Since starting the Subzero project in March, DeFi has been turbulent, to say the least. DeFi has had the worst 6-month performance ever relative to BTC (-57%) and ETH (-70%). (Source: Consensys.net)
We’ve considered not focusing on the macro environment at all, instead simply focusing on our own products and developing at our own pace (and this is certainly our priority), but this is not entirely possible, as the platform we originally set out to build from and the token we pegged to, is at the core of the problem…
Being pegged to Tomb resulted in the unfortunate destruction of 95% of the value in our liquidity pools. Is it over for us? Absolutely not. This article looks at the state of the market and what we can learn from the experience so far. Every good crypto project stands on the shoulders of its predecessors and if we don’t apply the learnings from past failures we won’t grow as a community or add anything of value to the space.
The 2022 Crypto Collapse
While Tomb Finance would be considered a minnow in the entire crypto market, it is deeply entrenched in the crypto collapse of May 2022. At a fundamental level, the protocol is built using the same concepts behind Terra Luna, though it is not expected to maintain a specific price, as a stablecoin does. And simply because a lot of factual information in crypto gets shut down as FUD — I’ll back this up by saying that Tomb Finance was built as a fork of Basis Cash (there are even references in the original frontend UI). This is the same Basis Cash in which Do Kwon was revealed to be an anonymous founder, using the identity “Rick Sanchez,” as recently as late 2020. (1. Source: CoinDesk)
It needs to be said that the two projects do work differently. They do have different mechanisms, but mainly in the sense that Terra had a strict balancing function to maintain the peg. That balancing function ended up being one of the main downfalls, resulting in hyperinflation until Luna was practically worthless. It could be argued that the main failure was this mechanism, as it enabled Luna to be minted at a variable rate. In a Tomb-fork it would be the equivalent of the share token minting at an exponentially faster rate as the price of the base token decreased. This would clearly be a problem.
In theory, if the Luna team had of been able to restrict the hyperinflation, they may have been able to save the original protocol, particularly if the treasury assets were used for buybacks in the 20–30c range rather than at 97c. This would have saved a lot of investor capital, but it wouldn’t have saved everyone from selling at a loss. Given enough time, UST may have even returned to peg, as we have seen occur with many Tomb-forks, however this would have required the remaining investors to see an enormous amount of value in the project (with such a large number of tokens in supply) and even in that case, the majority of holders would have sold at a loss.
Right now, Luna 1.0 has still not become completely worthless, though it is very close. Are the holders just overly hopeful of a recovery? Well yes, but it also shows that while asset backing is important, there are also many other factors affecting demand. If memecoins and the traditional banking sector have one thing common it’s that they’ve both taught us that currency doesn’t need to be 100% backed in every instance to have value. But it does help. The structure still needs to be resilient to a complete unwinding, often referred to as a death spiral, when a critical mass of capital leaves the system. The traditional banking system operates in exactly the same way, as we’re discovering in China right now.
In the breakdown of Luna, the price didn’t fully collapse until the team abandoned it in lieu of Luna 2.0. Although it happened quickly, there were a range of distinct points where the value dropped, observable in the short space of 3 days. We’re not talking about all the reasons for the collapse or a play-by-play breakdown, but simply where there was an observable erosion of what may have been perceived as intrinsic value:
- Loss of faith in the ability to hold peg (utility)
- Complete deployment of the LFG treasury (asset backing)
- Fear of greater losses taking place (store of value)
- Hyperinflation of the Luna supply (scarcity)
- Disabled the Terra blockchain (network effect)
- Team’s ceased commitment to support 1.0 (innovation/future revenue)
This is why Luna failed so quickly. In the space of 3 days, it lost all of the key benefits which gave it value in the first place. Most critical was the loss of asset backing and scarcity. If nothing else, the Luna collapse gave us the opportunity to see the significant price impact of a wide range of factors which affect demand and therefore crypto valuations.
The Tomb Ecosystem
Most investors should know the basic mechanics and understand that Tomb-forks are not stablecoins. There are differences to Luna, for example the price is designed to fluctuate well above and below the peg price and in theory they will be less likely to suffer the same capitulation that was seen with Luna. Once the price falls below peg the inflation stops (at least in the base token). This is also could be seen as a huge advantage that Tomb-forks have over rebase tokens (eg. Titano-forks), which inflate indefinitely.
The model is certainly more sustainable than others, however complete collapse can still occur if there isn’t any intrinsic value in the tokens. We’ve seen this with newly hyped-up projects, which print excessive amounts of tokens and go through an extended period of euphoria. If the value is only sustained by NFTs, nodes or other gimmicks, it’s unlikely to be sustainable. In these cases, the project is only sustainable as long as the community can support it.
The reality is, very few small cap DeFi projects have been successful. For the 5 to 10 talked about projects in any one moment, 50–1000 have already failed. Projects with similar purposes, promises and often similar tokenomics. In most high-APR projects, the investors are working against each other, because if users are allowed to print an excessive amount of tokens and there is only a small liquidity pool there will be an eventual crash and race to cash out, often from early investors or insiders.
This is exactly what occurred with Tomb Finance, who grew to a $1 billion valuation at one point. In the middle of the Luna collapse, there was a rush to sell, with the largest seller being the protocol’s own DAO wallet. The DAO fund was designed to help support the peg, by selling tokens when above the peg and purchasing when below. At the time of the liquidiation it held over 40 million tokens. There has been no formal explanation as to why the DAO wallet was leveraged and why it resulted in the erosion of over $15 million worth of investor capital. It is possible that it was used to buy back Tomb tokens and try to pick the bottom of the market, though more likely, it was supporting Harry Yeh’s own personal leveraged position which was also liquidated at the same time.
Ultimately, there are many bad actors in DeFi and the larger projects are not exempt from this. This is not to say that the price of Tomb will not recover, and they won’t be able to deliver some form of value for holders in future. The team is developing some form of utility for the token and while a permissioned network could be seen as honourable, it also goes against many fundamentals in DeFi — being decentralized, accessible, open, programmable and composable. Overall, it has become an ecosystem that we no longer want to extend or be a part of, but we’re not giving up on DeFi and will never give up on our investors.
Setting Ourselves Apart
Our original goal as a project, was to be a force for positive change in the DeFi space. A project run by a team with ethics, who returned over $10 million worth of investor funds from the treasury of our previous project (PAPA). A project offering honesty and longevity. We’ve always been focused on producing real revenue, but now we’re proud to change our peg and move forward with our own purpose and unique protocol design.
In our current position, the SUB and ZSHARE prices are certainly depressed. Part of that may be because we’ve taken steps to reduce APRs to manageable levels, but with it, should come a degree of comfort. From here we can easily provide a positive return to investors — it could be done with a small amount of marketing alone, but we want our future to be a sustainable one with genuine revenue channels and aligned with holders who understand the vision of the project.
We as developers and investors have seen enough projects rise and fall. We’ve all had the opportunity to see the market-determined-value of these tokens play out, in real time. So we should understand where the real value in DeFi projects comes from and what we are aiming to provide — utility, asset backing, store of value, scarcity, network effect, innovation and future revenue. In fact, most small cap DeFi projects fail to achieve any one of these values, let alone all of them.
With this in mind, we’ve revisited our purpose of Subzero and developed a new mission for the protocol, which is still in line with our past commitments. We have already been determined to realize value for our investors with the addition of new protocols/use cases (through ZSwap and ZBank). Admittedly they are taking a little longer than expected and we’re learning about setting time expectations, but innovation doesn’t happen overnight. As we continue to move forward, working on what might seem like new projects, it’s important for investors to understand that we aren’t leaving them or Subzero behind. That’s the difference with our team, compared to most DeFi projects.
In fact, it’s the quite the opposite, there will be a very strong relationship between any future DeFi projects and Subzero (a combination of upfront and long-term benefits) and a process by which we intend to keep investment fair and equitable. Subzero owners will own a stake in our future.
There’s a name for what we are doing and we think it’s very fitting… decentralized venture capital (DVC).
With Subzero, we will remain focused on generating revenue (specifically through the ABZERO rewards pool), but we feel that the addition of some form of asset backing (a protocol-owned treasury) is critical in ensuring long-term stability. Eventually if the asset pool grows large enough, it may even be used for cashing out (eg. via reverse bonds) or minting (eg. vested bonds), but only at prices which deliver increased value to the long-term holders. The treasury will earn 10% from regulation and be under the governance of ZSHARE holders.
We are in the process of making an update related to our Treasury in the app. This update is primarily focused on creating transparency of the ecosystem and the protocol-owned assets. Thanks to the blockchain we can have unparalleled transparency and community governance on investment decisions. We can cut out the middleman in traditional venture capital and build a transparent decentralized ecosystem.
By owning Subzero you are on the journey with us… and we’re not even half-way up the mountain. Let’s go.
Website: https://subzero.plus/
Twitter: https://twitter.com/subzeroplus
Telegram: https://t.me/subzeroplusofficial
Discord: https://discord.com/invite/3Ce4BY4Yqs
Join us on Discord to discover the rest of the differences in our protocol and what we are doing to ensure long-term sustainability.
Nothing in this article should be deemed as financial advice. Crypto currencies are extremely volatile and carry high levels of risk. Investment in any DeFi project should be considered as equal risk to gambling. Do not invest money you cannot afford to lose.
