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“With extremely high profit expectations, continuous repurchase and destruction of tokens, the launch of Vault products is becoming a major positive for the development of the Pencils Protocol ecosystem.”
Pencils Protocol is currently the DeFi platform with the highest TVL in the Scroll ecosystem. Even though the overall market conditions are relatively flat, it can still maintain a locked value of around US$300 million and has more than 247,000 active users.
In September, Pencils Protocol received good news one after another. First, Pencils Protocol received a new round of strategic financing with a valuation of US$80 million. Investors included DePIN X, Taisu Ventures, Black GM Capital and Bing Ventures, which showed that the industry had high expectations for the development prospects of Pencils Protocol.
At the same time, Pencils Protocol also announced the economic model of the DAPP token, and it will launch a new round of IDO activities on the Tokensoft platform on September 18, of which 20% of the total DAPP tokens (20 million) will be used for this round of sales, which indicates that the economic system of the ecosystem will be fully operational.
In addition, the more important positive news is that Pencils Protocol's core product Vault will be launched soon. This product is an important revenue source for Pencils Protocol for C-end users, and it will also be an important revenue source for Pencils Protocol. It is reported that Vault will use 20% of its revenue to repurchase and destroy DAPP tokens. Therefore, the launch of Vault represents the further improvement of Pencils Protocol on the product side, and also indicates that the value flywheel system of the Pencils Protocol ecosystem will start to operate.
What is Vault?
In fact, Vault itself is a profit pool based on liquidity mining model, with leveraged mining function. On one hand, the Vault section is connected to the Staking pool, supporting users to lend assets to the Staking pool. On the other hand, Vault 1.0 will be connected to the liquidity pools of various DEXs in the Scroll ecosystem, supporting users to become LPs through liquidity mining and capture the leveraged liquidity mining income.
In this model, users can earn higher returns with less capital through leverage, and only need to pay part of the returns to Pencils Protocol as interest. At the same time, early active participants of Vaults can not only obtain basic rewards for deposit staking and LP staking, but also receive high multiples of points and token rewards, which will greatly increase the enthusiasm of users to participate in the Vault sector and greatly improve the capital efficiency of the Staking end. From an operational point of view, its process is no different from ordinary liquidity mining, with a low participation threshold, which can effectively attract a large number of Farming players.
On the other hand, the Vault product is also a liquidity hub, and user participation means that exponential liquidity is injected into DEX. This efficient liquidity hub is very meaningful for the current market stage, and it is currently deeply bound to the LRT track (including BTC and ETH ecology), which also continuously elevates the narrative direction of Vault itself.
In the long run, Vault will take user asset management as its main development direction, such as integrating more high-quality assets, and launching a variety of asset income methods such as on-chain Delta neutral strategies, on-chain synthetic income, on-chain exotic options, etc., to further broaden the income channels.
In fact, each round of market cycle requires an innovative aggregated income product to meet the user's income needs. When the market liquidity is insufficient in a bear market, users expect to obtain stable income. Aggregate income products that provide considerable and stable income are very popular. In a bull market, such products are still "hot cakes" in the eyes of many investors because of their rich gameplay and returns above the industry average. Therefore, regardless of bull or bear markets, there is always a market for such products. Considering that the early market estimates of Yearn Finance are between 3 billion and 5 billion US dollars, and Alpaca Finance's market value at its peak is also about 1 billion US dollars. Innovative similar products have not yet emerged in this cycle, and Vault's market-oriented approach just makes up for the shortcomings. The liquidity hub and LRT track narrative will drive the valuation of Vault or Pencils Protocol.
So just looking at the Vault product itself, we have a rough estimate of the valuation of Pencils Protocol. Vault will also launch many strategy-based passive income features in the future, and launch blockbuster products such as LaunchPad and Shop. Therefore, the pre-investment valuation of US$80 million in this round of financing is obviously seriously underestimated.
Why do we think it has strong profit expectations?
So first of all, once we understand the valuation logic of the Vault product, we can roughly have an estimate of Vault's business volume.
What roles require Vault?
One type is investors, Farming coin holders who expect to obtain stable income expectations
l Users who have participated in LSD and LRT staking and expect to make profits through LRT assets in the form of farming
l LRT project parties, who hope to further add capital value and liquidity value to their LRT tokens
l DEX, which hopes to connect to Vault to further capture liquidity.
Each of the above sectors has extremely strong market demand. Solving pain points and meeting rigid needs can achieve sustained growth. Similar products cannot bring the desired effects to these roles, and the advantages of the Valt sector are reflected, which is why we say that the upper limit of Vault product development is very high.
In fact, the TVL of the Staking sector alone is $300 million (only pre-market points rewards are provided), which not only represents that Vault leveraged mining has a deep bottom pool, but also represents that TVL will further explode after the opening of Vault products (pre-market points + Farming income, more and more projects join). Therefore, with the support of huge business volume and huge TVL, Vault products that meet the rigid needs of multiple parties will have full income expectations, and this will be a sector with earning ability far exceeding similar products.
Continuous repurchase and destruction are important engines for the growth of DAPP token value
Another major benefit brought by the launch of Vault is that Pencils Protocol will use 20% of the revenue of the Vault section to repurchase and destroy DAPP tokens. In other words, as long as the Vault section has transaction volume and generates revenue, it will continuously generate funds to repurchase and destroy DAPP tokens, and continue to deflate and realize an increase in value.
Therefore, the repurchase and destruction mechanism is actually an important engine for the DAPP token to continue to generate deflation and realize value growth. As mentioned above, the potential business scale of the Vault sector will continue to grow in scale under the promotion of multiple factors, which means that the funds for repurchasing DAPP tokens will become higher and higher, and the repurchase and destruction of DAPP tokens will become more and more intense.
From the perspective of the early circulation of DAPP, most of the early market DAPP tokens will come from IDO. The latest Tokensoft platform IDO rules show that subscribers will have a lock-up period ranging from 6 to 12 months, so there will be very few DAPP tokens in circulation in the early stage. And continuous repurchase will continue to dilute the impact of token holders unlocking, and even the destruction end will continue to be greater than the output end.
On the other hand, the DAPP token itself has certain practicality. For example, by staking $DAPP in Pencils Protocol Farms, you can get the Proof of Stake token $pDAPP at a 1:1 ratio. $pDPP holders can get subsidies by staking $pDAPP or provide $pDAPP liquidity on DEX. Or in the Vault section, users who want to get more points incentives, higher leverage, priority use of exclusive features, and richer strategy products need to stake $DAPP tokens.
Therefore, in order to obtain more rights and interests, especially after the launch of the Vault section, the rigid demand for DAPP will become more apparent.
Therefore, a positive value cycle will be generated around the Vault sector, that is, the continuous increase in the platform's business transaction volume will continue to bring income to the platform, and the repurchase and destruction of DAPP tokens will continue to accelerate to promote deflation. At the same time, the surge in Vault pool transaction volume and business volume will further promote the rigid demand for DAPP tokens and continuously reduce the circulation and deflation of DAPP tokens. Therefore, the repurchase and destruction of Vault is not only the fuse of the spiral of the rising value of DAPP tokens, but also the engine that drives this spiral.
Conservatively estimated, the DAPP token is expected to achieve a price increase of more than 10 times in the short term after TGE, and will continue to rise as the business expands. The launch of the Vault product will be the starting point of the value spiral.
