SIP-0048: Sovryn Strategic Investment Proposal
Summary
General Catalyst (GC) is proposing to lead an investment round in the Sovryn protocol. The investment round is expected to draw strategic investors who share in Sovryn’s mission and wish to partner with the protocol for the long term.
By building decentralized finance on Bitcoin, the Sovryn project is working to develop the operating system for individual sovereignty and a world built on Bitcoin.
Motivation
The internet protocol was built to enable the transfer of information across space and time, which led to incredible innovation and huge companies. While it solved the problem of transferring information across space and time, it did not solve the problem of transferring value across those dimensions. Bitcoin, as both an asset and a network, solves this problem in the following ways:
Space: Prior to Bitcoin, all transactions that happened on the internet relied on legacy rails (with multiple intermediaries), and while many companies glued together the internet protocol with traditional payment rails to make this work, nobody solved the problem of transferring value online natively. The simple way to think about this problem is that you can directly email someone words, but you can’t directly email someone money (without using traditional rails). The underlying reason for this is every time you email someone, it creates a copy of the sent email; this would create a huge problem with money, which requires the value to be truly transferred and not duplicated (aka “the double spending problem”). This is what the Bitcoin network solves.
Time: This dimension is a more complex one as it’s less relevant for the transfer of information and very applicable for the transfer of value. Over the last decade, the increase in the money supply of the United States Dollar (“USD”) has led to questions around how the USD will preserve its value over time. The decisions around monetary supply are driven by central banks with a long-term inflation target in mind, but with various priorities taking near-term precedence. Bitcoin takes the first step to separate money from the state (central bank), which is critical to preserve the value of “money” over time. A practical analogy is how the world operated prior to the 1970s with the Gold Standard being used for checks and balances around monetary supply. At that time, if a country wanted to increase its money supply, it would need sufficient gold reserves to back the supply or risk its fiat currency being devalued as compared to gold. When we shifted away from the Gold Standard in the 1970s, we shifted the backing of the USD from gold to “trusting” the central bank and the United States itself to preserve the value of the USD over time. This trust has been violated at an unprecedented scale and this is what Bitcoin the asset potentially solves.
To summarize: Bitcoin as an asset solves the problem of value transfer over time, and Bitcoin as a network solves the problem of value transfer over space. While we are excited about Bitcoin as an asset, we think there could be an incredible opportunity to pursue investments in projects that enable and build around Bitcoin the network.
Bitcoin recently had its most significant upgrade since 2017 called Taproot. While there are several incremental improvements to the protocol, the most exciting update is the improvements around the programmability of Bitcoin (aka “smart contracts”). Typically, Ethereum is associated with smart contracts (and Solana more recently); the core reason behind this is that over the last decade, while Bitcoin was focused on proving stability and decentralization, many other projects leapfrogged into making it easy to program smart contracts and build “dApps” on forked versions of Bitcoin. In essence, these projects have attempted to trade-off decentralization to enable faster throughput and complex programming. This has resulted in the large swath of “cryptocurrencies” we see today, many of which are much more hype than substance once you dig into the actual projects.
While the Bitcoin smart contract ecosystem is still early, we believe the team at Sovryn has the technical ability and community to enable many interesting products that could actually fulfill the promise of DeFi. [As the infrastructure improves further, scale into proper DeFi applications which non-Bitcoin networks have promised, but are yet to achieve]. We believe it was necessary for Bitcoin to become the unanimous settlement layer over the past decade for higher-layer protocols to flourish.
Why now?
As we have learned from most technological shifts, the path and the sequence matter. For example: it was very hard to build a big SaaS company without AWS or to build a mobile app without an App Store. Similarly, it is very hard to make Bitcoin the network successful, without Bitcoin the asset succeeding first. Bitcoin is the ultimate savings asset, and while we believe it still has significant room to grow as an asset, we are finally at the watershed moment where Bitcoin the network can flourish.
Investment Structure
- Participants in the round will purchase SOV at a 30% discount to the 30-day TWAP of SOV/XUSD on the Sovryn protocol, prior to posting the SIP. The SOV purchased in the round will be subject to a four year vesting schedule, with a one year cliff and then three years of linear vesting on a monthly basis. The SOV/XUSD 30-day TWAP on the Sovryn protocol, as of May 10, 2022 is $3.05. With the 30% discount applied, the purchase price of SOV will be set at $2.14.
- Investors in the round will have full “Bitocracy” voting rights while they vest but will not be eligible for staking rewards (in line with SIP-0024) until the one year cliff has passed, at which point investors will be able to receive vesting rewards on unvested SOV that has been restaked.
- A maximum of up to 6,250,000 SOV will be approved to be sold in this round, with the final amount sold to be determined by the Exchequer Committee.
- The SOV will be sold to GC and other investors by a company incorporated under the laws of the British Virgin Islands, acting as a facilitator of the transaction on behalf of the Sovryn community.
Strategic Benefit to Sovryn
The Sovryn project is working to develop the operating system for individual sovereignty and a world built on Bitcoin. This is an ambitious goal. To achieve it, Sovryn will need patient capital and long term-focused partners with significant weight.
GC is one of the world’s leading venture capital firms. We have helped many ambitious companies build businesses that have significant financial and societal value. This means more than just providing capital. It also means helping founders benefit from our experience, network, and resources.
We have been following Sovryn since early last year and were excited when the opportunity to participate came up. At GC we believe that the Bitcoin ecosystem is one of the most significant untapped opportunities in crypto. Bitcoin has the largest network, is the most liquid, reliable asset, enjoys leading mind share, and offers unmatched security. Bitcoin is also a unique and differentiated system, with no real competitors for the title of neutral reserve asset. Yet despite this, the vast majority of funding has focused elsewhere.
We at GC are philosophically aligned with the goals of the Bitcoin and Sovryn networks to empower people, promote individual freedom, and achieve broader financial inclusion. As a fund manager, we are in the business of making investments we believe have the potential for outsized returns. But we also believe we have the opportunity to make investments that are in the long-term interests of society. We believe investing in the Bitcoin ecosystem is such an opportunity. We intend to make significant investments across the Bitcoin space, and can envision opportunities to help develop mutually beneficial partnerships between our portfolio projects. We believe that the Sovryn protocol could be a cornerstone of this strategy. As an open source protocol enabling Bitcoin-native financial products and tools for individual sovereignty, we believe that future investments in the Bitcoin space could benefit from integrating and leveraging the Sovryn platform.
Additionally, we believe that during the coming years the broader world, possibly including some of our partners and portfolio companies, could seek to integrate with the Bitcoin ecosystem. We believe that Sovryn is building the tools to make this possible.
Our intention is to help grow the Sovryn ecosystem, actively participate in Bitocracy, and become useful members of the Sovryn community. We think we have much to offer and are excited to get started.
Expected Outcomes
- The Sovryn protocol Treasury will secure sufficient capital to fund operations of the protocol for a minimum of 24 months.
- Sovryn will be the first Bitcoin-focused portfolio investment for GC. As the Bitcoin ecosystem grows, the potential for partnerships with various innovators grows with it.
- GC has worked with the Sovryn Exchequer Committee to include additional investors in the round that can provide significant strategic support for the protocol in terms of adoption, liquidity, and partnerships.
- The closing date for the round will be on or around the 25th of May, 2022.
About the Lead Investors
Kyle Doherty, managing director at venture capital firm General Catalyst, focuses on investing in large, greenfield opportunities in consumer internet, software, and crypto/Web3 companies. Prior to GC, Kyle worked with Coatue Management where he helped conceive and launch the firm’s private investment practice and grew it into a leading private technology investment platform. Before Coatue, Kyle spent time as an investor at Morgenthaler and as an equity analyst. Kyle earned an MBA from Harvard Business School and studied economics and finance at MIT.
Nick van Eck, helps lead General Catalyst’s efforts in hatch, early-stage, and late-stage investments across the Crypto/Web3 ecosystem. Nick primarily focuses on DeFi and Infrastructure opportunities. Prior to GC, Nick worked at JMI Equity as an analyst focused on enterprise software. Nick earned a BA from the University of Virginia where he studied history and economics.
Resolved
- To approve the sale of up to 6,250,000 SOV under the terms specified herein.
- To authorise the Exchequer Committee to determine the total size of the investment (up to the limits set in this SIP) and to take any necessary steps to ensure that the resolutions approved by this SIP are executed.
- To authorise , the incorporation of a company under the laws of the British Virgin Islands, to negotiate and sell the SOV tokens to investors on behalf of the community in accordance with the resolutions approved by this SIP and to take any necessary steps to ensure that the resolutions are executed.
- The SOV acquired in this investment round will be deposited into an irrevocable vesting smart contract designating the syndicate’s RSK address as the recipient. The SOV will vest over four years with a one year cliff.
This SIP will be subject to the Admin Governor voting settings as described here.
