"High profit expectations, continuous repurchase and destruction of tokens, the launch of Vault products is becoming a major positive for the development of the Pencils Protocol ecosystem.
Pencils Protocol is currently the DeFi platform with the highest TVL in the Scroll ecosystem. Even in a relatively flat market, it is able to maintain a lock-up value of around $300 million and has over 247,000 active users.
Entering September, Pencils Protocol has successively received positive news. First, Pencils Protocol raised $80 million in a new round of strategic financing, with investors including DePIN X, Taisu Ventures, Black GM Capital, and Bing Ventures. This represents the industry's high expectations for the development prospects of Pencils Protocol.
At the same time, Pencils Protocol also announced the economic model of the DAPP token. It is about to launch a new round of IDO activities on the Tokensoft platform on September 18th. 20% of the total supply of DAPP tokens (20 million tokens) will be used for this round of fundraising, indicating that the economic system of the ecosystem will be fully operational.
In addition, the most significant positive news is that the core product section of Pencils Protocol, Vault, is about to be launched. This product is an important source of income for Pencils Protocol's C-end users and will also be a significant source of revenue for Pencils Protocol. It is reported that Vault will allocate 20% of its revenue to repurchase and destroy DAPP tokens. Therefore, the launch of the Vault product represents further improvement in the product aspect of Pencils Protocol and indicates that the value cycle of the Pencils Protocol ecosystem will begin.
What is Vault?
In fact, Vault itself is a profit pool based on the liquidity mining model, with leverage mining capabilities. The Vault section connects to the Staking pool, supporting users to borrow assets from the Staking pool. On the other hand, Vault 1.0 will connect 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 a portion 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. This will greatly enhance the enthusiasm of users to participate in the Vault section and significantly improve the capital efficiency of Staking. In terms of operations, 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 it 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 as the main development direction, such as integrating more high-quality assets and launching various asset income methods, such as on-chain delta-neutral strategies, on-chain synthetic income, on-chain exotic options, etc., 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, these products are still highly sought after due to their rich gameplay and above-average returns in the industry. Therefore, such products always have a market, and considering early market valuations of similar products like Yearn Finance, which ranged from $3 billion to $5 billion, and Alpaca Finance, which reached a market value of about $1 billion at its peak, no innovative similar products have emerged in this market cycle yet. Vault, targeting the market, fills this gap. The narrative of liquidity hub and the LRT track will also drive the valuation of Vault or Pencils Protocol.
Just from the perspective of the Vault product itself, we can have a rough expectation of the valuation of Pencils Protocol. Furthermore, Vault will launch many passive income features based on strategies and start heavyweight products such as LaunchPad and Shop. Therefore, the valuation of $80 million before this round of financing is significantly undervalued.
Why do we believe it has strong profit expectations?
So, first, we understand the valuation logic of the Vault product, and 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 section are reflected, which is why we say that the development potential of the Vault product is high.
In fact, the Staking section alone has a TVL of $300 million (only providing pre-trading rewards), which not only represents the deep pool of Vault's leverage mining but also indicates that TVL will further skyrocket after the launch of Vault products (pre-trading rewards + farming income, more and more projects joining). 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 section that can earn far more than similar products.
Continuous repurchase and destruction, an important engine for the growth of DAPP token value
Another major positive brought by the launch of Vault is that Pencils Protocol will use 20% of the revenue from the Vault section to repurchase and destroy DAPP tokens. This means that as long as there is trading volume in the Vault section, funds will continuously be generated to repurchase and destroy DAPP tokens, leading to continuous deflation and an increase in value.
Therefore, the repurchase and destruction mechanism is actually an important engine for the continuous deflation and value appreciation of DAPP tokens. We mentioned the potential business scale of the Vault section earlier, which will continue to grow in various aspects. This means that the funds for repurchasing DAPP tokens will become higher and the repurchase and destruction of DAPP tokens will become larger.
Looking at the circulation of DAPP tokens in the early stage, most of the early market circulation of DAPP tokens will come from IDOs. The latest rules for the Tokensoft platform show that subscribers will have a lock-up period ranging from 6 months to 12 months. Therefore, there will be very few DAPP tokens in circulation in the early stage. Continuous repurchases will continuously dilute the impact of token holders unlocking, and even the destruction side will be greater than the output side.
On the other hand, the DAPP token itself has a certain utility. For example, in Pencils Protocol Farms, users can stake $DAPP to obtain $pDAPP tokens at a 1:1 ratio. $pDAPP holders can then earn subsidies by staking $pDAPP or provide liquidity for $pDAPP on DEXs. In the Vault section, users need to stake $DAPP tokens to obtain more point incentives, higher leverage multiples, exclusive features, and richer strategy products.
Therefore, in order to obtain more benefits, especially after the launch of the Vault section, the demand for DAPP tokens will further manifest.
Therefore, a positive value cycle will be generated around the Vault section. The continuous increase in platform business transaction volume will bring continuous income to the platform, continuously accelerating the repurchase and destruction 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 the circulation and tightening of DAPP tokens. Therefore, the repurchase and destruction of Vault will not only be the fuse for the value appreciation spiral of DAPP tokens but also the engine that drives this spiral.
Conservatively estimated, the DAPP token is expected to achieve an increase in price of more than 10 times in the short term after TGE and continue to rise with the expansion of business. The launch of the Vault product will be the starting point of the value spiral."