New Portfolio Allocation – A Core Infastructure Play

If you have ever interacted with a blockchain, sent a transaction using a crypto wallet or just used the internet, you’ve unknowingly interacted with Remote Procedure Call (RPC) infastructure. Basically this is just a bunch of really good computers hooked up to really fast internet. This infastructure is effectively in charge of transferring your inputs on a website from your computer to that website. For every message that you send via the internet, the RPC servers of whichever app you’re using have to relay the message. You can immediately grasp the importance of this infastructure. A couple of times this year we have had Amazon Web Services go down, and a lot of high usage sites crashing. This is due to RPC outtages.

In the case of blockchain, there is an additional layer; validators. Validators make sure that the ‘messages’ the RPC servers are passing are correct. For most crypto applications the flow of a ‘message’ – be that transaction or any interaction with the blockchain – is passed from your computer to the RPC server, the RPC server then sends it to the validator, who confirms that it is correct, relaying this confirmation back to the RPC server. Finally, the RPC server relays this confirmation back to your computer and you see your transaction being confirmed, or ‘message’ being delivered.

You can look at the above as being the CPU (validators) and the circuits (RPC) in a computer. But one critical component of a computer which we havent discussed yet is the memory. The messages and transactions need to be stored somewhere for Proof of Stake (PoS) protocols. Also, the images and data that make up an NFT and other key information needed by protocols are too large to be stored directly on the blockchain and thus have to be stored elsewhere. How this is done is important, especially as this area of the market is still in its infancy.

The highly anticipated GenesysGo IDO is rapidly approaching. It will start on the 3rd of January at 2pm UTC and last for 24 hours. We have also decided that we will be participating in the IDO as well and are rebalancing our portfolio to include SHDW. For this purpose we will be selling 10% of the 15% allocation that we currently have in SNX. You can view our existing portfolio here. The portfolio allocation discussion and reasoning can be found after the step by step guide to participating. Or you can just watch a 2 minute video showing you all the steps!

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

The Thesis

From the introduction you’ve understood how infrastructure plays a critical role in any blockchain application, let’s look at that critical sector of infrastructure: Storage.

Storage is critical for all blockchains, especially for Proof-of-Stake networks to store their history (all the blocks in existence since the first one) in an immutable manner. Additionally, all peripheral data (e.g. images for NFTs) have to be stored securely as well. To put the scale of data in perspective the full Solana ledger is currently 50TB and is growing by 6TB a week.

Well that doesn’t seem to be such a big problem does it? Surely it’s stored safely?

The current solutions are:

  • One week of history is stored locally on all validators
  • Parts of the history are stored on IPFS and ARweave
  • Full history also stored on a Google big data database

The current solutions are not robust enough as the Google database can be censored or hacked, ARweave is not large enough nor can it handle the throughput required for Solana, and lastly IPFS is not permanent as rent is required whilst also not being economical for such large datasets. If you made it through that sentence, congratulations you can clearly see why the decentralised storage market can be disrupted.

Enter Shadow Protocol – the next piece of the puzzle being built by the Genesys team. The goal is provide a decentralised storage solution for Solana and that network consists of three key parts:

1 – Operators (People providing storage and compute power to the SHDW protocol)

2 – Network (RPC network)

3- Drive (Decentralised storage)

Operators provide storage and compute resources in return for receiving rewards in the form of SHDW tokens. Users will be able to choose between either a one time payment for permanent storage (the ARweave model) or a monthly rent payment to continue hosting their data (IPFS model). Storage payments will be taken in the SHDW token creating both a use case and demand for it.

The most important and interesting part though is the fact that operators will be required to stake their tokens to participate in the network using a Proof of Stake model, with emissions stemming from the fees collected (i.e. Revenue). This further increases demand, and removes tokens from the circulating supply, with a clearly understandable use case. Its applications expand outside of blockchain to general data storage applications. Shadow Protocol is designed to be able to handle the throughput that Solana requires, and to be built to work in synergy with Solana. In turn this should ensure that it can handle the demands of other ‘slower chains’. Running a SHDW node and participating in the network remains within Alpha-DAO plans, to extract maximum value from its purchases.

There are 200,000,000 (200 million) SHDW tokens in total supply at the start. The team wanted to raise funds but they wanted to avoid the typical VC route to mitigate risk of big concentration of the supply in a few hands. So, they decided to perform the “seed” phase funding via an NFT called “Shadowy Super Coders” (SSC). At the start, it wasn’t known what purpose the NFT would serve but the mint price was 2.5SOL with a collection of 10,000 NFTs.

As you can see above, 50% of the supply is reserved for the “seeders” or NFT holders which means (after doing the maths) that each NFT will own 10,000 SHDW tokens. Now, we also know that these tokens will be vested and unlocked linearly over one year; meaning daily unlocks for 365 days as an NFT is staked – there will be contract for that. As can be seen NFT holders will be receiving 65% of the token supply. However all of these tokens are locked up. They can only be accessed if a holder stakes their NFT and then claims their tokens which are unlocked daily. Each NFT comes with 10,000 tokens that are locked away. It is up to owner to stake the NFT and then recover the tokens attached to it. If the tokens are not redeemed and the NFT is sold, the new owner can then redeem the remaining tokens. Additionally once an NFT has been staked for a year and all the 10,000 tokens have been redeemed, and additional bonus of more tokens are unlocked. This vesting schedule ensures that there will not be many tokens available throughout the upcoming year. Additionally there is no ‘dumping by VC’ scenarios present, and the distribution of unique owners is diverse. The additional bonus of 3,000 tokens for having continually staked your SSC are some unlocks you have to account for – but there should be few NFTs that are actually staked for the full year. The Strategic Reserve (10%) tokens are unlikely to be available on the market. Emissions will release gradually over the year. So the only available unlocked supply will be the tokens offered at the IDO.

The IDO offers the benefit that it is open and accesible to anyone who wants to participate, and there is no minimum or maximum capital requirement. On the other hand however the IDO comes with a built in price discovery mechanism and there is no control of the price at which you will buy the token. In most cases, a fundamentally strong token does not fall below it’s IDO price, and thus participating in the IDO offers the best possible opportunity for entry.

The ever growing need for decentralised storage, ‘low velocity’ tokenomics with clear use case for the token and staking model required to participate in the network, bring rock solid fundamentals. The biggest risk is the ‘execution risk’ – will GenesysGo be able to deliver the service to the standard they have outlined. Their track record, combined with the fact that they service more than 50% of the network RPC requests, leads us to believe the team will rise to the occasion.

To explain why we have such a large level of conviction regarding SHDW we can simply explain it as follows. Participating in the IDO can be equated to participating in an IDO for Amazon Web Services at their inception. The current decentralised storage protocol market caps are valued at 5.2billion (IPFS and Filecoin) and 2 billion (Arweave). Observing the SHDW tokenomics it can be expected that at the end of the year around 50% (IDO + emissions + NFT holder unlocks) of all the SHDW tokens will be unlocked. From those a large number are expected to be staked from participants in the network. Even so, with 100million SHDW tokens unlocked and a market cap of 2billion, this leads to a projected value of 20 USDC per token by the end of 2022. This is of course assuming that within a year the SHDW drive will be operational to the level that ARweave currently is – simply providing decentralised storage. The above is an extremely reasonable scenario, and with the work ethic and track record of the team this goal should be significantly surpassed.

Live Updates

From both the Mango and Aurory raises, we expect these pools to be massively oversubscribed, and thus the token price is always higher than the stated token price. In this case the stated token price is 0.50$. Currently just over 15 million USDC has been deposited, and the tokens’ price can now only increase from its intial price of 0.5$. As USDC can only be deposited and not withdrawn, we expect the majority of deposits to be in the final minutes. As mentioned above you cannot control the price at which you will buy the SHDW token, and thus the following mind games and game theory are occuring:

By delaying depositing in the pool you keep the price of the token down and make people think that it is not worth depositing their USDC. Remember as you can’t withdraw you have to fully commit to your decision. This can cause people to become skeptical about entering. Then seconds before the timer expires large amounts are deposited moving the price significantly and as the time limit is just closing people can no longer enter – also keeping the token price lower. The best way to understand this is imagine if either of these approaches went to an extreme. Assume no one deposited until the last minute – would your conviction be shaken and you would reconsider participating ? Or on the other hand imagine the final amount was instantly deposited in the first minute and the token price increased significantly – would you have FOMO or would you think the token price was too high ?

These tactics have occured in all previous pool raises. Our approach to this problem is simple – your thesis and conviction should not be affected by the current pool amount. If anything the less participation at this point (once 15million USDC has been deposited ensuring the 0.5$ floor price) is better for you as a participant as you will receive the token at a lower price. Don’t forget the only tokens available on the market for the next months will be those from the IDO, and the holders of those will be IDO participants. There is ‘no one to dump on the aftermarket’, due to the way the tokenomics are structured.

Regardless we can project a fair number using the current price of the SSC NFTs. 1 NFT = 90SOL = 15,100USDC = 13,000 SHDW tokens. This means that an expected price for the token is $1.15. In turn, at least 34 million USDC are expected to be contributed to the pool. With 15million already deposited, and more than half the time remaining this target seems logical. What will be interesting is to see the premium that the market places on the immediate availability of the SHDW tokens. Remember the price of $1.15 is for tokens with a one year vesting schedule, whilst the IDO tokens are immediately liquid. The instant liqudity along with the raises in previous pools lead to our projection of around 120 million USDC being contributed to the pool with around 40% of the deposits occurring in the last hour. 

Participation

(buy SOL on exchange -> send to new phantom wallet -> switch SOL to USDC through phantom -> deposit USDC in IDO pool -> claim SHDW tokens at 2:05pm UTC 4th of January 2022)

1- Create a phantom wallet (you can download phantom here).

2- Withdraw Solana from your exchange account to the wallet address you just created. You can see the wallet address at the top of the Phantom interface. Make sure the amount of SOL in USDC you have withdrawn is larger than the amount of USDC you want to participate in the SHDW IDO with (i.e. if you want to participate with 2000$ in the IDO you would need 10.2SOL (2040USDC) – assuming 1SOL = 200USD). This extra 0.2SOL should be enough for all your transactions on the Solana network for the upcoming year!

3 – Once your SOL has arrived to your phantom wallet, we will need to switch it to USDC. We can do this natively within phantom (this should also make us eligible for a potential airdrop which we predict). To do the switch, click on the button shown below in the red box and set up the interface – of course adjust the amount of SOL you want to swap to USDC accordingly. Once the swap is complete you’ll be able to see your balance has updated and you now have USDC in your wallet.

4 – Now you’re ready to participate in the IDO. Go to the website “ido dot genesysgo dot com” and accept the Terms of Use after reading them. Make sure to connect your wallet by clicking the button in the top right corner. You will see a countdown timer indicating how much time is left until the IDO will go live.

5 – Once the IDO is live you will see the counter replaced with the deposit interface as shown below. Fill in the amount of USDC that you wish to deposit as shown in the figure below. Once happy with the amount click deposit and then confirm your deposit in the resulting pop-up. This will then trigger the usual phantom pop-up window to confirm your transaction from the wallet interface.

6 – Once the deposit period has expired (it lasts 24 hours) you will then be able to redeem your SHDW tokens. You can keep an eye on how long is left in the deposit period with the timer found just under the deposit button. Once the sale period is over click the redeem button that will appear and approve the transaction to claim your tokens. Your SHDW tokens will now be present in your wallet.

Key notes

The deposit phase lasts 24 hours and starts on the 3rd of January 2022 at 2pm UTC. The website link is “ido dot genesysgo dot com”. Deposits are made in USDC.

The tokens’ price is dependent on how much USDC is deposited by everyone. There are only 30million tokens available in the IDO, and they will be swapped for all the USDC deposited as explained by the examples below. This means that if people participating in the IDO pool together 30 million USDC, the price of the token would be $1 per token. If you had a 100USDC participation, in this scenario you would receive 100 SHDW tokens.

Alternatively, if the participants in the IDO pool together 120 million USDC, then the price of the token will be 4USDC. Your same 100USDC participation in this scenario would receive 25 SHDW tokens. The token price can be calculated with the below formula:

Token Price = (Amount of USDC deposited by 2pm UTC on the 4th Jan 2022) / 30,000,000

It is important to remember that here there is no “withdraw” option. Any USDC you deposit into the pool is commited to the purchase of the SHDW tokens from the IDO. This mechanism should lead to smoother price discovery, as the price during the IDO period can only increase (USDC can only be added not removed).

The tokens will be listed across three different exchanges (Raydium, Orca and Aldrin) once the deposit phase is over and people will be able to sell the tokens they redeemed from the IDO sale.

Portfolio Update

In terms of the game theory compare the expectations from the current portfolio. SNX was a major innovation in the world of DeFi and saw its best performance during the bull run at the start of the year. It was severely impacted in the May crash and has struggled to recover. Regardless since the entry point of 3.5$, with the current price of 6.3$ a healthy profit is still being realised. In this case we are victims of our own conviction, which was warranted from the development progress and market conditions at the time. The research team has discussed this and we retain rock solid conviction in all our current allocations going into 2022 except for SNX.

The lack of momentum SNX has had, along with the rise of competent competitors on other chains has been reflected by its performance in the markets. The lack of recovery following the May crash is of more concern than the actual crash. Fundamentally strong assets such as (ETH, SOL, FTT and the majority of our portfolio) have recovered for the most part. KWENTA which was covered here is still in development, and is the reason we are still retaining an allocation in SNX. Its’ release should add another fundamental value add to SNX. However, the opportunity cost from not participating in the SHDW IDO is too large. We also do not have any exposure to the infastructure sector in our portfolio, and the upside present is clearly illustrated by the two main competitors. Holding SNX over the last 6 months has come at an opportunity cost which we are no longer willing to pay, hence the rebalancing.

To walk you through how we are rebalancing our portfolio with the allocation of SHDW see above the current state of the portfolio. To make things easier we have added an example of a 10,000 USD investment portfolio. As stated we will be selling 10% of the 15% allocation we have in SNX. This equates to exactly 2/3rds of our current SNX allocation. In the example with the 10K USD portfolio, you can see the portfolio has 428 SNX tokens. Here we would sell 2/3rds of those tokens (428*0.66 = 282 tokens) at their current price of 6.3$. This would net us 6.3 * 282 = 1776$. These funds would then be fully used to participate in the SHDW IDO. Once the IDO completes and the final price of the SHDW token is determined, we will update our portfolio to reflect the current standing of those assets.

Additionally, the SHDW tokens comes with further upside when it is staked with a SHDW node in the form of emissions. Assets which can be staked benefit from that hidden upside. To clarify, we are not interested in providing liquidity, as it comes with impermanent loss and handicaps the upside which can be had.

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results. The author of this article owns vested SHDW via SSC NFTS. 

Conclusion

The decentralised storage sector is ripe for disruption, with only 2 protocols in the space both with some significant drawbacks. Learning from their competitors’ shortcomings GenesysGo offers a superior approach. More importantly they come with a proven track record, as their current infastructure services 50% of the solana networks RPC traffic, whilst offering multiple validators dispersed across the globe.

The IDO has received a lot of attention and around 120million USDC is expected to be entered into the pool for the tokens, leading to an expected token price of 4 USDC per token. Even factoring in that token price, the projected targets make for an excellent risk/reward ratio.

 

 

The author will also be participating in the IDO, and his holdings can be found here:  G2DBzgc4kCQYbKfWJjePsFKeDWBkgrPAthj5JRLy1LRm and CproxWoLCk4QrCd3VJNUpo3QZf3bjEnTN1FuBcRbZYaw

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Bill Papas

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