Sept. 9, 2024: Strike it $RCH 🛋️💰
Among options protocols, is SOFA.org King? Good?
This weekend, SOFA.org applied for a gauge vote.
A beauty of following Curve as our beat is access to the nonstop drumbeat of innovation. Whenever we fear DeFi innovation has dried up, we’re always pleasantly surprised to see new protocols emerging and coming to our attention via Curve listings. This weekend it was SOFA.org
Since Curve has had a cushy relationship with couches in the past, we’ll provide a short overview of the protocol for today’s article.
July 6, 2023: The Cash Couch 🛋️💸
Thank you to all who turned out to ETH Barcelona and attended the panel on Risk Factors in Stablecoin/DeFi Design. Really enjoyed this conversation, make sure to follow giga-brain fellow panelists @TheBlockAdopter and @Tiza4ThePeople as well as the outstanding moderator
What is SOFA.org?
According to their gauge application:
“It aims to facilitate the tokenization and on-chain settlement of Real World Assets (RWA) and financial products, creating a decentralized clearinghouse”
Based on their app, their “structured product” functions like an option.
How does it work?
According to their docs, their vaults function as a decentralized clearing house.
Poke into their application, and their structured product unmistakably resembles options trades using USDT, RCH, and stETH as deposit assets:
Given various deposit assets ($USDT, $RCH, $stETH), you have a few different “reference assets” (ie BTC, ETH) and you get paid off accordingly if you correctly guess whether the asset will go up, down or stay in the same range over a window of time. In other words, an option…
From the screenshot above, you can see it’s packaged as both ordinary and leveraged scenarios. For the BTC “bull case”:
Bitcoin’s around $55K right now… if it hits the magic price of $59K (+7%) by 5 days from now, this contract pays out 16.75%… if it does nothing, then it still pays out 5.42%… is this a free money hack?
Dive into the contract terms and you get more info on the source of the yield:
There’s some fees from staking the deposit and earning interest, with the remainder sourced from emissions of the $RCH token (see below).
You also can sacrifice this base yield in favor of higher payouts… via their leveraged products, where the payouts are higher but the “base yield” turns negative.
If their structured products are not to your liking, you also have the ability to construct your own:
In addition to this “Earn” application, they also have a “Surge” application that more simply requires purchasing a ticket and paying out a premium for landing within a certain price range at expiry.
What is $RCH?
Their protocol utility token is $RCH, which recently underwent a fair launch. From their gauge application:
$RCH has a total supply of 37 million tokens, with 25 million (~67%) pre-minted and locked in a Uniswap liquidity pool. The remaining 12mm (33%) are earmarked to be airdropped to protocol users and supporters. Furthermore, all protocol revenues will be used to buyback $RCH in Uniswap on a regular basis, ensuring a long-term deflationary supply design and long-term value accrual to token holders.
Further explained in their tokenomics documentation, the Uniswap liquidity pool is the target of a recurring burn. “All SOFA protocol revenue buys and burns $RCH from Uniswap” so that “increased transactions lead to more $RCH burns.” After the initial two thirds of the token supply was deposited into the Uniswap liquidity pool, the corresponding LP tokens were “promptly destroyed” according to the docs, so it could not be withdrawn.
The only remaining source of $RCH is the airdrops to protocol users, which tapers off at ~20% every 6 months.
Their documentation also describes a separate $SOFA token that is purely governance, no profit-sharing, that does not appear to be related to this proposal.
Use of Curve
They initially launched via Uniswap. According to the governance post, the Curve pool launched yesterday is intended to “further stabilize and grow liquidity.” This pool was seeded with ~$100K.
Since there’s a large Uniswap pool for arb trading, the pool should be healthy enough, though there’s very little trading history as of yet.
Should You Use SOFA?
We’re based in the US, so we’re prohibited from using it in the first place. What’s more, we’re super risk averse, so we never advise using DeFi protocols anyway, especially not newer protocols.
Our general recommendation with DeFi, if you’re not technically sophisticated enough to audit a new protocol yourself , is to just give it some time to operate before you join. You can factor in more time to protocols that are more complex, and SOFA certainly appears complex…
They also don’t use Vyper, making it tougher for users to readily understand their contracts. They do operate a bug bounty program.
The contrary argument to our overly cautious take is that the $RCH rewards are highest for the first 180 days, so greater rewards for the early adopters who assume the higher share of risk.
Early users may derive some comfort from the three audits (two to three, depending on how you count Peckshield):
If you’re interested in onchain options protocols, you may also want to look into Stryke (formerly Dopex) for comparison. They’ve been operating on Arbitrum for quite a while without incident, so it may be a good way to interact with options markets that have less smart contract risk as they have stood the test of time.
Funny enough… back in the day, Stryke launched on Arbitrum, arguing that L1 was too expensive to support an options protocol. Now that we’re in a chilly DeFi winter and gas on mainnet often dips below 1 gwei, SOFA appears to have had no misgivings about launching on Ethereum and Arbitrum both. Sign of the times, perhaps…