[MANA] Collateral Onboarding Risk Evaluation

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Summary Proposed Risk Parameters

Risk Premium: 12%
Liquidation Ratio: 175%
Debt Ceiling: 1 million
Auction Lot Size: 500,000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 20 Dai

Outline

  1. Overview
  2. Metrics and Analysis
  3. Risk Parameters

Overview

Protocol Summary

Decentraland is a protocol for a virtual world where users can create virtual content, purchase virtual real estate, and engage in other simulation-based activities. The protocol has two main tokens; an ERC-20 token called MANA and a non-fungible ERC-721 token called LAND. MANA is a currency for Decentraland-related assets such as real estate and vanity items inside their simulated world known as the Metaverse. MANA is also a voting token in their DAO (described below). LAND tokens are another component and represent real estate inside the game. After several years in development, Decentraland launched their platform in February 2020, where they also started the process of transferring admin controls over to the DAO.

MANA Token Value Accrual

In addition to being used as a voting token and a currency for Decentraland assets, MANA has a burn function. The three largest token burning events in the past have been two LAND auctions and the establishment of the DAO. Additionally, MANA token holders can vote to adjust various parameters such as the burn fee applied for each trade of Decentraland non-fungible tokens (NFTs). Other governance actions include the whitelisting of NFTs inside the protocol.

Decentralization & Governance

The MANA token can be used for voting in a DAO that was established along with the launch of the Metaverse in Feb 2020. As part of this DAO token holders can vote on future LAND auctions, whitelist NFTs, and more. The DAO is supported by the Security Advisory Board (SAB), which acts as a guarantor for contract security. The SAB was established for dark bug fixes in smart contracts. Initially the SAB has five members picked by the Decentraland team that can upgrade the LAND and Estate contracts, requiring at least three signatures with no votes against. The members of the SAB can be changed by the DAO.

The DAO will also be supported by the Decentraland Foundation, an independent non-profit organization that holds Decentraland’s intellectual property, domains, repositories, social media accounts and other assets. The DAO and the Decentraland Foundation were allocated 222m MANA each, which vest over 10 years and will serve as financing for community related operations.

The Metaverse is hosted on a network of independent nodes called Catalyst. Initially, host nodes were selected amongst reputable community members, but the DAO has the authority to alter the list. Catalyst ensures constant uptime of the Metaverse.

Metrics and Analysis

MANA Token metrics

Daily Active Addresses

Daily active addresses have typically been highly correlated with the price action of MANA. There was initially a lot of activity during the 2017/18 speculation around its ICO, before going through a relatively inactive period in the post-ICO era. Recently, as a result of the Metaverse launch in Feb 2020, there has been a resurgence in daily active addresses, suggesting that the product launch has garnered traction.

Daily active addresses, since inception; Source: Santiment

Daily New Addresses

New address growth has been in sync with daily active addresses, implying that a significant amount of network activity is that of new users. The launch of the Metaverse appears to have attracted many new accounts.

Daily new addresses, ICO distribution not included; Source: Santiment

Daily Onchain Transaction Volume (denominated in MANA)

Onchain transaction volume resembles other network metrics. Activity has mainly been clustered around the ICO era and the recent launch of the Metaverse. Increased transaction volume may suggest an organic increase in demand for the product (or is merely related to the price increase).

Daily onchain transaction volume, since inception; Source: Santiment

Token distribution, return & inflation metrics

  • The Decentraland team conducted an oversubscribed ICO in August 2017, where all available tokens were sold in one hour, raising approximately 68.2k ether or $25m.

  • With the launch of the Metaverse and establishment of the DAO, the Decentraland team and other vested entities have begun a 10 year vesting period for their tokens.

  • Out of the 609.3m tokens burned thus far, only 5.3m are due to fees. Approximately 54.6% of the burned amount is due to a decision to burn 333m MANA with the launch of the Metaverse. The remaining tokens were burned during two LAND auctions, which suggests that the primary driver for token burn is increased supply of LAND.

Initial token supply 2,805,886,393
Token supply 2,196,586,585
Circulating supply 1,411,976,448 64.28%
MANA burnt 609,302,407 161,483,050 109,500,000 333,000,000
Price 0.037
Market cap 52,325,023
Implied market cap 81,401,106
Returns MANA $ price Tokens circulating Inflation since
1m -9.35% 0.040879 1,369,794,785 3.08%
3m 50.15% 0.02468 1,050,161,831 34.45%
6m 7.61% 0.034438 1,050,145,479 34.46%
1y -18.39% 0.045408 1,050,147,771 34.46%

Source of data: CryptoCompare, CoinMarketCap, Etherscan, Manaboard

Source of data:, Etherscan

Source of data: CoinMarketCap, Manaboard

Tokens on exchange

MANA is listed on the majority of reputable exchanges due to it having been one of the more popular tokens during the ICO era. Approximately 530m MANA or 37% of the circulating supply is currently being held by exchanges, of which 55% is on Binance. Strangely, trading volumes on exchanges do not reflect deposits proportionately; the vast majority of real trading volume occurs on Binance, while other exchanges like Bittrex have extremely low trading volumes. This may suggest that many users who accumulated MANA in the past are essentially using the exchange as a custodial service, and likely exhibit very low interest in the platform or the virtual world itself.

Source of data: Nansen-d5

In the seniority distribution we can see that token holders accumulated approximately 25% of the supply around the ICO and immediate exchange listings. Fifteen percent was acquired in the post-ICO era and 50% in recent months. The address distribution between these three groups is fairly equal, making it difficult to determine if accumulation was retail or institutional driven (typically recent large acquisitions amongst few addresses would imply institutional interest). Note that this metric can be significantly skewed by exchanges moving token deposits between their custody accounts.

Source: Nansen-d5

Trading Data - CEX volume

Trading activity on custodial exchanges is atypical and does not reflect proportional deposits on respective exchanges. The large majority of trading activity occurs on Binance, suggesting that tokens on exchanges like Bittrex, Bitfinex and Poloniex have been sitting idle since the ICO era. We have decided to omit OKEx trading volume due to reported volume being significantly higher than their deposits would otherwise suggest (compared to similar exchanges such as Huobi). Trading volumes are insignificant on platforms other than Binance and Coinbase.

Source of data: CryptoCompare

As seen below, Coinbase listed MANA much later than Binance, who has been consistently leading MANA trading volume market share.

Source of data: CryptoCompare

Trading Data - DEX volume

Trading activity on non-custodial exchanges is very low and suggests that the Decentraland community is not primarily interested in financial services. Kyber has shown the most activity in recent weeks. Shortly after Balancer launched, we noticed an ENJ, MANA and ETH market which, at the time, didn’t have any recorded trading volume and currently does not exist anymore.

Source of data: Uniswap.info, 0x Tracker, Kyber Tracker, Pools.fyi

Volatility

Source of data: CryptoCompare

Downside Risk

MANA has a significantly higher count of negative daily returns compared to ether, especially at ranges between -20% and -40%. This suggests MANA vaults are expected to be liquidated more often than those collateralized with ether under the same circumstances and user behaviour.

Source of data: CoinMarketCap

Current presence in leverage and lending platforms

The only leverage or lending platform that currently supports MANA tokens is Aave, with ~$163k supplied and ~$16k borrowed. There is no sign of significant demand for MANA on lending platforms, which is to be expected given that MANA is not in the financial sector and that the user base is probably focused on other sectors like gaming and VR.

Decentraland Specific Metrics

  • The first LAND auction known as the Terraform Event took place from Dec 2017 - Jan 2018, where 34,356 LAND parcels were sold for 161,483,050 MANA. The highest parcel reached 582k MANA, whereas many of the available parcels were sold for the starting price of 1k MANA.
  • The second LAND auction took place in Dec 2018 where 9,331 parcels were sold for 109,521,854 MANA. This sale was conducted as a dutch auction, where the median price amounted to 12,122 MANA and the most expensive parcels sold for ~30k MANA. During the second auction the Decentraland team decided to spend 15m MANA from the community fund in order to acquire a large chunk of LAND.

Daily trading volume and number of daily trades

Below we can see the trading dynamics for LAND on the secondary market. The LAND market experienced increased demand during the second LAND auction in Dec 2018. A second notable increase in demand occurred in Feb 2020 with the launch of the Metaverse, but quickly contracted towards its mean value. Over time, neither the number of trades nor LAND value sustained an increase in activity.

Source; Nonfungible

Summary of Notable Risks

  • The vast majority of CEX trading activity occurs on one exchange (Binance).
  • Some exchanges with relatively large token deposits show very little trading volume. These are likely holders that acquired the tokens during the 2017/18 era. The inactivity may suggest that they are not actively following development of the project and are more interested in price speculation (i.e., no strong sentiment or usage base).
  • Approximately 37% of the circulating supply is deposited on CEX platforms (of which 55% is on Binance). This represents a significant exchange risk. Additionally, the new governance mechanism increases incentive distortions as well.
  • DEX volume and the general presence of MANA in DeFi applications is very low, suggesting that the Decentraland community is not very close to the DeFi ecosystem.
  • Due to the low crowdsale token allocation during ICO (40%), large amounts of tokens are yet to be released into circulation. This could offset any deflation due to the burn mechanism.
  • Competition in the space is high (for example, Cryptovoxels). Additionally, blockchain gaming has been a difficult sector in which to achieve product market fit.

Proposed Risk Parameters

Risk Premium: 12%
Liquidation Ratio: 175%
Debt Ceiling: 1 million
Auction Lot Size: 500,000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 20 Dai

We use the model described from the governance call here: a credit risk model that estimates the loss distribution of a portfolio of MANA Vaults. Risk parameters are estimated from this hypothetical loss distribution. Inputs to the model are derived from trading data along with stressed input parameters. A link to our model specification with inputs and outputs can be found here. Auction parameters have been selected to mirror those for ETH, with the exception of the lot size that has been normalized to a ~$20,000 amount

Lead Researcher: Marko Stemberger

Sources

5 Likes

Great summary, in the case of LEND, a suggested increase of the DC was subject to oracle diversification, which metrics would you consider in order to increase the DC of MANA?