Why we invest in Colony: accelerate Avalanche through a DAO

Investment Thesis:

  • Invest in Avalanche: Unique consensus mechanism that is highly adaptable and provides space for innovation.
  • Community-driven accelerator: the new paradigm in investment, invest as a community.
  • Builder of Avalanche: Be a part of the network and deliver the first Avalanche index fund ecological development
  • Maximized Value: One-stop access to the growth of Avalanche

Born in The Community

The epidemic since 2020 has given birth to an era of extremely loose monetary policy. Institutions have access to enormous amounts of funds in the traditional financial system and they have invested in cryptocurrencies as a hedge against inflation. On top of that, technology giants with resources have also jumped on board as well. The crypto market, thus, has become increasingly crowded. As a result, the assets have increased in value and it is difficult for an individual to participate in this market.

Colony joins Avalanche with the core value community and introduces the new concept: Ecosystem Farming, empowering the community with the opportunity of investing in early-stage Avalanche projects for the first time. Thus, as an accelerator in Avalanche, Colony has successfully aligned incentives of the community with the long-term value of the ecosystem from the beginning and the value created will be passed down to community members.

And, of course, all the created value will be rerouted back to the community, through Avalanche staking rewards, Liquidity provider rewards, and Tokens via airdrop of early-stage Colony funded projects.

Blockchain 3.0:Avalanche

The public chain is like the infrastructure of a city. It provides functions such as energy, transportation, and communication to enable a city to be built upon it. The team led by Turing Award-winning Professor Emin Gün Sirer designed a new consensus algorithm in Avalanche, providing new space for developers and users seeking better performance.

highly Adaptable consensus algorithm

Before there are mainly two types of consensus algorithms: Classical consensus that runs multiple rounds of voting from every node in the network, and the Nakamoto consensus that relies on POW. When networks grow, the cost of classical consensus increase exponentially, often proportional to the square of the number of nodes n, which inhibits scalability and thus fails to support more users. Nakamoto consensus algorithm can scale to support a large number of users but at the expense of efficiency.

Emin Gün Sirer, a Turing Award-winning professor at Cornell University who mainly researches distributed systems, Ted Yi, Emin’s professor who contributed Libra’s consensus algorithm as the first author, and Kevin Sekniqi, Ph.D. in cryptography, come together designing the ‘’the third generation consensus algorithm” based on metastable state and random sampling. Metastable state refers to the fact that the system does not maintain a specific stable form, but starts random sampling to reach consensus only when needed. Therefore, you don’t need much to become a validator in Avalanche and 2,000 AVAX is good enough.

Avalanche’s consensus is probabilistic. The rounds of random sampling needed to depend on the size of the network. However, compared with the classic consensus mechanism, the complexity is manageable(proportional to the logarithmic function, lower than the first-class function). Connor Daly, the founder of Pangolin, said in a Twitter post that the probability of drawing a wrong conclusion is extremely small, less than 0.0000000001%. Different nodes are sampled and after a certain number of samples, you will find that it is impossible to reverse the final result. It is as if it started with a snowflake at the beginning, but ended in Avalanche.

The parameterizable consensus mechanism gives developers the opportunity to define their preferred nodes according to their needs and therefore attracting developers to build on Avalanche. For example, DEX Pangolin founder Connor Daly prioritized security by requiring 80% of the nodes to conspire before endangering the security of the network, that is to say, more than 80% of the nodes need to give different answers.Built-in blockchains for scalability

Avalanche features 3 built-in blockchains: the Exchange Chain(X-Chain) that creates and exchanges assets, the Contract chain(C-Chain) that runs smart contracts and is compatible with EVM, and the Platform Chain(P-Chain) coordinates and monitors validator. These three interoperable blockchains are the bedrock of future scalability.

Picture of Avalanche’s primary network

First, let’s look at two directions of scaling without sacrificing decentralization.

1. Vertical scaling: increase the speed of transaction processing, which can be achieved by improving data structure, or requiring higher-performance hardware. But this can still run into the bottleneck of the storage required by the smart contract call function.

2. Horizontal scaling: Increasing the number of blockchains. There is no limit in theory, but, there is the issue of interoperability between independent parachains or shards.

The Subnets on Avalanche’s P chain are scaling horizontally. The subnet needs to process transactions through a virtual machine and Avalanche supports EVM, Bitcoin Script VM, Cardano’s UTXO model, Solana’s transaction engine, etc,in effect providing users with cross-chain asset liquidity. Although EVM has a strong network effect, maybe we can look forward to the innovation of developers.

Compared with the open-source public blockchain, the designer of the subnet can modify nodes to determine the visibility and access to achieve security and privacy. Only qualified nodes are allowed to send transactions, view the chain, and download the data. While the subnet of the P chain can customize the GAS fee, the subnet is coordinated and monitored through the P chain which gives the consensus from the Avalanche network.

Builders of Avalanche

Colony, as the first community-driven incubator in Avalanche, focuses on building the ecosystem to contribute the beta value for the projects they invested. Colony will build the ecosystem from four directions:

1. Become a validator: positive cash flow provides intrinsic value.

10% of Colony’s NAV will be used to pledge AVAX to become a validator. Taking the amount fundraising of 20 million into consideration, there are 2 million US dollars available. Assuming that the nodes meet the standards that the retention rate is as high as 80% and say that AVAX stays at US$119:

Colony holds 16,806.7 AVAX* 9.82% according to the average annualized rate of return shown on Avascan=1650.42 AVAX (here we ignore the possibility that Colony as a node may accept other people’s AVAX).

For the convenience of calculation, we ignore the price volatility of AVAX here:

1650.42AVAX*119 USD/10,500,000 market circulation=0.018 USD, the EPS for a CLY investor

From the perspective of mining revenue, we can benchmark the EPS of mining companies and the TTM-PE:

Table of mining stocks

Investors have generally given a 20–130 PE ratio for mining stocks, each comes with different mining capabilities and strategies, which can be a handy benchmark for Colony’s staking business. On top of that, since the payout is in AVAX, a higher PE ratio can be given to pay for the expected appreciation from AVAX.

Of course, there are still many uncertain factors in this income stream. The income estimated here may be different from the actual income but it can be seen that Colony’s future cash flow income is still pretty good.

2. Provide liquidity for DEX: Fund buyback program while building the community

30% of Colony’s NAV will be used to provide liquidity in the Defi market, that is 20 million U.S. dollars * 30% = 6 million U.S. dollars. Assuming Colony provides liquidity on the top 2 DEX on Avalanche, Trader Joe, and Pangolin with an equal amount of 3 million U.S. dollars.

As an LP with a pretty large amount of funds, Colony is probably going to choose the biggest liquidity pool to obtain stable income. For example, USDC.e-WAVAX’s on Trader Joe has 16.29% of APY, and the APY for the trading fee is 30.59%, and thus we will have a total of 1,406,400 U.S. dollars for providing liquidity.

In the top liquidity pool on Pangolin, such as WETH.eWAVAX, the trading fee APY is 15%, plus 4% of mining income, and thus total APY adds up to 19%. Colony can thus earn 570,000 U.S. dollars in one year.

Based on the simple calculations shown above, as an LP, Colony receives $ 1,976,400 U.S in total. At the current price of CLY, Colony can repurchase 1,183,400 CLY tokens, accounting for 11.2% of the 10.5 million tokens circulating in public.

At the same time, the TVL contributed by Colony can make an impact on the TVL ratio, as of December 22, according to the data of Defi Llama and CMC, the total TVL of Defi is worth 249.89 billion US dollars, of which:

Table for TVL ratio

TVL ratio is the ratio of market capitalization divided by TVL, which can help determine whether DeFi assets are overvalued or undervalued. Among the 5 most TVL chains, Avalanche has the second-lowest TVL ratio, slightly higher than Terra, indicating that AVAX is, relative to others Assets, undervalued.

Assuming that the AVAX price remains the same, Avalanche is an asset that is continuously undervalued. From a valuation perspective, there is more room for AVAX to go up. If the AVAX price rises and the TVL Ratio falls, it may be that TVL attracts more funds to join the ecosystem. Either way, there is room for Avalanche to grow in value.

3. Index of Avalanche: capture market beta of Avalanche’s growth

Currently, Colony has not launched index funds for the time being, we can refer to some existing index investment business models to estimate possible income.

Lists of projects with index fund

Index Coop now has 5 types of the index funds, of which Leverage product is focused on the specific chain, such as the ETH 2X Flexible Leverage Index, which is similar to the Avalanche Index fund launched by Colony. Although the Index fund provided by Colony will not provide leverage, the investors for these 2 indexes can be the same group of people who would like to concentrate on a specific ecosystem. So here we estimate the income of the standard ETH2X.

In the public announcement, Index Coop showed revenue in November to be $723,710, and total income amounts to $1.88 million from the beginning of the agreement to November. Among them, the index fund ETH2x-FLI contributed 58% of its income. Investors went from less than 5,000 investors at the beginning of the year to more than 30,000 holders in December, and TVL has also reached $500 million in the past month.

This shows that index investment products are gaining momentum and more individual and institutional investors are beginning to consider putting index investment for long-term return.

We can expect Colony to have first-mover advantages and attract more investors to participate in index investment. At the same time, it should be noted that the structure of index funds, the method of anchoring value, and management fees are all issues that the Colony community needs to consider.

4. Market investment: Concentrate on ecosystem growth with multiple tracks covered

Colony is deeply rooted in Avalanche ecology and through official partnerships Colony is equipped with both resources and talents to accelerate the growth of the ecosystem.

Now Colony has publicly announced their investments in 7 projects:

List of invested projects

Given the market price of circulated tokens, Colony now looks at a return of $16,833,858.9 US dollars, which can be obtained by holding CLY tokens to access airdrops at the price of $1.67. At the same time, it should be noted that Colony’s investment decision-making is still centralized, and we need to pay attention to the details of community voting governance.

These four pillars generate revenue or cash flow for COLONY, furnishing tokens with intrinsic value and making tokens an asset that can generate income. Nonetheless, most of the crypto assets ride on market attention and narrative, and thus lack intrinsic value to be easily speculated by traders. As for Colony, apart from project investment, Colony’s income is pretty transparent to anyone who would like to look into their revenue.

Team of seasoned professionals

The picture of management team

The management team are experienced traders and professionals in traditional finance and thus comes in with deep understanding of risks and returns

  • CEO, Elie le rest, started investing in cryptocurrency in 2014 and cofounded ExoAlpha, the quantitative hedge fund that manages funds of up to $500,000,000.
  • CIO, Dr. Jean-Baptiste, started quantitative trading in 2015 and co-founded Olymp Capital and Olymp Fund with 44% IRR and managed ExoAlpha with CEO Elie.
  • COO, Jean-Marc Bonnefous, served as the CEO of Tellurian Capital, private equity in the commodity market, in 2007 and led the global commodity and derivatives trading department at BNP Paribus, one of the top European investment bank
  • CTO, ALEXANDRE COSTANTINI, leads software architecture at IBM.
  • Quant Trading Manager, David Lifchitz, risk control director of the U.S. market in the private equity Ashmore Group, which manages more than 90 billion US dollars

Nicolas, Avalab’s general manager, Avalanche’s CEO Mark, and Avalanche’s partner Dave, have also joined the team as consultants to work with Colony to develop the ecosystem in Avalanche.

Tokenomics

Picture of token vesting schedule

Colony has set a new record for fundraising in Avalanche, with a total of more than $20,000,000. From the very beginning, Colony is very clear about reaching as many users as possible in the early stage of the project.

Token distribution: The total circulation of CLY is 15,000,000, and 70% of the tokens have been sold on the open market. The remaining distribution details are as follows:

Table of token distribution

  • Fundraising stats:A total of 21 million US dollars were raised in private and public offerings, and 70% of the tokens were sold.
  • Initial circulation: $16.6 million CLY (excluding liquidity generation).
  • Initial market value: $6.6 million US dollars (based on an IEO price of 0.40 US dollars, Excluding liquidity tokens):

Table of fundraising details

There are 10,000 token holders and 20,000 people who staked their CLY. These users will eventually receive airdrop as early supporters. Community members who start staking now can receive airdropped tokens by the end of December this year.

Token value

  • Become an early investor in the project and capture value growth through CLY tokens.

The token is the direct manifestation of the value of the investment portfolio. Holding tokens is investing in the projects, which truly empowers community members with the value vested in the token and thus encourages long-term behavior.At the same time, in the secondary market, an investor can purchase the token as well to have exposure of the projects invested by Colony while enjoying the benefit’s the Avalanche’s growth.

  • Staking to receive a triple reward to encourage long-term investment

Staking CLY tokens can obtain:

  • AVAX staking reward
  • LP liquidity reward
  • Token airdrop reward

You need to stake at least 50 CLY tokens (the threshold requirement of 50 CLY may be adjusted or lowered through DAO’s community governance later) and the lock-up period is 20 days. Community members who staked less than 20 days will not be able to claim the upcoming airdrop award for the beginning and, if canceled, the time will be reset from Day 0. Colony incentivizes long-term investments. As an accelerator, Colony is committed to Avalanche with long-term vision and to support the development of the Avalanche ecosystem.

Backing from Top Investors

Foresight sees the potential in Colony and future growth of Avalanche accelerated by Colony. As an early adopter of Web3, we are here to support revolutionary and paradigm-shifting projects that will shape the future we are moving toward.

Led by Foresight Ventures, Avalanche Foundation, and GBV, Colony has secured 1 million USD in the seed round. As the official investment fund of Avalanche, Avalanche Foundation is funded by the Avalanche team that rarely invests in projects. This investment demonstrates the confidence Colony’s commitment and fits in the Avalanche’s ecosystem.GBV Capital is the investment arm under Genesis Block, one of the largest cryptocurrency over-the-counter transactions and this can testify to the trading ability of the management team. Investment institutions. Other Investment institutions also include Avalaunch, Avatar, Yield Yak, NGC Ventures, Spark Digital Capital, MEXC Global, Synaps, and ZBS Capital.

foresight sees the potential in Colony and future growth of Avalanche accelerated by Colony. As an early adopter of Web3, we are here to support revolutionary and paradigm-shifting projects that will shape the future we are moving toward.

The current landscape

The community-driven investment thesis pioneered by Colony still needs to attract funds from investors. Currently, we already see existing projects emerge to help investors with asset management on the chain.

Let’s take Enzyme and dHEDGE as examples

Enzyme: Circulated market value of 145 million U.S. dollars, fully diluted total market value of 148 million U.S. dollars

As an asset management agreement, Enzyme allows anyone to create an investment Portfolio or can choose one to invest based on market performance. The back-end implementation consists of a set of smart contracts that automatically execute functions such as investment, redemption, asset custody, transactions, and fee distribution, replacing long and manual processes in traditional funds. On-chain performance data and process give user full control and knowledge of their funds. In essence, Enzyme is more like a fund supermarket with a variety of strategies focusing on different assets and featuring different risks and resting that you can shop. However, unclassified choices could leave unsophisticated users lost and thus discourage further actions.

dHEDGE: Circulated market value of 145 million U.S. dollars, fully diluted total market value of 148 million U.S. dollars

Based on Synthetic protocol, dHedge allows fund managers to mint new fund tokens when they create a portfolio, and then Investors receive tokens in proportion to their share. To exit the strategy an investor can redeem their tokens. dHEDGE Is planning to allow investors to redeem fund tokens for a single asset, not just their investment shares in the fund’s portfolio. However, there is a scenario in which the fund manager outperforms and thus receives extra fees by minting new tokens. As a result, this will increase the manager’s share in the fund pool, and the investor’s share may be diluted. dHEDGE reaches liquidity pool on Ethereum and Polygon through the Synthetix protocol through synthetic assets but the fund manager may lack hedging tools such as futures or options.

Conclusion

Different from existing asset management, Colony gives an average investor the opportunity that was previously only available to large institutional investors or KOLs. It is attractive for people who have been kept outside the game for a long time.

The closed-loop of value transfer is original but makes a lot of sense. The LPs of the fund that invests in new projects are also the users of the project invested. The value from the project created with users goes back to the hand of the user of the project, who helped the projects start.

As a DAO, Colony redefines the capability of a community to incubate a project, and accelerate an ecosystem. This is just the beginning. The ultimate vision of Colony is a global platform that one can invest in a team, build the community, and trade the asset.

Source:Forsight Ventures

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