- In March 2021, the SORA community voted to allocate 33 million VAL “to the SORA Parliament to set up a company that can act as an investment fund for the ecosystem”
- In August 2021, the SORA community voted to transfer 32,950,000 of the 33 million VAL to be deployed to the VAL investment entity for investment
- After careful research and consideration, the investment entity that manages the VAL has decided to work with a licensed financial institution, which will allow most of the VAL to earn income while not being sold on the market, by keeping it on the balance sheet of the institution — which is a win-win for the ecosystem
VAL is the SORA Validator Token — a reward token for validators on the SORA network. Because SORA does not inflate the XOR token to pay block rewards (but only for productive economic output), another token was needed to incentivize validators to run nodes, so the SORA community created the VAL token to fill this gap.
VAL was the original v1 XOR, but the SORA community voted to turn the v1 XOR into VAL, redenominate the supply, and redistribute it so that 1/3 was given to the original v1 XOR holders, 1/3 was given to the new v2 XOR holders as a vested airdrop, and 1/3 was to be deployed for strategic investments through a community managed DAO (note: this is different from the VAL DAOs, which are funds from the TBC to VAL holders).
The community then voted to move a majority of the VAL from the community-managed DAO into an investment entity set up as a corporation. Today, we are announcing the exciting news that the investment entity has found a unique method of using the VAL, so that as much of it can stay off the market as possible, while still bringing VALue to the ecosystem.
But, before the explanation of how it all works, we will provide some insight into the rationale behind using approximately 1/3 of the VAL supply for investments. Back in 2020, when the community first proposed to change XOR v1 into VAL, there were disagreements between the XOR v1 and v2 token holders about who should have the most VAL.
Ultimately, a compromise was proposed to give both equal amounts, while vesting the XOR v2 holder’s airdrop of VAL. In exchange for the asymmetry of holdings (because v2 holders were vested), it was agreed among the community to use 1/3 of the VAL supply as a common good for the ecosystem. This distribution was finalized on March 2021, one month before the SORA v2 network launch, via a referendum.
Originally, it was envisioned to make something similar to the Hermes DAO, where users would vote on the allocation of the funds, but it was quickly realized that this model would not scale well for equity and other real-world investments, because in many cases, a legal entity is needed to make due diligence and sign contracts.
Therefore, in August 2021, it was proposed to move a majority of the funds, 32,950,000 VAL to be exact, to a legal entity to manage the investments. This on-chain referendum passed and transferred the VAL, and since then, they have been managed for investment. However, in the Fall of 2021, the crypto market exhibited weakness and so most of the funds were not deployed in off-chain investments, and instead have been doing passive, bear market strategies, such as liquidity provision and farming, as well as taking advantage of strategic opportunities like the Hermes DAO HMX ILO.
Due to the prolonged market weakness, a team of volunteers with over a century of financial market experience searched for a solution. After 9 months of unpaid volunteer research, the highly experienced team suggested a way to utilize the VAL under management to attract income without selling on the market: as collateral for financial asset repo agreements.
拋磚引玉・Toss Out A Brick To Attract Jade
A naive investment fund manager may only consider equity investments or other financial instruments, but a deep understanding of money markets (which you can learn about in this free course) reveals less obvious yet equally appealing opportunities. In money markets, you can earn yield by providing liquidity (currency) — an opportunity that can be quite lucrative, but it requires collateral.
So this reveals the opportunity for the VAL in the investment vehicle: without giving away the secrets for others to copy, the simple answer is, the VAL can be wrapped and enter the global financial markets by putting it on the balance sheet of a financial institution in a country that is crypto-friendly.
Then, once on the balance sheet, it just sits there without entering the market but can be pledged as collateral for getting liquid currency that then can be invested in TradFi money market products to earn some yield. This is of course done safely so the collateral never gets “called,” as the main advantage of this approach is to earn a yield on the VAL without having to sell it on the open market.
Recall that balance sheets should balance assets and liabilities. Below is an example of a balance sheet that has assets on the left-hand side and liabilities on the right. Solvency is when there are at least as many assets as liabilities. Liquidity is the ability to pay liabilities as required.
Every financial institution is somewhat different and has different liquidity needs, but some types of institutions have regular and predictable liquidity needs and these institutions are the ones being targeted with the VAL fund. As shown in the example, the financial institution can use the VAL by putting it on its balance sheet to stay solvent while taking on more liabilities, borrowing via a repo agreement and paying money for the asset provision.
However, doing this business is not without costs. There are some regulatory hurdles in the way, which require licensing and these cost a lot of money upfront to set up. However, this process was started last year and is almost complete, with expected regulatory licensing finished in June and yield coming in from the VAL repo agreements toward the end of this year/early next year.
This is a long-term, big-brain play and many details are not obvious. If it all works out, in the long term, this approach can contribute to a robust SORA ecosystem and will be worth the effort. The team that is advising on this approach has done this work before and knows how to do it, even with assets like crypto, so we look forward to providing future updates as progress is made!
About SORA, Polkaswap, and Fearless Wallet
SORA is a movement that advances humanity by empowering people with decentralized technology, DeFi, and with a new economic system geared towards enabling human progress. The SORA network implements a new way of parachain architecture on Polkadot and Kusama network, with the capability to bridge external blockchains (like Ethereum) to the Polkadot ecosystem.
One of the DeFi applications that is on the SORA network is Polkaswap, a noncustodial liquidity aggregating, cross-chain AMM DEX designed uniquely for the Polkadot ecosystem with boundless liquidity through its one-of-a-kind Aggregate Liquidity Technology (ALT).
Fearless Wallet is a bespoke mobile wallet designed for the decentralized future on the Polkadot and Kusama ecosystem, with native support for iOS and Android platforms. A premium user experience, fast performance, and secure storage for your accounts. Fearless Wallet will integrate Polkaswap for easy, decentralized swaps of assets.