Sommelier Protocol Revenue Analysis

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Introduction

SOMM stakers participate in profit sharing on strategies being run on Sommelier. Typically a 1% management and 10% of performance fee goes to the Sommelier platform (and consequently to SOMM stakers).

We can therefore compare Sommelier protocol revenue to an inflationary model using the argument that investors won’t differentiate between the two if holding either token earns the same returns. We can project what kinds of TVL are needed to generate meaningful staking returns.

The Sommelier protocol earns $25M in revenue to stakers under a variety of different scenarios.

Because SOMM staking revenue depends on strategy performance and TVL, we will consider two cases:

  1. Bull case
  2. Common case

In the bull case we assume that the average Sommelier strategy earns 50% revenue. The expectation is that the majority of Sommelier strategies will take directional bets on a variety of tokens. During a bull market the returns of a benchmark portfolio (consisting of e.g. ETH and BTC) easily reaches 50%, therefore we believe this number to be reasonable.

In the common case we assume an average return of 10% across Sommelier strategies.

Highlights

We assume a 1% platform fee and 10% performance fee to the protocol.

  • In the bull case where Sommelier strategies earn 50% returns on average, the protocol earns $25M in revenue on $416.67M TVL.
  • In the common case where Sommelier strategies earn 10% returns on average, the protocol earns $25M in revenue on $1.25B TVL.

Bull case

Protocol Revenue vs TVL - Bull Case
Protocol Revenue vs TVL - Bull Case3072×1536 149 KB

Assuming an average return of 50% across strategies (and a 1% management and 10% performance fee to the platform), we see that the Sommelier protocol reaches $25M revenue to stakers at a TVL of $416.67M.

Common case

Protocol Revenue vs TVL - Neutral Case
Protocol Revenue vs TVL - Neutral Case3072×1536 160 KB

In the common case of 10% average returns across Sommelier strategies, we see that $25M protocol revenue is achieved at a TVL of $1.25B.

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In what form and how often will profits be distributed to stakers?

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Fees will be distributed in SOMM. Maybe someone from the protocol team can weigh in on how frequently

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Hi Jake. The short answer is once fees are in SOMM-form, they will be distributed every block just like a normal Cosmos chain until the rewards run out (if new fees aren’t accrued/converted first). The process and timing of accruing fees and converting them to SOMM is unpredictable because it depends on how often fees are accrued (which can vary), whether the amount accrued is worth worth buying from the auction to a user, etc.

Early on, while there are few Cellars and infrequent fee accruals, reward APY will be low and inconsistent. As TVL and the number of Cellar increase, it will start to look more like the steady APY % you would expect to see on inflationary chains.

If you don’t know what I mean by auction, basically the protocol will take fees accrued in whatever denom they are in from the Cellar and sell them to the market for SOMM via a dutch auction system. The resulting SOMM will be distributed to stakers.

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Interesting. So as the TVL of cellars grows, is it assumed the auctions will put upward price pressure on SOMM as time passes because the protocol will be continually buying a finite supply of SOMM to distribute to stakers?

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Yes exactly. Assuming increase in performant strategies, this would be a very healthy effect on the price of SOMM.

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GOOD. So as the TVL of cellars grows, is it assumed the auctions will put upward price pressure on SOMM as time passes because the protocol will be continually buying a finite supply of SOMM to distribute to stakers?