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Socean Finance: Changing the Game on Tokenomics?


TLDR:

  • Socean Finance is a liquid staking pool on Solana that offers 6.25% APY

  • Socean is the fourth largest stake pool on Solana with ~100M TVL. and numerous Solana DeFi Integrations such as Friktion, Solend, & Grape

  • Socean acknowledges problems with existing governance token mechanisms on Solana and seeks to improve upon them with “Socean Streams” a program offering vested governance tokens at a discount

  • We will be releasing a podcast with the team on January 30th.

Hello PoF Members! This month we’ve had a heavy focus on liquid staking. We want to make sure you understand what’s going on with stake pools behind the scenes and be aware of the many protocols you can stake with. In our article “What is Liquid Staking?” we discussed the basics of why liquid staking is important for Proof of Stake networks’ security, your financial freedom, and we compared the market leaders in this sector: Lido & Marinade. Next, we released this in depth review of Lido & Marinade’s delegation strategies, educating you on how these projects have different methods of delegating stake to validators and varying levels of decentralization. Today, we’ll be talking about Socean Finance, a stake pool on Solana that offers 6.25% APY, has over 685K SOL staked, and has an upcoming IDO for their governance token (date tbd). This report will provide you an overview of what Socean Finance is, what it offers, its integrations in Solana DeFi, and how they plan to improve on governance token economics.


Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.


Primer on Liquid Staking Pools

Just in case you’ve forgotten what a stake pool is, here’s a quick reminder. Stake pools allow for the pooling of Proof of Stake tokens (in this case SOL) to be delegated to a group of validators on the user’s behalf. The pool then issues a liquid staking token (ie: scnSOL) to the user in return. scnSOL is a “liquid staking token” which is a derivative representation of the SOL you have staked with Socean’s stake pool.


Simply put, you receive 1 scnSOL token for each SOL you stake with Socean. If you staked 4.2SOL you would receive 4.2 scnSOL tokens.


Liquid staking tokens usually trade at a slight premium to the underlying staked asset because they take into account the staking rewards accrued to the underlying PoS token each epoch.


What is Socean?

Socean is the fourth largest stake pool on Solana behind Marinade, Lido, and JPool. Socean offers the same services as the aforementioned others with slightly different mechanics. They allocate their collected SOL to validators that have proven reliability over history, are decentralized geographically & jurisdictionally (by data center), and are not part of the security set. The security set is the top 19 validators on the Solana network that hold enough stake to halt the network. By not delegating to this group, Socean helps to democratize stake and protect the network against possible attacks – Marinade also utilizes by this strategy.


Socean’s delegation requirements focus on validator performance in order to maximize APY and improve the health of the Solana network. They have stated they will produce reports for the community in which they will explain their data analyses and delegation strategy. We’ll be on the lookout for these reports and if you’re interested, we’ll share our interpretation of the data. If you would like to try out the platform, you can deposit SOL to their pool by going to their website socean.fi. They charge nominal fees: 0.15% deposit fee, 0.3% withdrawal fee, and a 0.16% management fee. Socean’s stake pool monitors and relegates stake dynamically based on predetermined code in smart contracts that make sure to minimize the loss of rewards and distribute stake fairly. The team worked directly with the Solana Foundation to help develop their stake pool program. Socean contributed roughly 20% of the Solana Foundation’s stake pool program’s code. An important difference between Socean and the Marinade & Lido is that Socean has yet to launch their governance token. We will dive deeper into this later on in the article.


Solana DeFi Integrations

At time of writing, Socean has integrations with Friktion, Solend, & Grape. Friktion has launched a scnSOL covered call vault that offers 49.7% APY. Covered calls are a complex topic, and you should understand the risks before you ape in. We’ll dive deeper into exactly what a covered call is in a future journal. If you are interested in learning before then, check out this 7 minute video and please, let us know what you think! Solend, a popular borrow lending protocol on Solana has integrated scnSOL. You can supply scnSOL to earn SOCN (Socean’s unreleased governance token) and also borrow against your scnSOL to boost your APY. Grape, the popular NFT verification service on Solana with its own thriving community, has partnered with Socean to own its own liquidity through Socean Streams, an innovative new product Socean is offering protocols in the ecosystem to fix problems with existing launch structures and liquidity mining. Let’s first explore the problem Socean Streams aims to solve, then explain its proposed solution.


Problems With Existing Tokenomics on Solana

There have been many IDO’s and launches of governance tokens on Solana and other platforms this past year. Some have went quite well, with the token price appreciating post IDO and remaining level or above the IDO price (ie: Mango Markets, GenesysGo) while others have experienced great volatility and depreciated greatly since their launch (UXD, Marinade). The vast majority of governance tokens on Solana provide no clear way for users to benefit from the growth of the protocol’s TVL. While governance tokens’ primary purpose thus far has been to give users power to govern and control the future of the protocol, if there aren’t aligned incentives where users will benefit from helping steer the protocol in the right direction users will not participate in governance. If users are not incentivized to govern, they will dump all their tokens they have mined/been airdropped. This creates price anxiety, sell side pressure, and has led to dumps and volatility. Also, many IDOs this year have allocated a large percentage to VCs or founding teams that get prices far below IDO price. This leads to gradual dumps on retail that are predatory and unfair. These charts look something like the one below.

This abysmal token performance is caused by low supply, aggressive emissions, and team/VC dumping. It’s important to note that Socean did raise 5.75M from private investors. Based on Socean’s views on bad tokenomics, we’d be surprised if they allow their investors to dump on retail. But hey, you never know. Anyways, VC dumping isn’t the only cause for falling token prices. Our beloved liquidity mining programs might not be as amazing as we once thought.


Why Liquidity Mining Can Collapse Token Price

We at PoF have participated in liquidity mining for many tokens and sometimes it is quite profitable. But right now we’re not talking about profit, we’re talking about how these incentives affect protocols long term, and the future might not be so pretty. Liquidity mining programs often cause collapse in token price because they attract mercenary yield chasers that have no loyalty to the protocol. These yield chasers farm simply to dump, which creates massive sell side pressure on the token. And you can’t blame the mercenaries either, they are simply taking advantage of poor tokenomics and market inefficiencies. Also, since mining reward APYs are denominated in the token, as token price falls the APY does as well. This makes liquidity mining less attractive and can cause a negative flywheel effect where the token takes a dive possibly never to return. If the token has no utility other than governance, in a protocol that people don’t want to govern, why would anyone hold on to the token? Theoretically the solutions are: clear utility where users benefit from the success of the protocol (such as revenue share), incentivize liquidity providers that aren’t mercenary APY chasers, and reward long term holders. To help fix this problem, Socean created Socean Streams.


What is Socean Streams?

Socean Streams is an experimental project Socean is incubating where users can buy governance tokens at a discounted rate that unlock over a period of time determined by the protocol. For example, if you wanted to buy 100 units of a governance token that trade at 1USDC, instead of paying full price right now ($100) you could buy into a vesting contract that would disperse 100 tokens to you over the course of 30 days for $95. In order to guarantee delivery of these governance tokens, the protocol who wants to use Socean Streams must first lock their governance tokens in a smart contract that is irreversible, meaning they cannot be withdrawn by the protocol**. This is key to ensure delivery of the vested tokens to users.** You’ll be able to redeem your tokens directly on the Socean Streams UI. The tokens will be named according to the structure below.


Socean Streams utilizes a “descending auction mechanism” to improve upon the mechanisms of current IDOs. It is called a descending nature because a ceiling and floor price are set for the launch, and over the period of the launch the price of the tokens will decrease to the floor unless people start buying the token. Once people begin to buy the token, the price descent is reset and the price appreciates, then starts to descend again until more people buy or until the end of the auction. You can view a two different scenarios of a descending auction launches below.


(Source: Socean)


Instead of giving out liquidity to mercenaries for free who dump and make your token free fall, this mechanism allows governance tokens to be purchased over time which helps for the health of the token price. The bonded / vesting mechanism used here is similar to the GensysyGo’s vesting that occurs through staking their GenesysGO NFTs. Since tokens are vested linearly over time, there is less sell side pressure on the token.


Conclusion

Socean is yet another option for you to stake your precious SOL. As stated previously, it’s important for us as stakers to keep up to date with different protocols we can stake with. This way we have our options open in case a protocol ever fails, and can pick and choose the stake pools that align with our values. Socean Streams is an innovative addition to the Solana DeFi ecosystem that aims to help protocols conduct better launches of their token and prevent token price freefall. While Socean’s descending auction mechanism may solve certain problems regarding the launch of tokens, there are numerous other variables that go into the value of governance tokens. If the governance token has no true utility, using Socean Streams to sell bonded tokens will not add anymore value to the token. We at PoF are always impressed when protocols innovate and try something new, so we’ll be keeping an eye on Socean Streams. We are super excited to have the team on oujr podcast in late January and learn more about their mission, values, and vision for the future. Learning from teams directly is a key part of the investment process. Be on the lookout for this one!

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