Thread by @SlawTeh

1/ Another thread on valuing RUNE.

This one directly refutes then notion that circulating supply of RUNE important to a valuation framework. Sorry to those who insists it does.

2/ The idea that circulating supply matters is a TradFi idea - we value companies / stocks based on fully diluted shares outstanding.

3/ A company is worth what a company is worth regardless of the number of shares outstanding, and we should account for all the current and future shares when calculating per share values.

Notice the word “outstanding.” Sometimes, companies buy back and retire shares.

4/ When shares are retired or in the treasury, their location does matter. We don’t count those shares. And valuation models change when shares shift into and out of the “shares outstanding” category.

5/ Similarly, the location of the RUNE token affects valuation. And because of Thorchain’s security model, it’s like a leveraged form of share repurchases.

Some details, then a model..

6/ Right now, nonRUNE TVL is $100M in Thorchain’s network of LPs and 32.0M RUNE deposited or bonded. At $14 per RUNE, the network needs 7.14M RUNE in the LPs and 14.28M RUNE bonded by nodes.

7/ The network is in surplus by 10.5M RUNE - an additional amount added by nodes as they competed for a spot to earn block rewards (very lucrative).

8/ The circulating supply is 234M and the maximum supply is 500M, with an emission schedule which looks like this (source: messari.io):



9/ If $1B of BTC is staked in a Thorchain LP, the systems security design mandates that $1B of RUNE is deposited within the LP along side of the $1B of BTC and that the nodes post a $2B bond of RUNE.

10/ To secure $1M BTC, the network must have $3B RUNE. To secure $5B requires $15B.

The nonRUNE TVL determines the value of the entire network.

11/ One simplified approach - “deterministic price” - is to take the value determined by the network - currently $300M and divide it by circulating supply - 234M - and labeling the result - $1.28 per RUNE - the deterministic price. This calculation has little value.

Why?

12/ Now for a model.

Imagine an LP of $100M BTC + $100M RUNE, and a network with the necessary 21.5M RUNE. Imagine $10M per day of RUNE gets deposited into LP. We are changing the location of the RUNE from outside the network to inside.

What happens?

13/ First, let’s consider the arb bots. In the pool, the RUNE is cheap and BTC is expensive after the inflow. An arb bot buys roughly $4.8M of BTC, swaps it for $5.2M or RUNE, rebalancing the pool to $104.8M BTC + $104.8 RUNE. The arb bot sells the $5.2M RUNE making profit.

14/ It’s easy to imagine that sale would likely hurt the price of RUNE. The daily volume on FTX + Binance for spot RUNE is slightly great than $10M.

But what of the nodes? The inflow of $10M of RUNE into the LP means that they would need to add $20M of RUNE to their bonds.

15/ So just as the arb bot is trying to sell $5.2M of RUNE, the node bot (if there was such a thing) would try to buy $20M of RUNE, four times the buy pressure as the sell pressure.

Under this scenario, does the price of RUNE go up or down?

16/ During periods where the arb bots and nodes are balancing out the system, one undeniable thing happened: non-RUNE TVL got added. The network is worth more because the location of the RUNE token changed.

17/ First, a note about the nodes today. They have surplus RUNE. They don’t need to buy more if RUNE tokens where suddenly flowing into the system and staked asymmetrically. So in practice, a large sudden inflow of asymmetrically staked RUNE could pressure RUNE's market price.

18/ Over a longer period though, nodes will have to double up the inflows whether RUNE or non RUNE token. It’s simply required by the security model.

Think of that “double up” as leverage.

19/ For each $1 of nonRUNE that gets staked asymmetrically, roughly $2.50 of RUNE is bought and added to the system. For each $1 of symmetric-stake that is added, $2 of RUNE is bought. For each $1 of RUNE staked, $1.5 of RUNE is bought.

That’s some powerful leverage.

20/ Dividing the deterministic value of the network by circulating supply ignores what impact that value would have if shoved into the network. The shifting of tokens into the network is like leveraged share repurchases.

21/ Here is an extreme scenario that some deterministic-price-truther is going to ask about. What if 200M RUNE worth $14.00 each flowed into the network?

That’s $2.8B of value. Big arb bot sales inbound and nasty!

22/ Let’s say the price of RUNE crashed in the process, and that inflow of RUNE ended generating only $0.7B of additional growth in nonRUNE TVL. RUNE’s deterministic value would be $10 per RUNE. The crash couldn't cause the TVL damage in the assumption even!

23/ After the washout, the leverage to each new dollar flowing into the Thorchain LPs would be 3:1, as in $1M in add $3M to RUNE’s market cap. In the long-run it's always going to be than anyway.

What a rocket we would have then.

24/ The location of the RUNE tokens is far more significant than the count. If fact, the RUNE not in the network is the treasury RUNE.

And the RUNE put into the network isn't like a share buyback. It's like a share offering at 3 times book value.

25/ The system continuously offers 'stock' and continuously accretes 'book value'. That should make TradFi people comf. Fooled you with the buy-back idea. So just know:

Location, location, location.