How to evaluate a rebase protocol (POL) — Why price is irrelevant

If you’ve invested or are thinking of investing in a protocol owned liquidity model, like FHM, this article is a must read. Few projects have addressed this directly, so we’d like to clear up some FUD and the no. 1 mistake investors make when it comes to evaluating any protocol owned liquidity project.

First things first

It can be shocking to watch the price of a token you hold plummet. However, if that token is part of a protocol owned liquidity model, like FHM for example, then your panic may be misguided.

Judging a project like FHM by its market price and daily price action is a fundamentally inaccurate way to evaluate the health and future potential. POLs are NOT like other crypto investments, and by the end of the article, you’ll understand why.

As crypto-traders, green figures and positive price action is what we’ve been conditioned to want to see — but as those of you who have been around DeFi for long enough know, it isn’t always that simple.

Today we’re going to explain the best way to accurately evaluate a protocol owned liquidity model like FHM as well as why looking at price alone as an indicator is a mistake that can cause investors to make wrong decisions.

Disclaimer: We won’t beat around the bush. If you’re a short-term degen looking to turn a quick profit, this is NOT the project for you. Seriously. The FHM team is made up of a number of dedicated and experienced individuals who have gained the support and trust of an incredibly loyal community. The way we have done this is by proving beyond the shadow of a doubt that we are not just another OHM fork or protocol owned liquidity model promising absurd returns. The team has proven time and time again they have what it takes to trailblaze their own path by creating innovative financial instruments and REAL products that work and are designed to adapt. Our vision extends far into the future and while we know it will be a bumpy ride, we are not the project for you if you are here for short-term gains.

Why price is NOT the right indicator

When it comes to protocol owned liquidity models, the market price of the native token (in our case FHM) gives a woefully incomplete picture of how the protocol is travelling. While market price is in some ways a reflection of what the market believes the token to be worth, because of elastic supply and the nature of a rebase asset, it does not actually reflect the actual value of the treasury when fully unwound into minted FHM, nor the operational runway afforded to enable continued development.

A far better way to evaluate what a rebase token is worth and whether it is undersold or overbought is to start by looking at its book value. Book value is calculated by taking the amount of funds held in the treasury and dividing it by the circulating supply.

Treasury balance/Circulating supply = Book value

If we do this for FHM right now (28/2/2022) this looks like:

$31,007,034/$821,507 = $37.74

The book value of FHM is thus $37.74 — which is more than triple its current market price.

The book value represents the amount of risk-free assets held in the treasury that is backing a single FHM token. If the protocol was to be liquidated tomorrow, this is how much each FHM token would be worth. So, what does this mean for investors?

Well, when the book value is higher than the market price, this is an indication that the token is currently trading well below its true value. This could be for a number of reasons, namely that any protocol even slightly associated with OHM and OHM forks have been unfairly hit recently in the wake of some of the larger OHM forks making some bad mistakes and getting greedy through (9,9) bonding (which eventually triggered a devastating cascade effect of many protocol owned liquidity models). The fact that FHM has a serious treasury balance to back up their FHM token (which also has a high book value), gives you more information than price in regards to the health of the protocol and whether or not it is a good investment.

Another way to calculate what the FHM token is actually worth is by comparing the market cap and the treasury balance. If the market cap is much lower than the treasury balance (which is not always the case), it indicates that the market price will probably be below the book value, meaning that the asset may be underbought. If you believe that the team has what it takes to deliver real products and innovative financial instruments, this may mean that it’s an excellent time to buy.

At points, protocols like TIME had a market cap about 7X the treasury balance which suggested that it was overbought, though at the time people had a lot of faith in the protocol and the team to deliver, so they were able to maintain that ratio for quite some time.

What 99% of OHM forks and rebase DAOs have failed to do

The other main pitfall of judging a protocol owned liquidity model or any OHM fork by its market price alone is this: A protocol owned liquidity model’s primary goal is not to increase the value of its native token, but to consistently grow its treasury through investments and releasing innovative financial products, instruments and services.

Many OHM forks copied the ingenious fundraising model of Olympus where bonding allowed the protocol to acquire large amounts of capital in a very short period of time. It also enabled protocols to pay dividends to investors, creating what seemed like a virtuous economic flywheel that rewarded both the protocol and the investor. This seemed like a revolutionary step forward for protocols, but one crucial element was missed by most of these protocols.

In order for this virtuous flywheel of bonding, staking and treasury growth to continue, new money from new investors was constantly needed to be injected into the treasury in order to continue paying out the ridiculously high APYs they were offering — in other words, a textbook ponzi scheme.

While the fundraising efficiency of Olympus and other copycat forks was undeniably brilliant, in reality this was just 1% of the whole battle. What was undoubtedly a great mechanism to raise capital from new investors was too hastily hailed as the product itself, when really it was just a good starting point to bootstrap the actual work — GROWING THE TREASURY & ITS ECOSYSTEM.

For a POL model to succeed it needs to be able to consistently grow its treasury. Period. This is the SINGLE most important thing to know as both an investor and DAO governor.

Unfortunately, the vast majority of protocols completed the fundraising stage and then just stopped (or rugged), slowly crashing and burning and taking all their investor’s money with them. Few protocols had any new ideas about how to grow their treasury and were not able to develop anything beyond an inflated APY and a lot of hype.

The most important thing: Growing your treasury

Consistent treasury growth can be achieved through a number of structures, financial instruments and innovative products services — which is where FHM really shines. While most protocols talk a big game in an attempt ensnare as many new investors as possible, FHM has consistently delivered REAL products and innovations that have opened up a wealth of new financial possibilities.

Despite fighting to be heard amidst the noise of OHM forms and protocol owned liquidity models, since its inception FHM has done what few other DAOs have, and a die hard community has formed around the project as a result.

Firstly, FHM has successfully gone cross chain, bridging two of the most promising ecosystems out there — Fantom Opera and Moonriver — capturing the liquidity from another chain, opening the protocol up to a whole new user base, creating new arbitrage opportunities and bridging two vibrant ecosystems like never before. You can learn more about this cross chain compatibility and its benefits here.

Secondly, FHM has developed its own proprietary stablecoin USDB (previously FHUD). USDB utilizes a novel proof-of-burn mechanism which allows the protocol to leverage previously idle assets in the treasury, essentially supercharging the protocol’s ability to grow its treasury while creating a tradeable stablecoin backed by REAL assets that will soon have a number of use cases.

Another key way to grow a protocol’s treasury and deliver returns to investors is through LP pools (which FHM has done remarkably well) and also by using FHM as an investment vehicle. While this avenue is less rewarding during times of market stagnation and uncertainty, like the one we are experiencing now, FHM’s team has made some wise decisions in regards to its investment strategy.

For starters, FHM has always invested more heavily than its competitors in stablecoins. While this was criticized in the beginning as stablecoins obviously don’t offer the high growth potential that many investors are looking for, when the market unexpectedly crashed, we were in a perfect position to buy the dip — which is exactly what we did. On top of that, FHM has become the 1st protocol to add NFTs to their treasury. And these aren’t any old NFTs. Along with there only being 420 Clandestina NFTs in existence (6 of which now belong to FHM’s treasury and community), ownership of a Clandestina NFT is representative of Secret Network node ownership, which pays out consistent rewards to the protocol and its investors.

Secret is one of the preeminent privacy-focused networks out there, and we are incredibly excited to be involved with them — a relationship that will likely open the doors to new collaborations in the future. Quintin Tarantino chose the Secret network to launch his own Pulp Fiction NFT project, and now we own some of the rarest (and most gorgeous) NFTs on the market. And this is just the beginning.

Where most rebase DAOs have put all their energy into the initial fundraising stage, hyping the protocol, offering unsustainable APYs, etc., FHM’s team knows that the real work comes after the initial influx of capital. While we did have an incredibly encouraging start — a stealth launch which saw 300 members arrive on Day 1 with virtually no marketing efforts — FHM, unlike many OHM forks, have continued to innovate and create novel financial instruments that have well and truly distinguished us from all the other copycat protocol owned liquidity models and OHM forks.

This is a long-term project and holding FHM down the track is how you will be rewarded for being an early adopter. As our stablecoin USDB gains use cases, there is a proof-of-burn mechanism in place that burns FHM when USDB depegs to the upside, a mechanism that will eventually turn FHM from an inflationary currency to a deflationary one, meaning holders of FHM will reap massive rewards once our ecosystem and products begin to develop and mature.

Still, we know it can be concerning to see a token you’re heavily invested in take 20 or 30 percent losses in a day. All OHM forks and protocol owned liquidity models have been hit especially hard in the recent market crash, but always remember — if you are not a short-term investor, which most of the FHMily are not, price volatility is completely natural and can even attract savvy investors looking to buy the dip on an unrivaled rebase DAO.

All new and ambitious projects will get knocked around a bit by FUD and market conditions, and we are no different. However, as a project that has proven time and time again to be anything but a copycat OHM fork, we know these periods of low prices and market instability is just something we have to push through while we work towards developing and releasing the products that will matter in the end.

A big thank you to our die hard community members and large holders who understand that price is not a reflection of the health and trajectory of the protocol. We know you are still here and still buying up FHM because you have faith in the protocol and the team, and we want you to know we are working harder than ever and have some big things in the pipeline.

Longevity is key

Rebase protocols should never have a short time horizon — longevity is crucial for a protocol of this nature to succeed. At FHM we have the long term vision of becoming a decentralized reserve bank that offers a number of novel financial products and possibilities. In summary, when evaluating whether or not a protocol owned liquidity model is worth investing in you should look for the following things:

• Actual products and financial instruments that are both innovative and functional
• Innovative ways of consistently growing the treasury
• A trustworthy and active team who DELIVER on their promises
• A loyal and engaged community with members getting down to the nuts and bolts of governance and future development in the Telegram and Discord
• The ability to adapt, pivot and rebrand to suit a rapidly changing landscape
• A book value that exceeds the market price (indicating the asset is underbought)
• The ability to create financial instruments that can function and thrive even in bear market or uncertain conditions
• A document clearly outlining the way their treasury will be managed and how their operations and financial management model works

We hope this has cleared a few common misconceptions. Always DYOR and engage with the community and team to see if an investment is right for you. And remember: Price isn’t everything. Dig a little deeper and you’ll be able to make smarter investing decisions in the wild world of DeFi. Stay tuned for more BIG things from FHM.

Be sure to visit on the Internet, in Discord, Telegram or Twitter!