Float-Bank, a fair launch fairytale and the true birth of a next-gen FED?
Float genesis is finally here, and it’s time to release our Float-Bank research report
Introduction
Float is a next generation algorithmic stablecoin that does not peg to 1 dollar. Instead, it’s growth correlates with the growth of Ethereum and is much less volatile than Ethereum. In simulation for 2020, Float peg prices grew 50%+ while Ethereum grew 500%+. Bank is the share token of the system that represents the voting right of the system, benefits from expansion, and absorbs sell pressure from contraction. Float, the stablecoin, is in its genesis phase now.
The fair launch
The system’s launch began with a fair distribution of Bank in late January when almost all other algo stablecoins lost their pegs except Frax. Phase 1 Whitelist was given to anyone who voted in Snapshot once or more, or participated in some of major protocols’ governance. A limit of $30k per person was implemented to prevent whales from dominating the launch pools. A total of 40k addresses were eligible for the phase 1 of the launch, and more than 3000 participated.
The team even went to the length of forking snapshot just to allow multiple selections within in one vote: select which tokens can be used to mine Bank in Phase 2 of the launch. The voter turnout for the proposal was a staggering 58%. To many people’s surprise, YAM beat UNI and Badger to join YFI, SUSHI, ETH and WBTC as the five additional tokens eligible for phase 2 mining. YAM was the OG fair launch algostable project along with YFI and SUSHI but dwarfed by the rest of the list in terms of current market cap. Yam’s victory was a further testament to the fair launch spirit and the quality of the Float-Bank’s seed community
Words spread quickly as people like this democratic and fair way of launching a new project. Nevertheless, a lot of people learned about Bank but were not eligible for phase 1. In the final hours right before Phase 2 launch where everyone was eligible, Bank price shot up to $1600 from $800 in less than a couple hours. It was spectacular to behold the chat groups and the price chart simultaneously. The next day when Phase 2 launched, Peak TVL was $1.5 billion.
The Team and Community
The team has a style of its own. Four core team members each play a role in the Beatles. British accent was quite obvious from the community calls. From articles to community calls and transcripts to answering questions in the community, the team has a very clear channel of communication and are generally very responsive. They have an ambitious vision to make a global currency but are very down to earth in terms of laying the groundwork. They are fully aware of the competitions as they even released an article to compare Float with Fei and Rai, and are quick to learn from Fei’s mistakes to improve the genesis process. The team just released their interactive litepaper that illustrates well what could happen with the system under different assumptions, which is a class leading effort by any project.
The team is also cautious and insists to have the audit done before the Float genesis. It takes another 6 weeks to finally get to the exciting moment.
Something interesting to observe. The core community Wechat group for Float-Bank has about 330 people and are self-dubbed shareholders of a wild FED. But 6 weeks was too long, price dropped to 1/4 of the previous peak and the member count dropped down to 299 before the genesis detail was released. Same goes for the discord group where there were less than 1 message a day at a time as people seem to forget about the project.
Twitter follower count is ~7400, less than OHM at ~8700, Reflexer at 10k and FEI at 24k, more than the previous generation algo-stables, with ESD/DSD at 3400, Basis Cash at 6300.
The Mechanism
The litepaper and the gitbook have done a really good job at explaining the system so we are only going to attempt some simple explanation here and add a few comments
Float Bank is a two token system where Float serves as the stablecoin (not pegged to $1) and Bank serves as a share token that represents governance right, benefits from expansion, and absorbs sell pressure from contraction. The protocol launches by fairly distributing Bank to derive a Bank market value, and then leveraged the fairly distributed BANK to mint initial Float, and then further use the remainder of the Bank distribution schedule to provide yield farming reward to mint.
The Float target price is not pegged to $1 but correlates with ETH growth and significantly dampened, a 100% price daily change in ETH would only cause the target price to change by 0.2%. 700% ETH growth in the past half year only cause the target Float price to go up by about 40%
In general, 1 $Float (with a starting peg of $1.618, the golden ratio) is backed by roughly the same amount of ETH. The ratio of ETH in the reserve (called basket) to the circulating Float market cap is called basket factor and the system is designed to use Dutch auctions to bring the basket factor back to 1 (could be changed to lower numbers)
There are 4 cases:
Expansion: Float over peg, basket factor >=1
The protocol issues more Float to auction them off in hope to bring Float back to peg, the price will be paid in ETH+BANK, the part within peg will be paid in ETH and the part over peg will be paid in BANK. BANK will then be burned. The basket factor will drop but stay >= 1
This will likely be the case in the coming month since a 10% supply increase limiter has been implemented. Float price will likely stay above peg for a while since there’re very limited initial Float supply and relatively high Bank reward for early Float minters. See below our own Model for post genesis analysis.
Expansion: Float over peg, basket factor <1
The protocol issues more Float but will only sell to ETH, in hope to bring the basket factor back to 1 quicker. This will be the case if Float is in high demand but ETH price dropped.
Contraction: Float under peg, basket factor >=1
The protocol will use ETH in the basket to buy Float off market to bring Float back to peg.
Contraction: Float under peg, basket factor <1
The protocol will use ETH in the basket as well as mint some new BANK to buy Float off market to bring Float back to peg. This is the only scenario dilutive to Bank holders.
A few other key highlights in the mechanism
- Dutch auction is a proven mechanism by Maker and Gnosis to reach a fair price. It settles instantly and is Dex and flashloan compatible for the best capital efficiency
- The expansion cycle could burn a significant amount of Bank which supports Bank price other than pure governance right, just like Maker.
In general we think that the mechanism by Float protocol is very thoughtful and covers most scenarios, and will likely achieve at least Frax level stability. Considering that its partial collateral asset is non-stable, the mechanism is even more well thought out. Tying the system growth to ETH growth(could be other non stable assets) is also probably a better idea than tying it to centralized stable assets. You can play with the simulation in the litepaper to see it for yourself.
The genesis
From May 9th to May 15th, for each Bank staked in the Bank only pool, 100 Float will be mintable for $1.618 each. To encourage long termism, the token staked will be locked for 8 days without receiving any reward if the staker decides to withdraw.
At current price, it means that $700 BANK staked allows a holder to mint Float worth $161.8. However, is this how the price action is going to play out? Likely no.
While the litepaper simulation gives a good simulation for a longer term system performance, it has not touched upon how the genesis and the subsequent initial auctions could play out. This is why we devised and published the following model for anyone interested to fiddle with. We lay out the major parameters, assumptions and corresponding results here for your viewing pleasure.
See this link to play with the spreadsheet.
The bull case
We set the bull case at $2000 Bank, $3 Float, and 80% Bank only staking ratio to mint Float. We think $2000 is possible since last time it went to $1600 all due to hype, this time the product is real and ETH has gone up by 80%. Float is way above its peg price $1.618 at $3 due to very limited supply and potential high APR for the Float and Float-eth pool. We also think a 80% Bank only staking ratio is reasonable since 45% of Bank have been staked in the pool less than 2 days into genesis, and with 80% of the Bank supply locked, it will be much easier to pump the Bank price.
We think the market has not priced in the effect of the potential Bank burn after each auction. The price could react quickly once the results of the first few auctions are released. However this is just some wild guess and cannot be modelled, so we have to set the price right before the first auction and see what happens assuming those prices can persist.
The auction
After some discord conversation with the team, we came to the understanding that in order not to make the market too volatile, the max supply increase will be limited to 10% of the existing supply. The auction frequency will start at 1 auction every 24 hours but could speed up to 30 minutes an auction later. The frequency upgrade will span out in 4 weeks.
Each auction will auction 10% of existing Float supply but at a dynamic discount where the discount starts high at 3% and will linearly decrease to 0.2% as Float price starts really high at $3 but approaches peg gradually. The Float price will be something like, 3, 2.9, 2.81……1.623, 1.62, 1.618. The Float-ETH staking ratio also goes up linearly from 50–80% as Float approaches peg.
We believe Float price will act in such fashion because initial Float supply is very limited and the Float-eth pair reward will be quite handsome that it could cover the price drop, which will attract some buys even at this high price level. On the other hand, we assume Bank market cap stays constant while Bank is burnt after each auction but ignore Bank mined after genesis for simplicity. We hope to derive a Bank price and a series of stats that best describe the whole system after burns
Nevertheless we cannot predict market volatility so this is hopefully our best attempt.
The result is quite astonishing. After 40 such auctions, Float price will drop from 3 to 1.6 and Float market cap will grow to 362 mil, Float issuance at about 226 million. What’s more interesting is that out of the 40 auctions, 30 of them will burn more than $750k worth of Bank. A total 32 million worth of Bank, or 17.5% of the circulating Bank supply is burnt, sending Bank price from $2000 to $2425.
The mid case assumed Bank price at $1200, Float starting at $2.5. The model result gives a 101 million Bank market cap, 8.5% Bank burnt, $1319 Bank price and a 125 million Float market cap,
It’s not necessary to hold model results accountable for accurate predictions, so the short take away is that we could be looking at $2500 Bank, 200 million Bank market cap, 20% circulating Bank burnt, 300+ million Float market cap. Compared to 700 million Tribe market cap and 1 billion Fei Market Cap, even the bull case Float-Bank still feels like a steal.
Valuation comparison with other decentralized stablecoin project
According to the table above, to take the median or Average of all the Share/coin marketcap ratios, we are generally looking at 1:1 share to stablecoin ratio with a lower bound of 0.5 and an upper bound of 3. If we exclude Luna then we are looking at 0.5–1 range. We think that Bank might have some premium and should be worth closer to or even above 1 for the following reasons.
- Bank is fair launched and carries the weight of community governance.
- Initial Float supply is very limited, It may take a while to reach full potential, see early Maker/DAI ratio.
- Circulating Bank is half of total Bank supply, compared to FXS only has ~10% of total supply circulating.
- Fei launch exploited its issuance potential, even half of the fei has been withdrawn after FIP-2, fei issued is still way more than it should at the current stage.
We have the short term bull case at less than half the Tribe-FEI numbers, mid case close to current Frax and peak BAS-BAC numbers. In the long run we could see the ceiling higher than Maker/Luna current valuations as the 2 industry giants have demonstrated what’s possible with the decentralized stablecoin business.
Float-Bank does need to step up its business development if it were to achieve long term commercial success. Glad that from the talk we had with the team, they have some collaborations and use cases lined up ahead and will release them when the time comes.
About NGMI Capital
We are a bunch of crypto degens from various backgrounds who may or may not make it.
Some of us come from world class institutes, some are more native than others.
We like to troll but we also have serious thoughts.
We all believe in the crypto future but may not agree with each other.
We probably should turn this into a DAO but we just stay as a small chat group.
Not financial advice.
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