Market Watch #3
Friend Tech: Are Keys Trading Profitable?
Since its launch in August, the social app Friend Tech has grown quickly, attracting 270K users and achieving an all-time-high TVL of $48M. This rapid growth has generated over $30M in trading fees — split equally between creators and the platform — establishing the app as the third most profitable crypto protocol in the past two months, only behind Ethereum and Tron.
While Friend Tech displays impressive numbers and seems to have achieved product-market fit with genuine social interactions, a deeper trend exists; a significant portion of the activity is speculative, driven by anticipations of an airdrop.
Many users engage in points farming through the (3,3) farming behavior, feeding a reflexive cycle that amplifies trading volume, which boosts the app's revenue and also attracts new users.
Beyond this, however, lies an often overlooked challenge, especially for speculators; the inherent difficulty in exiting positions without a loss due to the Bonding Curve Pricing Mechanism.
But first, we must understand how it works under the hood. Friend Tech's pricing mechanism follows a bonding curve. In simple terms:
• When you buy a key, the supply increases by one. Conversely, when you sell a key, it decreases by one
• There is also a 10% fee for buying and selling
Essentially, for a trader to exit his position at breakeven, his key price needs to increase by a minimum of 22% after purchasing it.
But how much liquidity must be added for it to happen?
The following equation describes the amount of ETH required to flow into his keys for him to exit at breakeven after purchasing it, based on his buy price:
Visualizing this effect on a chart, as the key price goes up, the harder it becomes for the marginal user to exit without losing money, since the amount of ETH needed to flow into his keys grows quadratically.
Now, why do users still trade keys despite having this mechanism working against them?
It is likely that they believe the future airdrop will be more than their losses. This also aligns with portfolio value being the most important factor for weekly points distribution.
In the end, the real beneficiaries seems to be the protocol and creators, consistently reaping trading fees on top of speculative activity.
$APEs in Governance
Throughout the NFT frenzy of 2022, BAYCs (Bored Ape Yacht Club) prominently stood out as one of the most influential projects in the space. Its popularity extended beyond its crypto niche, attracting the attention of mainstream celebrities from disparate industries, with many acquiring their own BAYCs. Crypto and NFTs have since experienced a substantial downturn over the past year — ApeCoin and BAYCs were no exception, both experiencing a valuation decline of >85% from their respective peaks.
Despite these conditions the ApeCoin DAO remains active, drumming up proposals for governance. Recently, two highly debated ApeCoin DAO proposals were approved after two months of extensive discussion by the community:
• API-297 put forth by Yat Siu, Chairman of Animoca Brands, and
• AIP-304 proposed by Machi Big Brother, a noteworthy contributor to BAYC’s growth
Below is a simplified comparison between the two proposals:
Contrary to the community's polarization over the comparison of these proposals, they are in fact, distinct approaches toward a shared objective — a sentiment held by Yat Siu himself as he sees them as complimentary to each other. While the grants vary in approach, they share a common goal of enhancing ApeCoin DAO's intangible value through improved IP value, a stronger brand perception, and fostering goodwill in the Web3 community.
With BAYC being the poster child of Yuga Labs, we examined the price impact these proposals had on the collection. When AIP-304 was posted on 7th July, its floor price saw a 20% increase — likely due to speculative buys and floor asks being lifted.
The introduction of AIP-297 on July 13th, however, had little effect on floor prices and saw ordinary trading volume, despite its proposal for an NFT floor-sweep. This was because the proposed sweep size, using 50.75% of its 750k $APE grant allocation for only 8 BAYCs, was simply not material enough to be front-run.
On Sep 21, AIP-297 and AIP-304 was passed by the ApeCoin DAO. Floor prices have since fallen by 30% from July’s peak due to a soft crypto market and the understanding that these proposals have few near-term effects on the value of Yuga NFTs. In an environment of low liquidity and scarce capital, it is wise to avoid short-term speculation of Yuga NFTs solely based on these two proposals.