In-depth Analysis of Tranchess: Project Mechanism, Business Situation, and Valuation Analysis

Author: Rollin

Section 1: Key Points of the Research Report

1. Summary of Key Points

Tranchess is an asset management platform aimed at cryptocurrency investors, currently providing high-yield asset management products based on BTC assets for users on the BSC chain. It primarily focuses on the concept of tiered funds, but so far, its tiered sub-funds have not been favored by users. The main demand from users is to hold the parent fund token (BTC passive index fund) to receive platform token incentives, with very few users holding the tokens of the risk-tiered sub-funds.

2. Main Risks

Project operational risk: Whether the project can bring long-term sustainable profits is still to be verified. Currently, users on the platform do not have a significant demand for tiering; purely passive index funds cannot maintain the current high-interest returns.

Token unlocking risk: Currently, about 57% of the platform token CHESS is staked, with an average lock-up period of 4 months, leading to significant selling pressure at the end of the year.

3. Valuation

The current platform scale is approximately 30,000 BTC, with a fully diluted valuation of $900 million. Given that the current platform revenue is primarily from management fees, the project is significantly overvalued.

Section 2: Basic Information about the Project

Tranchess is an asset management platform for cryptocurrency investors, providing mining, lending, and trading functionalities. Tranchess meets the investment needs of different risk preferences by breaking down a single investment category into several derivative investment tools (including agreed yield shares and leveraged shares), similar to "financing tiered funds" in traditional finance.

Tranchess is issued on the BSC chain, and its platform token is CHESS.

1. Business Introduction

Before introducing the implementation mechanism of Tranchess, let's briefly explain tiered funds.

"Tiers Fund" refers to a fund share (sub-fund) that presents differentiated risk-return performance by stratifying the income and net assets of a parent fund (mother fund) under a single investment portfolio.

The sum of the product of the net value of each sub-fund and its share ratio equals the net value of the parent fund.

For example, if the net value of the parent fund is split into two types of shares: Net Value of Parent Fund = Net Value of Class A Sub-Fund X Share Ratio of Class A % + Net Value of Class B Sub-Fund X Share Ratio of Class B %.

If the parent fund is not split, it is an ordinary fund.

A common type of tiered fund is the financing tiered fund, where sub-funds are typically divided into agreed yield Class A sub-funds and leveraged Class B sub-funds. Holders of Class B sub-funds pay agreed interest to Class A sub-fund holders annually, while the overall investment gains and losses after interest payments are borne by the Class B sub-fund.

Taking a financing tiered fund product X (X is the mother fund) as an example, it is divided into Class A sub-fund (agreed yield share) and Class B sub-fund (leveraged share). Class A sub-fund agrees to a certain yield, and all remaining assets of fund X after deducting the principal and accrued income of Class A sub-fund belong to Class B sub-fund. When the overall net value of the parent fund declines, the net value of Class B sub-fund declines first; conversely, when the overall net value of the parent fund rises, the net value of Class B sub-fund will appreciate faster after providing returns to Class A sub-fund.

Class B sub-fund is equivalent to borrowing money from Class A sub-fund, obtaining a certain leverage capability. The larger the A:B ratio, the higher the leverage. Class B sub-fund has a more complex internal capital structure, and its non-linear return characteristics imply embedded options.

The tiered fund model, which splits the parent fund into sub-funds, can meet the complex investment portfolio needs of investors with different risk preferences.

Tranchess platform products draw on the financing tiered fund model from the traditional financial world to provide wealth management products that meet the investment needs of users with different risk preferences in the cryptocurrency market.

Tranchess Implementation Mechanism

Tranchess 1.0 is a fund that directly tracks BTC performance. Theoretically, Tranchess can track any single cryptocurrency asset or a basket of cryptocurrency assets.

Tranchess consists of three tiered tokens (QUEEN, BISHOP, and ROOK) and its governance token CHESS. Each tiered token is designed to meet the needs of different user groups: stable income (BISHOP), leveraged investment (ROOK), and simple holding (QUEEN).

The minting process of QUEEN, BISHOP, and ROOK:

Users mint QUEEN at a 1:1 ratio by staking BTCB (a pegged Bitcoin product on the BSC chain). QUEEN can be split into BISHOP and ROOK, and users holding QUEEN can choose whether to split. One QUEEN can be split into 0.5 BISHOP (agreed yield sub-fund) and 0.5 ROOK (leveraged sub-fund), and 0.5 BISHOP and 0.5 ROOK can be combined back into 1 QUEEN.

As shown in the figure below:

QUEEN, BISHOP, and ROOK can all be traded on the secondary market through the exchange on the Tranchess platform. Whether or not you hold BTCB, you can use USDC to purchase these tokens on the platform's secondary market.

When users mint QUEEN, they can choose not to split and simply hold the passive index fund; or they can choose to split, sell their BISHOP tokens, and hold ROOK tokens, thus maintaining the same long position in BTC while obtaining more liquidity.

QUEEN - BTC Passive Index Fund

QUEEN can be understood as the token of the parent fund, with each QUEEN representing a portion of the parent fund. The parent fund invests in BTCB (a pegged Bitcoin product on the BSC chain), equivalent to tracking an index fund of BTCB.

The total net asset value of QUEEN = Bitcoin value - management fees.

Holding QUEEN is equivalent to holding an equivalent amount of BTC, and additionally receiving rewards in the platform token Chess.

BISHOP - Low-Risk Preference Fund

BISHOP is like a high-yield savings account, where BISHOP holders lend their liquid assets to ROOK holders, earning risk-free interest income daily, with its net value unaffected by BTC secondary market price fluctuations. The weekly yield benchmark for BISHOP is a predetermined number, based on the previous week's USDC lending rate on the VENUS platform. Additionally, the community will provide extra interest rate incentives for BISHOP.

BISHOP daily interest rate = VENUS previous week's lending rate / 7 + community incentive rate / 365

Since all of BISHOP's liquid assets are lent to the ROOK sub-fund, its asset utilization rate is always 100%. Therefore, BISHOP's interest rate can be based on the lending rate (high-interest end) of the lending platform rather than the borrowing rate. The current interest rate ranges from 16.8% to 44.3%, with the recent USDC lending rate on the VENUS platform around 10%, and the current stablecoin interest rate on the platform exceeding that of other lending and leveraged platforms.

ROOK - Risk Preference Fund

ROOK is the corresponding token of another sub-fund, where ROOK holders borrow from BISHOP holders daily to obtain about 2x leverage. The orange part in the figure below represents the ROOK net value curve, while the green part represents the BISHOP net value curve.

The return for ROOK holders = gains and losses of the main fund - interest paid to BISHOP tokens.

Unlike leveraged products currently on the market, Tranchess significantly reduces the liquidation risk faced by leveraged products through a "rebalancing mechanism." Understanding rebalancing is key to understanding the core mechanism of Tranchess, which will be detailed later.

Platform Fees

Management fee: 1% per year

QUEEN minting fee: 0

Redemption fee: principal * 0.2%

QUEEN split/merge fee: principal * 0.05%

Rebalancing

Definition

Rebalancing is the process of resetting the NAV (net asset value) of QUEEN, BISHOP, and ROOK to 1. During the reset process, the quantities of the three tokens will also be adjusted to ensure that the total value held by everyone remains unchanged. When the ratio of NAVRook/NAVBishop falls below 0.5 or exceeds 2, the rebalancing reset process will be initiated.

The specific mechanism assumes that there are three types of users with different risk preferences holding the following amounts of assets:

● Alice holds 1000 QUEEN;

● Bob (low-risk preference) holds 1000 BISHOP;

● Carol (risk preference) holds 1000 ROOK.

PS:

ROOK fund leverage = (Total value of ROOK assets + Total value of BISHOP assets) / Total value of ROOK assets

Rebalancing Triggered by Market Decline

One day, the market declines, and the NAV of QUEEN drops to 0.75, while the NAV of ROOK drops to 0.46. At this point, NAVRook/NAVBishop < 0.5, triggering rebalancing. The comparison results are as follows:

After rebalancing, the total value of assets held by everyone remains unchanged, but Bob's asset structure changes.

Alice still holds only QUEEN; although the quantity has decreased, the overall value is still only related to QUEEN, and the asset's risk exposure is not affected by rebalancing.

Bob experiences the most significant change; before rebalancing, he only held stable asset token BISHOP, but after rebalancing, more than half of his assets are converted to QUEEN. This means that before rebalancing, Bob did not need to bear the risk of market fluctuations and only obtained stable yields; after rebalancing, he passively holds QUEEN tokens, and half of his assets will bear the risk of BTC fluctuations.

Carol still holds only ROOK; although the quantity has decreased, the overall value remains unchanged. It is worth noting that due to the changes in BISHOP assets, the ROOK leverage ratio decreased from 3.26 to 2. A decrease in leverage means that before rebalancing, Carol could obtain the gains and losses of 2000 QUEEN tokens, i.e., 2000 * 0.75 = 1500 value of QUEEN fluctuations (ignoring other fees); after rebalancing, Carol can only obtain the gains and losses of 920 new balanced QUEEN tokens, i.e., 460 * 2 * 1 = 920 value of QUEEN fluctuations (ignoring other fees).

Rebalancing Triggered by Market Rise

One day, the market rises, and the NAV of QUEEN increases to 1.57, while the NAV of ROOK rises to 2.1. At this point, NAVRook/NAVBishop > 2, triggering rebalancing. The comparison results are as follows:

After rebalancing, the total value of assets held by everyone remains unchanged, but Bob and Carol's asset structures change.

Alice's total asset value and asset structure remain unaffected by rebalancing.

Bob's asset structure changes, converting from 1040 value BISHOP tokens to 1000 value BISHOP tokens and 40 value QUEEN tokens. This is equivalent to the platform distributing interest income to Bob in the form of QUEEN. In the case of market rise rebalancing, compared to market decline rebalancing, Bob's asset structure changes less, and the risk is also lower.

Carol's asset structure also changes this time. From holding 2100 value ROOK tokens, she changes to holding 1000 value ROOK tokens and 1100 value QUEEN tokens. After rebalancing, the leverage of ROOK tokens increases from 1.5 to 2, while the actual leverage of Carol's total assets decreases to 1.47 times. The rebalancing method increases the leverage of ROOK tokens but does not increase Carol's total asset leverage. (Carol's actual leverage = (Total value of Carol's assets + Total value of BISHOP assets) / Total value of Carol's assets)

Business Characteristics

Based on the above rebalancing mechanism, we can more clearly demonstrate the asset change characteristics of tiered users through simulated market fluctuations.

Assuming the following:

● BTC market price drops from 60,000 to 33,750 and then rises to 83,190

● Each rebalancing, BISHOP tokens gain exactly 4% absolute return (non-annualized yield)

● Bob and Carol each buy 1000 BISHOP and 1000 ROOK at a net value of 1

● Bob and Carol do not perform any operations after buying tokens

Below are the asset situations for Bob and Carol, where number is the number of tokens held, and Market Value is the total value of assets held.

Bob: Holding BISHOP does not mean no risk

As shown in the figure below, Bob experiences a loss of principal during the BTC decline. Due to rebalancing, Bob is forced to hold an increasing number of QUEEN positions, and the proportion of QUEEN assets can easily exceed that of BISHOP. If Bob does not sell QUEEN in time to convert back to BISHOP, he may incur principal losses due to excessive market fluctuations.

Carol: Holding ROOK and going long BTC with 2x futures leverage makes a big difference

Comparing Carol's purchase of ROOK tokens on the Tranchess platform with going long an equivalent amount of BTC with 2x leverage on a perpetual futures platform, the situation becomes more complex.

After the market fluctuates violently and breaks new highs, Carol's final market value on the Tranchess platform is only 810, below her initial cost; while the total asset value on the perpetual contract with 2x leverage is 1773, far exceeding the value of buying ROOK tokens.

During market declines, the rebalancing mechanism automatically reduces leverage for ROOK holders, effectively lowering the liquidation risk for ROOK while also diminishing the yield value of ROOK, exhibiting dual characteristics. 2x contracts can easily be forcibly liquidated by the platform when the market drops by around 50%, but the Tranchess platform has no liquidation mechanism; the worst-case scenario is that the market suddenly drops to a ROOK net value of 0. Otherwise, the rebalancing mechanism can continuously help users maintain some positions without going to zero. However, the decreasing leverage during declines also means that when the market price rises back to its original level, the total asset value cannot return to its initial value, as seen with Carol in the above table. This point needs to be clearly understood by ROOK token holders.

Secondary Market Exchange on the Tranchess Platform

The asset exchange on the Tranchess platform uses the internal exchange functionality. If Bob and Carol want to maintain their original asset structure and positions, they should quickly sell the reset other asset types on the secondary market after each rebalancing to convert back to their original asset types. The secondary market exchange on the Tranchess platform plays an important role, but because the platform needs to close trading and minting functions for 12 hours after each rebalancing, along with the friction costs and slippage risks during trading, it is challenging for Tranchess users to maintain their original asset structure and they have to bear some asset fluctuation risks.

Intraday Volatility Does Not Affect Rebalancing

The rebalancing on the Tranchess platform is not monitored in real-time but is judged at a fixed settlement time each day. Intraday net value ratios that exceed the specified range during non-settlement times will not trigger rebalancing. This design greatly reduces the issue of frequent rebalancing due to significant intraday fluctuations.

2. Project Roadmap

Tranchess has not clarified a detailed roadmap but has stated broadly defined goals. In terms of products, it aims to track more underlying cryptocurrency assets, add various fund structures through innovative synthetic derivatives, and realize more use cases for its governance token CHESS. Tranchess is seeking to expand to multiple chains and establish a mature technology and marketing team to collaborate with other protocols in the ecosystem.

3. Business Situation

Tranchess currently has a circulating market value of approximately $90 million, with 10% of tokens released, and a fully diluted valuation of about $900 million. Currently, it ranks 439th in circulating market value on the coingecko platform. The price of the platform token CHESS has dropped from a high of $5.4 in August to $3 now, with a retracement rate of 44%.

Since its launch on June 24 this year, the platform has accumulated $1.7 billion in TVL, ranking third in TVL among projects on the BSC chain, second only to Pancake (trading platform) and Venus (lending platform).

Tranchess has a high user concentration. The figure below shows the daily trading volume and trading account numbers for QUEEN, BISHOP, and ROOK token contracts. Comparing daily trading volumes, QUEEN's daily trading volume is around 80 million, while BISHOP and ROOK average only 6 million; comparing daily trading account data, QUEEN has an average of 200 daily trading accounts, with an average trading volume of around $400,000 per account, while BISHOP and ROOK have only a few daily trading accounts.

Tranchess users mainly hold QUEEN tokens. Among the three tokens, BISHOP and ROOK tokens total only 46 million, while the rest are QUEEN, with QUEEN's value accounting for about 95%.

In summary, Tranchess users mainly buy and hold QUEEN tokens, with very few users splitting and trading QUEEN. Currently, the risk-tiered products offered by the platform have not attracted user interest, and the core users are large holders with substantial idle BTC looking for quality mining pools.

4. Team Situation

Aside from co-founder Danny Chong, the team is anonymous. Danny Chong has over 16 years of experience in the banking industry, having been responsible for the FX and Rates sales SEA department at Crédit Agricole CIB. Other team members are distributed globally, with rich experience in the technology industry (Microsoft, Google, Facebook) and the financial industry (Morgan Stanley, UBS).

Tranchess has raised $1.5 million in seed funding from top venture capital firms, including Three Arrows Capital, The Spartan Group, Binance Labs, Longhash Ventures, IMO Ventures, and several crypto opinion leaders. This funding will be used to expand the product to a multi-chain system and prepare for a transition to a DAO structure by the end of the year.

Section 3: Business Analysis

1. Industry Space and Potential

The Tranchess platform aims to address the following market demands and user pain points:

a. Institutional clients/large holders holding a large amount of idle BTC positions --- providing index-enhanced products

● Quick redemption in the primary market, no lock-up period

● Sufficient trading depth in the secondary market

● Stable enhanced yields

b. Low-risk preference --- efficient, high-yield lending

● Few low-risk products on the market, with low yields

● Low capital utilization efficiency, requiring dual-asset trading pairs

c. High-risk preference --- capital utilization efficiency

● Improve capital utilization (no need for excessive pledging, reducing costs)

● Reduce liquidation loss risks

Currently, BTC holders have substantial assets, and related wealth management services in the market are still in the early stages of development, indicating a broad development space and potential in this sector.

Since the invention of Bitcoin-pegged coins, the number of Bitcoins on Ethereum and BSC has been continuously increasing. Currently, there are 18.8 million BTC in circulation, of which approximately 250,000 BTC are mirrored assets on the ETH platform, and about 110,000 BTCB (BTC mirrored assets) on the BSC platform. Currently, there are 30,000 BTCB deposits on the Tranchess platform, absorbing one-third of the BTCB on the BSC platform.

So far, only 2% of BTC has participated in the new ecosystem. Long-term BTC holders are usually very concerned about asset security. Although the DeFi market can provide better returns, the cumbersome cross-chain operations, the complexity of DeFi contracts, and the risks associated with various codes have become a barrier for BTC assets to enter the DeFi market.

Compared to other BTC asset management products, the QUEEN token on the Tranchess platform, as a purely pegged BTCB asset passive index, does not allow the underlying locked BTCB assets to flow into exchanges or other platforms for profit, which increases the security of BTCB assets.

The genuine demand for tiered products is key to the long-term sustainable development of the platform. Currently, tiered products in the market, such as Barnbridge and Saffron, have seen relatively weak development. Risk-tiered products are very complex, with low standardization, and face multiple challenges regarding liquidity, security, and yield. Currently, the main users of the Tranchess platform do not have a demand for purchasing tiered sub-funds; the growth of its TVL scale comes solely from the high rewards from the issuance of Chess tokens. The main users of the Tranchess platform are currently QUEEN holders, and the trading volume of tokens on the platform's secondary market is also very inactive. From the long-term development perspective of the platform, if there is no genuine demand for tiered products, a single asset passive index fund is meaningless and cannot bring real profits to the platform. People are willing to pay for risk-tiered products and can trade them in large volumes, which can create long-term sustainable profits for the platform. The future development of tiered products remains a significant challenge for Tranchess.

Competitive Project Analysis

Currently, Tranchess's core business direction is to provide wealth management products for users' idle BTC assets, with the highest overlap in business with the BadgerDAO project. The goal of Badger DAO is to bring BTC assets into other blockchains, primarily providing wealth management products centered around BTC.

BadgerDAO's business model is similar to traditional yield farming pools, importing BTC mirrored assets such as renBTC and wBTC into various exchanges to provide liquidity for profit.

BadgerDAO offers two products that track BTC with native yields:

DIGG is an algorithmic stablecoin based on BTC prices, which attempts to keep the price of 1 DIGG equal to the price of 1 BTC by dynamically adjusting the supply of DIGG. The existence of DIGG provides a completely decentralized way for users to hold BTC-like assets on other platforms (assets like wBTC and BTCB have centralized components).

ibBTC is an interest-bearing BTC token, where users can stake BTC-like assets to obtain ibBTC, which will earn the average yield of the entire staked BTC-like asset pool on the Curve platform.

Compared to BadgerDAO, Tranchess's products are much simpler and more closed; Tranchess products do not derive any profits from external projects, and current yields come entirely from within the platform. Compared to BadgerDAO and similar products on BSC, Tranchess stands out as a leader in BTC asset management.

Scarcity of BTC Asset Management Products on the BSC Chain

The following shows the yield situation of BTC-related wealth management products on the BSC ecosystem, excluding Tranchess. The first is the BadgerDAO platform, and the second is the Belt.fi platform.

BadgerDAO has a TVL of $800 million on the ETH chain, but only $200,000 on BSC. In comparison, Belt.fi's TVL far exceeds BadgerDAO's scale on BSC. This huge disparity is mainly due to the current core demand of BTC idle asset users for stable returns; low-risk single-coin lending and single-coin yield farming projects match the real market demand. The yield of BTC yield farming pools on Belt.fi is only 3.4%, having absorbed 3,496 BTC, approximately $200 million in TVL.

The QUEEN token provided by the Tranchess platform, as a single-coin wealth management project, has no liquidity or impermanent loss risks and offers extremely high yields, perfectly hitting the target user demand on the BSC platform. Currently, the incentive yield provided by the platform ranges from 10% to 33% (higher in the early stages), far exceeding that of the Belt.fi platform.

A key question arises: Can the CHESS token on the Tranchess platform continue to provide such yields above the market? By understanding the history of BadgerDAO, we can gain some insights and warnings.

History of BadgerDAO

The historical TVL of BadgerDAO has been a roller coaster. (BadgerDAO's main business is on the ETH chain; the following analysis is based on platform data on the ETH chain.)

Similar to Tranchess, BadgerDAO initially gathered $2 billion in TVL in a short period. At that time, the fully diluted valuation of BadgerDAO was about $1.5 billion. Subsequently, the TVL rapidly declined, with a maximum drop of about 80%, and the current TVL is about $800 million, with a current fully diluted valuation of $700 million. The historical TVL trend chart is as follows:

The historical price of BADGER also saw an initial rise followed by a decline, with a maximum drop of about 90%, as shown below:

BadgerDAO initially experienced a "Davis Double," followed by a "Davis Double Kill." February was the peak development period for the platform, with annualized yields from BTC token incentives reaching 20%-500%. Subsequently, the growth of TVL began to weaken, the token price started to decline, platform yields began to drop, and TVL subsequently plummeted, forming a "Davis Double Kill." Currently, the TVL of the BadgerDAO platform has started to rise slowly, around $800 million, with BTC-like asset yields ranging from 5% to 50%, with specific yield distribution depending on each account's incentive coefficient (the more various assets locked on the platform, the higher the incentives and yield rates).

Comparing the early development phase of BadgerDAO, the current growth rate of Tranchess's TVL has slowed, and yields are gradually declining. Will it experience a roller coaster like the BadgerDAO platform?

This question has no answer, but through the subsequent valuation analysis, we may gain clearer insights.

3. Token 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 contracts indicate that the 60 million tokens allocated to the team and most or all of the tokens allocated to seed round investors will begin to exit linearly from September 23, 2021, with exits completed over three years and two years, respectively. According to the white paper, the community incentive plan will complete its exit in about four years. Of the 150 million tokens allocated for community incentives, 120 million are being distributed on the Tranchess application. CHESS is distributed to QUEEN, BISHOP, and ROOK holders in a fixed ratio of 3:4:2.

Token Utility

The CHESS token currently has three utilities:

a. Allows users to vote to support the interest rate incentives that BISHOP holders can receive;

b. Receive 50% of protocol income (BTCB);

c. Obtain a higher yield coefficient by staking CHESS.

To participate in governance and benefit from protocol refunds, users need to lock their CHESS tokens for a certain period, ranging from one week to four years. The number of veCHESS (voting-escrowed CHESS) received by users when locking CHESS increases linearly from 0 to 1 (i.e., locking 1 CHESS for 1 year will yield 0.25 veCHESS, while locking 1 CHESS for 4 years will yield 1 veCHESS). Currently, about 57% of the circulating supply is staked, with an average lock-up period of 4 months. The current average yield incentive for locked tokens is as high as 60.5%.

4. Risks

1. Growth Issues

The current user demand for Tranchess is primarily for holding QUEEN tokens, with genuine demand for the platform's tiered tokens being very weak. Users mainly hold tokens, leading to low platform trading volume. Under the current operational circumstances, it is challenging for the platform to maintain long-term sustainable high yields. The current growth of TVL has begun to weaken, and if the platform cannot enhance the genuine demand for tiered funds, it may encounter a "Davis Double Kill" situation.

2. High User Concentration

Tranchess users are primarily large holders, leading to high user concentration, low trading demand, and limited future decentralization of platform governance.

3. Token Selling Pressure

The high proportion of locked Chess tokens and the average lock-up period of 4 months may lead to significant token selling pressure at the end of the year.

Section 4: Preliminary Value Assessment

1. Five Core Questions

What stage is the project in its operating cycle? Is it in the mature stage or the early to mid-development stage?

The project is currently in the early to mid-development stage. The BTC asset management sector is broad, and the tiered fund market has yet to open up, presenting significant imaginative space for the project. However, whether users have a demand for such risk tiering still needs market verification.

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

Tranchess is currently the highest-return, lowest-risk BTC asset management platform on the BSC platform. Its high returns are based on the outlook for genuine demand for tiered funds in the future. However, it appears that the platform has yet to develop real user demand in this direction, with a low proportion of staked tiered sub-fund tokens and low trading volume.

Is the project's mid-to-long-term investment logic clear? Does it align with industry trends?

The mid-to-long-term development logic of the project is to help BTC users manage assets and risk tiering effectively. The current high yield of the platform comes from the rapid growth of TVL in the early stages, but the platform currently has very limited genuine demand and trading volume for tiered funds, leading to significant uncertainty in the future.

What are the main variable factors in the project's operations? Are these factors easily quantifiable and measurable?

Whether the project can genuinely tap into the market's demand for risk tiering of BTC assets remains to be verified. Current data shows that the market has not yet reflected such demand, with large holders primarily holding low-risk, high-yield QUEEN tokens. Even with rapid growth in TVL, the demand for tiered sub-fund tokens remains very low.

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

The project plans to transition to DAO governance by the end of the year. Currently, users are mainly composed of large holders, and although the TVL is high, the community has few active members.

2. Valuation Level

Before establishing a valuation model for Tranchess, let's briefly outline the core value points of its platform. The following analysis is primarily hypothetical, aimed at better understanding the project's core value points and does not represent the actual development direction of the project.

The value of the Tranchess platform = asset management fees + trading fees

Trading fees include transaction, split, merge, and redemption fees. Currently, the proportion of transactions and splits on the platform is very small. We assume that the platform maintains its current operational situation, focusing solely on asset management fees as core income, and how the platform valuation would proceed.

Without considering trading fees, the platform's revenue is primarily from a 1% management fee, which needs to be redistributed to asset owners (those paying the 1% management fee) and other CHESS holders. This is equivalent to asset owners taking out 1% of their assets and redistributing it to themselves and all CHESS holders. This model is essentially a zero-sum game, where early entrants gain high returns, and later buyers bear the losses.

This valuation uses a discounted cash flow model, assuming that Tranchess receives a fixed BTC management fee each year, estimating the total value of the platform through the discounted value of future management fees.

The model valuation assumptions are as follows:

● Platform market value = discounted asset management fees

● The locked BTCB on the platform is a constant (between 30,000 BTC and 120,000 BTC)

● Management fees are charged at 1% of the BTC value annually

● Discount rate is 4%, with the final discount factor = (1 + 4%) / 4%

● Final valuation = discount factor * management fee (in BTC) * BTC price

*The platform management fee is in BTC terms, so its final valuation is also related to BTC price fluctuations. The following valuation is based on a BTC price of $56,000.

We can derive the following valuation situation:

The current fully diluted market value of Tranchess is around $900 million, corresponding to a long-term managed asset scale of 60,000 to 70,000 BTC. Currently, Tranchess manages 30,000 BTC, and under this model assumption, the market expects Tranchess to maintain an average management scale of 60,000 to 70,000 BTC in the future.

Regardless of the valuation level, further assuming that Tranchess's management scale can indeed grow to 60,000 to 70,000 BTC and maintain that level, how would the platform's yield change at the current reasonable valuation level?

Regardless of the valuation level, further assuming that the Tranchess platform's TVL continues to grow at a rate of 3% per week, reaching a management level of about 60,000 BTC by March next year. If Tranchess maintains its current valuation, with CHESS remaining at $3.3, how would the platform's yield change?

The model calculation is as follows:

In the above deduction, the TVL, token issuance speed, and CHESS price after October 14, 2021, are all hypothetical data, with the token issuance speed assumed to continue decreasing by 4% per week.

From the above deduction, it can be seen that as TVL grows and token distribution decreases, the platform's average yield will return to single digits by early next year. In reality, it is challenging for the platform to achieve a situation where yields continuously decline while TVL continues to grow. To maintain a high yield level, market valuation expectations need to be further raised, and TVL needs to grow more rapidly. A platform that relies solely on management fees is merely a speculative game about expectations, unable to generate truly sustainable long-term income, merely consuming internally, with earlier participants profiting at the expense of later ones.

The above model is not feasible. The Tranchess platform must develop the demand for its tiered funds, encouraging users to trade and be willing to pay real costs for the platform's tiered functionality, which can provide a long-term sustainable profit source for the platform.

Given the current actual situation of the platform, the demand for tiered sub-funds is very weak. The value of staked QUEEN tokens is $1.5 billion, while BISHOP and ROOK only total $50 million.

If the Tranchess platform cannot stimulate genuine tiered demand in the market, no matter how large the market scale expectations are, it will ultimately halt the expected growth and enter a downward spiral.

Section 5: References

Project Whitepaper

https://docs.tranchess.com/whitepaper

Tranchess: A New Species of DeFi Structured Fund

https://www.chainnews.com/articles/449423107596.htm

Tranchess Protocol - "Making BTC the Star of the DeFi World"

https://www.chainnews.com/articles/811802424955.htm

Picolo Research Explains the Risk Tiering Protocol Tranchess in the BSC Ecosystem

https://www.chainnews.com/articles/979757679262.htm

Introducing Tranchess

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