Solrise Finance is a decentralized asset management protocol on the Solana blockchain. It allows any portfolio manager to create a fund governed by a smart contract. Investors interact with the smart contract directly from their wallets. They can acquire fund tokens in exchange for stablecoins. They can also redeem those fund tokens for stablecoins at any time.
The protocol created by the Solrise Finance team is disrupting the asset management industry in two different ways:
Investors wanting to buy crypto have to opt for a mutual fund or an ETF. With these investable products, they have to pay a management fee that considers many intermediaries: custodian, exchange, trustee, promoter, index provider, fund manager, etc. Solrise Finance is cutting all of these intermediaries because the smart contract can fulfill most of those roles.
The only major competitor to Solrise Finance is Enzyme Finance, a similar protocol on the Ethereum blockchain. Enzyme Finance has the first-mover advantage but is currently stuck between a rock and a hard place. The Ethereum network gas fees are incredibly high, ranging between $50 to $400 per trade, making active management very costly to operate.
As stated previously, Enzyme Finance is the current leader, and Solrise Finance is the challenger. You will find below the pros and cons for each of those decentralized investment protocols:
The secret sauce of Solrise Finance is twofold: First, Solana is the most suitable blockchain for active investing because the fees are about $0.00025 per transaction. Many fund managers eagerly wait for a protocol enabling that investment approach and Solrise Finance seems to be the answer. Second, the team is skilled and has a lot of experience with Solana.
The team doesn’t have to prove itself; they are among the most talented Rust developers with solid backing from well-known venture capital firms. The team has a long history of working together. They met playing video games before getting involved in blockchain-related projects. They are also proud second-place winners of the Solana x Serum DeFi Hackathon.
The team has two significant achievements: they built the popular Solflare wallet from scratch, where $11.3 billion worth of SOL is staked. Just to give an idea, 24% of the whole circulating supply of SOL is staked on Solflare! They also built Solana Beach, the most popular dashboard for the Solana blockchain, useful for analyzing the current state of the network.
We will spend more time on token utility because it is a major project weakness. The SLRS token is going to have a maximum supply of 1 billion tokens. So let’s do a back of envelope calculation to gain a better understanding of this topic.
Let’s assume that in 1 year, the platform will have $300 million Total Value Locked (TVL) spread over 100 funds. We took the fund distribution from Enzyme Finance and added a multiplier of 2.5, assuming that Solrise Finance will be more successful:
To simplify, let’s pretend that the $300 million TVL is spread over 100 funds evenly, so each of them has $3 million (as shown in pink). Let’s also suppose the average fees of those funds are 1% management fee and 10% performance fee.
For each fund manager, the revenues generated by the management fee is straightforward: 1% * $3 million = $30,000 USDC. To estimate the revenues from the performance fee, we have to make more assumptions. Let’s say the odds of the manager exceeding the high watermark follow a random walk and that he would earn 20% APY on average. The math is therefore 50% * 20% * 10% * $3 million, which surprisingly also equals $30,000 USDC.
If we sum up both accrued fees, we get total revenues of $60,000 USDC per year for a $3 million fund. The fund manager does not keep all those revenues. He has to give a portion to Solrise Finance to use the smart contract. The share going to Solrise Finance varies between 3% and 16%, depending on the amount of SLRS tokens owned by the fund manager.
We created the table below to see how the revenues of a $3 million fund would be distributed between the fund manager and Solrise Finance for a full fiscal year. At the time of writing this report, SLRS tokens are trading at $0.80 each. However, for simplifying this whole example, let’s assume that each SLRS token will be worth $1.00 each in a near future:
|SLRS Locked by Manager
||Manager Share of Fund Fees
In a best-case scenario, if all the 100 fund managers want to get the maximum share of their fund, they will each have to purchase 75,000 SLRS tokens. In other words, they would collectively need to acquire 18.75M SLRS token. Yet there will be 1 billion in circulation after 3 years! So what is the purpose of the other 981.25M SLRS tokens? There is none.
We are aware that Solrise Finance is involved in many projects and they want to put more utility to the SLRS token. They are in the process of creating a decentralized exchange named Solrise DEX Pro. It is likely that revenues from that platform will go toward buying and removing SLRS from circulation. But we still find it quite concerning in its current state.
Another problem is that 50.03% of all tokens are owned by the foundation and the team, giving insiders full control. Maybe the protocol itself is decentralized, but the ownership is not. From our perspective, the whole token utility and tokenomics need to be changed because it is not economically viable, and the current structure threatens the token’s longevity. We don’t like the idea of stale token ownership to get shares of the fund fees, it is a weak monetization of the protocol.
The team should consider adding a deflationary component to the tokenomics and a way for fund managers to continuously consume tokens. We were thinking of a smart contract subscription business model where the fund managers must purchase SLRS to receive their share of the management fees. This is would be our suggestion for Solrise Finance:
Let’s go back to the main example where $60,000 USDC is generated in fees by a $3 million fund. If the fund manager owns 3750 SLRS, let him buy $6000 USDC worth of SLRS tokens to claim his share of the pie. In other words, to receive his revenues of $54,000 USDC, he must give back 6000 SLRS tokens to the protocol. Solrise Finance could set a program where they keep half of the revenues and burn the other half. Each time a fund manager receives his share, the SLRS tokens get scarcer. Solrise Finance also benefits from this mechanism by owning 50.03% as the tokens will inevitably appreciate with time.
The smart contract relies mainly on two suppliers: Serum and Pyth. Serum is the decentralized exchange that the smart contract interacts with to make the trades. It is the most established and robust DEX on the Solana blockchain. Pyth is the oracle allowing Solrise to calculate the fund’s performance by providing data on each of the tokens in the universe.
In our scenario above, we assume that Solrise Finance will get $300 milion in TVL within a year. On the other hand, Enzyme Finance took nearly three years to reach half of that amount. However, we believe all the marketing efforts, such as running competitions with large SLRS prizes, will be a TVL catalyst once Mainnet is launched. In addition, the low cost to trade on Solana is such a strong selling point that we are sure it will attract many talented active portfolio managers.
Many risks could derail Solrise’s business plan. Here are the main ones:
Smart Contract Hack
The code is not peer-reviewed or audited yet because there are not many third parties proficient in Rust, which is the programming language on Solana. However, the team created the Solflare wallet, which has more than $11.3 billion worth of SOL tokens in custody and has yet to be hacked, giving confidence in the cybersecurity measures in place.
Smart Contract Issues
Solrise Finance is going to limit the investment to $1,000 per investor at Mainnet launch. Also, there will only be 15-20 tokens available. So, with no short, derivative, and leverage, what could go wrong, other than a coding error, trading those tokens? It makes us think the team is not entirely confident and wants to minimize potential financial losses.
We won’t sugar coat it; the tokenomics are awful in their current shape and form. They are so bad that if they are not improved, the value of SLRS could plummet as much as -90% in the next three years because of inflation. Right now, the available token supply is sitting at 217 million. So Solrise Finance still has some time to amend the tokenomics before it’s too late.
A few teams are working on other decentralized investment protocols. Just on the Solana blockchain, a new competitor named Solstreet Finance is building on a similar protocol with more promising tokenomics. Their coin has yet to be launched, and they are about four months behind in development. However, they plan to launch their Mainnet in Q1 2022.
Solana experienced a major outage a couple of weeks ago. The whole network became unavailable for more than 36 hours because a high-frequency bot spammed 400K transactions per second on the Grape IDO. If more outages occur, this might shake the confidence in Solana that fund managers and investors may consider a more reliable blockchain.
There is no point in valuing SLRS tokens with fundamentals such as Market Cap / TVL because the investment protocol has yet to hit Mainnet. Instead, the best way to value SLRS is to make a projection by looking at the SLRS/SOL currency pair. As shown below, the pair has traded on average for 0.0065 SLRS per SOL and is range-bound between 0.003 and 0.0095 SLRS per SOL. We believe the pair may revisit 0.0095 SLRS per SOL with the hype surrounding the Mainnet release on October 18.
A probable scenario is for SOL to trade between $145 and $175 by October 18. If the trading pair moves to its highest threshold of 0.0095, we derive an expect value ranging from $1.38 to $1.66 per SLRS at that time. SLRS is currently trading at $0.80 per token, which gives an appreciation of up to 108% in less than a month, a great short-term upside.
In the medium-term, price appreciation of the SLRS token will depend more on TVL than raw speculation. Solrise Finance will have to meet and exceed its roadmap products. The team has a track record of achieving its milestones. Sometimes they are off by a couple of weeks, but it’s better to have a well-polished product to minimize adverse risks.
Solrise Finance is well-positioned to become the new leader in the decentralized asset management industry for 2022. As long as the whole crypto market cooperates in the next couple of weeks, SLRS has solid near-term price appreciation. However, the team will have to revise the token utility and tokenomics to avoid the ravaging effects of inflation.