After multiple vertical mergers, is Tribe DAO undervalued?
A major competitive advantage of Tribe DAO is that it stores assets through PCV.Source: Banklesshq
Original Author: Ben Giove
Translation by: Katie Gu, Planet Daily
A few months ago, Fei Protocol and Rari Capital merged their multi-billion dollar protocols into Tribe DAO. This merger set a precedent for how DeFi protocols can complete mergers in the future. The protocol seems to adopt a vertically integrated approach, with Tribe DAO aiming to own the entire DeFi stack.
Tribe now has a decentralized stablecoin, an innovative lending market, and a plan to incorporate other gaming projects, all while holding hundreds of millions in crypto assets, with only the DEX space yet to be "touched."
However, Tribe does not receive much attention in the crypto market, leading me to wonder, "Is Tribe undervalued?"
The Power of Mergers
Despite the significant drop in DeFi token prices, many protocols have improved their volatility due to their diversified asset reserves, solid competitive positioning, and influence.
Projects that meet this requirement include Tribe DAO. Born from the merger of Fei Protocol and Rari Capital, Tribe DAO represents a new "protocol mafia" and has quickly become a giant in DeFi.
With over $600 million in funds, Tribe has become a force within DeFi after combining Fei Protocol's stablecoin with Rari's independent lending market. Furthermore, each protocol has withstood significant tests early on, such as the decoupling after the issuance of FEI and Rari's development status, proving their resilience and capability to endure the harsh tests of DeFi.
So, how much is a project managing such a large amount of funds worth?
Overview of Tribe DAO
I will introduce the four sub-DAOs within Tribe DAO separately.
1. Fei Protocol
The first project of Tribe DAO is Fei Protocol. It is the issuer of the FEI stablecoin, which is the 11th largest stablecoin by market cap, with a supply exceeding $558 million.
FEI is an over-collateralized stablecoin pegged to the US dollar, supported by a series of assets (i.e., protocol-controlled value, PCV). Fei has deployed its PCV across various DeFi protocols such as Lido, Convex, and Fuse, generating yields and guiding liquidity.
A key feature of PCV is that it is entirely composed of decentralized assets, including ETH, decentralized stablecoins, and DeFi governance tokens.
Source: Dune Analytics
Although initially, Fei Protocol utilized mechanisms like direct incentives to achieve stability, Fei significantly broke its peg to the US dollar after launch. This prompted significant changes in Fei's design, such as the removal of direct incentives and the eventual launch of Fei V2.
Fei V2 includes several key upgrades, such as 1:1 redeemability between Fei and its underlying collateral, and plans to algorithmically manage PCV using Balancer V2.
Another service offered by Fei is Liquidity as a Service (LAAS). In partnership with Ondo Finance, LAAS helps DAOs reduce liquidity costs by providing the ability to lease tokens, as DAOs that deposit native tokens into Ondo's LP (liquidity provider) pool will see their matching amount of Fei. Fei earns a fixed fee based on the amount of liquidity provided, while the benefiting DAO is entitled to all transaction fees and bears the risk of temporary loss.
2. Rari Capital
The second major sub-DAO within Tribe is Rari Capital. Rari is best known for Fuse, which allows anyone to create their own independent lending market. Fuse is the third-largest currency market protocol on Ethereum, with over $789 million in TVL (total value locked).
Source: DeFi Llama TVL Dashboard
Fuse is highly customizable and offers more features compared to existing protocols. For example, administrators can change a variety of mining pool parameters, such as selecting their own oracle provider, while DAOs can launch liquidity mining programs from Fuse pools using a feature called flywheel, allowing users to borrow against their LP (liquidity provider) positions while earning rewards.
As mentioned earlier, Rari facilitated the creation of Tribe DAO through its merger with Fei. This was the largest transaction of its kind in DeFi history. The execution of the transaction allowed holders of Rari's native governance token RGT to trade their assets into Tribe at a rate of approximately 26.7 Tribe per RGT. Although some community members initially expressed concerns, the merger received overwhelming on-chain support.
The synergies brought by the merger have already begun to manifest, with many Fuse pools integrating Fei's liquidity, and the upcoming Tribe Turbo will fully leverage the capabilities of Fei and Fuse.
3 & 4. Volt Protocol and Midas Capital
In addition to Fei and Rari, Tribe DAO has recently added two new protocols that are likely to follow up through Tribe Launch, a program aimed at bringing new DAOs into the Tribe ecosystem.
The first is Volt Protocol, which is developing a stablecoin, Volt, that tracks the growth of the CPI (Crypto Price Index, also known as the Dow Jones of the crypto world). The protocol utilizes Fei and Fuse in its design and launch mechanisms and will be governed by the VCON token, with 25% of its supply owned by Tribe DAO.
The second is Midas Capital, which aims to help expand and deploy Fuse onto EVM-compatible chains. While Fuse has already been deployed to Arbitrum by the Rari team, Midas is expected to help Rari seize opportunities in emerging markets, with over $40 billion in TVL on non-Ethereum L1 and EVM chains.
What are Tribe's Competitive Advantages?
1. Protocol Controlled Value (PCV) Stored Assets
Source: Fei Analytics
One of Tribe DAO's main competitive advantages is its stored assets through PCV.
Tribe DAO can deploy its PCV to earn yields or use it to create Fei, referred to as protocol-owned Fei (POF).
Like PCV, POF can be deployed in ways that are strategically beneficial to the DAO, such as generating cash flow by earning additional yields and strategically guiding liquidity between different Fuse pools and AMM pools.
Source: Fei Analytics
Despite being below its peak in November 2021, the current value of PCV is $662 million.
Delving into its composition, we can see that 93.8% of the PCV is composed of ETH and stable assets. This means that the PCV should be able to maintain a robust portion of its value under bearish market conditions, as seen in early 2022, allowing Tribe to maintain a healthy financial position for a long time to come.
Additionally, the emphasis on these assets can also enhance the utility of PCV and the opportunity to earn yields, as these two groups of assets are the most widely integrated across the entire DeFi protocol.
This large and growing pool of stored assets will help Tribe DAO become a leader in DeFi and allow it to exert significant influence over yields and liquidity flows.
2. Vertical Integration
An important benefit of the Fei-Rari merger is that it helped Tribe DAO vertically integrate by providing a stablecoin and lending market. This covers two of the three main types of protocols, with the third being AMM (automated market maker), which DAOs need to control all layers of the DeFi stack.
Essentially, "controlling the stack" means that DeFi protocols, or the DAO mafia, can influence interest rates, liquidity flows, and create their own autonomous financial systems without relying on any third-party protocols. In an increasingly competitive and rapidly changing DeFi environment, this can greatly enhance the long-term survival chances of the DAO and significantly improve their competitive positioning.
While Tribe DAO does not currently own its own AMM, it has established a close relationship with one through its close ties with Balancer. In addition to planning to utilize a DEX to manage protocol-controlled value (PCV), Tribe DAO and Balancer executed a $9 million token transaction in November 2021. This is likely to keep the two protocols closely linked in the foreseeable future, helping to fill Tribe DAO's "AMM gap."
3. Talent Capital
Tribe DAO is composed of highly talented developers, contributors, and community members.
Before the merger, both Fei and Rari successfully established product-market fit, with Fei's market cap reaching $756 million, more than double the historical low set in July 2021, while Rari's TVL was $1.16 billion at the time the acquisition proposal was made. This demonstrates the strong development, business, and community-building capabilities of both teams.
Moreover, considering the innovations brought by Fei and Fuse, as well as the ability of these two teams to continuously release new features and products, the DAO and community seem well-positioned to adapt to the fast-changing DeFi environment.
4. Partnerships and Collaborativeness
The teams at Fei and Rari have demonstrated outstanding business development skills.
Over 20 DAOs have already launched or plan to launch Fuse pools, while Fei has partnered with several projects, including Index Coop, Angle Protocol, and the aforementioned Balancer.
This indicates that Tribe DAO has a high degree of collaborativeness, capable of forming strategically reciprocal partnerships within DeFi. Given the increasing value seen in DAO-to-DAO collaborations, and one of the core DeFi value propositions being composability, Tribe is less likely to be at a disadvantage.
Tokenomics
As the saying goes in traditional stock markets, "stocks are not businesses," in the crypto market, "tokens are not protocols."
As seen over the past year, many infrastructure-strong DeFi projects have significantly underperformed against market indices and benchmarks, largely due to poor tokenomics design.
Let's take a look at Tribe's tokenomics to see if it can avoid a similar fate.
- Token Distribution Mechanism
Source: Medium's article on Tribe distribution mechanism
As we can see, Tribe's initial allocation is highly decentralized, with only 18% going to the team and early investors. The distribution between these two groups is significantly lower than many other DeFi protocols, with Genesis participants receiving twice the allocation of private round investors.
Source: Medium's article on Tribe distribution mechanism
Additionally, Tribe benefits from long vesting periods, with vesting periods for investor and team tokens exceeding 4 years and 5 years, respectively. Furthermore, the team allocation is reverse-weighted, meaning token holders will have to endure initial inflation in the early stages of the protocol.
This combination of a fairer token distribution and longer vesting periods indicates that Tribe DAO is highly long-term oriented and may make decisions emphasizing long-term stability and sustainability.
- Token Utility
Tribe plays two key roles within Tribe DAO and the Fei protocol:
- Governance rights
- Protocol support
Like most DeFi tokens, Tribe is used as a whole for governance within the DAO, allowing holders to vote on various projects (such as PCV allocation). However, Tribe also holds minor governance rights over the assets held in the DAO treasury or PCV, with AAVE, ANGLE, BAL, COMP, CRV, CVX, INDEX, and TOKE constituting the tokens that can exercise these rights.
Tribe DAO is one of the pioneers of micro-governance in DeFi, as it is known for utilizing INDEX micro-governance to help reach the threshold for Fei's launch on Aave. Although these tokens only represent a small portion of the protocol-controlled value (PCV) relative to ETH and stable assets, Tribe's extensive micro-governance rights may prove valuable to the DAO in the future, increasing the token's appeal among such buyers.
The second main use of Tribe is to provide protocol support for FEI. Similar to MKR in MakerDAO, if Fei's collateral is insufficient, Tribe will be minted, redeemed from PCV, and re-collateralized for the protocol.
- Supply and Demand Dynamics
The main demand driver and value appreciation mechanism for Tribe is buybacks, as 20% of the "protocol equity," i.e., the value of PCV, will be allocated to Tribe purchased weekly if all Fei is redeemed for its underlying collateral, which will then be redistributed back to the protocol treasury.
In addition to helping incentivize the growth of PCV and manage accountability, these buybacks should contribute to the sources of acquisition pressure for Tribe. To date, buybacks worth over $13.28 million have been executed.
While there is a risk of permanent significant inflationary shock if Fei's collateral is insufficient, Tribe is currently only released through "Fei-Rari" liquidity mining, with "FeiRari" being a Fuse pool operated by Tribe DAO. Although this may create selling pressure on the token as it is mined by yield farmers, in the long run, the protocol is well-positioned to avoid reliance and may completely eliminate emissions due to the size of the protocol-controlled value (PCV).
As it stands, Tribe's tokenomics appears very favorable for investors, especially compared to the crazy inflationary tokenomics seen in DeFi.
Finally, Fei Protocol co-founder Joey Santoro has proposed a tokenomics improvement plan that could further enhance the supply and demand dynamics.
- Discounted Cash Flow (DCF) Valuation
Now that we understand Tribe DAO's products, competitive advantages, and tokenomics, let's take a look at Tribe DAO's financial situation and attempt to value it using a discounted cash flow (DCF) model.
Tribe DAO's cash flow primarily comes from three sources:
- Protocol-owned Fei (POF) earnings generated from distributing Fei across DeFi protocols.
- Earnings from protocol-controlled value (PCV) by similarly deploying these assets across various DeFi protocols.
- Platform fees generated from Fuse, which are derived from the spread paid to depositors and borrowers.
The model attempts to predict the growth of the Fei stablecoin and Fuse as a means of estimating the cash flows generated from these three sources.
The model uses a discount rate of 35%, which aligns with the average range venture capitalists use to value startups. Additionally, the model employs a terminal growth rate of 2% to track expected global growth.
The model assumes that the stablecoin market will grow 227% over the next five years at an increasingly slower rate. Given the competitive advantages mentioned earlier, Fei is expected to benefit, with its market share projected to grow continuously over the next four years as the scale of PCV increases proportionally.
The model also predicts that by deploying to AMMs, lending markets, and liquidity staking services, the DAO will be able to achieve an initial yield of 5% on protocol-owned Fei and a 3% yield on PCV, with the latter expected to decline as the protocol scales.
The model predicts that the lending sector on Ethereum L1 and L2 will grow at a slowing rate of 556% over the next five years. Considering the potential market for all DeFi assets, Fuse is expected to capture an increasingly larger market share in the industry (the model does not account for Midas Capital's capital deployment).
Although the utilization rates of different pools and the interest earned can vary significantly, the model predicts that Rari will achieve an overall utilization rate of 0.25% based on AUM (assets under management).
By summing the total cash flows generated by the two protocols and discounting them to the present, we calculate that Tribe's fair value lies between $1.63 and $3.52.
At the current price of $0.58, this implies an upside of 207%-564%.
Risk Assessment
1. Competitiveness
The stablecoin space is highly competitive, with 24 companies having a market cap exceeding $100 million and 9 companies exceeding $1 billion. Given the vast potential market in this space, competitiveness is unlikely to diminish in the foreseeable future.
Competition is equally fierce in isolated lending markets, with emerging protocols like Euler Finance and Silo Finance attracting investor interest. Additionally, the recently launched Aave v3 includes some independent lending features, further muddying the competitive waters.
2. Protocol Controlled Value Risk (PCV Risk)
As mentioned earlier, Fei's PCV (protocol-controlled value) is stored across various protocols. While the risk is distributed among these protocols, if one or more protocols are exploited, or if DeFi suffers a significant systemic event, a large portion of the PCV could be lost, putting Fei and its multiple Fuse pools at risk of under-collateralization.
3. Emissions
Despite ongoing buybacks, there are still active Tribe emissions, making the token a target for miners and potentially putting downward pressure on Tribe's price. Furthermore, considering the reverse-weighted equity and the potential for significant appreciation in price, reverse-weighted equity may pose a risk of substantial future sales by the team and core contributors.
4. Regulatory Concerns
Stablecoin issuers and the entire DeFi space may face crackdowns from regulators. Although Tribe DAO employs fully decentralized on-chain governance, it still faces the risk of scrutiny from government agencies seeking to control DeFi.
Conclusion
With two innovative protocol products, Volt Protocol and Midas Capital, a massive protocol-controlled value (PCV) stored asset base, and a strong group of contributors engaged in continuous building, issuance, and trading, Tribe DAO seems poised to become a DeFi mafia, emerging from this bear market.
While the protocol faces several significant sources of risk, its strong tokenomics and valuation suggest substantial upside potential at current prices. When investors look at Tribe, we should not abandon the entire forest for a single tree.
Disclaimer: This model is a framework for assessing Tribe's potential value, not a final judgment of its worth.
