Illuvium is the upcoming AAA quality video game leveraging blockchain technology, seeking to bring NFT play to earn (P2E) gaming into the mainstream. Spending time on the Illuvium Discord, you’ll see two of the most active channels involve the token and the associated staking. This isn’t surprising, as the primary game isn’t planned to launch until at least December 2021. Until that time, we can focus on the real world financial side of Illuvium. Disclosure and disclaimer - I am long ILV, and none of this is financial advice.
What is the Illuvium token?
To answer everyone’s first question, ILV has nothing to do with game play of Illuvium, and someone just interested in playing the game does not need to own the ILV token. In fact, both currently proposed games, Illuvium (think Pokemon meets Team Fight Tactics) and the mobile city builder style game, Illuvium Zero will have free to play versions. The primary currency for in-game purchases will be ETH, so no need to load up on ILV if you just want to play.
The ILV token serves as governance for Illuvium, the DAO (decentralized autonomous organization) governing the associated games. If you’re unfamiliar with a DAO, basically it is an “organization” where decision making authority was handed over to the community of token holders from its founding, giving them the power to elect a five member Illuvinati council responsible for direction of the organization. To limit power of the founders, whales, and other large stake holders, the DAO uses geometric voting, meaning that to determine the number of votes one has, take the square root of the number of tokens. Someone with 1 ILV has one vote, someone with 25 ILV has 5 votes, someone with 1000 ILV has 31 votes, and someone with 0.25 ILV gets 0.5 votes! Anyone from the community can nominate or run for the Illuvinati council, and the community votes for their representation every 3 months. All ILV governance proposals are publicly available here.
How are the tokens distributed?
At this point, there are a little more than 600,000 ILV tokens in distribution. At full dilution, there will be a maximum of 10 million tokens, a number that is likely never to be reached (more on that below - see sILV). Of the 10 million total potential ILV, 7 million have been created, with the remaining 3 million to be generated from staking protocols that started at the end of June 2021. Here is the breakdown of how the tokens are distributed.
The launchpad tokens established the existing circulating supply, and was conducted by a Balancer Liquidity Bootstrap Pool in March 2021. More on this on Illuvium’s blog here, or the Illuvium whitepaper here. In short, there are some circulating tokens, but the majority of tokens are locked, or not yet issued.
Lock up & Vesting
For the Seed tokens as well as the team’s tokens, these are currently locked with a linear unlock vesting schedule starting in March 2022. That means that for the tokens held from Seed purchase as well as tokens issued to the team, 1/12 of them will vest and become circulating in March 2022, 1/12 in April, 1/12 in May, and so on until March 2023 when all of these ~3million tokens will be circulating.
A wrinkle to this vesting was announced in the YouTube video below by CEO Kieran Warwick (go to the last timestamp in the video), where he announced that the founding senior management team (and largest Team token holders, at about 14% of 1.5 million) will lock and vest their tokens for an additional two years. Rather than receiving 1/12 of their tokens monthly starting in March 2022, they will receive 1/36 of their tokens in March 2022, with an equal unlock every month through March 2024.
The intent of this is to show the team’s commitment to the game, while also reducing the dilution of circulating supply that will occur in 2022. Note, all of these tokens are eligible for revenue distribution (more on that below), so they are invested in the success and revenue generation of the game. The impact of this added lock will mean the monthly unlock of seed and team tokens will be about 280,000 per month starting in March 2022.
What about me? How do I get my piece of the ILV action?
Currently, the best way to get financially involved in the Illuvium DAO and it’s long term interests are through purchasing the ILV token, and staking on Illuvium.io. The exchange holding the bulk of the liquidity is Sushi, thanks to the incentivization of staking by the Illuvium DAO. On Illuvium.io, ILV token holders can enter their tokens into smart contracts with Illuvium and benefit by receiving reward tokens. There are two core staking options. First is the ILV pool, where token holders can stake their ILV directly, currently earning up to ~85% APY in additional reward ILV. The second is the ILV/ETH Sushi Liquidity Pool, where ILV token holders can go to Sushi.com and pool an equal dollar value amount of both ETH and ILV, and receive Sushi Liquidity Pool (SLP) tokens in return, which can be staked at Illuvium.io, earning over 600% APY in ILV tokens. The 600%+ APY is based on the total amount pooled, including both your pooled ETH and ILV value.
A total of 3 million tokens will be distributed this way over a period of three years, with the majority being rewarded in the first year (1.8 million). The absolute distribution goes as follows - during the first two weeks (fortnight) of the staking pools, 100,000 ILV was distributed to those staking, with 80% going to those staking ETH/ILV in the SLP pool, with 20% going to those staking in the ILV only pool. Every two weeks, the amount being distributed decreases by 3%, so in period two, 97,000 ILV were distributed, in period 3, 94,090 ILV are distributed, in period 4 91,267 tokens are distributed, and so on for about three years (78 periods). For reference, at the time of writing this (August 2022), we are in the middle of period 4, so there remain 74 rewards periods. Also note, the number of tokens is specified for each time period, so the actual rate received depends both on the number of tokens, as well as the total number ILV staked in each associated pool.
The DAO has also set up several short term “Flash” pools to connect with other crypto communities to draw interest to Illuvium. Examples so far have included SNX, the project led by Kain Warwick, brother of CEO Kieran Warwick and lead game designer Aaron Warwick, and a unique Flash pool to earn ILV by staking AXS, the game token of Axie Infinity, driving connection with the incumbent leader in the P2E space. Both of these lasted a short period of time (~2 weeks), and distributed a small number of tokens from the staking pool.
For staking rewards, a one-year vesting is required to be able to withdraw these tokens. This twelve month period begins on each claim action from the staking pool, meaning that these tokens will enter circulation starting at the end of June 2022, but the majority of the initially rewarded tokens will be spread out across next year, with the final staking tokens not entering circulation until the end of June 2025. At that point, all potential tokens will be in existence, but not necessarily circulating due to the Illuvium Treasury.
In addition to the tokens outlined above, the DAO also reserved 1.5 million tokens designated to the treasury. These tokens have already been issued, but remain under control of the DAO. The purpose of the treasury is to reserve some central revenue generation and storage, as these tokens are eligible for revenue distribution. The primary publicly stated role of these tokens is for player rewards, either through in-game accomplishments, or the flashier tournament prize pools. At the current pricing above $450 per ILV, this means the DAO has a warchest of over $650 million to distribute this way, which Kieran has stated in an interview that enables the largest prize pools for tournaments in the history of esports, proposing an example of having a year 1 tournament with $25 million in prizes. Again, these tokens are controlled by the DAO and up to community decision making and proposals.
Make that money - Revenue Distribution
One of the most unique aspects of the project is how revenue generated will be distributed. It has been stated that 100% of all revenue is to be distributed to staking ILV holders. With the current monthly revenue of Axie Infinity topping $300 million, if Illuvium were to generate an equivalent revenue rate at maximum dilution (10 million ILV), that means every staked ILV token would receive at least $30 per ILV per month. The Illuvium team has stated that Axie is not the competition, but rather mainstream gaming. To put that into perspective, Fortnite reportedly generated more than $5 billion in revenue in 2020, so if Illuvium can pull a share from both P2E and traditional gaming sectors, the revenue distribution model can be quite compelling.
To conduct revenue distribution, the DAO will automatically purchase ILV from the Sushi ETH/ILV pool, putting buying pressure on the ILV token, both raising its price, while distributing those ILV to staking ILV holders. This is both why having sufficient liquidity in the Sushi pool is critical, and a self-sustaining cycle of providing more ILV and providing that value to the long term ILV holders.
sILV - Burn mechanism
I said earlier that the total ILV is unlikely to ever reach the coded potential of 10 million tokens. This is due to another mechanism of claiming tokens from the staking protocols. Staked token holders earn ILV from both of the core pools, and those rewards remain unclaimed until a transaction is performed by the staker. When the staker decides to claim, they are faced with a choice - either claim as ILV and begin a 1-year vesting period, or claim as sILV, or synthetic ILV and have an equivalent amount of funds (one ILV = one sILV in token price) available to spend in-game immediately. At the current time, there is no game and nothing to spend money on, so there is no immediate reason to claim sILV. However, those stakers who are more interested in using their rewards as in-game value can wait until the game is live, or another major event (<cough> land sale <cough>) provides a reason to having money to spend. When sILV is claimed rather than ILV, those ILV tokens will never be issued, and are deducted from the possible total of 10 million ILV.
When the sILV is spent, these tokens are burned and will never be reissued. The revenue spent using ILV is not part of revenue distribution, and this currency is just eliminated from existence.
For gamers interested in getting extra money to spend in-game, the sILV offers a great value to get into ILV early, stake, and potentially generate more money to spend on NFTs, travel or curing shards for the collection of Illuvial NFTs, the primary spending elements of Illuvium.
For long term staking ILV holders, the issuance of sILV is excellent, as it increase the concentration of revenue distribution, meaning each ILV is rewarded with a greater share of the revenue. Using our Axie Infinity $330 million monthly revenue number as an example, if there are only ever 9 million ILV rather than 10 million, that means every month, each staked ILV token would receive $36.70 in revenue rather than $33. A max possible dilution is 3 million ILV, but as the game launches, we will see how many people opt for the immediate rewards versus the potential long term value. There have already been some sILV issued as people claim their staking rewards, and you can see the issuance of the sILV token here. So far, even without a use case, over 5,000 sILV tokens have been claimed.
The tokenomics of Illuvium are quite compelling, with a fixed maximum of 10 million ILV and only the potential to decrease with the issuance of sILV. Revenue distribution provides a long term potential for value in addition to standard token price appreciation. The distribution of tokens was intended to be decentralized from the start, with half of the tokens available to the public for purchase or issued via staking, with another 15% reserved for rewards and potential future esports prize money. Kieran’s announcement of senior management locking their tokens for an additional two years helps provide confidence to the community of the long term commitment to the project by the leaders, and reduces the risk of potential token dumps in the coming years.
The current circulating supply of ILV is likely to remain constant until March 2022. At that time, the linear unlock of tokens begins, with unlock occurring for the next year for seed token holders and team members, and three years for the senior management. The other major unlock event will occur beginning in June 2022 as we begin to see staking token rewards hit the market. It should be noted that staking tokens do not NEED to be redeemed at this time, only that they CAN be removed from the staking pool. Leaving unlocked tokens staked provides benefits of compounding, which will last until June 2024.
I believe we will start to see some dilution and higher sell pressure in March 2022, with about 280,000 tokens unlocking per month from March 2022 through March 2023, and then a smaller number unlocking each month through 2025. This means that in February 2022, there will be around 600,000 circulating tokens. In March 2022, there will be an unlock of about 280,000 tokens, increasing total circulating supply to about 900,000. In April, the second unlock will occur, increasing supply to 1.2 million ILV. The first few months of this will have the greatest percentage impact, with circulating tokens increasing by 50% in March 2022, and then another 33% in April, 25% in May, and so on. If we see major pricing action due to dilution, it is most likely during this time.
The downward pressure of this circulating supply will hopefully be offset by the DAO’s use of the Sushi ETH/ILV liquidity pool as its means of purchasing ILV for revenue distribution, adding buy upward price pressure to the market at the same time as the dilution of newly unlocked tokens entering circulation. The higher the revenue of the game, the more ILV that will be purchased from the Sushi ETH/ILV pool, offsetting potentially cashing in of these newly unlocked tokens.
From a purely financial perspective, the launch of the mini game (Illuvium Zero) and the first Illuvium game in the next six months will inform the initial success of the project from a revenue and gaming community reception, with the next financial milestone being how the token responds to the first major unlock period in March 2022. Next up - a potential land sale around October/November 2021, and an open beta of the main game hopefully in December 2021.
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