Bull Cases in The Optimism Network
Our second weekly report looks ahead at a potential headwind in the crypto space. of course caution is needed when buying into a harsh bear market, but it still makes sense to look at where to express bullishness should market conditions change. I’ve chosen Optimism as a sector to focus on for upcoming growth for multiple reasons that will be highlighted today:
- User growth metrics on-chain reaching an all time high
- Protocol development increasing on the network
- Upcoming incentives
OP
The OP token has been a market leader whenever the market has rallied recently:
https://dune.com/optimismfnd/Optimism shows on-chain data that displays the OP network is gaining value:
Transactions/day on the network is >2X that of 2 months ago.
According to DefiLama, the OP chain TVL just reached an all time high in mid August. This is the only top 15 chain to reach a new ATH in TVL during this bear market.
At a $193M market cap the total on-chain value of the Optimism network is estimated at $1.32B.
Velodrome
Velodrome is an AMM modeled on Solidly. Velodrome’s model incentivizes liquidity by giving token lockers the ability to direct the protocol’s emissions to their chosen pairs. Emissions directed to pools = higher APR for LPs on that pool. In return, lockers receive 100% of the trading fees generated by the pairs they vote for, any bribes directed toward these pairs, and an anti-dilutive rebase. This has thus far proven to be quite effective with the following achievements.
The key here being that they allow other protocols to build liquidity using less of their token in incentives. This will be a catalyst for Optimism that should drive more developers to build on their chain in order to leverage this public service.
Valodrome’s TVL is currently $65.64M, 4x their market cap of $16M. Their voting pools are paying out much more than those on Curve and Convex with the average pool paying out 70% APR.
VELO token
VELO is in an RLZ in another RLZ.
They have experimented with tokenomics by taking on a (3,3) model that tapers off with time. An issue here is that a portion of rebases goes to veNFT holders, the team, and liquidity incentives. This means that stakers are still losing ownership of total supply with each rebase. They will be able to make this difference up + more through the bribes and fees they receive for voting for pools to send VELO emissions towards that will incentivize LPs.
Tour De OP
Velodrome is kickstarting a 6–8 month Optimism incentive program on November 24th. They will incentivize protocols using three methods:
Bribe Matching
The protocol will be matching adding to bribes made by other projects to the following degrees:
Theoretically bringing in more voters/VELO stakers, and more project bribes as they should get more liquidity per dollar spent bribing.
Lock Bonus
Each week, Velodrome will distribute a pool of 50,000 OP to all wallets locking 10,000 veVELO or more. Partnering projects will receive an extra 10% OP as well as more bribing bonuses:
This is an effort to create more demand for the VELO token and inspire more platform TVL. Essentially this entails redistributing revenue to a greater degree in hopes that the token will accrue more value and the platform will receive more volume. This is an incentive that doesn’t increase token emissions which is a win in my book.
Vote Boosting
“Every protocol that locks at least 2M $veVELO will qualify for a 2M $veVELO voting boost to the pool of their choice for two weeks — essentially doubling their APRs. Likewise, every bribe over $4,000 will qualify for a 1–2M voting boost from the Velodrome Team for the epoch on which it is deposited.”
The first half of this statement suggests more VELO emissions being directed to projects that have staked enough VELO, likely increasing overall VELO emissions temporarily. However, the second half of the statement shows the Velodrome team redirecting their voting power to qualifying partners. This should be a healthy incentive much like the lock bonus.
All together these incentives should result in higher activity on Optimism with more protocols building and moving over to capture cheap liquidity. As a result there should be more volume on the Velodrome DEX resulting in higher demand for VELO and increased TVL without too much increase in VELO emissions. Their partners will receive boosted liquidity and potentially revenue boosts, especially those who’s revenue model includes capturing VELO emissions.
enter SONNE…
SONNE
“Sonne Finance is a decentralized lending protocol for individuals, institutions and protocols to access financial services. It is a permissionless, open source and Optimistic protocol serving users on Optimism. Users can deposit their assets, use them as collateral and borrow against them.”
Sonne is based on Compound and AAVE and is native to the Optimism chain. While this isn’t the most exciting DeFi innovation I have reason to believe that it could be undervalued for multiple reasons.
Value Accrual
Each lended asset on the protocol has a reserve value associated which determines the amount of interest that will be extracted by the protocol as revenue:
80% of this revenue is distributed to SONNE stakers (will increase to 100% on December 28th)
Revenue will also be generated on Velodrome by capturing their emissions. This works by bribing voters to send VELO emissions towards the SONNE/USDC pair then providing liquidity on that pair to capture some of those emissions. Since their token was launched using a Liquidity Generation Event (LGE), most of the tokens in circulation were minted using capital that will be placed in this pair. This means they are capturing most of the emissions that are being delivered to that pair as APR. 20% of this APR is held in their treasury and the other 80% is distributed to SONNE stakers. They could then stake that treasury VELO to receive the extra bribing and voting boosts, as well as OP airdrops on Velodrome which will instantly >2x the revenue they are earning over there (2x APR from vote boosting incentive + added bonuses from the other two incentives).
Other Metrics to Consider
- $572k in liquidity on Velodrome with SONNE’s MC at only $1M. This liquidity should increase greatly with the Tour De OP incentives
- $24.3M TVL, 24x MC
- 177.78% APR for staking, should increase with more revenue expected after Nov 24
- Token inflation of around 33%/month, mostly to incentivize borrowing and lending (currently this outweighs the benefits of staking)
SONNE is sitting on an 0.886 + wycoff check from its ATH breakout, decent volume coming in a few days ago.
Thesis
A commonly considered headwind in the market right now is the Arbitrum airdrop. What isn’t being talked about is how that could bring echoing attention to other L2s in the space. OP is my strongest pick if this will be the case due to its rapid increase in users and TVL during the bear market. This strength has been reflected on its chart. VELO is deep in a Reload Zone after a large rally that occurred months after TGE. Their incentives should bring demand to their token and activity to the Optimism network. SONNE should benefit greatly from these incentives but is suffering from heavy inflation, we will need to see revenue numbers skyrocket for high TVL and liquidity to translate into token value.
