Illuvium LINK Flash Pool Analysis - Part 1: My Experience

By Deraji | ILVFi | 31 Oct 2021


We did it!  We survived the Illuvium LINK Flash pool!  As I’ve shared in previous posts on flash pools (LINK, XYZ), there’s some big risk (and big transaction fees) to participate in these opportunities to earn Illuvium’s governance token ILV (or the sILV gift card).  I’ve followed the flash pools in the past, though previous pools did not align with my crypto holdings, so I only commented from the sidelines.  This time, the flash pool hit my #5 holding, Chainlink, so I decided to see first hand how the Illuvium flash pool treated an “ordinary” investor.  In this article, I’ll share my personal performance and assessment of the flash pool.  In my article here, I take a more holistic view to the pool, including my recommendations to improve future pools, should they continue.

What’s the point of flash pools?

The idea behind flash pools is to attract members from other crypto communities to Illuvium as a means of marketing.  The idea is to increase decentralization, and draw more attention to the Illuvium project with an opportunity to earn “free” ILV token for staking a different token with Illuvium.io.  Flash pools will draw whales from other tokens, and the whale will draw their followers to the project.

Collateral damage is that flash pools are of limited duration, and draw in existing ILV stakers (not expanding the base).  There’s also a risk that those holding the targeted token will participate and have a negative experience in their first interaction with Illuvium.

To attempt to mitigate the issue of past flash pools, the LINK pool was expanded to about a month, starting on September 29 and lasting through October 29.  In total, about 3560 ILV were distributed via the flash pool, which was 2% of the total staking rewards issued during this time.  The APY (which I hate as a metric) went from just over 100% at the start of the pool, down to as low as 18.6% during the staking period, thanks to Drprofitt4, who we’ll discuss more later.  Previous flash pools lasted only for two weeks, but due to higher Ethereum transaction fees, the period was expanded to increase the opportunity for “smaller” investors to have a positive experience.

How did I do?

I staked a little over 200 LINK or about $6k (at $30 LINK), which I thought would be a reasonable participation level.  I’m a more traditional investor, new to the crypto space, so my holdings are ETH, BTC, SOL, ILV, and then LINK.  I’m not one that has ridiculous money in crypto thanks to earlier gains, so I feel as though I can represent “reasonable” exposure to crypto assets.  Given my interest in Illuvium, I decided to dive into the pool, knowing the risks, but wanted to be able to speak first hand from my experience.

Overall, I was in the 43rd percentile of participants (total of 818 unique wallets participating), so almost the middle (true median was 344 LINK).  I joined part way through day 1, waiting for “low” gas, but wanting to get in at the beginning.  I spent about $80 to participate so far, with a ~$20 transfer fee to get my LINK to the wallet I wanted to use, $10 for contract permission to use my LINK, and then about $50 for staking.  I’m waiting for gas to be “reasonable” again before unstaking and redeeming rewards.  Presuming I can unstake and claim for ~$60, my total expenses will be about $140.  

For my involvement, I was rewarded with 0.26 ILV.  Thanks to the recent increase in price (have you seen the trailer?), my rewards are worth about $260, meaning I netted $120 in a month.  Cool.  

A lot of that profit was thanks to the recent increase in price, as the value of ILV has more than doubled since the beginning of the flash pool, and there was an opportunity to buy ILV at $492 back then.  Which leads us to the idea of economic profit.  What were my other options rather than participating in the pool, and how would I have done taking a different path?

Economic Profit - The Investment Road not traveled

I want to introduce a new idea to my blog today, and that is Economic profit.  Below is the quick formula for this concept:

Economic profit = revenues - explicit costs - opportunity costs

The raw profit from my participation in the Illuvium LINK flash pool was about $120, as my revenue was $260, and my explicit costs will be about $140.  However, that neglects what I could have done as an alternative to participating.

So what were the opportunity costs that I gave up by staking my ~200 LINK with Illuvium for a month?  In other words, we’ll ask “what else could I have done for the past month, and how would that have performed?”  Let’s assume I’m a long term HODLer of LINK (which I am), so selling LINK wasn’t an option.  How could I have leveraged my assets effectively?  

  • Option 1: Leave LINK in CeFi, earn interest, save myself the ETH
  • Option 2: Leave LINK in CeFi, buy ILV with the transaction fee ETH
  • Option 3: Do nothing

Alternative Reality 1: CeFi - HODL ETH + LINK

First, I’m a fan of centralized finance (CeFi) as a passive (yet risky) means of generating some value from tokens you look to hold long term.  I use a mix of DeFi (liquidity pools) and CeFi for my long term holdings, in addition to just holding the token in a wallet.  CeFi is a term for firms like Celsius, Nexo, and BlockFi, where you leverage these “unbanks” as a custodial service to hold your tokens, and are rewarded with interest.  During the LINK flash pool period, one could earn about 3% APY for just storing your LINK.  

Second, I decided to spend ETH to pay my transaction fees.  At the start of the flash pool, ETH was trading a little below $3k.  As of today, ETH is over $4k, growing around 50% this month.  I gave up the opportunity to grow my existing ETH due to participating.

My potential value in CeFi interest would have been to earn about 0.5 LINK, so I gave up around $15 by participating.

My total ETH spent will be ~0.035 ETH, or around $150 at the current value, but I’ve already accounted for most of this in my “explicit costs.”  The aspect I’m missing is the potential appreciation of ETH during the month that I missed out on, which gives me an opportunity cost of about $30 (only considering ETH appreciation on my staking fees, not unstaking).

For the opportunity cost of just leaving my LINK in CeFi and holding my ETH, I had an additional “expense” of $45, meaning my economic profit of participating in the flash pool versus putting my LINK in CeFi was:

Alt Reality 1 Economic Profit = $260 - $140 - $45 = $75

Hooray!  Still positive!

Alternative Reality 2: Just Buy ILV

Let’s presume I was crazy excited about ILV after seeing LINK whales stake in the flash pool, but I decided to buy ILV directly rather than stake LINK.  How would I have done?  I could have committed my 0.035 ETH at the end of September to buying ILV directly at $492.  Presuming I had access to an exchange, I could have purchased around 0.2 ILV.  My cost basis would have been ~$100, meaning my one month profit would have been ~$100 due to ILV going from $492 to $1000.  Plus I would have still earned my LINK CeFi interest.  That means my opportunity cost was $100 from the ILV appreciation, plus $15 from the LINK interest.  Economic profit in this case would be:

Alt Reality 2 Economic Profit = $260 - $140 - $115 = $5

That’s still positive, but getting really close to breaking even.  I would have had Sushi exchange fees in the US, meaning my economic profit was slightly better than $5, but it also depends on me getting out of the flash pool for $60 in transaction fees, which is no guarantee, and I’ll lose opportunity to make interest in CeFi while my LINK remains tied up.

Alternative Reality 3: Do Nothing

The last option, and one of my favorites is to “do nothing.”  When you’re not sure, one of the best things you can do is nothing.  You’ll kick yourself occasionally for missing an opportunity, but you’ll also save yourself from rushing into some bad decisions in crypto.  Trust me, there are bad decisions you can make ape-ing into things.  For me, this is the same as alternative reality 1 above, though this may vary for others.

Overall, the best alternative opportunity was to buy ILV at the end of September, so that will be my basis for assessment of economic profit.


ILV of sILV for a New Investor?

All of this also presumes I claim ILV (which I will).  If I was a new investor to Illuvium, I would be faced with the choice to claim sILV or ILV.  Claiming ILV from the flash pool will lock rewards for the 12-month vesting period, meaning just buying ILV would provide the opportunity to sell to immediately realize the 100% appreciation profit. I’m “stuck” waiting until next November, hoping price remains at/above the current level in the period of greatest token unlock.  I do get the added benefit of “automatically staking” my 0.26 ILV, which I predict would be around 0.36 ILV in a year through yield farming, though I will have to wait another year to receive my rewards, plus owe additional claiming transaction fees.

If I chose sILV, I could participate in the upcoming land auction, though I’m not sure 0.26 sILV will be enough for a Tier 1 land, and selling sILV on the secondary market would give me a negative economic profit today at the “gift card” trades at ~$500 per sILV.

Selling sILV Economic profit = $130 - $140 - $115 = -$125

Claiming sILV and selling it, I would incur a $125 loss versus buying ILV directly and earning CeFi interest on LINK. 

My personal experience summary

Overall, I may sneak out of the Illuvium LINK flash pool with a slight economic profit, I hope.  It is highly unlikely that I participate in any future flash pools, as they truly aren’t designed for me or investors at my level.  I’ll track them and share my insights to hopefully help others understand, but at current ETH transaction costs, it is just not worth it relative to other opportunity costs.  Hopefully staking V2 further reduces transaction fees, but as I’ll share in my other post, it's still not likely worth it to participate.  

Which leads me to my further analysis, and whether Illuvium should do flash pools at all?

I’ll share this in a second post my statistical analysis on the pool along with recommendations on ways to improve flash pools.

Thanks for reading!  

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Deraji
Deraji

Crypto curious thinker, amateur economist, geriatric millennial gamer passionate about Illuvium. Happy to share my economic and financial assessment of this unique blockchain NFT Play-to-Earn project. patreon.com/ilvfi


ILVFi
ILVFi

ILVFI focuses on the upcoming P2E game, Illuvium, the first proposed AAA-quality video game based on blockchain technology and NFT ownership. We'll focus on both the game play, as well as the in-game and ILV governance token economics.

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