"The launch of the Vault product is becoming a major positive development for the Pencils Protocol ecosystem, with high profit expectations, continuous token buybacks and burns."
Pencils Protocol is currently the highest TVL DeFi platform in the Scroll ecosystem, with a lock-up value of around $300 million and over 247,000 active users, even in a relatively flat market.
In September, Pencils Protocol has received positive news. First, Pencils Protocol raised $80 million in a new strategic financing round, with investors including DePIN X, Taisu Ventures, Black GM Capital, and Bing Ventures, indicating strong expectations for the development prospects of Pencils Protocol.
At the same time, Pencils Protocol has also announced the economic model of the DAPP token and will launch a new round of IDO activities on the Tokensoft platform on September 18th. 20% of the total DAPP tokens (20 million) will be used for this round of fundraising, indicating that the economic system of the ecosystem will be fully operational.
In addition, the launch of the Vault product is even more significant. The Vault product is an important revenue source for Pencils Protocol's C-end users and will also be an important source of income for Pencils Protocol. It is reported that the Vault product will allocate 20% of its revenue to repurchase and burn DAPP tokens. Therefore, the launch of the Vault product represents further improvement in Pencils Protocol's product offerings and signifies the start of the value flywheel system in the Pencils Protocol ecosystem.
What is Vault?
In fact, Vault itself is a profit pool based on the liquidity mining model, with leverage mining capabilities. The Vault module is connected to the Staking pool, supporting users to borrow assets from the Staking pool. On the other hand, Vault 1.0 will be connected to the liquidity pools of various DEXs in the Scroll ecosystem, allowing users to become LPs through liquidity mining and capture multiplied liquidity mining rewards after leverage.
In this model, users can achieve higher returns with less capital through leverage, and only need to pay part of the income as interest to Pencils Protocol. Early active participants in Vaults can not only receive basic rewards for deposit and LP staking but also receive high multiples of points and token rewards, which will greatly increase the enthusiasm of users to participate in the Vault module and significantly improve the capital efficiency of Staking. In terms of operation, the process is similar to ordinary liquidity mining, with a low entry threshold, which can effectively attract a large number of farming players.
On the other hand, the Vault product is also a liquidity hub, and user participation means injecting multiplied liquidity into DEXs. This efficient liquidity hub is very meaningful in the current market stage and is deeply integrated with the LRT track (including BTC, ETH ecosystems), which further enhances the narrative direction of Vault itself.
In the long run, Vault will focus on user asset management, such as integrating more high-quality assets and launching various asset income methods, such as on-chain delta-neutral strategies, on-chain synthetic income, and on-chain exotic options, to further expand the income channels.
In fact, every market cycle needs an innovative aggregated income product to meet the income needs of users. In a bear market, when market liquidity is insufficient, users expect stable income. Aggregated income products that provide substantial and stable income are popular. In a bull market, such products are still highly sought after by investors due to their rich gameplay and above-average returns in the industry. Therefore, such products always have a market. Considering early market valuations of Yearn Finance and Alpaca Finance, which were estimated to be between $3 billion and $5 billion and around $1 billion, respectively, in this market cycle, innovative similar products have not yet emerged. Vault perfectly fills this gap. The narrative of liquidity hub and the LRT track will also drive the valuation of Vault or Pencils Protocol.
Looking at Vault's product itself, we can have a rough expectation of Pencils Protocol's valuation. Furthermore, Vault will launch many strategy-based passive income features and start heavyweight products such as LaunchPad and Shop. Therefore, the valuation of $80 million before this round of financing is significantly undervalued.
Why is it believed to have strong profit expectations?
So, first of all, once we understand the valuation logic of the Vault product, we can roughly estimate the business volume of Vault.
Which roles have a demand for Vault?
- Investors who expect stable income from farming and holding coins.
- Users who participate in LSD and LRT staking, who expect to profit from LRT assets through farming.
- LRT project teams, who expect to give their LRT tokens additional capital value and liquidity value.
- DEXs, who expect to access Vault to capture more liquidity.
Each of the above roles represents a strong market demand. By solving pain points and meeting these demands, continuous growth can be achieved. Similar products cannot bring the desired effects to these roles, but the advantages of the Vault module are reflected, which is why we say that the development potential of the Vault product is very high.
In fact, the Staking module alone has a TVL of $300 million (only providing pre-market point rewards), which not only represents a deep pool for Vault's leverage mining but also means that after the launch of the Vault product (pre-market points + farming income, more and more projects join), TVL will further skyrocket. Therefore, with a huge business volume and TVL, the Vault product, which meets the needs of multiple parties, will have strong profit expectations. It will be a sector that can earn far more than similar products.
Continuous buybacks and burns, an important engine for the growth of DAPP token value
Another major positive impact brought by the launch of Vault is that Pencils Protocol will use 20% of the revenue from the Vault module to repurchase and burn DAPP tokens. This means that as long as there is trading volume in the Vault module, funds will continuously be generated to repurchase and burn DAPP tokens, leading to continuous deflation and an increase in value.
Therefore, the buyback and burn mechanism is actually an important engine for the continuous deflation and value appreciation of DAPP tokens. As mentioned earlier, the potential business scale of the Vault module will continue to grow under the promotion of multiple factors. This means that the funds for repurchasing DAPP tokens will become higher and the intensity of buybacks and burns will also increase.
From the circulation of DAPP tokens in the early stages, most of the early market circulation of DAPP tokens will come from IDOs. The latest rules for Tokensoft platform IDOs show that subscribers will have a lock-up period ranging from 6 to 12 months. Therefore, there will be very few DAPP tokens in circulation in the early stages. Continuous buybacks will continuously dilute the impact of token holders unlocking, and even the burn side will be greater than the output side.
On the other hand, DAPP tokens themselves have a certain utility. For example, in Pencils Protocol Farms, users can stake $DAPP and receive proof-of-stake tokens $pDAPP at a 1:1 ratio. $pDAPP holders can then earn subsidies by staking $pDAPP or provide liquidity for $pDAPP on DEXs. In the Vault module, users need to stake $DAPP tokens to obtain more point incentives, higher leverage multiples, exclusive features, and richer strategy products.
Therefore, in order to gain more benefits, especially after the launch of the Vault module, the demand for DAPP tokens will further increase.
Therefore, a positive value cycle will be generated around the Vault module. The continuous increase in platform business transaction volume will bring continuous income to the platform, continuously accelerating the buyback and burn of DAPP tokens, promoting deflation. At the same time, the surge in trading volume and business volume in the Vault pool will further promote the demand for DAPP tokens, continuously reducing their circulation and tightening. Therefore, the buyback and burn of Vault is not only the fuse for the rise in the value of DAPP tokens but also the engine that drives this spiral.
Conservatively speaking, DAPP tokens are expected to achieve more than a 10-fold increase in price shortly after TGE, and they will continue to rise as the business expands. The launch of the Vault product will be the starting point of this value spiral.