Metamorphosis: Transforming Bribes into BTRFLYs

You ever watched Survivor?

I have to admit, I’m a bit of a fan myself. Always loved the deception, the politics, and, above all else, the strategy. 

Amid all the scheming on the show, one tactic reigns supreme: the blindside. 

For those of you *slightly* less familiar with Survivor, a blindside occurs when players team up to try to vote off a powerful opponent, who has no idea of the danger that lies ahead. In almost every case, the coup is made possible by convincing a player outside of the core alliance to bring their votes into the fold and usurp power. 

These attempts are almost always made to swing the result, but rarely have a meaningful impact on the game. Survivor is ultimately a zero-sum universe. There can be only one winner, and victory must necessarily come at the expense of someone else, but simultaneously cannot be achieved alone. Alliances and trust matter deeply, so mercenarial behavior is considered a negative, unless absolutely necessary. 

Needless to say, the swing vote is a position of tremendous power, but also danger. Make the wrong decision, you doom yourself and your alliance. On the other hand, the right decision can immediately catapult you to the top of a winning team and put you in prime position to win the million dollar prize. In any case, there is only one vote that matters, the swing, and players will do whatever it takes to secure it for their team.  

If you can remember a time before the recent market vomit, all this discussion of voting, mercenary activity, and bribing may ring a bell. As it turns out, swing votes aren’t only meaningful in Survivor- they’re also the endgame of the Curve Wars. 

Without retracing too much widely circulated history, the Curve Wars is a big ol’ battle for liquidity. Ownership of Curve (CRV) and Convex (CVX) gives holders voting rights on how to allocate that liquidity. 

Like you, I literally don’t care at all how it’s allocated. In fact, with the exception of certain types of protocols, very few people care exactly where their liquidity gets allocated- just so long as it’s efficiently generating fees. The groups that do care about liquidity allocations are willing to pay handsomely for the ability to control them. 

Put yourself in their shoes, and ask yourself this: What would you pay for a single vote toward a goal? It’s almost impossible to answer. The result is a factor of too many variables- how many total votes are there, how many do you have already, how many are needed to win? 

On the other hand, what if you knew that the vote that you were looking to purchase would guarantee you victory in the vote. Now the math is much easier- I’m willing to pay every disposable cent I have toward the cause. This is the value of the swing vote. 

Now unlike the example above (and Survivor), votes in the Curve War aren’t part of a zero-sum game. Multiple protocols can increase their liquidity availability through bribes during any given round, and this ‘deciding-vote auction’ increases capital efficiency by allowing bribe pricing to be continuously re-calibrated.

So, who has the deciding vote in the Curve Wars? As it stands (1/31), Redacted is the fourth largest DAO holder of Convex, behind Frax, Badger, and Mochi. Of the three ahead of BTRFLY, only Frax is better positioned to continue growing their Convex reserves. I will put my neck out there and say that, within 6-12 months, max, Redacted will be a top-2 holder of CVX. So, if you’re a protocol looking to bribe, there’s a glaringly obvious place to start.  

Needless to say, the Olympus bootstrap methodology is only sustainable in the extremely short term. Between OHM itself lowering their APY & the implosion of peers, Redacted made the prudent decision to both slash emissions down to 1,000% APY (~230% APR) and revamp their tokenomic model. 

The second major recent pivot by the team is the introduction of the Harberger Tax, a new method of taking on cost-efficient capital for the DAO. The creation of bonding to facilitate protocol owned liquidity was a key development, but we’ve seen protocols such as Dopex, with double bonding, and Olympus, with v2 bonds, tweak the technology to sweeten incentives.

One of the major complaints of the traditional bonding methodology was that protocol owned assets aren’t necessarily deployed in a way that is directly linked to price. Furthermore, bonding incentivizes mercenary action. Yield-hunters chase and snipe the profitable ROI bonds to flip on the secondary market. If 100% of bonds were getting flipped (which they aren’t), the Treasury would effectively just be trading their token on the secondary market for the target asset, but at a discount. This is price suppressive, and is a driving force for the ever-feared dilution. 

This inefficiency is because purchases are being driven by those with the most resources, rather than those with the greatest willingness to pay. Redacted uses another novel solution to address this: the Harberger Tax. A percentage of tokens from each ‘bonding’ transaction is now taxed and burnt. Investors seeking only to hoard assets and maximize yield will fundamentally receive less value from the voting and governance tokens than protocols that seek to use them for their intended purpose. This will lower their willingness to pay, and help ensure that future BTRFLY tokens are going to those who will actually use them to influence votes. 

At its core, this is effectively a timed auction, where the 'n' highest bidders at the end of each period have their swaps executed into BTRFLY. In this case, bids are effectively set by willingness to accept lower ROIs. Remember that bots are interested in sniping bonds the moment that ROI > cost of execution. With Harberger, bots don't profit off of the benefits from holding BTRFLY, so their willingness to burn deposits (read: accept a lower ROI) should always be lower than legitimate holders.

Interestingly, this relationship not only adds utility to the tokens for protocols, but also increases the value created by each newly minted BTRFLY token, which should eventually pass through to non-protocol holders. The more of a bonded asset a protocol is willing to burn to receive BTRFLY, the more upward price pressure is placed on the token. 

Why stop there? Some of you may remember Prism Protocol, a Terra based application that sought to break down LUNA into its respective elements- a yield focused token and a governance focused token. This would allow LUNA holders to utilize the token for its yield and collaterability in a protocol like Anchor, while simultaneously retaining voting and airdrop rights. 

Redacted will draw on this same concept through the upcoming split of BTRFLY into two parts, one governance locked token, glBTRFLY, and one bribe locked token, blBTRFLY. Using their recent acquisition of Votemak, Redacted will actually be able to create a fully permissionless bribe marketplace- the Hidden Hand Marketplace. 

I think the magnitude of this is hugely underappreciated. The Curve Wars have drawn back the curtain on the value of ve-tokenomics, but is also fundamentally limited to specific pools, protocols, or cohorts. Now any protocol will have a centralized marketplace to deposit bribes and generate votes across a variety of products. In the next few months, the team will begin Harberger markets for DPX, TOKE, and FXS, expanding the pool of votes that protocols will be able to bribe for in the marketplace. 

blBTRFLY is designed to be largely held by “retail users looking to receive their in-flow of bribes from Hidden Hand and revenue generated by the protocol through bonds and yield.” A 16-week lock period rewards users with a portion of the 4% fee taken on bribes. Voters have no cost to using the marketplace. 

This tokenomic update will, importantly, continue to drive yield directly to token holders. Half of the fees generated by the Hidden Hand Marketplace will be passed through to locked stakers of BTRFLY, with the other half going to the treasury. This balance will allow the protocol to continue to grow and scale, but not do so at the expense of those believing in the team’s vision, as has increasingly become the case in recent months.  

Remember the token change? This even further expands the use cases for the marketplace. glBTRFLY gives Redacted the flexibility of creating a DAO-facing product. Holders will have their blBTRFLY tokens locked in the protocol to earn their 2% royalty on bribe fees. In doing so they sacrifice their metagovernance rights, which are then passed through into glBTRFLY. If we assume that 80% of bLBTRFLY is locked, and Price-to-Treasury multiple remains fixed, “lockers of glBTRFLY would essentially be getting 2 CVX and 1 CRV vote for the cost of one, subject to change based on protocol conditions.”

Redacted is currently (1/30) trading at ~$125mn Market Cap, with ~$75mn in the Treasury. Buyers of BTRFLY are paying a 67% premium to the paper value of the assets they receive. Why pay extra when one could just lock the CVX in Votium instead, and earn ~40% APR through bribes. Let’s take that as our baseline, think about what the value of the new Hidden Hand marketplace could be, and see if owning BTRFLY is actually worth the surcharge. 

Assumptions: 

- Start with $1,000 in each scenario, performance measured over 12 months. 

- Assume base price holds, APR holds, and cash flows/treasuries remain proportional. 

- Hidden Hand stats assume 10 protocol integrations, 20% the volume of Convex/Votium, scaling linearly over the course of the year. This averages out to ~$650,000/week or $33.8mn total over the year.

- Assuming OHM returns of only 11% APR because of recent volatility and skepticism.

Baseline - $1,000 of CVX: 

$1,000 of CVX @ 40% APR = $400

Total Profit: $400; 40% return

Redacted - $1,000 of (bl)BTRFLY: 

$382 of CVX @ 40% APR = $191

$209 of CRV @ 40% APR = $104

$186 of BTRFLY/OHM SLP @ ~44.6% APR = $83

$1,000 of Hidden Hand @ ~27% APR = $270

$55 of OHM @ 11% APR = $6

Total Profit: $654; 65% return

The bonus return of 25% from BTRFLY is almost exactly equal to the current premium that an investor would pay for BTRFLY over treasury assets - 67% premium to treasury value vs. 62.5% bonus return for BTRFLY over CVX. That’s not to mention the diversification and alternative yields offered by Redacted. 

Honestly, I think that my assumptions are on the conservative side. Curve likely yields more than 40% APR. Redacted already has multiple protocols lined up for Hidden Hand, so my 12 month linear scale up is probably more like 6-8 given standard DAO difficulties, or sooner if things go well. Olympus likely returns 100%+ or 0% (I’m betting on the former). An upside scenario here probably looks like a Total Profit in the second scenario of closer to $800, or 80% return, vs. the 40% offered on CVX alone (+100% difference). Furthermore, complaints before were largely focused around the yield not getting passed to token holders efficiently, but remember now that half of profit from bribes (not all assets) gets passed through directly to blBTRFLY lockers. The rest of revenues should apply consistent upward pressure to both token backing, which, combined with lowered APY, should directly affect price.

I’m excited for the next twelve months of building, but, hey, it’s probably nothing. 

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.