PRISM- what’s it worth?
TL;DR
- PRISM is an upcoming project on Terra where you will be able to split a yielding asset into two parts — yield and price. From there you can do loads of cool stuff (see bottom of the article to links to guys way smarter than me explaining it all), but is PRISM worth investing in, as well as using? (NFA)
- I like to think of PRISM as the Kinder Egg* of the Terra world in that it makes money in three different ways. All of it should scale with usage and underlying asset prices, and flow through to PRISM token holders (this is def not FA)
- TVL should be able to reach 3bn UST, while annualised revenues consistent with this TVL would be c.40–50m UST
- Using peer group valuation implies a credible first year market cap of c.$500–750m (seriously, this is not FA) but with material upside leverage should the protocol take off and/or crypto prices strenghten further (bull case 3–4bn).
*for those not familiar with Kinder egg, see here. Three things — chocolate, a toy AND a surprise — all in one!
Finally, a use for my 15yrs in tradfi…
First off, a bit about me. I am a current (but hopefully soon to be ex) veteran tradfi equity analyst who has been in crypto (increasingly) seriously for a little over a year, with Terra/Luna the red pill to take me down the rabbit hole. I am not associated with PRISM but I AM looking forward to it as I have a degen problem and have been liquidated (Anchor, Binance, Kucoin you name it I have the t-shirts/scars) too many times. You may have seen my memes. All mistakes are my own, and for the love of all that is holy, none of this is financial advice.
What is PRISM? PRISM is an upcoming defi project launching on the Terra blockchain. If you dont know that already, then LUCKY YOU as you’ve missed out on literally MONTHS of twiddling your thumbs waiting for this exciting project to launch and are coming to it at the right time (kudos, as timing is everything). If not, well all I can say is that I share your pain (wen, pls ser Mr Refractor, wen? apparently soon…)
What does it do? Very basically, it lets you separate a yield bearing asset into two parts, yield and price. This helps your capital efficiency as, for example, if you’re super bullish on Luna price but don’t have any more fiat/dont want to increase your borrow, instead of having to wait for all of those airdrops (BORING) you can sell your yield token (future staking yield) and use the cash to ape into (I mean invest) moar Luna (or pLuna if you’re full degen). Alternatively, you may decide that you really LIKE the yield, so you can go and buy more yield tokens and do cool things like 1) autocompound it, which may also be tax-efficient depending where you are in the world 2) save time/your thumbs, as PRISM will automatically pick up all the different airdrops for you 3) use is as a separate asset.
There are many many more cool things like the fact that any pAsset (the price part of your refracted asset) will give you price leverage with no liquidation risk (my future children thank you, Mr Refractor), you’ll also be able to leave limit orders to make sure you don’t miss out on any phat arb opportunities, and many more assets will be added including Eth, Solana, Terra-native token, LPs…. but that’s for another post (and others have done an amazing job explaining it already)
SO I think it’s pretty clear, it should be a pretty useful protocol, and be another great addition to the Terra blockchain. But ahead of the launch (January???), how can we think about it’s potential value?
When valuing anything, it’s wise to start with the immortal words of Arnold in Predator:
Good starting point, I think you’ll agree, but particularly relevant for Prism in that it generates income from two distinct models — it’s partly similar to yield autocompounders (think Yearn, Lido etc) and partly similar to an AMM (SushiSwap or Astroport for Terra natives).
yAsset revenues
Modelling the yield part of the business is not massively complicated, and has three main moving parts: TVL, the yield of the assets, and what percentage of yAsset is staked vs unstaked. To begin with, you’re only going to be able to refract Luna via Prism, but eventually this should expand to other major yield bearing assets such as Eth, Solana etc as well as other Terra native tokens (including LPs). This is the same model as defi platforms such as Yearn, Lido etc. and most of these protocols operate in a similar way — allow you to do cool things with your yield at a small cost (usually 10% of the underlying yield)
TVL valuation
Below is a very basic table showing potential TVL for PRISM assuming only Luna is refracted. For context, StaderLabs currently has c.1.5% mkt share of staked Luna, the largest single validators have c.5–8% (eg Orion), while Lido, the closest peer in terms of business model, has managed to amass a massive 64m bLuna (c.20% share) in a little over 6m.
The table above clearly won’t capture all TVL opportunities, given the likely additions of other tokens. For example, with c.15m eth currently staked, each 1% of mkt share of staked Eth would increase TVL by 600m UST at current mkt prices. This would be roughly the same as the amount of bEth currently in Anchor.
Given the utility provided by PRISM, I don’t think it’s unreasonable to see a TVL of $3bn relatively quickly.
Earnings valuation
Protocol revenue from staking yield will be driven by TVL, the yield of the assets refracted, and the split of staked v unstaked yAsset. PRISM will receive 10% of yAsset yield on staked yAssets (post validator fees of a maximum of 5% of yield), and 100% of the yield on unstaked yAssets. While I expect the majority of yAssets to be staked, users may choose to leave their yLuna unstaked if they wish to trade the underlying, be a liquidity provider, or use it as an asset in other protocols.
Luna yield is currently split between Luna/stable coin emissions (distributed for 2yrs) and airdrops from other Terra protocols. The most conservative approach would be to only reflect the underlying staking yield on Luna. Assuming $100 Luna and the current yield structure, potential annualised protocal earnings would be as follows:
adding in an assumed airdrop yield of 1% would increase annualised protocol earnings from yAssets by between $0.5-17.2m depending on % mkt share & staked/unstaked split:
Additional near term upside from Eth & Terra LPs
Adding in Eth could further increase annualised protocol revenues from staking yields by 3m UST for every 1% of mkt share of staked Eth (assume 15m staked Eth @ $4000, and 50bps of protocol revenue per Eth, inline with Lido) while there is also potentially signifant uspide from refracting LP tokens within Terra, given the generally high yields of underlying LP tokens. For example, 100m UST of TVL in Terra LP tokens, at an average yield of 30%, would result in a further 3m UST in annualised revenue, even assuming all yLPs are staked.
Luna price sensitivity: note that the analysis above has all been using Luna at $100. What if the Luna price changes? Given the weight of stablecoins in the staking yield, all else equal, yAsset-related protocol revenues will have a c.0.75 beta to Luna px (ie earnings will increase/decrease by 7.5% for a +/- 10% move in Luna)
In summary, I think that a 3bn UST TVL and c.30–40m UST of annualised revenues from the staking yield side of PRISM is extremely achievable at current crypto prices, with material upside over time.
Swap fees / limit orders
I promised you a Kinder Egg, so where are the other two revenue streams? Well…. PRISM IS ALSO AN AMM. Yes, that’s right, once you’ve refracted your assets, you’re also going to want to trade them right?? Here I will admit my crystal ball is cloudy in that I really don’t know how degen people are going to be, but most successful AMMs earn protocol revenues equalling c.1.5–2% of TVL; given that a substantial potion of the TVL is likely to be locked I dont think it’s fair to assume all of it, but could the “trading” TVL be 500m UST? This would mean c.7–8m UST of annualised revenue
Another way of estimating it would be to look at current trading volumes on other AMMs in Terra. c.750m UST worth of Luna-UST and Luna-bLuna has traded over the last week across Astro & TerraSwap, which annualised is a massive 39bn UST in trading volumes. Let’s again be conservative and say that Prism achieves 10% of the combined volumes, and only in Luna (ie ignore other additional assets such as Eth, Sol, LPs). This would equate to 3.9m UST in annualised revenue (30bps trading fee, of which 20bps go to liquidity providers & 10bps to the xPrism pool). As such, I am comfortable assuming c.5–10m UST in annualised protocol revenues from basic swap fees.
But wait, there’s more! Third and finally, PRISM will also allow you to leave limit orders so that you can occasionally sleep/eat/see other humans/doomscroll twitter without missing that monster arb opportunity. What will this freedom cost you? A meagre 5 UST or 0.1% of the trade size — whichever is larger, and only if the trade is actually filled. The fee will be split between the executing bot and the protocol, with any excess profits (say a limit order to buy Luna is executed below the limit price) retained by the protocol. This adds an incremental revenue stream for the protocol and should also help to dampen downside if crypto prices pull back.
Tokenomics
Protocol earnings will be converted into $PRISM on the AMM and added to the $xPRISM pool, as such benefitting $PRISM holders; notably the protocol is being launched without VC backers, reducing the risk of significant flow back as it scales. Max supply is 1bn tokens; it’s not 100% clear how many tokens will be available at launch, although Mr. Refractor indicated between 7–10% on a recent podcast.
Valuation & peer group analysis
Below is a sample set of what I would consider to be peers
While useful to show Lido given the similarity in business model (and its success with bLuna), I would be tempted to exclude it from the peer group for valuation purposes as — for now — the token is purely governance and has no link to protocol earnings. Stripping out Lido would leave median Mkt cap at around 0.22x TVL, although notably Yearn trades at a higher multiple of TVL, reasonable given its higher earnings/TVL ratio. The median P/E ratio is c.20x, with Aave a material outlier. Using peer group median multiples (and less in the case of mkt cap to protocal earnings) under various scenarios (bear, base & bull cases) suggests a wide range of potential valuation, as one may suspect:
It’s probably early to give too much credit for the bull case (albeit important to show the earnings & valuation leverage in the protocol), so I would view a likely initial, or first year, valuation, to be somewhere between the bear & base cases, implying a range of c.500–750m UST.
PRISM is due to launch “sometime in January” (although we have heard that one before). For more information on the protocol, including the launch mechnism, the team’s Notion site seems to be pretty comprehensive, while there are excellent twitter threads on what you can do with PRISM from Crypto Harry, Terranaut and AgilePatryk (amongst others), all of whom are far smarter than me. I for one am looking forward to becoming like this guy in the near future.
Much love, any questions/comments, let me know. LE
