Sommelier Finance - Revving Up the Flywheel

What's it take to get the wheel spinning?

Proof of stake coins have been known for one thing when it comes to staking, eye watering yields. The main downfall is those yields have to come from somewhere and that somewhere is usually more coin issuance. So the question has always been: Is this sustainable?

Short answer: No, most of the time. It’s complicated and depends on how each protocol views the use of their coin. But that’s a completely different topic.

The general consensus that is starting to take hold for most coins is inflation = bad.

So how do proof of stake protocols reconcile the need for issuance to bootstrap a community without inflating everyone out of the atmosphere? It’s a question much smarter people than me are trying to solve, but I think Sommelier has a pretty good idea to support their protocol without inflation, if it can reach exit velocity.

Before jumping into it though, I think we need to take a step back with a clarifier. Most proof of stake protocols are only inflationary while they are bootstrapping their communities. So it’s technically a misnomer to assume coin holders will be inflated to oblivion (I know I said it above). The real problem for proof of stake protocols is how do they maintain staking/security after emissions run dry? I’m not aware of a coin that has reached it’s emission cap yet so this isn’t something that has had to be solved for yet.

Now, jumping into it, how do you bootstrap your protocol if there are no staking emissions? If there are no rewards, how do you get and keep people securing the chain?

Real yield, meet Sommelier. Total coins issued for Sommelier are 500 million. No inflation yield, but offering yield nonetheless. How? It will all be in the auction.

Sommelier is offering actively managed defi that allows them to capture a percentage of the fee generated by the protocol. That fee will be auctioned off to swap for Somm coins which will then be given back to stakers as rewards for securing the network. The beauty of the system is the auction will act as price support when the protocol is accruing enough fees. You can see how valuable this can be to the protocol and how it starts to turn into a flywheel. The more success the protocol has, the more fees generated, the more value swapped through auction, the more rewards to stakers, the more number go up.

An obvious qualifier to all of this is how do you attract people to the protocol if you need to generate fees to auction if you don’t have many fees to start? The current answer is to support rewards with community pool coins until fees can support the protocol. This is obviously a short term fix, but provides runway to get the flywheel spinning.

Will Sommelier get the wheel spinning? There are never any guaranties, but this is a quality team that has executed well so far. I also recognize this is something new and I don’t think the markets fully understand or appreciate what it is they are doing yet. Real Yield USD continues to dominate it’s arena, but inflows seems to be leveling off for now. A lot more than Real Yield USD is needed. The current rollout pace of strategies has been fairly measured, but I think that is more so out of precaution to see how things work and current shortcomings on infrastructure. We now know active management can be a gamechanger for performance, so once the infrastructure is built out a little more, I think we will start seeing strategies pop-up quicker, providing additional opportunities for fee generation.

The makings of the flywheel are there, active management is a stupidly large market opportunity, and Sommelier is paving the road for the inevitable liquidity inflows. Do with that information what you will.