New utility for SOV: minting subprotocol tokens

There seems to be some restlessness among some SOV holders who are itching to do things with their SOV other than staking, voting, and providing liquidity in the SOV/RBTC AMM pool (see this thread, for example). While I am myself content with the current use of SOV as an incentive alignment and coordination token, I do have an idea that I think can add even more “utility” to this use case for SOV.

Rather than have one token that governs every aspect of Sovryn, instead we can start to think of each piece of the system as a distinct “sub-protocol” that has its own token and Bitocracy system. The twist is that each “subtoken” is a continuous token minted using a bonding curve with SOV as the reserve asset. This is a spin on ideas originally proposed by my former Aragon colleague Luke Duncan while I was still working on that project. (And if you are not familiar with continuous tokens, this post should get you up to speed.) Edit: This work is also building on earlier work by Simon de la Rouviere on continuous TCRs.

The bonding curve creates an economic link between SOV and the subprotocol, because as the subprotocol gains value against SOV, SOV gets pulled into the bonding curve to arbitrage the price back to equilibrium (and vice versa). We want this economic link since it is SOV holders who via Bitocracy are supporting the development of these subprotocols. However the incentives of the subprotocol are still isolated in a way as well, since total failure could lead to ruin for the subtoken holders. This uniquely incentivizes them to take actions that increase the subprotocol’s chance of success, which would not be the case if the token was SOV since the value of SOV isn’t dependent on any single part of the total system. I emphasize that this is a great feature to have – we want tokenholders to receive strong signals if the protocol they are responsible for isn’t doing well, rather than have those signals diluted because of a link to unrelated efforts.

You might say, well light doesn’t this contradict what you said about not using SOV as a currency? There is a key difference here that makes this kind of usage exceptional: the SOV used to mint subtokens is locked in the bonding curve. The SOV is not released back into circulation until the subtoken is sent back into the bonding curve and removed from circulation. This means that as the subtoken supply inflates, SOV supply deflates. This is not the case if SOV is used to simply purchase a token in a crowdsale. The purpose of using SOV this way is not to raise funds as a substitute for another currency asset, it’s to create an economic link between two cryptoeconomic protocols. And for this purpose, I think this is a powerful tool for the job.

An alternative
There is an alternative to using a bonding curve that could achieve the same goals of creating both an economic link and incentive isolation. This is to create a new token for the subprotocol, without a bonding curve, and then split any fees earned by the subprotocol with the Sovryn Treasury. I think this could work just fine. However if the new token takes on a source of value accrual separate from fees somehow (for example, if the new token is used as a reserve asset to back a subtoken) then there would be no way for SOV holders to benefit from that without also holding the new token.

The continuous token model is a different way to share value accrual: rather than having to hold SOV and a new token, SOV holders can simply hold SOV and benefit from the deflationary effect as SOV gets pulled into the subprotocol bonding curve.

6 Likes

Thanks john, this is a very logical sugggestion for additional deflationary efffects on the SOV supply. Could you please post one or two Bond Curve overview articles for community members who are unfamiliar with what they are?

1 Like

I see Sovryn as Operating system, first for Bitcoin-based Finance and second for general self-sovereignty. SOV is the coordination token tying all of this together. In a way, I see SOV Bitocracy as the highest house of governance - but not the only one.

Local governance is best governance. There is a simple heuristic I suggest, which is that the broader the scope of governance, the more minimalist the governance powers should be. For Sovryn this means that the current SOV Bitocracy should have minimal governance responsibilities with regards to the sub-protocols. Local governance in this context would mean that the sub-protocol have their own token and their own bitocracy.

I like the idea of continuos bonding curves and I would take it a step further. I think the SOV held in the bonding curve should be able to vote in the highest Bitocracy. This could be accomplished using the delegate system - by having each sub-protocol be a “delegate” to the Bitocracy. We would need to think how we would treat the stake weight of these SOV, since they probably can’t be staked for arbitrary times.

This would help decentralize the system, while at the same time creating a fractal system of governance, with strong local governance and broad, cross-ecosystem unity of purpose.

2 Likes

Seems like a very creative proposal. However, I’m having trouble piecing it together. Can you provide some actual examples of how this would work using current ‘sub-protocols’ or upcoming developments?

Couple of other questions:

  • I read this as having two objectives: 1) provide more utility to SOV token and thus create deflationary effect when it is used to mint sub-tokens and 2) Create economic link that helps us identify which sub-protocols are valued vs which are failing, almost like a futarchy? Are there any other objectives this proposal aims to achieve I am misunderstanding?

  • By “sub-protocols” what are we referring to here; like borrowing, lending, trading, swaps, are all separate sub-protocols? Or are these other token protocols or something else entirely?

  • What incentive is there to use SOV to mint a sub-token? I’m assuming there would be revenue earned by these sub-protocols which is diverted from Bitocracy to sub-token holders? That’d be a little concerning as it would fracture the revenue to stakers and turn SOV into a more pure governance-like token, which isn’t ideal as the masses in Bitocracy care about the APY and I do feel that is a major selling point. So, is this idea in competition with the primary SOV value proposition of protocol fee revenue?

  • In a hypothetical situation, if a bunch of SOV is locked as collateral to mint a sub-token, then the sub-protocol fails in dramatic fashion, what happens? Do all the sub-tokens likely get redeemed, which unlocks the SOV back onto the market? I am just having trouble how this adds value versus fractures value across. It’s like the opposite effect of BabelFish. It segregates value accrual as opposed to aggregating it.

Ultimately, I definitely see it as a very good way to identify which localized sub-protocols the community values by bifurcating those individual economic links. At the same time, I’m having trouble seeing how much net value this creates.

I keep thinking that any benefit you get from minting sub-tokens results in a corresponding draw-back to Bitocracy stakers?

4 Likes

I think this is a great idea…for several years down the road.
So my recommendation would be to keep this framework in mind as the desired future vision, so that when current decisions about the protocol are made, they are congruent with this end goal, or at least don’t make it more difficult to achieve.

Why not now?
Simplicity. In order to climb the adoption curve as quick as possible, we need to keep things as simple as possible. This means the straightest line possible from providing the customer value to token value. Right now, the masses are struggling to understand the SOV token value itself. The understanding will come in time. There have been many new concepts introduced to the community in a very short period. (If some of the Uniswap v3 functionality was introduced in v1, it would have created more confusion than value.) So let’s walk the users and investors up the education curve at as fast as possible, but no faster.

For example: quadratic voting power, staking rewards based on the same quadratic function, even the conversion of BTC to rBTC, RSK chain wallets, AMMs, the list goes on. I would hesitate to add, let’s say, three more subprotocol tokens when we’ve thrown so many new things at the community already. I believe there is a link between:
a) retail users of the platform and SOV investors (users who understand the platform are much more likely to become token holders and/or stakers),
b) SOV investors and complexity of the tokenomics. - investors are much more likely to provide capital/iquidity for something that is easily understood. Whenever I read the tokenomics of a token I’m interested in, and two more tokens appear, my guard goes up and I become a bit more skeptical.

Additionally, I’m not sure that the subprotocols are reasonably segregatable, at least not yet, such that they would be desirable investments on their own (although I’m not entirely sure what subprotocols you have in mind, so I could be completely off base). But for discussion sake, if lending/borrowing is one subprotocol, it may be very dependent on margin trading for demand. If it is scorecarded separately, the full platform could be suboptimized and margin cost may be too high. Or if lending is subsidized (via loot drops), how does that affect each subprotocol, are there winners and losers?

On the flip side, a focus on the economics of each subprotocol and the proper incentives driving each one is hard to argue with. You can make an argument that proper focus early in the project on these will create more focus on economic value and greater token holder value in the long run.

I love the concept, but wouldn’t recommend it yet.

1 Like

Thanks so much everyone for the great comments and thoughtful feedback so far! Will respond to some questions/comments that stood out to me below.

I linked one in my OP but ICYMI: https://yos.io/2018/11/10/bonding-curves/

Yes I would keep the AMM, lending, and margin trading protocol bound together by the same Bitocracy because of this tight interrelationship. I’m moreso thinking about incentive isolation for future subprotocols: sovBTC, for example, or the rollup, etc etc… there are a bunch of ideas that have been floated, even code in various stages of completion, for various protocols that could be seen as Sovryn subprotocols due to the close relationship with Sovryn and the other parts of our system.

I hear you about the need for simplicity. We shouldn’t make either the end-user-facing product or the underlying technology more complex than it needs to be. However as there are several subprotocol projects (a few I have mentioned above) in flight we may have to make a decision about this sooner rather than later. I’d rather do it the “right” way (and I think this model may be the right way; open to other ideas though hence why I posted about it here) rather than go with a subpar alternative for the sake of “simplicity”.

There are two main classes of SOV holders we need to have messaging for: passive holders and stakers. Passive holders buy SOV and hold it in their wallet until they’re ready to sell. Stakers actually stake SOV in Bitocracy and participate in governance. You can also think of these as two stages along the adoption curve (every SOV holder starts off a passive holder, but some graduate to stakers).

At the very beginning of the journey I think the SOV pitch is: buy SOV to get financial exposure to the potential success (or failure) of the Sovryn ecosystem. Once people own SOV and feel invested in the protocol’s success, they may be interested in becoming more active in contributing to that success. Then the messaging changes to, participate in the community, add value, stake and vote, create proposals, and earn extra rewards in the form of protocol revenues and SOV subsidies.

The continuous token model I described doesn’t actually change either of these messages. But it does have the potential to create new markets for SOV – for example, maybe someone isn’t interested in the AMM or lending protocol. But they are interested in sovBTC. So before they had no reason to buy SOV, but now they have a reason to buy SOV: so they can buy the subtoken from the sovBTC bonding curve. That’s how I am thinking about this right now anyways.

See the examples I gave to magicmike above :slight_smile:

The goal is twofold:

  • Create an economic link, so SOV holders share in the accrual of value to any subprotocols. This because SOV holders are the ones ultimately footing the bill for subprotocol development.
  • Isolate incentives to the degree that subprotocol stakeholders most strongly feel the benefits of success or pain of failure. This because we don’t want market signals to be diluted, and token price is an important signal to monitor on a medium-long term scale.

A given subprotocol will be solving a different protocol than the others, and so people will buy a subprotocol token if they want to participate in the potential upside (and downside) of that specific protocol. There will also be an incentive if there’s an arbitrage opportunity between the bonding curve price and the secondary market price.

If the assumption is that SOV holders will directly receive a share of revenue from every protocol that the Sovryn community builds, this model would change that assumption. Value accrual sharing works differently using the continuous token model. See the last section “An alternative” of my OP for an explanation of the differences here.

Yes

I don’t see how this is related to BabelFish. Can you explain what you mean here?

I don’t think so. I think there are only benefits. They are just different benefits than not using subtokens.

Here are the options as I see them, with pros/cons summary:

  • Subprotocols governed by SOV stakers.

    • Pros: Simple. SOV holders get full and direct financial exposure to all subprotocols via all sources of potential value accrual.
    • Cons: There is no incentive isolation here, no specialization of labor, no deference to local knowledge. Weak incentive alignment between subprotocol governors and users; failure of a subprotocol could hurt SOV value but depending on its importance overall, maybe not much. So SOV stakers have a weaker incentive to show the care and attention needed by all subprotocols. “Tragedy of the commons” for Bitocracy attention.
  • Independent tokens for subprotocols, sharing revenue with SOV stakers.

    • Pros: Also relatively simple. Isolates incentives and creates some economic link to SOV.
    • Cons: Does not share value from non-revenue sources of value accrual.
  • Continuous tokens for subprotocols.

    • Pros: Incentive isolation and economic link to SOV. SOV holders share in all potential value accrued to subprotocol/subtoken.
    • Cons: Relatively complex compared to the other options.

Thanks so much everyone for the great comments and thoughtful feedback so far! Will respond to some questions/comments that stood out to me below.

I linked one in my OP but ICYMI: https://yos.io/2018/11/10/bonding-curves/

Yes I would keep the AMM, lending, and margin trading protocol bound together by the same Bitocracy because of this tight interrelationship. I’m moreso thinking about incentive isolation for future subprotocols: sovBTC, for example, or the rollup, etc etc… there are a bunch of ideas that have been floated, even code in various stages of completion, for various protocols that could be seen as Sovryn subprotocols due to the close relationship with Sovryn and the other parts of our system.

I hear you about the need for simplicity. We shouldn’t make either the end-user-facing product or the underlying technology more complex than it needs to be. However as there are several subprotocol projects (a few I have mentioned above) in flight we may have to make a decision about this sooner rather than later. I’d rather do it the “right” way (and I think this model may be the right way; open to other ideas though hence why I posted about it here) rather than go with a subpar alternative for the sake of “simplicity”.

There are two main classes of SOV holders we need to have messaging for: passive holders and stakers. Passive holders buy SOV and hold it in their wallet until they’re ready to sell. Stakers actually stake SOV in Bitocracy and participate in governance. You can also think of these as two stages along the adoption curve (every SOV holder starts off a passive holder, but some graduate to stakers).

At the very beginning of the journey I think the SOV pitch is: buy SOV to get financial exposure to the potential success (or failure) of the Sovryn ecosystem. Once people own SOV and feel invested in the protocol’s success, they may be interested in becoming more active in contributing to that success. Then the messaging changes to, participate in the community, add value, stake and vote, create proposals, and earn extra rewards in the form of protocol revenues and SOV subsidies.

The continuous token model I described doesn’t actually change either of these messages. But it does have the potential to create new markets for SOV – for example, maybe someone isn’t interested in the AMM or lending protocol. But they are interested in sovBTC. So before they had no reason to buy SOV, but now they have a reason to buy SOV: so they can buy the subtoken from the sovBTC bonding curve. That’s how I am thinking about this right now anyways.

See the examples I gave to magicmike above :slight_smile:

The goal is twofold:

  • Create an economic link, so SOV holders share in the accrual of value to any subprotocols. This because SOV holders are the ones ultimately footing the bill for subprotocol development.
  • Isolate incentives to the degree that subprotocol stakeholders most strongly feel the benefits of success or pain of failure. This because we don’t want market signals to be diluted, and token price is an important signal to monitor on a medium-long term scale.

A given subprotocol will be solving a different problem than the others, and so people will buy a subprotocol token if they want to participate in the potential upside (and downside) of that specific protocol. There will also be an incentive if there’s an arbitrage opportunity between the bonding curve price and the secondary market price.

If the assumption is that SOV holders will directly receive a share of revenue from every protocol that the Sovryn community builds, this model would change that assumption. Value accrual sharing works differently using the continuous token model. See the last section “An alternative” of my OP for an explanation of the differences here.

Yes

I don’t see how this is related to BabelFish. Can you explain what you mean here?

I don’t think so. I think there are only benefits. They are just different benefits than not using subtokens.

Here are the options as I see them, with pros/cons summary:

  • Subprotocols governed by SOV stakers.

    • Pros: Simple. SOV holders get full and direct financial exposure to all subprotocols via all sources of potential value accrual.
    • Cons: There is no incentive isolation here, no specialization of labor, no deference to local knowledge. Weak incentive alignment between subprotocol governors and users; failure of a subprotocol could hurt SOV value but depending on its importance overall, maybe not much. So SOV stakers have a weaker incentive to show the care and attention needed by all subprotocols. “Tragedy of the commons” for Bitocracy attention.
  • Independent tokens for subprotocols, sharing revenue with SOV stakers.

    • Pros: Also relatively simple. Isolates incentives and creates some economic link to SOV.
    • Cons: Does not share value from non-revenue sources of value accrual.
  • Continuous tokens for subprotocols.

    • Pros: Incentive isolation and economic link to SOV. SOV holders share in all potential value accrued to subprotocol/subtoken.
    • Cons: Relatively complex compared to the other options.
3 Likes

This proposal by light is very critical for Sovryn if we are planning to move forward with this, so we all should scrutinize this as much as possibe.

Everyone should ask all type of relavent questions and get proper answer back. I will not vote for this until i am completely satisfied with the questions and the answers.

Sorry light, i know it’s already hard to come up with an proper idea but we should scrutinize it as much as possible before implementing, thanks for coperating with us. You are awesome.

Some Questions.

How are the team building these sub-protocols incentivised? Are they given these continuous tokens or are they given SOV?

Can these continuous token be staked to get governance rights on thier own sub-protocols?

Won’t it only affect these governors (or continuous token holders) if the sub-protocol succeeds or fails, not the builders(coders) unless they are also given these continous tokens as compensation?

Who funds the sub-protocols? As in, how do they allocate funds, resources and from where? From the general sovryn resources and funds or some other way?

What if the Main sovryn funds and resources are wasted? Then how is Sovryn (SOV staker ~who controls the main resources) compensated?

If the sub-protocol is successful will it be integrated to main Bitocracy later?

If the funds and resources for running the sub-protocols is coming from the general resources of Sovryn then why shouldn’t the sovryn stakers get fees from it?

Is removing SOV from circulation only good reason for them to use the funds and resources controlled by SOV stakers?

My Foresight.

I assume only an equivalent amount of voting power of SOV that is put into bonding curve is distributed to these continuous tokens and then the entire responsibility for that sub-protocols goes to thier own continuous tokens. The way i visualize this working is like this:

  1. A SIP for new new sub-protocol is proposed with the reason, requesting for specific amount and resources to run the protocol and the usual stuff.

  2. Stakers do their due diligence, think about providing more or less than requested amount and resources for their errands and finally negotiating a fee share, like 10% or 20% of the fee they collect from the sub-protocols(10% and 20% from 0.15% or 0.3% or which ever fees sub-protocols collect depending on their uses.

  3. SIP is passed or failed.

I also need to conduct a poll to know how many people understand this proposal of light so far. Remember, this is your protocol as much as it’s mine, so it’s your responsibility to make sure you spend time, efforts to ask questions and understand this completely.

Did you understand this proposal by light?

  • I understand it completely! (From A to Z.)
  • No! I didn’t get it. (I have to spend some more time to understand this.)

0 voters

1 Like

Light – Thanks as always for being super detailed. I’ve had to re-read several times :sweat_smile:

I am still un-sure how the financial and governance interests of sub-token stakers are reconciled with that of SOV stakers. It seems they could be at odds.

For example:

  • Let’s assume I stake $100 of SOV for max term today because I know SOV stakers will earn 0.15% on swap fees and I want that revenue share.
  • Then next month we classify all AMM activities including swaps as a sub-protocol and a sub-token can be created by locking SOV in the bonding curve.
  • This creates a SOV deflationary effect, but do I really care about that short term since I am locked in Bitocracy? At this point, the token price isn’t as important to me since I am not a short term seller.
  • Further, I cannot participate in that sub-protocol as much as I’d like because I’ve already max staked my $100.
  • Then, the sub-token holders decide to allocate the 0.15% swap fee to themselves as sub-token stakers, instead of SOV stakers.
  • Now, my staked SOV is cash-flowing less since that revenue share is being allocated away from me, yet I am locked into a long-term stake.

This is what worries me. Can sub-protocol stakers siphon revenue and governance from SOV stakers? It feels like there would be a battle for power between local (sub-protocol stakers) and global (sov stakers). How do we determine what is fair revenue fee share between each party? Can local sub-protocols pass changes without the approval of the SOV stakers? Some adversarial thinking about conflicting interests of local vs global interests is what I am getting at.

Thanks

2 Likes

@magicmike - I agree with you on simplicty, but I think its the messaging that needs to be simplified, not the system. The system should be as simple as it can be but no simpler.

In terms of the simplicity of messaging, I think we are making progress. But we aren’t there yet. This is a subject that has been occupying much of my mind recently.

@StanTheGreat - I think your emphasis on the economic incentives for sub-protocol creators is absolutely key. On the face of it, anyone who can create a new protocol would seem to be best served by simply creating an entirely new token and distributing it to themselves. Subprotocols can still be incentivised by allocating a portion of the subprotocol tokens to the creators. This would make a lot of sense in a spin-off situation. Does it also make sense for 3’rd parties? I am not sure - but my intuition is yes.

@dseroy Bitocracy does not scale to encompass an arbitrary number of protocols/products if all members must vote on all things. We are better served by thinking of Sovryn as fractal system - like states in a federation.

1 Like

Don’t get me wrong, I really like the idea of localized governance. But how it impacts revenue share needs to be fleshed out.

A few of us have staked for max term with the expectation of earning future protocol revenue. With this model, a sub-protocol can now arbitrarily vote to siphon revenue (which is a huge selling point of staking) while our SOV is locked? It’s a little Oof.

Is it just me or babelfish does sounds like an sub-protocol?

2 Likes

So I actually wrote a piece on a continuous token offering that I worked on last year. It was very economically sound, given it was the first DAO token offering of its kind.

I’m actually bullish on making SOV the reserve asset for continuous offerings for sub-protocols. I say let’s do it.

Would you see these sub-tokens having theoretically no caps then, just with an increasing minting price?

I think we have to be careful about the types of bonding curves we utilize, and have ways to pause their minting/modify the curves.

Thanks again for the comments everyone!

Oh you worked on OpenRaise? Nice.

To your question: maybe. A cap could be justified as a way of preventing literally all SOV from being locked in the curve (not a bad problem for a subprotocol to have but I’d have to think about the implications of this for SOV Bitocracy and other subtokens that might use or want to use SOV as a reserve asset). Something to think about, if you have an opinion on this question I’m all ears!

Also if you have more thoughts to share about the reasons for pausing or modifying a curve I’d be interested to hear! Or if you have thoughts about the type of curve that might be best to start with for this use case in general.

I think all of your concerns are completely valid. For existing cash flows, we’d have to be very thoughtful about how to make it equitable for SOV holders if we decided to divert those to, or split them with, subtoken stakers. I think an arrangement could be found where it is a win all around. For example, SOV stakers could get a larger-than-usual share of the subprotocol revenue, and a larger-than-usual chunk of the token supply as compensation for giving up exclusive share of that revenue. And while this is an important consideration, since it’s possible that the existing protocols could be moved to a subprotocol, I’m not proposing that here. For the purpose of this discussion, I’d like to focus on subprotocols that do not yet exist (and for which SOV holders do not have an existing “claim” on revenues).

I do think this is a relevant question even for subprotocols that do not exist yet. I would think of it as quid-pro-quo. What does the subprotocol get from being so closely tied to Sovryn? The answer to this question might change on a case by case basis but generally I’d say: an initial community of support, funding, security (Bitocracy could be a “guardian” in the subprotocol governance system to protect the subprotocol from malicious proposals while the cost to attack is low). So I think whatever benefits SOV Bitocracy gets from the subprotocol should be proportional to the benefits the subprotocol gets from SOV Bitocracy (risk adjusted, of course).

I have a few specific ideas how to manage the split:

  • We could set up the subprotocol governance such that changes to the fee split require approval from both SOV Bitocracy and Subprotocol Bitocracy.
  • SOV Bitocracy could accept whatever changes Subprotocol Bitocracy wants to make to the split, and adjust the amount of support provided to the subprotocol accordingly.
  • SOV Bitocracy could start off totally in control but have it programmed to give up some or all control to Subprotocol Bitocracy after some period of time.
  • We could preprogram the fee split to start high and taper off to 0 over time, assuming that the subprotocol will become less dependent on SOV Bitocracy.

There are a lot of ways the fee split could be managed. In any case, I think at least for the first couple of iterations, something flexible would work best, since we don’t want to set something in stone that might not work well later down the road. And since subprotocols are being birthed from the Sovryn community, having SOV Bitocracy in control at first is not unreasonable imo.

No apology necessary! I posted here exactly so the idea could get as much scrutiny as the Sovryn community can offer. Thank you :slight_smile:

I think the incentives of the subprotocol teams would be most aligned if they are given subtokens with a vesting schedule.

Yes, although as I mentioned to dseroy above it might make sense to have SOV Bitocracy govern the subprotocol at first and then let go of the reins after an initial bootstrapping period.

At first, I imagine SOV Bitocracy would fund the subprotocol. Source of funding would initially be from the Sovryn treasury, then once the subprotocol is live, from funds raised in the initialization of the bonding curve and from a portion of the initial subtoken supply. Over time, the subprotocol could earn its own revenues and become self-sufficient.

Every spending decision by SOV Bitocracy is a investment that may or may not pay off. I don’t see subprotocol development as being any different. In this thread I have described several ways SOV Bitocracy could earn risk-adjusted rewards as compensation for these risks.

I would be in favor of keeping them separate.

They may or may not make such a deal with a subprotocol. But sharing fee revenue is not the only way to make a return on these investments.

I wouldn’t say it’s the only good reason. Subprotocols could have purposes that are complementary to Sovryn and help drive adoption of Sovryn (and increase Sovryn protocol revenues for SOV Bitocracy). A “rising tide lifts all boats” scenario. This could have other second- and third-order positive effects for Sovryn. These must be considered on a case-by-case basis.

I’m not sure I follow this part. Once SOV goes into the bonding curve, it loses its relationship to its original owner. The original owner is effectively trading their SOV for the subtoken, losing whatever benefits SOV gave to them and gaining whatever benefit the subtoken gives to them.

Yes I think that’s one way it could work. Subprotocols might not need as much help from SOV Bitocracy and so might launch without needing to do a SIP and ask SOV Bitocracy for resources first. They might do a SIP but only ask for community or marketing support, not financial support. There are a bunch of different ways a subprotocol might kickstart.