Launching Sovreign
What is Sovreign?
Before we get into the details of the launch, the liquidity incentives and the roadmap, let’s summarise what Sovreign is and why we felt the need to build it in the first place.
DeFi’s USD Problem
A large percentage of DeFi Yield Farming is currently happening with three stablecoins: USDC, USDT, DAI. For example, just on AAVE, around $11bn (47% od TVL) is deposited across these three assets. None of the USD-Stablecoin lending pools on AAVE are earning more than 6% APY.
Since the beginning of 2021, the USD supply has increased by ca. 15%, and even the lower estimates point to a ~8% annualized inflation.
Most USD-yielding activities are underwater on real terms (i.e. less inflation)!
This is the largest problem the emerging DeFi space has ever faced, notwithstanding the centralized and censorable nature of the vast majority of USD-stablecoins.
As DeFi users ourselves, we need a more sound monetary base with stronger inflation resistance for DeFi farming to be productive.
Believing in Store-of-Value and cryptocurrencies generally as an alternative to Modern-Monetary-Theory while having a substantial part of fixed-income activities denominated in USD is an incoherent stance that will become more obviously paradoxical as the USD moves into higher and higher inflation in the coming months.
Therefore, we developed Sovreign, which derives its name because the Store-of-Value (SOV) REIGNs supreme. To provide an alternative monetary primitive to the space — an asset that is stabiler than most volatile cryptocurrencies and acts as a novel crypto-native SDR.
The Sovreign Basket
The SOV token is stabilized and backed by a pool of Store-of-Value assets and tracks the Net-Asset-Value of the pool over time, like an index.
At the start, the pool contains 6 assets of 3 categories:
1- Cryptos: Ethereum and Bitcoin
2- Commodities: Gold and Silver
3- Currencies: Swiss Franc and US dollar
Each of the 3 asset-categories will comprise a part of the pool as determined by the community. The SOV token can be minted by depositing any one of the assets into the underlying pool.
The underlying Pool is a BalancerV1 CRP with the Router contract as the single Whitelisted LP (Liquidity Provider). When tokens are deposited through the Router, the Balancer LP Token is wrapped, and a corresponding amount of SOV tokens are issued.
The Rebalancing of the basket to match the desired weights works the same way as in all Balancer Pools — the internal price set by the pool depends on the set weight for each asset and the actual amount deposited — if one asset is over-represented, the price of that asset will be lower then in other outside the pool. This creates an arbitrage opportunity that incentivizes traders to swap over-represented for under-represented ones.
This model of rebalancing has been proven to work very well in other Balancer Pools.
Dynamic Basket Composition
As the notion of what is good Store-of-Value is a highly debatable concept that evolves over time, the wisdom of the crowd must be leveraged to define the set of assets and the respective weights each asset has in the pool.
We implemented a continuous voting mechanism through which the weights of the assets in the Balancer pool can be updated every week but in a manner that avoids large volatility in the weights, causing impermanent loss to the LPs of the SOV pool.
During each week (epoch), holders of the REIGN token can vote on the desired weight — the vote is reflected as an update of the continuous tally, which is shifted up or down depending on what the users voted and how much voting power they have. At the end of the week, the new weights are set in the balancer pool as the average between the continuous tally at that point in time and the previous epoch’s value.
To offset the disincentive of the gas cost incurred by users voting on allocation, we added a 3% increase in the SOV pool deposit rewards for users having voted during each epoch.
Once the new weights have been set, they are adapted linearly over the course of 2 days by calling the pokeWeights() method on the underlying Balancer pool. This action will be done by Arbitrageurs using the internal price change resulting from updating the weights to arbitrage the pool back into balance against other liquidity sources.
Liquidity Position Price
A rather novel concept implemented in Sovreign is the addition of a price backstop utilizing a mechanism through which any user can buy an existing SOV liquidity position to redeem the underlying assets if the spot market price of SOV drops way below its fair value set by the basket’s NAV.
Each time a user deposits underlying assets into the SOV pool, a new Liquidity Position is created that allows said user to withdraw the underlying assets by burning SOV. This means that if the spot price of SOV would drastically drop below its Fair Value, only those users that initially minted SOV can exploit the Arbitrage opportunity of buying SOV on the market below cost and redeem it for the underlying assets. This is not desired as it adds a layer of inefficiency and reliance on those users making it more difficult in these edge cases for the price of SOV to stay pegged against the Fair Value. Thusly, we added the mechanism of “purchasing” SOV Liquidity Positions. Each time a Liquidity Position is created, the user sets a price for it; this price is expressed as a percentage of the total position value held by the user and is capped at 10%. If another user wants to purchase an open Liquidity Position, they need to pay the price set for the position to the original owner — who now loses the ability to redeem the underlying assets.
This mechanism incentivizes holders of open Liquidity Positions to exploit Arbitrage opportunities and make the price of SOV stay pegged to the Fair Value — as otherwise if the spot price of SOV drops below the Liquidity Position price — other users are incentivized to buy SOV and redeem it for the underlying by buying a Liquidity Position.
The Launch
The Sovreign Protocol has been deployed on Ethereum Mainnet on Wednesday 18th of August.
All pools are open for deposits immediately and rewards will be calculated starting from Sunday 29nd of August at 23:59:59 UTC (timestamp 1629676799). Rewards are claimable weekly each Sunday at 23:59:59 UTC (every 604800 seconds)
To incentivize liquidity and distribute the REIGN tokens among users the following rewards programs are in place:
- 2'396'634 REIGN tokens are proportionally distributed each week between all holders of open SOV Liquidity Position. If the holder of open Liquidity Position votes on the weekly pool rebalancing they get an additional 3% reward. The rewards are halved every 2 years. The SOV pool will initially be capped at 4mio SOV minted.
- 480'769 REIGN tokens are proportionally distributed each week between all users staking into the governance contract. These rewards can be multiplied up to 1.5x by locking the stake up to 2 years (linear increase). The rewards are halved every two years.
- 96'153 REIGN tokens are proportionally distributed each week between all users staking the SOV/USDC Sushiswap LP into the farming contract. This program runs for 100 weeks.
- 96'153 REIGN tokens are proportionally distributed each week between all users staking the REIGN/WETH Sushiswap LP into the farming contract. This program runs for 100 weeks.
Two AMM Pools have been seeded on Sushiswap for SOV/USDC and REIGN/WETH, respectively — with the initial liquidity being provided by the early community members.
What’s Next
While the development, testing and launch phase is coming to an end with the release, the real journey is just getting started.
We know that dethroning the USD-pegged stablecoins is a tough challenge and will require a lot more than just smart contracts. It is a work of educating the community about the looming danger of USD-Hyperinflation, doing Business Development to get the extensive DeFi protocols to have SOV accepted as collateral for lending and similar. We are also working on further improving the front-end with an analytics/info page.
To accomplish all of the aforementioned goals, we are looking for part-time and full-time positions to participate in the DAO:
- Communications & Integrations development
- Front-end Development (React + Next.js)
- Backend Development (Rust or Go)
- Smart Contract Developer (Solidity + Hardhat)
- Business Development and Partnerships
The DAO treasury will be funded via a MISO auction on Sushiswap’s (more details soon) in the coming weeks. The funds will be exclusively held by the Treasury DAO for the sole purpose of development and maintenance of Sovreign, thusly leaving compelling rewards for talented individuals that want to get involved.
If you are interested in learning more about the open position join our discord and reach out to us!
Let the Discussion about Store-of-Value Begin!
We are extremely excited to get the real conversation about Store-of-Value started — the truth is only found through discussion and challenging of preexisting points of view — for this reason, we invite everyone to our discord to discuss what the allocation of each asset should be to make the ultimate SOV token because the Store-of-Value REIGNs supreme!
