Oct 31, 2020
VGX and LGO Token Merger Economics & Analysis
There has been a lot of speculation around the new combined token coming out of the Voyager Digital merger with LGO (an AMF regulated entity in France). Voyager issued a blog post explaining the token economics of the yet to be named new smart token. This sparked a flurry of questions from current VGX and LGO holders especially around a new allocation pool that creates dilution. To clear up some confusion in the community, let’s dive into the initial deal and token economics and the impact of the allocation pool on the token value.
Deal and Token Economics
After the swap, there will be 255,491,293 tokens split between VGX and LGO holders, 222,295,208 to VGX holders and 33,196,085 to LGO holders. VGX token holders get a 1:1 ratio and LGO token holders get a 1:6.536 ratio. LGO token holders will get a redistributed 30M coins equating to a 14% bonus for holding the new token for 3 months. This does not impact the initial combined supply as its a redistribution to current token holders.
LGO gets valued at ~5M and VGX holders get diluted 14% to pay for the new combined token. This dilution has some in the VGX community up in arms. Using a simple dilution price calculation, you can see why the market hasn’t moved much and is showing the deal fairly valued on a dilutive basis. Hovering around $0.16 as of writing this article. VGX token holders do give up a small % of overall market. Holding 10k tokens goes from 0.0045% to 0.0039% of token supply which is negligible on a cost basis given the market has priced the deal fairly. Here is a look at the dilution price calculation.
All of this is being priced without knowing how many tokens will be burned after 1 year. As a reminder, Tokens can be swapped for 1 year after the deployment of the smart contract and all remaining tokens that are not claimed by the end of the 1 year will be burned. Given VGX was a re-branding of ETHOS, there could be millions lost. There are currently 27,321 unique addresses of VGX and between 20–30 million coins that haven’t moved in 3 years. Its quite possible the 14% dilution to VGX holders becomes much less once coins are burned after a year.
Impact of Allocation Pool
The most contested aspect of the new token is the creation of an annual allocation pool. The Voyager blog post said it is “to grow the community and encourage staking of the Voyager token. The dedicated growth and incentive pool will initially be 40mm tokens for the first year, 20mm for the second year, and then 10mm per year over the next 6 years. After three years, the community will have the option to amend or terminate the allocation pool.”
In year 1, there is the potential for 15.7% in dilution. This is not a given that all 40M will be minted since these have to go to either staking (at 7% annually) or rewards and can’t be sold on the open market. If all 255M were staked, then 7% (17.9M tokens) of the 15% growth is a redistribution back to token holders (it’s unlikely that all will be staked).
This means the true potential dilution is 8.7% (22.1M tokens) which goes to rewards and growth of the community. This equates to $0.01 of dilution cost (using the dilution price calculation from earlier). In year 1 for every 10k tokens, this equates to $100. And this is ONLY if all are minted and given out for rewards.
In USD terms, the community is spending $3.5M for this growth in year 1. The value of this dilution depends on customers brought into the network. Let’s say we get 5 customers per $100 this equates to 165k more customers or $21.33 per customer acquisition from the community. Even using the conservative 165k customers acquired with this growth and only 15% own 1,000 tokens that is 24.8M in tokens owned and MORE than the true dilution of 22M. It is likely that the number of customers will grow MUCH faster than this and they will want to own more tokens than this once the reward tiers and debit card is announced.
Year 2 staking at 7% would be 20.7M tokens or more than what is allotted to be minted in year 2 (20M). The community will own the vote on year’s 2 interest rate. Year 3–6 as is would equate to 22M+ in staking interest at 7% or more than 2x the new supply created. Essentially Year 2+ you already are seeing negative inflation for rewards even though many believe it to be opposite. The community gets to decide to amend or eliminate the allocation pool starting in Year 3. At this point, setting interest while balancing rewards for bringing in more customers will be critical.
Conclusion
Fears of dilution are overblown in the community. Given the faster access to Europe (300M+ people), a better token utility, and community ownership of the token, this is a fantastic deal for VGX and LGO token holders. Getting people into the ecosystem faster is important to the long term value of the new token.
Disclosure: I am a current VGX token holder. This is not financial advice. This article is a factual analysis of announced terms and my perspective of the new token economics. Do your own research or seek out the professional advice from a financial advisor.
