In-depth analysis of structured fund Tranchess: Project mechanism, business situation and valuation analysis
1. Key points
1.1. Summary of key points
Tranchess is an asset management platform for cryptocurrency investors. It currently provides users on the BSC chain with high-yield asset management products based on BTC assets. It focuses on the concept of structured funds, However, so far its structured fund shares are not favored by users. The main demand of users is to hold funds of fund tokens (BTC index fund) to obtain platform token incentives, and very few users will hold sub-fund tokens after risk classification.
1.2. Main risk
· Project operation risk: Whether the project can bring long-term sustainable profits remains to be verified. Currently users do not have obvious classification requirements on the platform, and the index fund alone cannot maintain the current high interest-rate returns.
· Token unlocking risk: At present, about 57% of platform tokens CHESS are staked, with an average lock-up time of 4 months, and there will be a large selling pressure at the end of the year.
1.3. Valuation
The current platform scale is about 30,000 BTC, and the fully diluted valuation of the project is US$900 million. When the current platform revenue is dominated by management fees, the project value is significantly overestimated.
2. Basic situation of the project
Tranchess is an asset management platform for cryptocurrency investors, providing users with mining, lending and trading functions. Tranchess is very similar to the “financing structured fund” in traditional finance, by splitting a single investment class into several derivative investment instruments (including agreed income shares and leveraged shares) to meet the investment needs of different risk appetites, which is very similar to the “financing-based structured fund” in traditional finance.
Tranchess is issued on the BSC chain, and its platform token is CHESS.
2.1. Business Introduction
Before introducing the implementation mechanism of Tranchess, let’s briefly introduce the concept of structured fund.
“Structured fund” refers to two or more levels of fund shares (sub-funds) with differentiated risk-return performance through the split of the returns and net assets of the fund of funds under an investment portfolio (fund of funds).
The sum of the product of each sub-fund’s net value and its share ratio in a structured fund is equal to the net value of the fund of funds.
For example, the net value of the fund of funds split into two types of shares = net value of sub-fund A*share ratio % of sub-fund A + net value of sub-fund B*share ratio % of sub-fund B
If the fund of funds is not split, it is an ordinary fund in itself.
A common type of structured fund is financing structured fund. Usually, the sub-fund is divided into two types: agreed income sub-fund A, and leveraged share sub-fund B. Among them, the holders of the B-type sub-fund pay the agreed interests to the holders of the A-type sub-fund every year, and the B-type sub-fund bears the overall investment profits and losses after the interest payment.
Taking a structured fund product X (X is called the fund of funds) of a structured financing model as an example, it is divided into a type-A sub-fund (agreed income share) and a type-B sub-fund (leveraged share). The type-A sub-fund agrees to a certain rate of return. All remaining assets of Fund X after deducting the principal and accrued income of the type-A sub-fund are classified into the type-B sub-fund. When the overall net value of the Fund X (i.e., the fund of funds) falls, the net value of the type-B sub-funds will fall first; correspondingly, when the overall net value of the Fund X rises, the net value of the type-B sub-funds will gain faster appreciation after providing the returns to the type-A sub-fund.
The type-B sub-fund is equivalent to borrowing money from the type-A sub-fund to obtain certain leverage. The higher the ratio of A:B, the higher the leverage. The type-B sub-fund usually has a more complex internal capital structure, and its non-linear return characteristics make it include options implicitly.
Structured fund can meet the complicated portfolio needs of investors with different risk appetites, by splitting the fund of funds into sub-funds.
By learning from the financing structured fund model in the traditional financial world, the products of Tranchess platform provide the cryptocurrency market with financial products that can meet the investment needs of users with different risk appetites.
2.1.1. Tranchess implementation mechanism
Tranchess 1.0 is a fund that directly tracks the performance of BTC. In theory, Tranchess can track any single crypto asset or a basket of crypto assets.
Tranchess consists of three structured tokens (QUEEN, BISHOP and ROOK) and its governance token CHESS. Each structured token is designed to meet the needs of different user groups: stable yield (BISHOP), leveraged investment (ROOK) and simple holding (QUEEN).
The minting process of QUEEN, BISHOP and ROOK: Users mint Queen at 1:1 by staking BTCB (an anchored Bitcoin product on the BSC chain). QUEEN can be used to split into BISHOP and ROOK, and users who hold QUEEN can choose whether to split it. A QUEEN can be split into 0.5 BISHOP (agreed income sub-fund) and 0.5 ROOK (leveraged sub-fund), and 0.5 BISHOP and 0.5 ROOK can be merged into 1 QUEEN.
As shown below:
QUEEN, BISHOP and ROOK can all be traded in the secondary market through exchanges on the Tranchess platform. Whether you own BTCB or not, you can use USDC to buy the above tokens on the secondary market of the platform.
When users mint QUEEN, they can choose not to split it but simply hold passive index funds. They can also choose to split it and sell their BISHOP tokens to hold ROOK tokens. Thus, they can not only maintain the same BTC long position, but also obtain more liquidity funds.
2.1.1.1. QUEEN — BTC Index Fund
QUEEN can be understood as the token of the fund of funds, and each QUEEN represents a portion of the fund of funds. The investment target of the fund of funds is BTCB (an anchored Bitcoin product on the BSC chain), which is equivalent to an index fund that tracks BTCB.
The total value of QUEEN’s net assets = Bitcoin value — management fees.
Owning a QUEEN is equivalent to owning the same amount of BTC, plus an additional reward of platform token Chess.
2.1.1.2. BISHOP — Low-Risk Appetite Fund
BISHOP is like a high-yield savings account. BISHOP holders lend their liquidity assets to ROOK holders, earn only risk-free interest income on a daily basis, and their net value is not affected by price fluctuations in the BTC secondary market. BISHOP’s weekly yield benchmark is a predetermined number, based on the USDC loan interest rate on the VENUS platform in the previous week. In addition, the community will also provide additional interest rate incentives to BISHOP.
BISHOP daily interest rate = loan interest rate on VENUS in the previous week /7 + community incentive interest rate/365
Because all asset liquidity of BISHOP is lent to the ROOK sub-fund, its asset utilization rate is always 100%. Therefore, the interest rate of BISHOP can be benchmarked based on the loan interest rate (the high end) of the lending platform instead of the lending rate. The current interest rate is between 16.8% and 44.3%. Recently, the USDC loan interest rate on the VENUS platform is around 10%. The current interest rate of the platform stablecoin exceeds other lending platforms and leveraged platforms.
2.1.1.3. ROOK — Risk Appetite Fund
ROOK is the corresponding token of another sub-fund. ROOK holders borrow from BISHOP holders every day to obtain a leverage of about 2 times. The orange part in the figure below is the Rook net worth curve, and the green one is the BISHOP net worth curve.
ROOK holders’ returns = profit and loss of the main fund — interest paid to BISHOP token
Unlike the current leveraged products on the market, Tranchess significantly reduces the liquidation risk faced by leveraged products through a “rebalance mechanism”. Only by understanding the concept of rebalance can we understand the core of the Tranchess mechanism, which will be introduced in detail later.
2.1.2. Platform fee
Fund management fee: 1% per year
Queen minting fee: 0
Redemption fee: principal*0.2%
Queen split/merge fee: principal*0.05%
2.1.3. Rebalance
2.1.3.1. Definition
Rebalance is the process of resetting the NAV (net asset value) of QUEEN, BISHOP, and ROOK to 1. The number of the three tokens will also be adjusted during the reset process to ensure that the total fund value held by each person remains unchanged. When the ratio of NAVRook/NAVBishop is lower than 0.5 or higher than 2, it will enable the rebalance reset process.
2.1.3.2. The specific mechanism
Assume that there are three types of users with different risk appetites holding the following amounts of assets:
• Alice holds 1000 QUEEN tokens;
• Bob (low-risk appetite) holds 1,000 BISHOP tokens;
• Carol (risk appetite) holds 1000 ROOK.
PS: ROOK fund leverage = (ROOK total asset value + BISHOP total asset value) / ROOK total asset value
2.1.3.3. Rebalance caused by market plunge
One day the market falls, the net value of QUEEN falls to 0.75, and the net value of ROOK falls to 0.46. At this moment, NAVRook/NAVBishop <0.5, then the rebalance starts. The comparison results of the balance are as follows:
After the rebalance, the total value of assets held by everyone remains unchanged, but Bob’s asset structure has changed.
Alice still only holds QUEEN. Although the quantity has decreased, the overall value is still only related to QUEEN. This shows that the risk exposure of her assets is not affected by the rebalance.
Bob changed the most. Before the balance, he only held the stable asset token BISHOP. After the balance, more than half of his assets were converted to QUEEN. This means that before the rebalance, Bob does not need to bear the risk of market fluctuations and only obtains a stable rate of return; after the rebalance, he will passively hold QUEEN tokens, and half of his assets will bear the risk of BTC fluctuations.
Carol still only holds ROOK. Although the quantity has decreased, the overall value has not changed. It is worth noting that due to the changes in BISHOP assets, ROOK leverage ratio has been reduced from 3.26 to 2. Leverage reduction means that before the rebalance, Carol can obtain the gains and losses of QUEEN tokens worth 2,000, that is, the gains of losses of QUEEN tokens worth 1,500 = 2000*0.75 (ignoring other expenses); after the rebalance, Carol can only get the gains and losses of newly-balanced QUEEN tokens worth 920, i.e., the gains and losses of QUEEN worth 920 = 460*2*1 (ignoring other expenses).
2.1.3.4. Rebalance caused by market rise
One day the market rises, the net value of QUEEN goes up to 1.57, and the net value of ROOK increases to 2.1. At this moment, NAVRook/NAVBishop > 2, and the rebalance starts. The comparison results of the balance are as follows:
After the rebalance, the total value of assets held by everyone remains unchanged, but the asset structure of Bob and Carol has changed.
Alice’s total assets and asset structure remain unaffected by the rebalance.
Bob’s asset structure has changed: BISHOP tokens worth 1,040 are replaced by BISHOP tokens worth 1,000 and QUEEN tokens worth 40. This means that the platform issues interest yields to Bob in the form of QUEEN. Under the rebalance in the upward market, the changes in Bob’s asset structure will be smaller and the risk will be lower than in the downward market.
Carol’s asset structure has also changed this time. His ROOK tokens worth 2,100 have been transferred to ROOK tokens worth 1,000 and QUEEN tokens worth 1100. After the rebalance, the ROOK token leverage increases from 1.5 to 2, however, the actual leverage of Carol’s total assets has reduced to 1.47 times. The rebalance method increases the leverage ratio of ROOK tokens, but it does not increase the leverage ratio of Carol’s total assets (Carol actual leverage = (Carol total asset value + BISHOP total asset value) / Carol total asset value).
2.1.4. Characteristics of business
According to the above rebalance mechanism, we can more clearly show the characteristics of asset changes of structured users by simulating market fluctuations.
The assumptions are as follows:
· The BTC market price drops from 60,000 to 33,750 and then rises to 83,190
· For each rebalance, BISHOP tokens earn exactly 4% absolute return (non-annualized yield)
· Bob and Carol buyt 1,000 BISHOP and 1,000 ROOK with a net value of 1, respectively
· Bob and Carol do not perform any operations after buying these tokens
The following are the assets of Bob and Carol. “Number” is the number of tokens held, and “Market Value” is the total value of assets held.
Bob: Holding BISHOP does not mean that there is no risk
As shown in the figure below, Bob suffered a principal loss during the decline of BTC. Because of rebalance, Bob is forced to hold more and more QUEEN positions. The proportion of QUEEN assets can easily exceed BISHOP. If Bob does not sell Queen in time to exchange for BISHOP, he may lose his principal due to excessive market fluctuations.
Carol: There is a big difference between holding ROOK and long BTC with double futures leverage
If we compare Carol’s purchase of Rook tokens on Tranchess platform with her 2xleverage of long equal amount of BTC on the perpetual futures platform, the situation will be more complicated.
After the market volatility broke new highs again, Carol’s final market value on Tranchess platform was only 810, lower than the original cost. However, the total value of assets with 2xleverage long on the perpetual contract was 1773, far exceeding the value of buying ROOK tokens.
When the market falls, the rebalance mechanism automatically reduces the leverage of ROOK holders. It is two-sided because it not only effectively reduces the risk of ROOK liquidation, but also reduces the return value of ROOK. The 2xleverage contract is easily liquidated by the platform when the market drops by about 50%, but Tranchess platform does not have a liquidation mechanism. The worst case is that the market suddenly drops to zero of ROOK’s net value, otherwise the rebalance mechanism can always help users maintain a small position without clear-out. However, the lower and lower leverage also means that, when the market price bounces back to its original position, the total value of the asset cannot return to its original value, just like Carol in the table above. This requires a clear understanding of ROOK holders.
Secondary market exchanges on the Tranchess platform
Tranchess platform uses an internal exchange function for asset exchange. If Bob and Carol want to maintain the original asset structure and position as much as possible, they should sell the other class assets reset on the secondary market as soon as possible after each rebalance, in exchange for the original asset class. The secondary market exchanges of Tranchess platform can play an important role. However, because each rebalance of the platform requires 12 hours to close the trading and minting functions on the platform, and the transaction has to bear some friction costs and slippage risks, Tranchess users are difficult to maintain their original asset structure and have to bear some risk of asset fluctuations.
Large fluctuation within a single day will not affect the rebalance
The rebalance of Tranchess platform does not monitor in real time, but it makes judgements at a fixed daily settlement time. Even if the intraday net value ratio out of the settlement period exceeds the specified range, it will not trigger the rebalance. This design greatly reduces the problem of frequent rebalances due to large intraday fluctuations.
2.2. Project roadmap
Tranchess does not clarify a detailed roadmap, but rather states broadly defined goals. In terms of products, it aims to track more underlying crypto assets, add various fund architectures through innovative synthetic derivatives, and achieve more use cases for its governance token CHESS. Tranchess is looking to expand to multi-chain and build a proven technology and marketing team to cooperate with other protocols in the ecosystem.
2.3. Business situation
Tranchess has a current circulating market capitalization of about US$90 million, with 10% of its tokens released and a fully diluted valuation of about US$900 million. Its current circulating market capitalization ranks 439 on the Coingecko platform. The price of its platform token CHESS has risen from a high of US$5.4 in August to US$3 now, with a retracement ratio of 44%.
Since its launch on June 24 this year, the platform has accumulated US$1.7 billion in TVL, ranking third in TVL on the BSC chain, only after Pancake (trading platform) and Venus (lending platform).
Tranchess has a high concentration of users. The figure below shows the number of daily transactions and the number of trading accounts for QUEEN, BISHOP and ROOK token contracts. Comparing the number of daily transactions, QUEEN’s daily transaction volume is around 80 million, while the average volume of BISHOP and ROOK is only 6 million. Comparing the daily trading account data, QUEEN has an average of 200 daily trading accounts, with an average trading volume of about US$400,000. However, there are only a few daily trading accounts for BISHOP and ROOK.
Tranchess users mainly hold QUEEN tokens. Among the three tokens, BISHOP and ROOK have only 46 million tokens, and the rest are all QUEEN, which accounts for about 95% of the value.
In summary, Tranchess users mainly buy and hold QUEEN tokens, and very few users will split and trade QUEEN. At present, the risk-structured products provided by the platform have not aroused the interest of users. The core users are large coin holders holding a large amount of idle BTC and looking for good mining pools.
2.4. The team
Except for co-founder Danny Chong, the team is anonymous. Danny Chong has more than 16 years of banking experience. He was responsible for the SEA department of foreign exchange and fixed-rate product sales at Crédit Agricole Corporate and Investment Bank. The other members of the team reside all over the world and have extensive experience in the technology industry (Microsoft, Google, Facebook) and the financial industry (Morgan Stanley, UBS).
Tranchess has raised US$1.5 million in seed funding from top venture capital institutions, including Three Arrows Capital, The Spartan Group, Binance Labs, Longhash Ventures, IMO Ventures, and multiple crypto opinion leaders. This fund will be used to expand the product to multi-chain systems and prepare for a transition to a DAO structure before the end of the year.
3. business analysis
3.1. Industry space and potential
Tranchess platform aims to solve the following market needs and user pain points:
· Institutional clients/large personal accounts hold a large number of idle BTC positions — provide index-enhancing products
a. The primary market can be redeemed quickly, without lock-up period
b. Sufficient trading depth in the secondary market
c. Stable enhanced yields
· Those with low-risk appetite — high-efficiency, high-yield lending
a. There are few low-risk products on the market, and they have low yields
b. Fund utilization efficiency is low, with the needs of dual-asset trading pairs
· High risk appetite — fund utilization efficiency
a. Improve fund utilization ratio (no need of over-collateralization and cost reduction)
b. Reduce the risk of liquidation losses
At present, BTC holders have huge assets, however, related financial services in the market are still in the early stage of development. Thus, the track has broad development space and potential.
Since the invention of the Bitcoin anchor coin, the number of Bitcoins on Ethereum and BSC has been increasing. A total of 18.8 million BTC currently are in circulation, of which there are about 250,000 BTC mirrored assets on the ETH platform and about 110,000 BTCB (BTC mirrored assets) on the BSC platform. There are currently 30,000 BTCB deposits on Tranchess platform, absorbing 1/3 of the BTCB on the BSC platform.
So far only 2% of BTC has participated in the new ecosystem. Large long-term BTC holders usually care about the security of their assets. Although the Defi market can provide better returns for them, cumbersome cross-chain operations, the complexity of Defi contracts and the risks of various codes, have become a yawning gap for BTC assets to join the Defi market.
Compared with other BTC asset management products, the QUEEN token of Tranchess platform is a passive index that simply anchors BTCB assets. The underlying locked BTCB assets do not flow into exchanges or other platforms to obtain yields, which increases the security of BTCB assets.
The real demand of structured products is the key to the long-term sustainable development of the platform. At present, the development of structured products such as Barnbridge and Saffron on the market is relatively weak. Risk structured products are very complex, with a low degree of standardization, thus, their products are facing multiple challenges in liquidity, safety, and yields. Currently, the main users of Tranchess platform do not have the need to purchase structured sub-funds. The growth of its TVL scale only comes from the incentives for high additional issuance of Chess tokens. Tranchess platform has mainly QUEEN holders, and the trading volume of tokens in its secondary market is also very inactive. From the perspective of the long-term development of the platform, if there is no real demand for structured products, a single-asset passive index fund is meaningless and cannot bring real benefits to the platform. Only when People are willing to pay for the risk-structured products and these products can be traded and circulated in large quantities can they create long-term sustainable profits for the platform. The future business development of structured products is still a huge challenge for Tranchess.
3.2. Competitive project analysis
The current core business direction of Tranchess is to provide financial products for users’ idle BTC assets. The BadgerDAO project has the highest degree of business overlap with it. The goal of BadgerDAO is to introduce BTC assets into other blockchains, mainly providing financial products with BTC as the core asset.
The business model of BadgerDAO is similar to the traditional Defi aggregators. It imports BTC mirrored assets such as renBTC and wBTC into various exchanges to provide liquidity and gain profits.
BadgerDAO offers two products that track BTC with native yields:
· DIGG is an algorithmic stablecoin based on the price of BTC. It tries to make the price of 1 DIGG equal to the price of 1 BTC by dynamically adjusting the number of DIGG. The existence of DIGG is to provide a completely decentralized way, allowing users to own BTC-like assets on other platforms. (Assets such as wBTC and BTCB all have a centralized component)
· ibBTC is an interest-bearing BTC token. Users can obtain ibBTC by staking BTC-like assets, and ibBTC will earn the LP average income of the entire staked BTC-like asset pool on the Curve platform.
Compared with BadgerDAO, the products of Tranchess platform are much simpler and more closed. The Tranchess products do not obtain any yields from external projects and its current revenue comes from within the platform. Comparing BadgerDAO and similar products on BSC, we can find that Tranchess is the current leader in BTC asset management.
3.2.1. BTC asset management products on the BSC chain are barren
The following is the income of BTC-related financial products on platforms other than Tranchess in the BSC ecosystem. The first is the BadgerDAO platform and the second is the Belt.fi platform.
BadgerDAO has US$800 million in TVL on the ETH chain, but only US$200,000 on BSC. Compared with Belt.fi, its TVL also far exceeds the scale of BadgerDAO on BSC. The main reason for this huge difference is that the current core demand of users with idle BTC assets is to obtain stable income. Only those low-risk single currency lending projects or single currency mining financial projects can match the real market demand. The return rate of the BTC Defi aggregators on Belt.fi is only 3.4%, which have absorbed 3,496 BTC with a TVL of US$200 million.
As a single-currency financial project, the QUEEN token provided by Tranchess platform not only does not have any liquidity and impermanent loss risk, but also provides an ultra-high rate of return. Thus, it perfectly meets the needs of the target users of the BSC platform. The current incentive rate of return provided by the platform is between 10% and 33% (higher in the early stage), far exceeding the Belt.fi platform.
Here is a key question. Can Tranchess platform token Chess continue to provide such a higher rate of return than the market? By looking at the history of BadgerDAO, we can get some lessons and warnings.
3.2.2. The history of BadgerDAO
This historical TVL of BadgerDAO is a roller coaster (BadgerDAO’s main business is on the ETH chain. The following analysis is based on the platform data of the ETH chain).
Similar to Tranchess, BadgerDAO gathered US$2 billion of TVL in a short time in the early stage. At that time, BadgerDAO has a fully diluted valuation of about US$1.5 billion. Subsequently, its TVL declined rapidly, with the maximum decline of about 80%. The current TVL is about US$800 million, and the current fully diluted valuation is US$700 million. The historical trend chart of TVL is as follows:
The historical price of BADGER also rose first and then fell, with the maximum decline of about 90%. The trend is as follows:
BadgerDAO experienced Davis double hit in the early stage, followed by Davis double killing February was the peak development period of the platform, and its annualized yields of BTC token incentives reached 20%-500%. Subsequently, the rise of TVL began to weaken, the token price then began to fall, the platform yield began to decline, and TVL then began to plummet, forming a Davis double killing. At present, the TVL of the BadgerDAO platform is slowly rising to about US$800 million. The return rate of BTC assets is between 5% and 50%. The specific allocation of the yields depends on the incentive coefficient of each account (the more various assets locked on the platform, the higher the incentive, and the higher the incentive coefficient of the return rate is).
Compared with the early development stage of BadgerDAO, the current growth rate of Tranchess’ TVL has slowed down, and the rate of return is gradually declining. Will it experience a roller coaster like the BadgerDAO platform?
There is no answer to this question, but through the following valuation analysis, we may be able to understand it more clearly.
3.3. Token model analysis
CHESS is the native governance token issued by Tranchess on BSC, with a total supply of 300 million. The token distribution is shown in the figure below. The deployed smart contract shows that the team’s 60 million tokens and most or all of the tokens allocated to seed round investors will begin linear withdrawal on September 23, 2021, and the withdrawal can be completed within three and two years, respectively. According to the white paper, the community incentive plan will be phased out in about four years. Of the 150 million tokens allocated to community incentives, 120 million are being distributed on the Tranchess app. CHESS is allocated to QUEEN, BISHOP and ROOK holders in a fixed ratio of 3:4:2.
3.3.1. Token usage
CHESS token currently has three utilities:
1) Allow users to vote for the interest rate incentives available to BISHOP holders;
2) Obtain 50% of the protocol revenue (BTCB);
3) Obtain a higher yield plus coefficient by staking CHESS
In order to participate in governance and benefit from protocol refunds, users need to lock their CHESS tokens into a certain period, ranging from one week to four years. The number of veCHESS (escrowing voted CHESS) received when the user locks their CHESS can increase linearly from 0 to 1 (i.e., 1 CHESS locked for 1 year will get 0.25 veCHESS, 1 CHESS locked for 4 years will get 1 veCHESS). Now about 57% of the circulating supply is staked, with an average lock-up period of four months. The average annualized rate of yield incentive for position locking is as high as 60.5%.
3.4. Risks
3.4.1. Growth issues
The current demand of Tranchess users is mainly to hold QUEEN tokens, while the real demand for platform structured tokens is very weak. Its users mainly hold coins, with a low trading volume of the platform. Under the current operating conditions, it is difficult for the platform to maintain a long-term sustainable high yield. At present, the growth of TVL is starting to be weak. If the platform cannot increase the real demand for structured funds, it may encounter the situation of Davis double-killing.
3.4.2. User concentration is too high
Tranchess users are mainly large accounts, with high user concentration and low transaction demand. In addition, the dispersion of platform governance is limited in the future.
3.4.3. Selling pressure of its tokens
Chess tokens have a high lock-up ratio, with an average lock-up time of 4 months. Thus, there may be a lot of token selling pressure at the end of the year.
4. Preliminary valuation
4.1. Five core questions
What business cycle is the project in? Maturity stage or the early and middle stage of development?
The project is currently in the early and middle stage. The track of BTC asset management is wide, the structured fund market has not yet opened, so, the project has a large space for imagination. However, whether users have such needs of risk classification remains to be verified by the market.
Does the project have a solid competitive advantage? Where does it come from?
Tranchess is currently the BTC asset management platform with the highest rate of return and the lowest risk on the BSC platform. Its high returns come from the prospect of the real demand for future structured funds. However, from the current point of view, the platform has not yet developed real user needs in this direction, the pledge ratio of structured sub-fund tokens is very low, and the trading volume of the platform is also very low.
Is the medium and long-term investment logic of the project clear? Is it in line with the industry trend?
The long-term development logic of the project is to help BTC users do a good job in asset management and risk classification. The high yield of the current platform comes from the rapid growth of TVL in the early stage, but the current real demands of structured funds and trading volume on the platform are very limited, and the future is very uncertain.
What are the main variables in the operation of the project? Are these variables easy to quantify and measure?
Whether the project can truly discover the market demand for risk classification requirements of BTC assets remains to be verified. Based on the current data, the market does not demonstrate such demand. Large coin holders mainly hold QUEEN tokens with low-risk and high-yield. Even with the rapid growth of its TVL, the demand for structured sub-fund tokens is still very low.
What is the management and governance of the project? What is the level of DAO?
The project is ready to transition to DAO governance before the end of the year. The current users are mainly large coin holders. Although its TVL is very high, there are not many main members of the community and they are not very active.
4.2. Valuation level
Before establishing a valuation model for Tranchess, let’s briefly review the core points of its platform value. The following analysis is mainly based on assumptions, and the purpose is to better understand the core value points of the project. It does not represent the true development direction of the project.
The value of Tranchess platform = asset management fee + transaction fee
Transaction fees include transaction, split, merger and redemption fees. At present, the proportion of splitting and trading on the platform is very small. We assume that the platform maintains its current operating conditions that it only uses asset management fees as its core revenue, how will the valuation of the platform be conducted?
Without considering the transaction fees, the platform revenue is based on 1% management fee, the value of which then needs to be redistributed to the asset owner (those who pays the 1% management fee) and other CHESS owners. This means that the asset owners take out 1% of his assets and redistribute it to himself and all CHESS holders. The wool comes out of the sheep. This model is essentially a zero-sum game, in which early comers reap high profits but the last buyers bear the losses.
This valuation uses a discounted cash flow model to estimate the total value of the platform by estimating the discounted value of future management fees, assuming Tranchess receives a fixed BTC management fee every year.
The model’s valuation assumptions are as follows:
· Platform market capitalization = discount of asset management fees
· The BTCB locked by the platform is a constant (between 30,000BTC and 120,000BTC)
· Management fee is charged 1% of BTC value per year
· The discounted rate is 4%, and the final discount factor = (1+4%)/4%
· Final valuation = discount factor * management fee (BTC standard) * BTC price
*The platform management fee is BTC-based, so its final valuation is also related to BTC price fluctuations. The following valuation is based on the current BTC price of US$56,000.
We can get the following valuation situation:
Tranchess currently has a fully diluted market capitalization of around US$900 million, and the corresponding assets under long-term management is 60,000 to 70,000 BTC. Now Tranchess platform manages 30,000 BTC. Under the assumptions of this model, the market expects that the average management scale of Tranchess platform can be maintained at the level of 60,000 to 70,000 BTC in the long term.
Regardless of the valuation, further assuming that the management scale of Tranchess can really grow to 60,000 to 70,000 BTC and continue to be maintained, how will the yield of the platform change under the current reasonable valuation level?
Regardless of the valuation, it is further assumed that the TVL of Tranchess platform continues to grow at a rate of 3% per week and reach to the management level of about 60,000 BTC by March next year. If Tranchess keeps the current valuation unchanged, that is, CHESS remains at the level of US$3.3, how will the yield of the platform change? The model calculation is as follows:
In the above calculation, the TVL, token issuance speed and CHESS price after October 14, 2021 are all hypothetical data, and the token issuance speed is assumed to remain at a weekly reduction of 4%.
It can be seen from the above figure that as TVL grows and token distribution decreases, the average yield of the platform will return to single digits at the beginning of next year. In fact, it is difficult for the platform to achieve the situation where the yield keeps declining but TVL can continue to grow. To maintain a high yield and further drive up the expectations of the market valuation, TVL needs to grow faster. Tranchess platform with management fees as the only revenue is just a silly game about expectations. It cannot really generate long-term sustainable income and it is only internal consumption. Early comers earn money from latecomers.
The above model does not work. Tranchess platform must develop the need for its structured funds, so that users are willing to trade and pay a real cost for the risk-classification function of the platform, thus providing the platform with a long-term and sustainable source of profit.
In terms of the actual situation of the current platform, the demand for structured sub-funds is very weak. The QUEEN staked by the platform is worth US$1.5 billion, while BISHOP and ROOK are only US$50 million.
If Tranchess platform cannot stimulate the real risk-classification demand of the market, no matter how large the market size is expected to be, it will eventually stop the pace of expected growth and move towards the process of spiral decline.
5. Reference
Project white paper
https://docs.tranchess.com/whitepaper
Tranchess: New species of DeFi structured funds
https://www.chainnews.com/articles/449423107596.htm
Tranchess Protocol — “Make BTC the leading player in the DeFi world’”
https://www.chainnews.com/articles/811802424955.htm
Picolo Research elaborates Tranchess, a risk-classification protocol of BSC ecology
https://www.chainnews.com/articles/979757679262.htm
https://tranchess.medium.com/introducing-tranchess-8f55973654df
Tranchess 101: How to Earn Extra Yield on Your BTC?
https://tranchess.medium.com/tranchess-101-how-to-earn-extra-yield-on-your-btc-ffaa91d54899
