like

Thanks for your valued work @Sacro !!

I fully agree with this SIP.

I would like to put something on the table that I think will benefit the future value of the protocol even if we don’t see it immediately.

if I understood correctly, the goal is to increase the AMM fee revenue right?
why don’t propose with that extra share, we bought SOV and locked it in a smart contract for 10 years for example?
with that, we are increasing the buying pressure and locking more SOV …

Negative aspects:

  • it needs dev work to apply this, I am not technical but I think coding this is “fast”.

Positive aspects:

  • Increase buying pressure every month;
  • Decreasing SOV Circulating Supply;
  • Locking a lot of tokens in a Smart Contrat for 10 years.

Others Aspects:

  • community can try to have leverage from this buying and try selling its SOVs but as time goes by, more SOV is locked and there is less supply, and at a certain point, the trend will have to change.

What do you guys think?

3 Likes

Perhaps a bit off topic, but…in one of the older CoT threads from a few months ago there was brief consideration of migrating the existing LPs to protocol owned liquidity. Is now a better time to consider that as an option? I’m not smart enough to know all of the consequences up front (although I can guess a couple of them). Is this even an option with our ever declining token price?

2 Likes

hi Sacro
i would support this SIP
i would go for an increase of 0.1%
its minimum, but makes all of it more sustainable in the long run

1 Like

@profesh: i do not know how many SOV are paid out as trading rebase. I will do some digging. But as you seem to suggest, the sustainability calcs are without the rebase so the reality might look even worse.

@josecarreira i kind of like such a proposal. Introducing such a buy back could be as easy as sending the purchased SOV back to the adoption fund adress. I imagine such a buy back and lock-up would be well received, make up for good news and create some long-term buying pressure.

BUT after consideration, i would not want to add it to this SIP (only if the majority of the community wishes so).
Why: This has the potential to be the very first community SIP. I want it to be a small one, i want it to be easy. I want it to succeed. Changing the AMM fees does not require writing code. It only requires a simple change of a number in existing code. This makes the writing process and the review process as easy as possible. The risk to break things is extremely small :slight_smile:

@TacooCharlie That’s a topic worth discussing, i don’t have a strong opinion on it. So far i try to improve things a little here and there when i see opportunity. Let’s focus on this topic first!

Any thoughts on the numbers? 0.05%? 0.1? something else?

5 Likes

I fully support this SIP. If majority agrees I would go with a 0.1% but even 0.05% would be very good!

Great work on the proposal! Thank you for taking the initiative.

I totally agree with you that in this current market environment, especially when looking at the macro level, you have to position yourself more carefully. However, as @lactarius has already mentioned, this is only a delay of the real problem, namely unprofitability. I think a next bull run will improve the overall situation significantly, but the question is how long do we have to wait for it and can we just wait that long? Your suggestion definitely extends the time horizon, which is why I right now don’t see any disadvantage in a 0.5% increase.

I am a fan of buy-back programs, but in my opinion only excess profits should be used for this. Especially if you want to increase the revenue to extend your runway, this should be done directly and not first through such a proposed program. Otherwise, the actual goal is lost from sight and the focus is shifted on increasing the SOV price.

Thanks again @Sacro for coming up with this idea. I just love to see good work emerging directly from the community.

3 Likes

Hey @Sacro !

I love the initiative! It is indeed a much welcomed change. The token has been somehow forgotten and wether we like it or not it might be the thing that will bring traffic to the dapp.

I also like the idea of a buy back programs, specially if we set it on the same day the rewards are released!

1 Like

What’s the Number 1 problem for Sovryn?:thinking:

Protocol revenue.

How do we fix this?
Get more users.

How do we get more users?
Optimize mobile.

Please someone listen to the community regarding this.

7 Likes

Thanks for proposal, sounds good. I’m LP in these pools and feel comfortable, meanwhile any news about recovering lending pool.

1 Like

@Sacro I am pretty much in favour of this!

@Travis_trades
we aren’t getting more users first of all because we are on rsk and second of all Defi on Bitcoin is still extremely niche!
Mobile optimisation is nice but it won’t solve the adoption issues.

1 Like

Rsk isn’t necessarily the problem, there are things in our control that we can take responsibility for and change👍🏼

Stats show people are trading more mobile, vastly outperforming desktop trading. we could very easily see an influx of new users using Sovryn and trading on it(increasing protocol revenue) if we had a better mobile experience. I speak for many including myself on this.

2 Likes

You believe access to the protocol is the stumbling block to getting users trading on the dapp? I agree that mobile optimization should be (somewhere) on the list of priorities, but i doubt it will affect much. If there was demand to trade on Sovryn people would find their way on to it.

No it’s much bigger than that,

If you’re doing research on a product and you get to the dapp, you see that’s it’s glitchy, doesn’t show full pages, slow upload speeds for graphs, etc.

Then most will not only lose interest, but have a bad first impression of sovryn, which can be very damaging. First impressions bring excitement, funding/investors, and users.

Improved UI would also help retention and increase user base.

All of these things mentioned would dramatically help sovryn’s funding, and protocol revenue would increase, making stakers happy as well.

This would be a very big deal for Sovryn.

1 Like

I really like this SIP and the conversation it has induced. One thing that is missing for me is a discussion of the potential impact on trading volume if we raise fees. Raising fees is equivalent to increasing slippage, and we have long been aware that we need to decrease slippage.

Now it might be that those trading on our platform are price insensitive - but we should examine this hypothesis, rather than assume it.

Overall, my sense is that extracting maximum revenue is not the goal we should be focused on - the priority challenge now is, to my mind, growth. A focus on maximizing extractable profit makes sense when we have saturated growth. Not before.

3 Likes

You highlight the risks of this proposal well, and they are very valid. The question is whether they trump the benefits presented. I don’t think so.

Growth is most important, not revenue. I would argue that this SIP is also primarily about growth, not revenue. Why?

If you look at the history of bitcoin, strong user growth has always been associated with the incredible price increases of the bull markets. In the bear markets, growth stagnated or was much slower. Price increases are the best advertising. People talk about it, there is news, many potential new users are reached. Some try this interesting new project with a sexy market development. Of course, Sovryn is also dependent on bitcoin in this regard. But there are also homegrown problems.

The SOV token is not in a good shape. Few new users would try a project that is clinically dead on the chart. Too much risk.

Too few know or care about what a great job the core team is doing.

The price chart is important for user growth. It is the most important signal, the advertising with the largest reach.
By giving the SOV token more fundamental value through weekly bitcoin revenue, we can create a solid base, which is much needed.

The goal of this SIP is not to maximize profit. A 0.05% increase is not high enough for that. The goal is to reduce the gaping deficit, stop the dead spiral and increase demand for the SOV token. When it comes to a public release of Zero, the long downtrend should finally be overcome. Then we shall see growth.

4 Likes

As a user of margin trading, I am not affected by the increase raised by Sacro. I could even tolerate further increases.

I am so grateful to Sovryn to be able to do swaps, and (limit) margin orders, without KYC, and at such a low cost, that I am not looking at a fee increase like the one proposed. In fact, I can tolerate the imperfections that have to do with slippage, unexecuted orders…

I think those of us who trade in Sovryn understand the costs and difficulties that Sovryn presents, which go far beyond 0.1%.

That is why I will vote yes to this SIP.