Illuvium LINK Flash Pool Analysis - Part 2: Assessment & Recommendations

By Deraji | ILVFi | 31 Oct 2021


Today, I’ll review the outcomes of the Illuvium LINK flash pool, with statistics on the pool, as well as my assessment of the pool’s impact, and recommendations to potentially improve future flash pools, should they be approved by the Illuvinati council.  I previously shared an introduction to flash pools here, and my personal experience and economic profit analysis of participation here

Overall pool stats - Illuvium LINK Flash Pool (my full statistics and data are available here)

29 September - 29 October

  • About 3560 ILV distributed
  • About $3,600,000 in value distributed to participants
  • 818 Unique wallets participated
  • Biggest wallet - Drprofitt4, 3.1 million LINK staked ($93 million)
  • Smallest wallet - 0.82 LINK ($24)
  • New Illuvium participants: 469 wallets (57.3%)
  • Previously staking ILV or SLP: 349 wallets (42.7%)
  • At the pool’s peak, about 1.2% of all existing LINK was staked with Illuvium.

The plankton wallet

The smallest participating wallet definitely isn’t a reader of mine.  They staked 0.82 LINK, with staking transaction fees of ~$55, they still need to unstake, and they earned 0.000978 ILV for participating.  Overall, they will likely spend $120 in ETH transaction fees to earn $0.98 in ILV for participating in the flash pool.  Said differently, they essentially bought ILV at $123,000 per token by participating in the flash pool.

This wallet was not the only example like this, and they had a buddy at just a hair under 1 LINK staked, earning 0.00133 ILV at a likely cost of $90k per ILV.  Neither of these wallets had previously participated in Illuvium staking.

In total, 46 wallets staked under 10 LINK (5.6% of participants), with transaction fees spent so far of a little over $2700 before unstaking.  In total, this group received 0.204 ILV.  Twenty one of these 46 were previous ILV or SLP stakers.  Obviously, all lost money by participating in the flash pool.  By losing money, I mean the cost of their transaction fees exceeded the value of the ILV rewards received at the current ILV price (assumed at $1000).

The whale impacts

The biggest whale participating in the LINK flash pool has an ENS name tied to their wallet of “drprofitt4.”  

The doctor was already a staker of both ILV and SLP, and thankfully only joined the flash pool on 19 October.  For their ~10 days in the pool, I estimate Drprofitt4 received 312 ILV, or about 8.7% of the total rewards.  This was the largest single recipient of rewards.  At their peak, Drprofitt4 represented 56.4% of the pool’s staked LINK.  

However, Drprofitt4 wasn’t the only whale in the pool.  In total, 30 unique wallets staked more than $1 million in LINK.  Of these 30, only 3 were previous participants in Illuvium staking, meaning the pool did achieve its goal of drawing 27 new whales to the project.  For their involvement, these 30 wallets received 1908 ILV worth around $1.9 million, or 53.6% of all rewards issued. On average, these whales each received 55 ILV or $55k for participating, subtracting out Drprofitt4’s share.

The remaining 788 participants shared 1652 ILV rewards, or an average of 2.1 ILV per participant.

If we assess those staking more than $100k in LINK, the total number of unique wallets rises to 137, and the rewards received by this group accounts for 3148 ILV, or 88.4% of the total issued.  Of the 137, 108 were not previously staking with Illuvium, so 78% new to the DAO.

This now leaves 412 ILV rewards for the remaining 681 participants, or 0.60 ILV per participant staking under $100k LINK.

For the distribution, Xastor helped by putting together a breakdown of value per wallet, though Drprofitt4 and the whale threw off the curve a bit.  Here's the chart, dividing wallets into 100 evenly sized buckets.  There is one wallet in Bucket 100, one in Bucket 84, then the other whales appear in buckets 2-54.  Due to the high differentiation of these 30 wallets, everyone else was lumped into bucket 1.  

b441625d1594938b6644b1edd49ecd791ca6b1037eb8259070f9ecadc720f5ac.png

For wallet distribution, the below pie chart shows the distribution based on number of staked LINK.

ed906796e723cc4c0fb8f9acc159b53521a4915985eb1f1911492d4e098d25eb.png

Here is the same data with the rewards received by wallet size.  The number of wallets represented by each slice is shown in parentheses.

1718cbe8da5f95583914cb6dc0be295ff5c7f86b5b217efa9e775da8f7d246b3.png

How did the rest of the stakers do?

In part 1, I shared my personal experience, and just slightly generating a net positive economic profit participating in the LINK flash pool.  Economic profit is the concept that it’s not just the revenue minus expenses that defines success of an investment, but also the opportunity cost lost by participating versus an alternative investment.  

Economic profit = revenues - explicit costs - opportunity costs

In this case, the best “alternative investment” would be to just buy ILV with the money you had planned to spend on transaction fees to participate, combined with holding your LINK on a CeFi exchange (e.g. Celsius) and earning interest.

I’m Monday morning quarterbacking this a bit knowing now that ILV went from $492 to over $1000 during the LINK pool.  However, presuming participants want ILV, which seems reasonable given they participated in a pool rewarding ILV, my economic profit scenario seems pretty reasonable.

Due to opportunity costs, not even everyone who staked over $100k in LINK generated a positive economic profit by participating.  In fact, due to joining the pool late and high transaction fees, seven of the $100k+ wallets participating had a negative return compared to my alternative scenario of buying ILV with the transaction fees used to participate and leaving their LINK in a CeFi interest account at 3% APY on LINK.  The worst was one person who staked in the flash pool with a little over $400k in LINK about an hour before the end of the yield farming period.  Overall, participation was profitable for 95% of those staking over $100k in LINK.

For those under $100k LINK, the results weren’t quite as good.  Before we get there, on an absolute basis, 426 (52%) of the total 818 wallets that participated generated a negative economic profit by participating.  This means the value of purchasing ILV directly rather than staking in the flash pool while earning 3% interest on their LINK would have been worth more than the net rewards from participating in the flash pool.  

Ignoring the economic profit aspect and only focusing on ILV rewards earned subtracting transaction fees, 302 participants (37%) lost money, earning less value in ILV (at $1000/ILV) than the amount of ETH spent on transaction fees.  Given the ILV price doubling, this number was smaller than it could have been had ILV not appreciated so much during the month, so we’re actually lucky only 37% of people lost money by participating.

For where the breakeven points were, everyone staking under 116 LINK were negative economic profit (293 wallets, 36%), and everyone under 56 LINK were absolutely negative (192 wallets, 23%), spending more ETH on transactions than their ILV earned.

Did it make a difference if they knew about Illuvium?

Overall, the flash pool generated 469 new wallets interacting with ILV, while 349 wallets had previously staked with Illuvium.  Of those who had previously staked with Illuvium, 218 (62%) were negative on an economic profit basis, while 120 (34%) lost money on an absolute basis.  For those whose first experience with Illuvium was the LINK flash pool, 208 (44%) generated a negative economic profit, while 182 (39%) were negative on an absolute basis, so it was actually slightly worse for those not previously involved with Illuvium staking.

Focusing on “the little guy”

Looking only at wallets staking under $100k, there were a total of 618 unique wallets participating.  Of this group, 419 (62%) were negative on economic profit, and 295 (43%) were negative on an absolute basis.  

Summary

Overall, this flash pool was a best case scenario under the current parameters, with the price of ILV doubling during the course of the month.  Conducting the flash pool cost the DAO about $3.5 million in ILV, and generated a direct increase in decentralization adding 469 new ILV holders.  This means the “acquisition cost” of these new members was about $7500 per wallet.  In addition to the direct increase in DAO participants, this was the biggest flash pool in terms of targeting a top 20 blockchain project.  Outside of the direct increase in flash pool participation, there was a minimal increase in those staking during this month.  From the accessible data, it’s difficult to attribute further ILV price appreciation or increase in staking involvement directly tied to the flash pool.

Despite the extended 4 week period, pool rewards were dominantly received by whales, with 54% of rewards given to 3.6% of participants, those staking over $1 million in LINK.  Expanding to those staking over $100k in LINK, 88.4% of the rewards were given to 16.7% of participants.  Due to high transaction costs on the Ethereum network, 302 wallets (37%) participating received less ILV than the transaction fees required, despite the fact that ILV price doubled during the pool.  

What would I do?

First, to those of you reading this, I would strongly consider NOT participating in future flash pools unless you are a whale already holding the pool token.  Obviously, the LINK pool was an opportunity for large holders to come in and receive the majority of the value, but even for smaller projects, the structure of current flash pools skews value significantly towards whales.  Be careful and consider your alternatives to participating before jumping in.

For the DAO, the real question is whether flash pools are achieving their goals.  Does providing free ILV to holders of other crypto tokens generate value commensurate with the commitment of $3.5 million, particularly when $305k of value is given to one wallet that was already a participant in Illuvium staking?  What is the impact of providing a negative experience for 37% of participants, particularly for those who this is the first exposure to the DAO?

Personally, given the high cost of flash pools and positive results from other marketing, I would discontinue flash pools.  I strongly believe that to maximize long term value for Illuvium, more effort should be made to attract those NOT already involved in crypto currency, and ensure a seamless opportunity to draw in those who are yet to be familiar with blockchain.  Illuvium has managed to reach a nearly $10 billion fully diluted market cap prior to launching any product, so further driving up the token price by drawing in more whales will do little to provide long term value.  Committing marketing to non-crypto users will truly unlock maximization of revenue and revenue distribution by growing the paying player base.

Flash Pool Improvement Ideas

If flash pools are to continue, I would make several changes to improve the experience for participants.  First, I would impose a staked value cap per wallet, potentially of $250k.  This would negatively impact a small percentage (<10%) of participants, but still offer significant opportunity for free yield farming value, while leaving greater opportunity for smaller investors.  Major CeFi firms follow a similar model by significantly reducing rewards for whales as a means to attract and reward more investors in order to grow their client base.  Spreading rewards across more small wallets benefits the DAO by increasing decentralization, while providing a more positive interaction with Illuvium.  

Secondly, I would dedicate a small allotment of ILV as lottery-style rewards for participating.  Even with staking V2 and longer flash pools, people will still make poor financial decisions.  While we can’t save people from themselves, the DAO can offer a more democratic lottery reward that values participation (similar to prize linked/sweepstakes savings accounts), not just rewarding pre-existing wallet size.  Allocating ~30 ILV would increase the rewards by less than 1% of the total pool allotment while providing more opportunity for a positive experience, and at the very least, the perceived opportunity to have a positive experience.  I would give each wallet one entry ticket per day for pool participation, with a drawing to be held at the end of the pool.  A grand prize of 10 ILV could be rewarded, with a second prize of 5 ILV given to two winners, and a third prize of 1 ILV given to 10 winners.  By turning all transaction fees into an entry fee rather than just sunk costs, this lottery effect would enhance the experience of every participant, not just the winners. The 13 winners of the above structure would absolutely have a more positive experience, with all other participants being happier just having had the opportunity to win.

Please leave your comments below if you agree or disagree with my assessments and proposed improvement to flash pools, or if you’d discontinue them entirely.  If there’s enough positive response, I’ll adjust my analysis into a governance proposal for further DAO assessment.

My Methodology

This one took more time and leg work than normal as I wanted to make sure my statistics and analysis were accurate to make an informed recommendation.  All data was pulled directly from etherscan for wallet addresses, transaction fees and LINK staked.  I’ve been tracking the pool since the beginning, with daily updates on staking and unstaking.  That data is available here in the 3 pct tab.  I then combined this into a new sheet here, where I did the additional analysis to predict the total rewards and opportunity cost for each of the 818 wallets involved in the pool.  As of now, a significant number of people are still staked, which is a good call as gas has been extremely high this weekend.  For everyone except those who withdrew from the pool early, their opportunity cost was based on doubling their initial gas fees, plus a flat $10 added for the contract interaction approval.  As of now, this is likely to be conservative as unstaking fees have averaged more than staking fees.  

I welcome further analysis and critique of my assessment.  Unfortunately, this one was heavy manual data entry as I wasn’t able to work out a good way to export the number of LINK, so there may be a few errors .  Apologies.  Overall, I stand by my conclusions, and hope this analysis is helpful to inform my readers the risks of participating in flash pools, and is useful to the DAO to assess the appropriate ways to improve future flash pool experience for its members.

Thanks as always 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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