Report: Dracula Protocol V2
The return of the yield farming vampire
Executive Summary
Dracula Protocol is a decentralized and fully automated yield farming platform built on Ethereum, with its second version being released on April 30th, 2021. Dracula’s anonymous team aims to solve many inconveniences that retail investors face when farming yields in DeFi, like manual interaction and high gas fees. Dracula protocol solves this through automation, “draining” its underlying “victim protocols” on a daily basis which leads to less manual effort and higher yields for its users. The native governance token $DRC is already live since October 2020 and is non-inflationary, which means that nearly all its supply is already in circulation. The $DRC market cap is currently around $40M.
Introduction
In anticipation of the upcoming Dracula Protocol V2 launch, we wanted to present you an overview of this project, which has been originally launched as Version 1 in October 2020 and now starts anew in a second version on April 30th.
Yield farming has been one of the hottest topics in Crypto, especially since Compound kicked off the “DeFi Summer” in 2020 by starting to distribute its native governance token $COMP to lenders and borrowers on the platform. Even before, protocols like Synthetix incentivized its user base to bootstrap adoption by distributing governance tokens (more or less resembling equity in the decentralized protocol) to users and liquidity providers.
Nearly every new DeFi protocol is following these examples and therefore the number of yield farming opportunities is nearly endless. But most of them — especially those built on top of Ethereum — come with the same challenges: regular manual interaction (e.g. claim & redeploy) and high gas fees which both lead to lower profits for users and constant need to manually manage one’s position.
Yield aggregators like Yearn, Rari, Harvest, Vesper, or ForceDAO are already trying to solve this issue by aggregating user funds into vault strategies that auto-compound profits and lead to higher automation. But some of those are limited in what underlying protocols they use and some are even rewarding users with their own tokens, leading to the very same problems that we mentioned above.
Dracula Protocol — currently exclusively available on Ethereum — tries to solve this by providing one central interface to drain rewards automatically from countless underlying farms and re-invest them in a smart way for even higher profits.
The History Of V1
Dracula Protocol originally launched already in October 2020 with the first version of their yield farming solution that allowed their users to reap the rewards of underlying protocols — so-called “victims” have been Uniswap, Pickle, SushiSwap amongst others — via one central user interface. Rewards have been claimed automatically and sold for $ETH. This farming has been incentivized by the non-inflationary Dracula Token ($DRC)
After a few days though, Dracula Protocol V1 became a victim of whales itself who drove the TVL up from about $20m to over $100M in a single night with the capitalization capped at about 1–2%. You can read more about it here:
https://draculaprotocol.medium.com/dracula-protocol-ideology-520f33e18b29
This event drove the team to the decision to end the inflation for $DRC to prevent any extraordinarily dumping of farming whales in the future.
The $DRC token rose to a value of around $0.5 when the platform reached $100M in total value locked quickly after the initial launch but lost traction again and went down to around $0.02 and stayed there until February 2021 when Dracula Protocol V2 was announced, whose value proposition we will cover now in more detail.
The yield farming challenges to be solved
Dracula Protocol aims to solve many challenges of yield farming in DeFi which can be summarised as follows:
- Manual processes: Farming on different protocols, involves many manual activities and transactions which is not only time-intensive but also costly, especially on Ethereum. This does not only involve the initial deposit of funds but especially the regular claiming and redeployment of rewards.
- Crippled profits: Having to claim and redeploy rewards manually — which is often not worth the transaction costs when done regularly — also leads to less profit for the user. For one, the transaction costs have to be deducted from the profits, and — often even more important — a regular compounding of rewards is often not possible which significantly lowers the potential net profits. For example, an APR of 50% can be increased to 64% APY when rewards are compounded weekly and an APR of 150% can be even increased to 339% APY (!) — you see that the higher the returns, the higher the divergence between compounded rewards and non-compounded rewards. You can do some calculations on your own here: https://www.aprtoapy.com/
- Fish vs. Whale: Most DeFi users are not whales but “smaller fish” and try to maximize their profits in order to earn some passive income on top of their regular salary. They also want to diversify their portfolio to reduce risk which further lowers the size of their capital they can invest into individual yield farms. But being a “small fish” has several disadvantages. First, depositing less than $5000 into individual farms is often not worth it for the above reasons (manual transactions, gas costs), and secondly, as individual holders, they are dependent on the strategy of whales and are often facing them dumping large amount of reward tokens that have been farmed early on with a — in comparison to the normal users — gigantic capital. Additionally, whales often earn a significant share of the protocol’s governance shares and can therefore influence the protocol’s future (e.g. decide on the value accrual mechanics) compared to thousands of smaller holders with tiny amounts of governance shares each who first need to coordinate with each other in order to have a meaningful impact on governance decisions.
How Dracula Protocol V2 aims to solve these issues
Let’s have a closer look at how Dracula Protocol V2 tries to solve these issues and allow for a fully automated, profit-optimizing yield farming experience suitable for everybody.
Automation
Dracula Protocol V2 is built on one single protocol-agnostic platform that allows connecting to individual “victim” protocols in order to deploy capital there and farm rewards automatically without any additional manual user interaction. As rewards don’t need to be claimed and redeployed by individual users but rather are done in bulk for a pool, the overall gas fees are reduced significantly.
The whole automated farming process is well described in the following infographic:
Auto-compounding
The regular claiming and restaking of farming rewards allow for optimized profits due to compounding happening on a daily basis. As mentioned under “challenges”, this can significantly increase the net profit for users, especially when they farm for a longer amount of time.
Additional yield
Dracula V2 introduces a second layer of yield on top of the auto-collection of the underlying protocol rewards. These (like $SUSHI on SushiSwap) are sold automatically for $ETH and this $ETH is then deployed into the most profitable single ETH-based yield earning strategies. Rari Capital is one of four official partners supporting this strategy.
Whale hunting
Dracula aims to unite individual farmers and by pooling their capital becomes a whale itself, owning a significant percentage of the overall farming pool and being less dependent on the actions of other whales.
“The Daily Drain”
So how does this whole process work in practice?
Every day, Vampire Protocol is draining the rewards from the victim protocols and selling them for ETH. From those returns:
- 85% of these returns are put into a yield strategy for additional profits,
- 3.75% are granted to DRC stakers
- 6% are used to incentivize liquidity providers to the DRC/ETH pool (currently Uniswap)
- 3.75% are moved to the developer fund and
- 1.5% are moved to the gas fund used for paying the transaction fees
Also, check the below visualization for an even better understanding of how this works.
Profit-taking in ETH or DRC
Generally, the yields earned from the victim pool rewards will be further invested in $ETH but users will still have the ability to decide if they want to receive their profits in $ETH or in $DRC. $ETH in this case acts as the more stable option whereas $DRC payouts allow users to bet on a future price rise (outperforming $ETH) of $DRC. When the second option is chosen, $ETH will be used to market buy $DRC.
Other optimizations in V2:
Compared to an older version of the protocol, Dracula V2 comes with a completely new user interface, optimized smart contracts, and more versatile “victim adapters” which means that also more exotic protocols can be utilized (e.g. BadgerDAO).
Known victims:
We already know about the following victim protocols that will be supported by Dracula Protocol V2:
- Sushiswap
- 1inch
- KeeperDAO
- Dodo
- Mirror Protocol
- BadgerDAO
- Vesper
- Stabilize
- Alchemix
- Pickle
- TruFi
- YAxis
- Luaswap
The team behind Dracula Protocol
The Dracula team is anonymous and started the project originally as an anti-thesis to many projects that either only make their Venture Capital (VC) backers rich or wreck havoc to private investors that come late to the party and suffer because of whales’ dumping their initial farming returns. The team’s original motivation is explained in this quote:
We started $DRC and Dracula Protocol as a reaction to the unfairness that occurred with Sushiswap. When Sushi entered the market, centralized exchanges and major corporations listed and supported the project, despite its lack of ingenuity or novel ideas.
This support from big money resulted in vicious dumping on ordinary retail investors and eventually led to a massive price crash. Dracula Protocol was meant to combat this type of behaviour; our idea was to exploit and punish whale-baked farms with a second-layer “vampire” concept…
Moreover, almost every major company in the DeFi ecosystem (Curve, Uniswap, 1inch, Dodo…) has conducted some private sale exclusively for a closed community of investors and donors who bought their shares at a 90–95% discount from current market prices.
You can read more about the origin story here:
https://hackernoon.com/defi-vampirism-draws-first-blood-as-dracula-protocol-upgrades-to-v2-gq7y339g
Dracula Protocol has no VCs or secret investors backing the project which makes it interesting for individuals who are afraid of being dumped on by VCs or not being able to get into a project early enough.
On the other side, an anonymous team leads to higher risk for users and investors as the project members do not put their offline credibility at risk.
Unconventional marketing initiatives
The team — being limited in funds for marketing cash-out — came up with quite innovative ideas to generate a certain buzz around the V2 launch of the project.
Next to meme contests and similar activities, they had not only their own song created:
https://open.spotify.com/album/33EzKhlDAXVmHgSMzZkXNu
but also their own Manga:
Future plans
At this point in time, the team is still very much focused on the release of V2 of the protocol, and not much is known about the roadmap beyond this important milestone. This will probably change soon after the release. $
What has been teased already has been an expansion across Ethereum, focusing on cross-chain farming without migrating away from Ethereum. Right now xDai and Solana have been researched by the team whereas a full migration to Binance Smart Chain (BSC) is currently not planned because of its centralization.
Risks
Dracula Protocol shares many of the risks of all other DeFi protocols of which the most important ones are listed here. This is not necessarily a complete list, so please always do your own research before using Dracula Protocol or any other DeFi protocol.
- Smart contract risk: Errors or exploits leading to a loss of funds because of protocol errors or malicious actors. Although the V2 contracts have been audited by Solidity Finance, this is no security guarantee. The audit results can be found here: https://solidity.finance/audits/Dracula/?ref=hackernoon.com
- Layered risk: The composability in DeFi could lead to a multiplication of risks as several protocols work together or are built on top of each other. Therefore a bad event in one of those could lead to a negative chain reaction and affect all other protocols too. This is especially true for a protocol like Dracula that lives from sitting on top of other protocols.
- Other software risks: Malicious attacks such as hacks, DDoS attacks, or similar could lead to temporary unavailability of the service or even data loss.
- Market risk: A black swan event could lead to either a massive price fall for $DRC or $ETH or any other underlying digital assets used by Dracula Protocol.
- Economic incentive risk: Network participants could be encouraged to act in bad favor or against the design of the protocol — this is exactly what happened during version 1 of the protocol.
- Regulatory risk: New country-specific regulations could affect the protocol — like any other DeFi protocol — in negative ways, e.g. restrict the usage of Dracula’s services or the access for certain countries. As the protocol is decentralized and the team anonymous any such measures would be difficult to enforce by authorities.
- Team risk: Having an anonymous team always poses some risk to users and investors as they are not putting their real-world credibility at risk. The developers could just leave or even harm the project and turn their back on it without facing any consequences. There have been countless negatives examples in the past.
The tokenomics of DRC
Dracula V2 tokenomics are very interesting as this project is already live for several months with a currently quite low market cap of about $40M at the time of writing and DRC being almost non-inflationary.
The existing DRC token (contract: https://etherscan.io/token/0xb78B3320493a4EFaa1028130C5Ba26f0B6085Ef8) will therefore also be used in V2.
The total supply will be capped at 15,000,000 DRC with the minting of further tokens being disabled. The current circulating supply is 14,3M which means the current market cap of about $40M is almost equal to the fully diluted valuation.
The $DRC token can be staked to take part in governance and it will also accrue value from protocol activity which will scale in line with the total value locked (TVL) of the platform. 3.75% of each daily drain (once a day, the platform will sell the underlying rewards for $ETH) will directly go to $DRC stakers.
Unlike many other yield aggregators and DeFi protocols in general, $DRC is therefore not incentivizing users and stakers based on token inflation but rather providing a revenue flow based on the protocol’s proceeds in $ETH, or optionally in $DRC (which will be bought with ETH from the open market).
As there are no VCs involved in the project, there is no lock-up and vesting period related to those. 8% of all originally minted $DRC has been sent to the developer fund. This fund currently held about 600k $DRC tokens with 50% of them burned after the decision to stop token inflation (see “history of V1”).
The good and the bad
Finally, let us summarize the strengths and weaknesses of the protocol in a few bullet points:
Strengths:
- Ambitious team, sticking to the original value proposition and principles of catering for the “retail user”
- Confirmed partnerships for ETH yield strategies and an increased number in “victim protocols”
- Low market cap of the native $DRC token with a potentially high upside compared to similar tokens
- Non-inflationary $DRC token, no VC investments
- Clear problem-solution fit for retail users on Ethereum
Weaknesses:
- Anonymous team
- Currently restricted to one blockchain (Ethereum), leaving behind potential target groups on other chains
- The market of DeFi yield aggregators is highly competitive; many users could just stick to the “big ones” like Yearn
- Unknown roadmap beyond V2
Personally, investing in projects that went through their first boom and bust cycle can be very lucrative as the most focus of both retail and institutional investors is focused on newly-launched projects. This leads to already established projects that haven’t immediately gotten traction flying under the radar of many, despite having an active team, an existing code basis, and a vibrant community.
Links
Protocol Website: https://dracula.sucks/
Discord: https://discord.com/invite/7JgByFU
Telegram: https://t.me/DraculaProtocol
Medium: https://draculaprotocol.medium.com/
Audit V2: https://solidity.finance/audits/Dracula/?ref=hackernoon.com
V2 FAQ: https://www.notion.so/Dracula-Protocol-FAQ-7339eeefb07b4b6e9b796d2caf918ba2
V2 Tokenomics Article: https://draculaprotocol.medium.com/v2-drc-tokenomics-56271be9802f
About Qi Capital
Qi Capital is a group of like-minded and experienced individuals from around the globe, sharing two common objectives: providing insights about crypto and DeFi, and proactively working with ambitious teams on the future of decentralized finance. Our core principle is to promote and foster individual creativity, growing not only as a group but also as creative thinkers and builders. To learn more about us, check out our website www.qicapital.org and our “Qi Podcast” via www.buzzsprout.com/1729379/ or engage with us on Twitter: @QiCapital.
Disclaimer
Some members of Qi Capital own or farm DRC. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token or participate in any farms. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice. All market prices, data, and other information are not warranted as to completeness or accuracy, are based upon selected public market data, and reflect prevailing conditions and the author’s own views as of this date, all of which are accordingly subject to change without notice.
