Alpaca: Alpaca, the new Defi in the sprint

Alpaca is in a track with clear and growing demand, the overall quality of the project is relatively good, and it is a potential project worthy of attention

Research Institute: Mint Ventures

Researcher: Xu Xiaopeng

Section 1

Research Report Highlights

▌1. Core investment logic

Alpaca is in a track with clear and growing demand, and the overall quality of the project is relatively excellent, which is a potential project worthy of attention.

Market maker market size is basically the same as the total size of DEX. In the long term in the rising period, and the subsequent arrival of specialized institutions, conducive to the continued growth of business volume of high-order market-making financial products such as Alpaca

The project has a very good and diligent team, its innovation, product iteration speed, industry direction judgment, community operations and other aspects are reassuring

There are several new developments that may bring significant marginal increment to the overall revenue and profit of the holders, including: the completion of SDK development to facilitate more external protocol access, capital efficiency and new interest income from the launch of AUSD, institutional business expansion, etc.

The project is currently on the shelves of CEX including Kucoin, MXC and Gateio, and is not on the line of the first-tier big firms, especially Coinan

▌2. Valuation
Whether compared with similar leveraged lending projects on BSC or with mature lending projects in the industry, Alpaca’s current valuation is in a reasonable and underestimated range.

▌3. Key Risks
See “Internal Risks” and “External Risks” in Fundamental Risks for details.

Basic information of the project in Section 2
–The project’s business scope

▌1. Project scope of business
Alpaca is the largest leveraged lending agreement on the BSC, which is essentially a derivatives and money market for decentralized market makers. Market makers (liquidity mining miners) can leverage a larger market making principal through the Alpaca agreement to enhance their absolute return on market making; lenders can earn lending interest by lending funds.

For decentralized exchanges, Alpaca provides liquidity to improve their capital efficiency by connecting borrowers (market makers) and lenders.

Since lending and mining through Alpaca uses leverage, the user is also a process of shorting longing the asset while mining. In this way, Alpaca actually provides lending + leverage services, except that currently the main scenario in the AMM trading platform for liquidity mining.

▌2. Project history and roadmap
The official appearance of the Alpaca project was on February 26, 2021. After the first article introducing the project “Introducing Alpaca Finance” was published on twitter and medium, it has been operating for more than 4 months so far, and its core product has been online.
The team is very efficient in what they do and the roadmap has a very detailed list of work goals –
The work completed in Q1 (about a month in real time) centered around: early token distribution, launch of the minimum available product and Alpaca liquidity mining, code audit and initial token empowerment.

The Q2 team went into full gear, adding a richer lending currency and leverage pool, adding prophecy machine guards to prevent and control attacks, integrating the new DEX (Waultswap), experimenting with NFT-style campaigns on the marketing side, going live with single-coin leverage mining, and using this to give Alpaca tokens a new level of empowerment.

From the situation of Q1 & Q2, Alpaca team has very good performance ability and the product iteration is very fast.

There are many noteworthy focuses in Q3 and Q4 work plan, including: multi-chain expansion, improving the combinability of protocols, AUSD stable coin issuance and use case expansion, further empowerment of governance tokens, enriching the use cases of NFT within its own ecology, expanding Alpaca ecology through investment, expansion of institutional service functions, and entering the basic loan field.
Many of the above business directions are expected to bring Alpaca larger business volume improvements, such as cross-chain expansion of business, more assets, mining pools and DEX categories, and improved combinability of protocols.
According to the work plan for the second half of the year, it can be seen that Alpaca team is preparing to expand its business map to a broader financial sector from leveraged mining services.

▌3. Main products and business now
A. Leveraged mining for borrowing
Business logic and user roles
Leveraged mining is currently the core business of Alpaca, and has obtained $1.2 billion TVL through this business. leveraged mining is essentially a derivative of the lending business, and compared to basic lending platforms such as Aave, Compound and Venus, the largest lending platform of BSC, Alpaca’s users focus on going to DEX platform for liquidity mining after lending funds. Although users can also lend coins to mine on Venus, they are limited by the collateral rate of most coins, and the leverage multiplier they can obtain through loans is low. And based on the same collateral, miners can leverage more money to participate in liquidity mining through Alpaca, multiplying their returns (and risk).
There are four players in Alpaca’s lending and mining business.

Alpaca: Alpaca, the new Defi in the sprint

The lender, Alice, tops up her BNB into Alpaca’s pool, her BNB is then able to be borrowed by Defi miners for mining and Alice is able to earn interest on the lending as income.

Bob, a miner, wants to create a leveraged liquid mining position with a mining pair of BTCB (BTC in BSC)/BNB. He borrows BNB from the pool and then Alpaca Finance’s smart contract automatically converts part of Bob’s borrowed BNB into BTCB, intelligently adjusts the optimal funding ratio of BTCB to BNB, and then injects BTCB into PancakeSwap to inject BTCB/BNB liquidity and enjoy the LP benefits of PancakeSwap.

Erin is the liquidator and anyone can participate in the liquidation, but it is usually done robotically. When the liquidator finds that the risk rate of one of the leveraged positions is greater than the default ratio set by the system, Erin will automatically liquidate the leveraged position by calling the kill method in the contract in real time to ensure that Alice lenders’ funds will not suffer losses. There is also a bot within Alpaca Finance that uses 100% of the proceeds to repurchase and destroy Alpaca tokens.

Carlos, as a bounty bot, monitors the accumulated rewards in each pool in real time and periodically claims and reinvests these rewards as LPs, enabling Defi miners to earn compounded income, similar to the operation of a machine gun pool. For this service, he withdraws 3% of the reward pool into a developer fund to cover operating expenses, a role currently played by an official bot.

In this business model, Bob, a liquidity miner, is the bottom source of demand, and it is his pursuit of liquidity mining revenue that drives the entire leveraged business; Alice satisfies Bob’s borrowing needs through deposits and earns interest herself; Erin, a liquidator, ensures that the system does not incur bad debts and receives a liquidation reward; Carlos, a reinvestment robot, improves the overall system’s Carlos, the reinvestment robot, improves the efficiency of the whole system and collects a certain fee. The Alpaca project, which built this multilateral lending platform, receives 10% of the interest income from depositors as the main source of income for the current agreement. In terms of business model, it is still relatively simple and clear.

Long/Short Instrument
It is important to note that Alpaca offers not only a leveraged mining tool, but also short or long a certain asset for you while liquidity mining.
For example, if you choose to take a 3x leveraged liquidity mining position in BUSD-BTC through Alpaca, you have three options at this point.

  1. you are long BTC and want to go long BTC while liquidity mining, then you open a position with BTC as principal and borrow 2 times the value of BUSD, the contract will automatically sell part of BUSD for BTC to complete the 1:1 LP ratio, then you deposit the LP position with 3 times the market value of the original principal (50% BTC-50% BUSD) into Pancake and start mining. In this case, because the borrowed BUSD is partially exchanged for BTC, you are equal to doing more BTC at the same time, and when BTC rises, you can reap the double benefit of liquidity mining gain + BTC rise, the specific details of opening the position are as follows.
Alpaca: Alpaca, the new Defi in the sprint

you are bearish on BTC and want to short BTC while liquidity mining, then you open a position with BUSD as principal and borrow 2 times the value of BTC, the contract will automatically sell part of the BTC for BUSD to complete the 1:1 LP ratio, then deposit the LP position with 3 times the market value of the original principal (50% BTCB-50% BUSD) into Pancake and start mining. Mining, in this case, because the borrowed BTC is partially exchanged for BUSD, so you are equal to shorting BTC at the same time, when BTC falls, you can reap the double benefit of liquidity mining gain + BTC fall, the specific details of opening a position are as follows.

Alpaca: Alpaca, the new Defi in the sprint

You want to do hedging arbitrage. Then you will divide the principal into two equal parts and execute the above two strategies to hedge at the same time. Then whether BTC eventually goes up or down, the two strategies above can hedge the gain or loss from the fluctuation of the currency price, so as to arbitrage. At this point your two positions would look similar to the following chart.

Alpaca: Alpaca, the new Defi in the sprint

*The above strategies are all examples, users will have richer operational strategies according to their actual needs and scenarios.

Reading this may make you realize that the above mechanism does not seem to be so well understood by users who are just starting to try leveraged mining. Indeed, after a leveraged position is established, the profitability relative to the initial principal is not so easy to measure due to factors such as slippage, impermanent losses, coin price increases and decreases, and transaction fees.
In order to accurately assess the risk-reward ratio, professional users of Alpaca usually use a multi-parameter trial calculation grid to measure their expected returns from opening a mining position.

Product Depth
Because of the complexity of the product, Alpaca’s product has a certain depth, providing a product ladder from low to high for users who want to gain revenue through Alpaca.

Entry level: directly provide mainstream assets such as BNB, stablecoin, BTC, ETH for lending to obtain interest income, characterized by low risk, low difficulty and low return.

advanced level: conduct leveraged mining of stable coin pairs, such as USDT-DAI, BUSD-UST, etc., but pay attention to the slippage loss of opening positions, etc., characterized by medium-low risk, medium difficulty and medium return.

Advanced: to conduct leveraged mining of non-stable currency pairs, which requires the ability of gain trial calculation, risk balance, trend judgment, or use as a hedging tool or shorting more tool, characterized by medium-high risk, high difficulty, high yield, suitable for high-level financial players.

Business Data
The TVL (net money lock value) of Alpaca consists of: the leveraged mining position in the open position + the unloaned deposit balance + the pledged Alpaca-BNB liquidity mining LP + the pledged sAlpaca value, and the main source of income of the Alpaca agreement is the commission from the interest income of borrowing, so we mainly observe the utilization of funds on the deposit side here, and here we take June 2021 30, 13:00 Alpaca’s official data

After calculation, Alpaca’s overall capital utilization rate (total borrowings/total deposits) is 42.04%, higher than Venus (33.5%) and Compound (33.9%) in the same lending track, and slightly lower than Aave (44.6%), the overall capital utilization rate is still relatively high, in which the BNB part makes a relatively important contribution.
At present, Alpaca’s business has been on the right track. From the TVL & coin price correlation of Alpaca in the past 30 days, although Alpaca’s TVL will fluctuate with the coin price, but even if the coin price once experienced a significant drop of more than 50% during the period, the TVL always remained above $1 billion, and the fluctuation is much smaller than the coin price, which indicates that the impact of Alpaca’s coin price itself on the business level of the product is shrinking, and users use the product more for practical needs.

Alpaca: Alpaca, the new Defi in the sprint

B. Alpaca Ranch (Grazing Range)
Alpaca Range is a revenue pool launched by Alpaca in partnership with other projects on BSC, where users can deposit project tokens, Alpaca, to receive rewards in partner tokens and limited edition NFTs issued by Alpaca and the partner. at the same time, Alpaca also gives rewards to Alpaca for leveraged mining of project tokens on Alpaca.
This type of partnership model is similar to Pancake’s existing syrup pool + liquidity mining model, with the following benefits for Alpaca & holders and partners.

Alpaca & coin holders: the mining subsidies provided by the partner provide Alpaca with cash flow in addition to the interest share, which enhances the intrinsic value of Alpaca tokens, and also helps to increase the token lock-up volume and alleviate the selling pressure of the circulation.

Partners: formed for the promotion of accurate users, can get the potential users of the product and token investors; Alpaca can provide the project with liquidity from leveraged mining users, and quickly improve the depth of the pool.

In addition, Alpaca also issues limited edition NFT for users who deposit Alpaca quantity to meet the target. At present, NFT only has collection and display functions for the time being, and according to the official roadmap description, the specific equity use cases of this NFT will be explored within the ecology in the second half of the year.

Alpaca: Alpaca, the new Defi in the sprint

Up to now, Alpaca Ranch has reached cooperation with 9 projects, the specific list is as follows.

Alpaca: Alpaca, the new Defi in the sprint

We found that in addition to newer projects, there is no shortage of more famous BSC and multi-chain projects such as Belt finance, DODO, Boring DAO, etc., which can side by side prove the attractiveness of Alpaca within the BSC ecology.

C. Future Business
According to the team’s roadmap in the second half of the year, there are 3 pieces of business progress worthy of key attention, which are
There is no too much detailed information about AUSD for now, but it should be a stable coin product based on Alpaca’s interest-bearing assets (ib tokens) collateralized issuance. According to the team’s AMA in April, the business was originally planned to go live at the end of Q2. However, due to the continuous outbreak of security incidents on BSC in May-June, the team also increased the workload on security audit, which led to some delay in the release of some features.
AUSD’s collateral assets should be crypto assets that users deposit into Alpaca, such as stablecoins, BTC, ETH, BNB, etc. The minting method may be similar to Makerdao (just a guess). But like all stablecoin projects, AUSD was born with the same question common to other new stablecoins: what new value do you offer to users of stablecoins in a market with a strong network effect like stablecoin that makes them want to use you?
As with any new product, it is difficult for users to adopt a new stablecoin without “several times the benefits” compared to an old one.

USDT: The earliest and largest issuance, the first-mover advantage has built a strong monetary network effect, but the centralization and opaqueness has been criticized, and the market has been worried about its cash-out risk.

USDC: It was issued earlier and is second only to USDT in terms of volume. Although it is also a centralized stable coin, it is under strict regulation and uses USD as collateral, so the risk of cashing out is low.

BUSD: Second only to USDC in terms of issuance volume, although it is issued by Coinan, there is also regulation to pay attention to its collateral and issuance volume, and the risk of cashing out is also low. In order to promote BUSD, Coinan has given strong operational support such as transaction fee waiver to expand its application scenario, and it is currently the most widely circulated stablecoin in the BSC ecology.

DAI: The decentralized stable coin with the largest issue volume and the longest history, issued by Makerdao using the over-collateralization mechanism, has the largest network effect among decentralized stable coins

Due to the strong network effect and the existence of brand advantages, it is very difficult for new stablecoins to compete with the old players even though there is no problem in terms of security and decentralization, because the lack of scenarios will lead to a lack of demand for stablecoins, which in turn will cause the coin price to be unanchored from $1 for a long time, a phenomenon that currently exists with Venus’ VAI.
For AUSD minters and users, it may have two new values that make people want to mint and use it –
For the minters: the ability to deposit crypto assets and receive a return while also using the deposit certificate as collateral to mint AUSD, which, if the AUSD generates additional revenue, enhances the efficiency of capital gains from the same deposit and gives an incentive to mint.
For users of AUSD: Alpaca may first launch a leveraged mining scenario for AUSD within the ecology, allowing AUSD to have an early use scenario and revenue source, avoiding the embarrassment of minting coins with no place to use them, which is the main point of difference between AUSD and other pure minting projects – Alpaca itself can provide an early use scenario for AUSD without the need to find it externally, solving the problem of a cold start for the scenario.
Of course, AUSD will eventually need to expand its use cases outside of the Alpaca ecosystem, otherwise its ceiling will soon be reached. The expansion of external scenarios is ultimately determined by the volume and product impact of the Alpaca ecosystem.
Institutional business
Bringing more institutional and professional-level investor capital to the platform will either be one of Alpaca’s priorities for the second half of the year. This point in addition to the roadmap has been on the end, can be from two other events on the side of the evidence.
First, Alpaca was officially established in the Seychelles in early June; second, the team started recruiting for TOB positions such as commercial director, institutional growth, and institutional sales, and there are already some candidates in talks.

The establishment of a legal entity will allow the project to better meet the qualification requirements of the other party in cooperation with institutions, especially traditional financial institutions; and the recruitment of institutional positions reveals the team’s trend of shifting its business focus to institutions.
Why does institutional business become the project’s focus? This may be determined by industry trends, as well as Alpaca’s own product positioning.
As far as industry trends are concerned, the growth dividend in the crypto world is far from suspended, and the space for investment, arbitrage and transactional opportunities in it is much larger compared to the traditional financial market. As long as the channels for compliance into Defi gradually become smooth, institutional funds will certainly come down to dig for gold. Recent fixed yield 4% stablecoin income products from Compound as well as Coinbase have demonstrated this trend, and they are very attractive to institutional assets in a low interest rate environment around the world.
In terms of the Alpaca product itself, due to the leveraged mining and subsequent more complex derivative trading tools on the platform, the threshold of understanding and practice is extremely high relative to most ordinary users. Only professional players and institutions with professional data modeling capabilities and proven arbitrage experience are the best clients for such products, and while the absolute number of such users is far less than retail players, the overall amount of their funds is also far higher than that of retail players.
So, why would institutional users want to use Alpace instead of traditional derivatives instruments? Or is there still gold in the Defi market worth their while after the token reward bonus of liquidity mining has faded? The answer to this is probably also yes.
The reason behind this is that the underlying transaction mechanism of Defi liquidity mining, AMM, is not the same as the traditional transaction aggregation mechanism, and the revenue source of liquidity mining is also more complex and non-linear, in which the gold mining opportunity comes from the rapid growth of the crypto market on the one hand, and the radical change of the rules on the other.
For example, in talking with some experienced users in Alpaca community, they said that professional users choose leveraged mining as one of the arbitrage tools because on one hand, there is mining income from leveraged mining, which is the first derivative with no loss (interest) and can make up for the loss of other derivatives combined with it. But more importantly leveraged mining and options and other derivatives have different capital volatility curves, and the intersection of different return curves can lead to low-risk arbitrage opportunities. It is worth mentioning that Defi products, due to their combinability and openness, the gaming environment is also more complex, and while amplifying uncertainty and risk, there will be more arbitrage opportunities that can be captured flexibly.
It is perhaps based on these trends that the Alpaca team has increased its resource investment in institutional services.
Improving protocol composability
Currently Alpaca’s protocol interaction mainly comes from the direct use of users, from the protocol call less, because the function of leveraged mining is far more complex than the machine gun pool and the basic deposit and loan protocol, and Q3 Alpaca will increase the SDK to facilitate external protocols to use the leveraged mining function. Increasing business volume by improving the combinability of protocols is a very important tool, and Aave founder Stani Kulechov said in a recent AMA that nearly 80% of Aave’s current transaction volume comes from calls to external protocols, making Aave one of the most successful base protocols on Ether.
In addition, there will be innovative products such as cross-asset leveraged mining coming online subsequently.

▌4. Team situation
As a Defi project born only 4 months ago, the alpaca team still remains mysterious and anonymous, without disclosing information of any core members, and has never given relevant information about the number of team members, job composition and geographical distribution.
But such an anonymous team is impressive in the following aspects.

A. Fast product iteration and responsiveness
Alpaca team is obviously a believer and practitioner of agile development concept. The so-called agile development refers to a set of methodologies for software development with the evolution of users’ needs as the core and an iterative, step-by-step approach, whose principles include: advocating simplicity, embracing change, incremental improvement, rapid feedback, and moving forward lightly.

Alpaca: Alpaca, the new Defi in the sprint

Alpaca’s documentation library is very rich and supports English, Chinese, Thai and French versions.

Alpaca is promoting the project with such a work and product mindset, which is reflected in the community management, product interaction and code efficiency, documentation and other perceptible external aspects.

Specifically in terms of product iteration, Alpaca has maintained a steady rollout of big features and intensive small improvements.

The big features mainly refer to the core features that can be put on the product roadmap, such as the recently launched single coin pledge mining (LFY) and dual-asset lending. Smaller improvements include the ability to add real-time prices to the billing page to avoid loss of billing due to price changes. Quick response to such detailed requirements.

The team’s agility and quick response can also be seen in another unexpected event.

After Alpaca was launched, it quickly attracted nearly 1 billion TVL within a week due to its original open source code, crisp interactive pages and interesting image of alpacas. however, on March 4, Alpaca’s imitation disk project ran away one day after it was launched, leading to questions about the safety of the Alpaca project itself and a maximum TVL plunge of nearly 30% (from 1 billion to 700 million) in half a day. After the incident, Alpaca officials quickly responded on Twitter and in the community on the same day, giving a transparent explanation, reiterating that they were doing an audit with Peckshield + another company, and launched a bug bounty program on the second day (3.5), encouraging bug catching with high bonuses, and only one day later (3.6) officials announced the results of the first day of bug catching and made corrections As a project that has been online for only one week, the professionalism and participation of the community users and the responsiveness of the officials are all very impressive.

The diligence of the project on the product side can also be seen from the frequency of updates on the project Github, Alpaca’s current code updates and frequency is almost the highest on BSC.

B.Innovation ability
Alpaca is not the pioneer of leveraged mining, the initial practitioner of the model is Alpha (later expanded to BSC) deployed on Ether. However, Alpaca did not completely Fork Alpha’s code, but made a lot of innovations based on its code framework, which also laid the foundation for more innovative features and risk prevention and control later. So far, the innovations of Alpaca relative to Alpha include two-way asset lending (which Alpha also started to support in its recent V2 version), single-coin leveraged mining, AUSD stablecoin and cross-asset lending, and richer customization options when opening positions.

C. Deep understanding of Meme culture

With the Defi trend blowing strongly and the explosion of dogcoin and shiba coin this year, the word Meme started to be mentioned repeatedly in the community and in the dissemination operation of Defi project.

Meme refers to a popular Internet culture gene that is replicated and spread in a derivative way, somewhat similar to the “terrier culture” in Chinese, such as Jacky Cheung’s emoji packs and Zhang Jiahui’s “Come cut me if you are a brother” can be classified as Chinese Meme.

Alpaca: Alpaca, the new Defi in the sprint

The most successful representative of meme culture in the cryptocurrency circle is doge dog coin, which uses the dog’s head as a token symbol. The spiritual core of the meme culture in the cryptocurrency circle is: dissipating seriousness, anti-authority and geek spirit.

Alpaca chose alpacas as the project’s mascot and said in a serious way in the opening paragraph of the official document –

“Alpacas – what a majestic animal! We couldn’t think of a better mascot to represent our spirit. Alpacas love to live at high altitudes, meaning they’ll soar to the heavens as your companion on your DeFi digs ……”.

“Alpacas are nature friendly animals that walk with only very light grey footprints and 95% of the wool on their entire body is available, likewise, mining on Alpaca Finance, the super efficient BSC chain transaction consumes less gas than other chains… …”

Alpaca: Alpaca, the new Defi in the sprint

In the days after the launch, the developers made several changes to the alpaca’s image, combining IP images such as Harry Potter and Laser Eye. The most surprising thing for Chinese users was that Alpaca even grayed out the page and created an alpaca tribute to Yuan Longping, the father of hybrid rice in China, on the day he passed away.

Alpaca: Alpaca, the new Defi in the sprint
Alpaca: Alpaca, the new Defi in the sprint

The core team’s management of alpaca Meme culture was subsequently inherited by the community. Community users continued to secondary develop the image of alpacas, creating a large number of themed emoji packs, which became a unique cultural language within the community, as follows.

Alpaca: Alpaca, the new Defi in the sprint

D. Attention and investment on security
The team attaches great importance to the security of funds and contracts, and has arranged security audits by Peckshield and Certik before the official function is launched. In the May-June period when BSC security incidents were frequent, Alpaca was one of the few revenue projects that were not affected.

To prevent and control this risk, Alpaca has introduced a proprietary risk control mechanism they call “Oracle Guard”, specifically, when one of the assets in a user’s trading pair is on the exchange where it is listed This includes prohibiting liquidation, opening and closing positions, and increasing margin, all to protect users from trading at bad prices and suffering losses.

In interviews with community users, many of them mentioned the team’s emphasis on code security and transparency, saying that while the team keeps the code open source, they collaborate with volunteers in the community who have code auditing skills to conduct multiple reviews before formally submitting it for audit. This community participation in the audit practice, on the one hand, improves the community’s trust in the project, on the other hand, also improves the code security and efficiency.

In Defi Safety’s review of BSC on June 12 of this year, Alpaca’s security score was ranked number one, a rare achievement considering the speed of Alpaca’s product updates and the complexity of its business.

Alpaca: Alpaca, the new Defi in the sprint

Alpaca team’s agile development hard work, innovation ability, grasp of Meme culture and strong guarantee on security are impressive and highly recognized by the community. Moreover, Alpaca has not received any external venture capital investment so far, nor has it issued coins to raise funds through IDO or IEO. This is such a team, always maintain a high development spirit and rapid product iteration, in the product direction also shows the maturity of senior practitioners, where do they get their motivation?

I think this has a lot to do with Alpaca’s different economic incentive mechanism from other projects, which will be focused on in the later section [Pass Model Analysis].

Section 3

Business Analysis

▌1. Industry Space and Potential

Alpaca’s business started from leveraged mining, and is expected to cut into stable coins and cross-asset leverage this year, which can be seen as a derivatives and currency marketplace providing services for decentralized market makers. Unlike centralized exchanges, the liquidity of DEX is almost entirely provided by market makers. Moreover, compared to the higher market maker threshold of centralized exchanges, DEX allows every ordinary user to come over to provide liquidity and harvest transaction fee income through the AMM model, so the total liquidity of AMM model DEX can be regarded as the total market making capital scale.

According to Debank July 1, 2021 data, the top ten DEX using the AMM mechanism has locked in market-making liquidity of $33.77 billion (almost half of the total lock-up volume of Defi), this can be seen as the upper limit of the size of the professional market maker market, and this amount is still growing.

As stated in the chapter [Project Basics], Alpaca’s leveraged market making product is more complex and more suitable for professional market makers or institutions with arbitrage modeling capabilities (or the ability to use arbitrage models).

So how much of the current $33.77 billion DEX market making jungle is made up of professional market maker capital?

We don’t know the exact figure for now, but according to The Block research analyst Igor erdiev’s calculations of the current largest market maker in the crypto space, Wintermute, which is an algorithmic market maker designed specifically for cryptocurrencies, has at least $55 million in total market making capital on CEX and DEX. Wintermute is also one of the largest market makers on DEX platforms such as Synthetix, Tokenlon, and dydx, and its single-week trading volume on Bitfinex is about $2 billion, twice as much as the second place.

Even so, the market making capital of more than $55 million is not too big a percentage of the whole crypto world, and even the DEX world. It is believed that with the development of DEX and the popularity of compliance channels, more and more market making institutions will enter the market making field of DEX and increase the percentage of their market making capital in it, and such professional clients are the target users of Alpaca.

Considering the decentralized trading platform is the most important infrastructure in the crypto world, and the long-term trend of professional market makers’ funds increasing their share in DEX liquidity, the potential market size of Alpaca is also relatively large and expected to expand rapidly.

▌2. Pass-through model analysis
Alpaca uses a single token model, Alpaca is both the governance pass-through of the project and also the profit repurchase destruction to achieve deflation to enhance the intrinsic value of Alpaca tokens.

And Alpaca’s repurchase funding source currently comes from 3 main components.

Borrowing interest, Alpaca will collect 10% from the borrowing interest as the agreement fee, of which 5% will be used to repurchase and destroy Alpaca, and 5% as the project’s operating funds at the team’s disposal

The 5% liquidation reward obtained by the team’s liquidation robot through liquidation will be 100% used to repurchase and destroy Alpaca, it should be noted that Alpaca’s liquidation is open to all users, so the team’s liquidation robot may not be able to grab the right to liquidate, so there is uncertainty in this income

Single-coin leveraged mining revenue handling fee, Alpaca will charge 19% handling fee for single-coin leveraged mining (currently online CAKE mining) revenue, 10% of which is used to repurchase and destroy Alpaca, 9% as the project’s operating funds at the disposal of the team

In addition to the above three sources of repurchase funds, as more new business is launched, Alpaca can get more sources of repurchase funds, for example, in a recent exchange with the Chinese community, Samsara, a core member of the team, said that in the future, 5% of the third-party robot earnings will also be used to buy back half of the destruction of Alpaca, the overall liquidation proceeds in the high volatility market will also become a source of value for Alpaca.

In addition, in communication with Samsara, a core member of Alpaca, he said that he would subsequently increase the percentage of funds used to buy back the destruction of Alpaca in each of the above agreement income, to ensure that more than 50% of the agreement income goes to the holders of Alpaca.

A new attempt at team motivation

Seeing this, readers familiar with Defi’s project token economic model may be surprised: shouldn’t all of Alpaca’s agreement revenue be captured by the holders of the project tokens? Why is the team currently taking more than 50% of the revenue from the Alpaca protocol?

The Alpaca core team does take a significant percentage of the agreement revenue, in fact in addition to the above revenue, the team receives a 3% fee from the reinvestment of token rewards from DEX liquidity mining, as well as 8.7% of the output from the tokens that will be mined out of Alpaca from liquidity mining, a process that will continue for two years until all tokens are distributed.

I think that this is one of the core reasons why the Alpaca team has such a fighting chance. While it sounds a bit uncommon for more than 50% of the agreed revenue to go to the team rather than the coin holders, this may indeed be a more reasonable model for team incentives.

If we consider blockchain Defi startups similar to traditional internet startups, then we find the existing blockchain team incentive model a bit odd: the

The entire cash flow income of Defi goes to the token holders. The core team (mainly the founding team) is not paid, and they are incentivized either by the continued unlocking of free team shares early in the project, or by a percentage of token distribution from fair mining.

It is as if the startup team does not take a salary and lives for a long time only on the unlocking of the original shares and options realized in the early stages of the venture, and has to cover various fixed daily expenses of the company.

This model may lead to two negative effects.

(a) At the later stage of project development, the Genesis team, as de facto professional project managers, decouples its interests from the project development and loses the economic incentive to continue the struggle.

The team’s inability to undertake initiatives such as team expansion during important development periods due to the lack of sufficient daily economic income, limiting its growth rate.

The above is not alarming, as Stani Kulechov, the founder of the well-known Defi protocol Aave, said in a recent AMA that the core team may gradually fade out of the project’s development and operation after completing the development of Aave 2.5, and is planning to start a new WEB3 startup project.

The model adopted by Alpaca is more like the business model of traditional startups: the agreement obtains operating income by providing financial services, a part of the income is used for costs and expenses (given to the core team to cover operating costs, including salaries, office space, etc.), and the remaining part is retained as net profit to shareholders (token holders).

This benefit distribution model, on the one hand, ensures that the core team has a relatively stable cash flow income to maintain expenses, and on the other hand, the team’s income is aligned with the growth of the project, as the team’s income will increase with the overall revenue of the agreement, avoiding the problem of decoupling the team’s incentive and the project at the later stage of project development.

This model seems to alleviate to a certain extent the proxy problem of professional managers (founding team) and shareholders (coin holders) with option incentives (continuous token distribution).

Whether this model is ultimately better than the existing “governance tokens capture all of the agreed revenue” model will take time to observe and test, and it is a path that needs to be explored over time.

I believe that in this process, Alpaca holders need to focus on the following observations.

  1. whether the core team has a higher efficiency than other teams in getting more agreement revenue and making the pie bigger more efficiently?
  2. After the pie of agreement revenue grows larger, is the team willing to gradually concede the agreement’s revenue distribution share and improve the revenue capture ratio of the coin holders? Because as the total revenue size of the agreement grows, the trend of the team’s fixed expenses and personnel costs as a percentage of total revenue should go down.

▌3. Project landscape competition
A. Basic Market Landscape & Competitors
Leveraged mining belongs to a subdivision of the Defi lending category, and the main competitors currently in this subdivision track on BSC are Alpaca, Rabbit and Alpha, of which Alpha, although the first creator of leveraged mining, is weak in innovation, with a TVL of only about 74 million on BSC, and has basically withdrawn from the first tier, so we mainly compare the business data of Alpaca and Rabbit:

From the above data, Alpaca has a higher TVL and a correspondingly higher market cap. In terms of the key indicator of total fund utilization, Alpaca is 66.9% higher than Rabbit, which shows a higher utilization of Alpaca’s deposits and more leveraged mining users, which is also reflected in a higher profit generation capacity.

Alpaca: Alpaca, the new Defi in the sprint

And when we look back at Rabbit’s TVL growth data, we see that its TVL has taken off rapidly since June 22, skyrocketing from 44 million to the current 330 million, while Rabbit’s coin price has also skyrocketed nearly a dozen times over the same period, from 0.025 to about 0.52.

Alpaca: Alpaca, the new Defi in the sprint

The simultaneous spike in TVL and coin price may indicate that Rabbit’s TVL growth may come more from the traction of coin price, which attracts users on the one hand, and raises the token revenue from deposits and leveraged mining on the other. This also explains why Rabbit’s total capital utilization is low, as the coin price spike attracted more deposit users to get rabbit rewards, while the leveraging feature is a real core user feature due to its high difficulty. Whether the subsequent Rabbit coin price can be maintained at the current level may have a greater impact on its TVL.

In order to understand the difference between the two in terms of functionality, I also conducted a brief interview with three users who have used both the rabbit and Alpaca lever functions, and they all said that Alpaca’s functionality is more complete, and the data for revenue measurement is more accurate, and the reinvestment drawdown ratio for mining tokens is also lower, so Alpaca is more attractive from a functional point of view alone.

B. Project moat and source of competitive advantage
Alpaca as a platform for market makers to provide financial services, its moat comes mainly from the following points.

Having a core team with excellent overall quality. This is reflected in the agile development and product iteration capabilities, the skillful use of Meme culture, the accurate grasp of industry trends and the good balance between project capital utilization and risk.

Good community atmosphere. Due to the complexity and professionalism of the product, the users of Alpaca community are generally of high level, with good trading and financial knowledge, and no shortage of coding talents. The community has given the team great help in many aspects of the project, such as third-party project development, document compilation, communication material production, open position model tool production, code review, product strategy, community operation and management, etc. The internal unity is very good.

The project has a first-mover advantage in productmodelrisk managementTVL. Defi leveraged mining product is relatively complex in design, and Alpaca, as a project that entered this field earlier, has a certain first-mover advantage in terms of experience accumulation in product and model compared with later entrants.

In the traditional value investment concept, a company’s moat mainly comes from intangible assets (brand, patent, franchise), network effect, conversion cost (after users use it, the cost to change the product is high) and cost advantage (from the scale, geographic location, resources, etc. that are difficult to replicate). It is these competitive advantages that are relatively hard to shake and difficult to imitate easily that keep new competitors from casually entering track to compete with the existing players.

So, does the moat theory of traditional value investment still hold true in the blockchain field?

First of all, let’s look at the patent license of intangible assets. In the Defi space, patents and franchises are relatively rare for now due to open source code and the transparency and openness of the blockchain, but Uniswap has applied for a BUSL (Business Source License) for their V3 code, which prohibits other projects from forking their code for commercial purposes without permission. It is understood that Alpaca will also start applying for code protection for its original functional code (single asset leverage, cross-asset lending), forbidding other projects to fork their code without permission for some time.

However, due to the anonymity of a large number of Defi projects, the protective effect of the license remains to be seen, as there have already been cases of anonymous projects Forking Uniswap V3 code.

The brand effect in intangibles, on the other hand, comes mainly from the security and duration of existence of the project in the Defi space, rather than from emotional factors. The longer a Defi runs risk-free, the more users believe in its reliability and tend to use it, just like many users dare to use Compound and Aave with confidence despite not having the ability to audit the code, just because they have undergone a long time test and multiple rounds of extreme market stress tests.

Network effect is outstanding in the field of public chains and stable coins, but its effect on Defi projects is not significant at the moment.

In terms of cost advantage, since the development cost of Defi projects comes more from the intellectual capital of personnel, that is, their salaries, it is almost impossible to construct a cost barrier and cost advantage moats are very rare.

Conversion costs exist for some underlying Defi platforms that are widely adopted by external protocols, as other Defi to replace a piece of their own Defi LEGO may need to make adjustments to the overall model as well as re-run security audits. Secondly, institutional users may also have higher conversion costs for arbitrage tools, and they need to conduct a complete preliminary investigation of the partner platform, including the need to understand the platform’s security, stress resistance under extreme conditions, team capabilities, and stability of services, future product roadmap and handling methods in the face of competition. This evaluation process often takes 3-6 months, and due to the high evaluation and decision-making costs, organizations generally do not easily change partners without security incidents. Instead, individual users have low switching costs on specific products and will easily leave a Dapp for a newer, better one.

In conclusion, due to the openness, transparency and autonomy of user accounts, it is more difficult to form a monopoly in Defi and charge high “monopoly rent” than in traditional industries. This also means that the core team of Defi project must continuously update their knowledge, iterate the product, mention the combinability of their own protocols, and always put the user needs at the center in order not to be caught up by the later innovators.

Or you can say, for most Defi projects, the core team itself is the most critical “moat” of the project.

▌4. Fundamental Risks
Major internal risks
The team’s product development progress or market expansion is not as expected, especially the institutional market does not advance smoothly. Risk level: Medium

Bad debts caused by black swan events such as extreme quotes and smart contract vulnerabilities. Risk level: Low

Major external risks

Increased competition in the track: More professional and excellent teams enter the market maker service track with the support of capital, causing the industry’s operating profit to be depressed overall. Risk level: Medium

Cryptocurrencies enter a bear market: The crypto world has a quarterly cycle. When the bear market cycle comes, the trading volume of the entire trading market will decline significantly, and the revenue of market makers will also slide, which will have a direct impact on Alpaca’s project revenue. Risk Level: Medium

Section 4

Token Circulation and Distribution

▌1. Total volume and circulation
The total number of Alpaca tokens is capped at 188 million, and the current total token supply, total circulation and market value in circulation are listed below (in millions)

Alpaca’s token output lasts for 2 years, terminating in February 2023, with the number of outputs decaying monthly, as shown in the following chart.

Alpaca: Alpaca, the new Defi in the sprint

The monthly inflation rate of the project tokens will drop to below 5% after July, and the subsequent inflationary selloff will gradually become smaller.

It should be noted that due to the large mining output of the project’s early tokens, the project enabled the Stronk pool in March, where users can top up their locked Alpaca tokens and receive the locked voucher sAlpaca, in return for which they will be rewarded with additional sAlpaca tokens (s means Stronk), and after 4 months on July 12, users can exchange their sAlpaca tokens 1:1 for Alpaca. Users can exchange sAlpaca tokens 1:1 for Alpaca. it is expected that the total amount of principal and interest unlocked at that time will be about 30 million Alpaca, which will directly increase the market circulation of Alpaca by almost 30% and may put short-term pressure on the coin price. However, it should be noted that sAlpaca is actually a freely circulating deposit certificate, which can be exchanged with Alpaca in the secondary market, and the current exchange rate is already close to 1:1.

Alpaca: Alpaca, the new Defi in the sprint

Therefore, the circulation pressure of the unlocked 30 million Alpaca has been transmitted in advance to the market in disguise through sAlpaca, and its impact may be relatively limited when 30 million sAlpaca can be exchanged for Alpaca.

▌2. Token Distribution
Of the 131 million tokens in the total supply of Alpaca

Section 5

Preliminary Value Assessment

▌1. Five core questions
What business cycle is the project in? Is it mature, or in the early to mid stage of development?

The project is in the early stage of operation, the core product features are already online, and PMF (Product market fit) has been verified.

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

The project has a certain competitive advantage, mainly from the excellent team, as well as the experience accumulated in the early establishment of the project and the first-mover advantage of capital.

Is the medium and long-term investment logic of the project clear? Is it consistent with the general trend of the industry?

The project’s investment logic is clear, and the main scenario is also clear, which is to provide financial services for market makers, and will subsequently expand into the money market and focus on the institutional market. dex will continue to be the foundation of the industry’s development, and the trend of market maker specialization and institutionalization will continue, the project’s development direction is in line with the industry’s general trend.

What are the main variable factors in the operation of the program? Are such factors easy to quantify and measure?

The main operational variables of the project are the progress of business expansion and industry competition, which can be measured more intuitively through data such as the project’s speed of development and landing of key functions, TVL, capital utilization, etc., as well as the need to focus on observing the expansion of institutional clients.

What is the management and governance of the project and what is the level of DAO?

At present, the development of the product and the direction of the agreement is mainly led by the founding team, the community to give feedback from the product and other views and promote the core team to solve. alpaca has not yet launched the voting function, the subsequent need for users to pledge alpaca tokens to obtain voting rights and interests later governance, the current DAO in the early stages of preparation.

▌2. Summary of the core logic of investment
Alpaca is in a clear demand and growing track, the overall quality of the project is relatively excellent, and belongs to the potential projects worthy of attention.

Market maker market size is basically the same as the total size of DEX. In the long term in the rising period, and the subsequent arrival of specialized institutions, conducive to the continued growth of business volume of high-order market-making financial products such as Alpaca

The project has a very good and diligent team, its innovation, product iteration speed, industry direction judgment, community operations and other aspects are reassuring

There are several new developments that may bring significant marginal increment to the overall revenue and profit of the holders, including: the completion of SDK development to facilitate more external protocol access, capital efficiency and new interest income from the launch of AUSD, institutional business expansion, etc.

The project is currently on the shelves of CEX, including Kucoin, MXC and Gateio, and is not on the line of the first-tier major firms, especially Coinan

▌3. Valuation assessment
Although the alpaca project has a relatively clear cash flow, the DCF discounted cash flow model can theoretically be used to try to value the project, but considering that Defi is still an early stage market, and the development of the industry is changing rapidly with great variables, it is very likely that the DCF valuation will yield a “precise and wrong” answer.

In this study, we will mainly use the relative valuation method to compare the valuation of Alpaca, mainly using cross-sectional valuation with similar projects, to reach the preliminary conclusion that the current market value is high and undervalued.

First, we selected Rabbit, our main competitor on the BSC, for a side-by-side comparison because the main source of revenue for both programs is fees in the leverage function, so we used the comparison metric of lending funds / market capitalization outstanding

We can see that Alpaca has a higher lending capital / market cap outstanding metric than Rabbit, and Alpaca’s current valuation is more advantageous based on this metric alone.

Consider also the difference in the agreed revenue streams of the token holders of the two projects.

Alpaca’s holders’ agreed income is a fee from interest on user borrowings, which is greater and more stable. Rabbit’s agreement income is 15% of the liquidity mining token rewards (CAKE and MDEX) from the DEX platform, which will likely shrink in both certainty and size as the DEX liquidity mining subsidies decrease.

And under the current economic design of Rabbit, a 20% reserve is charged for interest on Rabbit funds lending, which does not accrue to token holders.

Overall, even though Alpaca has a larger market capitalization outstanding, Alpaca’s current valuation is more attractive, both in terms of the lending funds/market capitalization outstanding ratio and the certainty and sustainability of the token’s corresponding cash flows.

B. Comparison of Alpaca and Lending Leading Projects
So, since Alpaca actually belongs to the lending track segment, how does its valuation level compare to Aave, Compoud, and Maker? The comparison metric we use here is the PE of the token, i.e. the market cap of the project in circulation the project profit attributed to the holders of the token.

According to the above data, we found that the current PE of Aave and Compound are similar, while Makerdao is obviously lower and Alpaca is also lower; however, considering that the circulation rate of tokens of each project is not consistent, and projects with lower circulation ratio face greater inflationary pressure in the future, so I calculated the PE comparison after the circulation ratio adjustment, and we found that the PE valuation advantage of Makerdao is more obvious, followed by Alpaca and Aave, and the PE valuation of Compoud is relatively high.

Of course, although all four projects are lending projects, their business models are quite different, and the PE valuation can only be a reference indicator. Considering that Alpaca’s project development is in the early stage and there are more subsequent business growth points, its adjusted PE of 69.8 is more attractive compared with the leading lending projects that are already in the mature stage.

Of course, the reasons for Alpaca’s lower PE valuation may come from a variety of sources, such as the project has not yet been registered with a major firm, currently only provides services on BSC, and the project has a shorter time frame with higher uncertainty.

However, overall, Alpaca’s current valuation is still relatively attractive.

C. The current valuation range of the market is at the level
The market as a whole is currently in a pullback after a bull market rally (there are also opinions that it has entered a bear market), the valuation pivot has obviously retraced, and the market deflates the bubble significantly. From the btc rise, compared to the previous bull market high of $20,000, the current bull market peak of 64510 compared to the previous top of $20,000, the maximum increase of only 222%, and retraced the current increase of about 65% ($33,000), significantly smaller than the overall increase in the past bull market. From a time perspective, the current round of bull market from the bottom of the rise over time, but also far from the last round of bull market time.

However, the recent global liquidity easing policy environment into a delicate situation, despite the Biden administration’s $6 trillion fiscal spending budget leap, but some Federal Reserve officials have proposed to reduce the size of bond purchases on the agenda, whether the inflection point of liquidity will come early, the market divergence is increasing.

The recent increase in regulation in China for mining and speculation trend, many policies pending, the short term is still causing greater pressure on the market; and the inflationary effect of the sea of U.S. stocks printing money further emerged, the U.S. CPI rose 5% year-on-year in May, the largest increase in 13 years, rising prices will put pressure on the Fed’s current loose monetary policy, may accelerate the pace of reducing bond purchases, and even usher in interest rate hikes in the first half of 22 years, bringing downward pressure on global risk asset market valuations.

The current increased divergence in market direction will also have a direct impact on the valuation of individual items, which needs to be taken into consideration when making asset allocations.

▌4. Summary of Initial Value Assessment
Alpaca’s core competitive advantage is its excellent team, which also comes from the project’s relatively scientific revenue allocation mechanism, ensuring that the team has a relatively adequate operating budget. In subsequent development, the focus needs to be on the speed of Alpaca’s institutional market expansion and the rate of adoption by external agreements. By comparing the valuation with competitors and leading projects in the lending industry, I believe that Alpaca’s project valuation is currently at a reasonably low position.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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