Alpha-DAO: Proposal #9

Alpha-DAO is a new Decentralised Autonomous Organisation created by the research team behind the CPRO reports. There have been 8 structural proposals passed; however, the first investment that the Alpha-DAO will embark on has been passed after a 72-hour voting period.

Based on an ecosystem that the Alpha-DAO research team is familiar with and well-versed in, it was a no-brainer for most of the team to pass this vote.

All research completed by Alpha-DAO to build out a thesis behind the following investment is explained below.

The report also includes the execution strategy, alongside the capital allocated and the fees paid to the blockchain.

 

Disclaimer: This is not investment nor investment advice. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

 

The information made available in this report is NOT for replication. The purpose is to share the thought process behind the DAO’s decision making – additionally this is HIGH RISK journey for the DAO which means capital has also been allocated in accordance with this. Once again, DO NOT REPLICATE.

 

TLDR

  • Built on THORChain, THORSwap is the world’s first multichain decentralised exchange (DEX).
  • THORSwap aims to become the leading cross-chain DEX aggregator.
  • THOR is an ERC-20 utility and governance token for THORSwap, offering a robust revenue capture/value accrual model.
  • Alpha-DAO has allocated $10,000 of their capital into THOR, acquiring 9076 THOR tokens at an average price of $1.113, with 5 YES, 0 NO, 1 ABSENTION
  • The THOR tokens have been single sided staked through the THORSwap staking portal.
  • The mode of execution was a swap through the SushiSwap DEX on Ethereum.

 

What is THORSwap?

Most decentralised exchanges are currently built on a single chain – for example, SUSHISwap on Ethereum and Serum on Solana. Additionally, these exchanges use bridging and wrapped tokens to facilitate the trading of tokens that are not native to the chain the DEX is built on. Wrapping tokens adds another layer of complexity, and risk, to the already complex DeFi user experience.

Powered by THORChain, THORSwap is a multichain DEX providing direct Layer-1 to Layer-1 swaps – no wrapped tokens, no pegged assets, it does exactly what it says on the tin. THORSwap was developed by the same developers behind BEPSwap, the original THORChain DEX from the single-chain chaosnet (SCCN) period earlier this year. BEPSwap was a massive success with over $5 billion in lifetime trade volume across 70 liquidity pools and was one of the key reasons the THORChain developers used to justify the rollout of multi-chain chaosnet (MCCN).

Currently, THORSwap only supports the assets and chains that are available through THORChain, which is around 20 different assets across 5 Blockchains – Bitcoin, Binance Chain, Ethereum, Bitcoin Cash, and Litecoin. Due to exclusively using liquidity from THORChain, THORSwap is limited to offering only short tail crypto assets. A short tail crypto asset is a high volume/high demand asset like Bitcoin, or Ether, also known as an “economically significant” asset.

A long tail crypto asset is a low volume/low market cap/lower demand asset, which is basically any asset outside of the main Layer 1 tokens and coins – think UNI, SUSHI, RAY, etc. Currently, these assets must be approved by THORChain before a liquidity pool can be created for them. The next phase of their roadmap, THORSwap will look to provide long tail asset trading pairs across multiple chains. This will pave the way for thousands of supported assets and set the stage for THORSwap to become the go-to multichain DEX aggregator.

To achieve the vision of a trustless, decentralised, non-custodial multichain DEX, THORSwap has highlighted four key products that will be key:

  • Interface – THORSwap will be the on-ramp to the wider THORChain ecosystem, with a slick GUI and comprehensive access point to other THORChain based products and services.
  • DEX Aggregator – Leveraging and building upon THORChain’s technology, THORSwap will offer multichain swapping for thousands of assets across multiple blockchains at attractive rates.
  • API – Provide partner protocols with the means to leverage THORSwap functionality/liquidity pools, indirectly expanding the user base.
  • THORChad Rewards Platform – We covered THORChads briefly in this journal, however providing community incentive is paramount to building and expanding the user base of the protocol.

The Trading Blackhole

Central to the products outlined above is the “trading blackhole”. This is a perpetual positive feedback loop that provides incentive for the growth and adoption of THORSwap as the leading multichain DEX:

  • Discounted trading fees provides incentive for using THORSwap over other DEXs.
  • This leads to increased trading volume on the platform.
  • Increased trading volume leads to more revenue from trading fees.
  • More revenue leads to more value for the THORSwap community.
  • Adding value for the community ultimately provides incentive to use the platform, bringing us full circle.

Combined with the highly scalable nature and ambitious roadmap of THORChain, and first-mover advantage in terms of cross-chain swapping, we believe that THORSwap is well-positioned to capture a large portion of the liquidity and trading volume in this relatively new sector.

Central to THORSwap is cross-chain DEX aggregation. An aggregator in this context is essentially a price comparator – a DEX aggregator scans for the best prices for whatever asset the user is trying to swap and routes the trade to that liquidity source. THORSwap is in a particularly attractive position to take advantage of this utility due to the cross-chain nature of THORChain and the THORSwap DEX.

Of course, the success of THORSwap is dependent on the success of THORChain, which has been hindered by the exploits earlier this year. However, having followed developments closely over the past few months we are confident that the worst of the fallout is behind THORChain.

This brings us on to the next point – how does the community benefit from fee revenue and liquidity pools?

Liquidity Providers

Users can add liquidity to the various liquidity pools for each asset available through THORChain/THORSwap to earn a share of the fees generated from trading and slippage. We have covered how it all works and the risk involved in this journal. Native RUNE is required, as well as the native version of the second asset – in the above example, Bitcoin.

As stated in the 30x interest journal, impermanent loss and other risks are involved when providing liquidity in any liquidity pool (LP). There is impermanent loss (IL) protection paid out by the THORChain treasury to incentivise risk-free liquidity providing, but this is only for the early stages of development to attract liquidity. There is currently no option for single-sided staking of RUNE, or any other asset traded on THORSwap.

For some, this is a problem. Although there will likely be options in the future for pooling RUNE into delegated nodes, this currently isn’t the case. Is there another way to gain exposure to fees and revenue without the risk of IL or an exploit draining a pool? We think there will be soon!

THOR Token

THOR is an ERC-20 (Ethereum chain) asset and is the utility and governance token for THORSwap. Whilst the main purpose of RUNE is to incentivise liquidity, the main purpose of THOR will be to incentivise trading activity on the THORSwap platform (remember the black hole?). In this respect, RUNE and THOR will have a cooperative relationship, with RUNE attracting the liquidity necessary to support high volume trading activity incentivised by THOR.

The maximum supply will be 500 million tokens, with an initial circulating supply of 115 million THOR. The token allocation and emissions schedule is as follows:

  • 50% for Community Incentives – mining, LP rewards etc.
  • 20% for Private/Public Sale (fundraiser), divided 10% public sale and 10% private – early investors do not receive a discount so there will not be a supply spike when the token launches.
  • 15% for the THORSwap Team/Contributors, with a heavy vesting schedule laid out over a 36-month period.
  • 10% for the THORSwap Treasury.
  • 5% will be Airdropped.

 

The THOR token supply will be emitted over a period of 4 years, after which the entire supply will be in circulation. Most of those emissions dedicated to community incentives, and THORSwap has stated that there will be sufficient utility in holding and using THOR to counteract the inflation stemming from rewards.

The THOR token will also act as a “proof of membership” token – THOR holders will be able to stake their THOR and receive vTHOR tokens which entitles them to a share in THORSwap revenue, voting rights in the DAO, THORSwap trading fee discounts, and a THORSwap membership that will likely entitle them to future airdrops and other perks.

We believe that the single-sided staking will be attractive to those who are put off by the prospect of LPing through THORChain. In this respect, THOR would act as an indirect way of gaining exposure to THORChain revenue and activity with marginally less risk involved.  There is a relatively extensive revenue generation and value accrual model, outlined below:

 

 

  • Affiliate fees from THORChain-routed trades.
  • Referral fees from aggregators depending on the route of the swap – 1INCH is used as the example in the above flowchart.
  • Value accrual from THORChain related projects like THORNames, THORChads DAO etc.
  • Most of the trading fees will be distributed to vTHOR token holders (75%).
  • 20% of all fees generated by the protocol will be allocated to the Treasury to fund operations and development.
  • 5% will go to charity.
  • Treasury funds will also be used to purchase THOR on the open market for weekly proportional redistribution to vTHOR holders.

Overall, the revenue generation/value accrual appears to be robust, but as stated previously the success of THORSwap is closely related to the usage and healthy operation of THORChain.

Alpha-DAO Proposal

Proposal Brief:

Alpha-DAO should invest $10,000, 10,000 UST, or equivalent ETH, into the THORSwap protocol built on THORChain.

Reasoning:

As most will be aware THORChain and its ecosystem is still in development with a constant stream of updates and optimisation upgrades happening (see Asgard Sharding, for example: https://www.runebase.org/news/thorchain-shards-its-asgard-vaults).

Many of us initially invested in the THORChain ecosystem back in February at around $3. There has been a lot of teething issues for THORChain to deal with since then. The exploits this Summer undoubtedly shook investors and the community, and this sentiment has been reflected in the price action (or lack of) since we first invested.

However, the thesis for the investment has not changed – we knew the risks and there was not a working product when we invested back then, BEPSwap was the only real avenue for using and trying THORChain and it was single-chain (BEP2). This has now changed with the launch of MCCN (Multi-chain Chaosnet, as opposed to SCCN; Single (BSC) Chain Chaosnet).

THORSwap has developed from the same team who built BEPSwap, and having used both products for both LPing and swapping we can confidently say it works exactly as expected and as it should. The main factor limiting the growth of the protocol and the wider THORChain ecosystem has been the exploits during this Summer and the subsequent caution of the THORChain team with implemented new updates and features.

Most of us have conviction in the ecosystem and believe that once these teething issues have been ironed out and more features (chains, assets, pools, etc) have been added, the self-imposed capital/TVL limitations have been removed, and THORChain is in mainnet, it will become a no brainer for protocols on all chains supported by THORChain to use the protocol for any cross-chain activities.

The bottom line is that cross-chain liquidity and swapping will be required at least for the foreseeable future until a true solution to interoperability between all chains is found. Will THORChain dominate that niche? They could, or they could be a minority in the cross-chain liquidity market. However, THORChain is a bet that many of us have already taken in that sector.

 

Where does THORSwap come into this?

Currently, THORSwap is exclusively utilising THORChain liquidity for operations – but why not use liquidity from other ecosystems as well?

That’s exactly what THORSwap is planning to achieve. Here’s some key points:

  • THORSwap plans to integrate the most important liquidity sources for chains connected to and supported by THORChain, in essence becoming the first Multi-Chain DEX Aggregator.
  • Completely trustless, permissionless, non-custodial.
  • Once additional liquidity sources have been aggregated one of the main goals of THORSwap is to provide an open-source, permissionless, composable API for Web3 developers to take advantage of and leverage THORSwap-integrated liquidity pools and provide a simple and efficient environment for new or expanding protocols to create new cross-chain use cases.
  • The implementation of these goals is directly affected by the limitations of THORChain – until a chain is supported by THORChain it’s impossible for THORSwap to achieve their true vision for it. This is one factor to consider – do you believe that THORChain can fulfil their vision for the base protocol?
  • Another key point is that 1inch, another well-known DEX aggregator, has an MCap of $1.1 billion, with an MCap/TVL ratio of 27.77. There are no L1 cross-chain swaps available on 1inch.

 

One thing that is not covered in the CPRO research report is the tokenomics:

According to CoinGecko, at the time of writing, there are currently 26,179,000 THOR tokens circulating with a max supply of 500,000,000 THOR.

Market Cap is $32,300,000, FDV $616,600,000.

Execution Strategies

There are a few options for investment, however we believe that either going through THORSwap themselves or SushiSwap is optimal as THOR is an ERC-20 token.

Here’s the difference (at the time of writing, subject to gas fees on Ethereum):

  • THORSwap: $10,000 USDC for 8,500 THOR, $200-300 fee estimated (3% cost maximum).
  • SushiSwap: $10,000 USDC for 8,700 THOR, 95-115 GWEI, $80-130 fee estimated (1.5% cost maximum).

These two options vary depending on time and liquidity available in their respective pools, but this should give a decent estimation of how much it’ll cost.

Execution

AlphaDAO THOR Proposal passed on the 11th of December 2021 at 7.44pm after a 72-hour voting period. They purchased 9,076 THOR tokens at an average price of $1.113 which they’ve also staked in THORSwap at a current APY of 420%+ (single-sided).

Route

They sent 10,500 UST to KuCoin then ~10,000 USDC + ~0.10 ETH to their Ethereum address. Reason behind buying excess ETH is to account for future gas fees instead of paying KuCoin’s withdrawal fee each time. The KuCoin withdrawal fees added up to $60 and the other ~$40 was between slippage and fees.

They’ve paid $91.44 in gas fees on 4 TXs (2 approvals, 1 swap, 1 deposit).

List of TXs

TX1 – TX2 – TX3 – TX4

 

Disclaimers

This is not financial nor investment advice. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

Sign up for our FREE mailing list

Join 12,590 others now and get actionable research and analysis sent directly to your inbox.

Post a Comment

GET YOUR CRYPTO DAILY BRIEF

Delivered daily, straight to your inbox.