Thread by @JackNiewold

$SPELL is down over 75%.

Let's talk about the bear case:👇

There's no such thing as a sure thing in crypto, there's no such thing as a perfect protocol.

People ask me often why $SPELL (or any asset) has dipped. Even for a *perfect* asset:

• Markets can be inefficient
• Things take time
• Broader market conditions can be unfriendly

That being said, let's get into some of the reasons $SPELL might:

• fail outright
• take a long time to recover
• underperform on a risk-adjusted return basis

1. LP Emissions

I think this is the #1 criticism of $SPELL and perhaps the most valid.

Right now, liquidity for $MIM and $SPELL is provided by LPs that get paid out in more $SPELL tokens.

This inflates the supply and provides downward price pressure as LPs sell the token.

An example week:

Abracadabra Money Rev: ~$2.5 million
LP Rewards: $11 million

If you count these LP rewards as a cost, Abra is losing money.

Rewards are paid out in tokens, so a lower token price:

• Rewards more tokens to $sSpell stakers
• Rewards less dollars to LPs

This means the protocol is LESS inflationary at lower token prices. That's backwards.

There are mechanisms to change emissions structures:

• Incentivize liquidity with ANOTHER asset, $CRV for example
• Adjustments to liquidity pool APRs
• Protocol-owned liquidity

For now, though, nothing.

Continuing to pay too much for liquidity would continue to punish holders/stakers.

2. Poor Revenue Model

Abra's whole model is creating loans that pay themselves off. So a loan strategy with $UST actually EARNS borrowers about 15% a year.

Cauldrons often empty in about an hour after $MIM replenishments. Could this mean loans are WAY too cheap?

Is buying $SPELL is like investing in a bank that charges .001% for a mortgage?

In many cases the loan business turns into a race-to-the-bottom game.

More rev is generated on liquidations and loan originations than interest.

$SPELL could be optimized for more rev.

3. Liquidations

Liquidations are good for revenue, but they're bad for the health of the protocol. They pull out TVL.

It's similar to a foreclosure: the 'bank' has writing loans for interest, not on performing foreclosures.

But fees go up when liquidations happen, another backward incentive.

Liquidations have to happen, but maybe fees should be structured so that the protocol is more profitable when TVL is healthy.

Not relying on liquidations to make most of the revenue!

4. Daniele Sestagalli

Dani is a crypto-populist folk hero but he's only a man.

He's been criticized for impulsive decisions, over-incentivizing liquidity pools, poor tokenomics, centralizing protocol control.

This might be controversial but it's important to consider.

So far Dani has addressed these problems by creating a treasury to increase $MIM adoption.

The more $MIM in circulation, the more fees holders make, but a trillion dollars of $MIM still won't fix wonky/misaligned liquidity incentives.

The counter-argument to all of this is that these are all costs of scaling a unicorn.

$SPELL is still undervalued by revenue, liquidity needs to be bootstrapped somehow, if $MIM becomes the number 1 stable, $SPELL will grown in value despite iffy LP incentives/bad emissions.

The last thing I want to say is that this most recent dip has happened on very low volume.

Token price is low, but that's better news than a dump on big volume.

I think it's undervalued despite these problems, others will disagree.

There are problems to be addressed, as with any billion-dollar, 5-month-old unicorn.

Watch the team, watch revenue, watch how LP incentives start to change.

Thanks for reading! If you liked the thread, please do me a favor and like/RT the first tweet, I've linked it below:👇

https://twitter.com/JackNiewold/status/1464724080800808962?s=20

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