Chainflip’s Launch: Auctions, Swapping, and TGE
Key Points
DISCLAIMER: This article is intended as an overview of what we have modelled to happen in the Chainflip ecosystem over the next 6 months based on comparable projects and the research we have conducted. It is in no way financial advice, and should not be interpreted as such. FLIP is intended for consumptive purposes and should not be considered an investment asset.
With the Coinlist sale run by the Cross Chain Foundation very much underway, and registration closing on the 28th of August, we’ve all been wondering what comes next after TGE, which is expected on or around the end of October. What the token does before swapping goes live may not be so clear to everyone.
Looking back at our Auction design docs, we wanted to break down what we expect in the opening weeks of the Validator Auctions and present a recap of our findings and provide some additional context around post-TGE events that we think will be important for the protocol and ecosystem.
Validator Returns and Demand
Starting with the validator rewards - mainly referencing this Incentive and Emission design documentation which goes into detail explaining the Validator yields: https://docs.chainflip.io/concepts/components/incentive-design-emission-and-burning
From it, I want to draw your attention to this table which describes the relationship between Validator emissions, minimum bids, and the return yielded in FLIP.
Pay attention to the 7% column - that’s the emissions parameter that has been settled on in the design process. Because the validator auctions start with a minimum bid of zero - the TGE validator yields are going to be extremely competitive - for example, if you look at row one with a minimum bid of 25k FLIP, the APR is 168%. Compared to other more mature protocols, there’s a big incentive to get involved early. Just look at Axelar and THORChain as examples of what the yield usually settles at.
Based on these numbers, there’s likely going to be a scramble between all the different parties to capture those early rewards. stFLIP users should also be able to get in on it on day one too, meaning that not just professional operators with large amounts of collateral can get exposed to this. Technically speaking, the Validator auctions will be live before TGE, meaning that staking can begin right away and emissions will be turned on at the TGE.
With yields for Validators of other cross-chain protocols rumoured to be around only a few percent when running costs and complexity are factored in, it may make sense for others not yet involved in the project to come forward to participate considering running costs for Chainflip nodes are so much lower than most cross-chain projects at only around $100/mo, depending on the level of redundancy and service costs for endpoints.
Auctions Dynamics and Tokens Available
As everyone competes for the auction slots, it will be interesting to observe how much FLIP will be locked up, and how much FLIP Validators will need, and whether or not the models prove correct. The circulating supply of FLIP tokens at launch is only 22m of the 90m launch supply, but we already know there are other factors at play.
The Chainflip Protocol has a maximum of 150 validator slots due to scalability restrictions on its signing scheme. However, given that Thunderstake is also launching stFLIP, we expect that every FLIP holder will be able to participate, at least through the liquid staking derivative. Chainflip also has dozens of high-profile strategic investors and the Oxen Foundation who between them have over an additional 22 million FLIP tokens in the Validator lockup category which don’t count towards the circulating supply. Chainflip Labs’ sister company, JIT strategies, will also be staking from the project reserves, as Validator revenue forms a core component of our group’s long-term business model.
In total, it looks like there’s going to be over 50 million FLIP available to be used in the Auctions immediately after TGE, but only 22m circulating on the market.
Referencing the information on the Token page on the website, we can derive some interesting clues about what might happen in the opening weeks. Many of the locked tokens can also be staked into Validators, meaning that the actual requirements for Validators are likely to be much higher and will likely create strong competition between strategic investors, the Liquid Staking Product and stFLIP holders, as well as many other independent and professional validator staking providers for those top 150 slots.
Given the circulating supply on TGE is quite limited at just 22m FLIP of the 90m totally issued at genesis, it could create a lot of demand for those circulating tokens as prospective Validators seek to compete in the auction market.
The Auction Itself
So going back to the auction dynamics, how much FLIP are each of the 150 validators going to need? It is impossible to predict the future but our best guess based on the modelling would be between 200,000 to 400,000 FLIP tokens being the minimum stake range, as the protocol matures. If 200,000 FLIP is the amount required to participate as a validator, the return from emissions would still be 21%, based on an emission rate of 7% and the numbers in the first table above, which is an attractive rate in the market today.
If the staking rate were to equalise in accordance with current market rates, it’s more likely that bidding will continue until the return rate drops to around 10%, which would be about 400k FLIP tokens, making up 66.67% of the total launch supply, which is actually more tokens than will even be available to be staked in the first 6 months of the project (about 60m according to the unlock and emission schedule).
In other words, we don’t expect that there will be enough tokens out there to meet the demand of the Validator auctions with the rewards on offer.
Swapping Launch
With THORCHain clocking an impressive $101m in daily volume recently, mainly through native BTC swaps, we see it as a really encouraging signal for Chainflip’s swapping launch, which we expect to happen within weeks of the TGE. Swap Streams in THORChain have proven that if you offer efficient native swaps, the volume comes.
This will help offset the emissions from the Validators and generate revenue for the protocol which will be the next phase after the TGE and the initial bidding has settled to an equilibrium. We have good reason to believe that Chainflip will offer the most competitive swaps on native BTC and the other assets it supports, given that swaps through the JIT AMM are much faster than any other platform whilst offering index pricing to traders moving large amounts of capital between assets.
THORChain has also returned to a whopping $820m FDV as one of the top-performing tokens this whole month, despite a security scare last week. Referencing the buy-and-burn model detailed in the protocol documentation, If Chainflip can match THORChain’s volume on BTC, then the token market will be underwritten by the buy-and-burn mechanism so that validator rewards will be offset by protocol consumption. See the chart below to see the effects of the buy and burn on the protocol according to the model.
Of course, no one knows what the FLIP token is going to do in the wild. All sorts of things could impact the market conditions both within the ecosystem and globally. Chainflip is here for the long term, and our team’s goal is to provide sustainable utility to Web3 users the world over by building a protocol and product that can genuinely displace the role of centralised exchanges in the daily operations of the Web3 community, with the benefits of true decentralisation and permissionlessness.
We have to launch a successful swapping protocol, avoid any reliability and security issues, and navigate a very complex market environment. The TGE is likely to be extremely volatile and anyone looking for a quick flip (no pun intended) by participating in the sale should reconsider whether this project is the right fit.
Summary
We think the auction dynamics are a very exciting aspect of the Chainflip project and are likely to generate a lot of energy as the TGE occurs, along with some really exciting developments in the cross-chain market space that prove our thesis on the utility of the protocol. We don’t know what’s going to happen on launch, but hopefully, you found a recap on these models interesting.