Tokenomics is arguably the most fundamental criteria of investing in cryptocurrency. Regardless of whether you have an “All-star” team, if your tokenomics do not stack up, it makes everything else redundant as ultimately you are buying into the monetary policy or economic policy of the token. William Mougayar defines a token quite well.
A unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.
Essentially, tokenomics is how we create new business models to drive value into the coin (protocol) itself. Considering the number of projects that have come onto the scene over the last year it is no surprise that many have failed to understand just how important tokenomics is or have even considered the concept of ‘velocity’.
Wagerr is one project which has really understood the tokenomics of their project from day one. Unsurprisingly the value of the coin design has been lost in a sea of other projects coming to market after Wagerr. In this article, I will break down the wagerr coin design to hopefully inspire future projects to consider their design more thoroughly as well as help investors understand the importance of holding a coin that can actually appreciate in value.
Without going into too much detail on what the project is or its merits, here is a quick summary. Wagerr is a decentralised sportsbook that brings trustless betting to the entire world. Essentially wagerr will enable any person in the world to gamble on sports betting, with no limits, no blacklists, no handshakes and 100% confidence that they will be paid out should they be victorious. All of this with the overarching benefit of anonymity. Sports betting is an enormous industry and beyond individual betting, wagerr could be used by traditional sports books as a means to hedge their own risk, this is why no limits and anonymous features are critical. Ultimately, the volume of betting in wagerr could be significant should they launch a successful betting protocol. But for this article, we are focusing on their tokenomics.
Alright, let’s get into the detail of the coin design. First, let’s explain how wagerr coin ($WGR) has utility.
- $WGR is required to place bets on sporting events. i.e. no other coin could be used.
- $WGR is required to be staked if you are running a masternode/oracle. (more on this later).
The Wagerr network has two layers. The first layer is the standard Proof of Stake (POS) blockchain that allows users to send coins from one standard address to another.
The second layer of the network is comprised of Masternodes and Masternode oracles. Masternodes are not new to cryptocurrency and provide a more secure second-tier network for blockchains, whilst also performing specific functions for the network, those specific functions vary from project to project. Masternode oracles, however, are somewhat new to cryptocurrency, the idea at least has been around but to date has yet to be fully implemented. In Wagerr’s case, masternode oracles act as consensus agents that retrieve real world sporting event data and record the outcomes on the blockchain. This is then used by the network to determine winning bets. 25,000 WGR is required for a masternode, which can then be upgraded to an Oracle masternode. There is a limit of 2000 Oracle masternodes at any time on the network (these numbers are important later).
Wagerr has three types of betting on its blockchain.
- Head to Head Betting
- Multi-User (i.e. one big bet matches multiple little bets)
- Peerless direct chain betting (betting against the house)
Peerless Direct Chain Betting
The project originally planned to start with Head to Head and scale up to direct chain betting but has since changed scope and started with this. I personally see this is as the most relevant betting form for real adoption and so will ignore the former two for the analysis which works well as they are not in the immediate focus.
Essentially, there are two scenarios on each bet. Winning & losing.
Let’s describe both scenarios, using the example pictured above. Note that in both cases the player has staked 100 WGR on the outcome and the odds are 2.50.
Player A wins — (Implied probability 40%)
- 241 $WGR is paid to the player (the minted coins and original stake)
- 3.6 $WGR is given to the Oracle Masternodes
- 0.9 $WGR is given to the Development Fund
- 4.5 $WGR is burnt
- NET COIN SUPPLY +145.5
Player A loses — (Implied probability 60%)
- The 100 $WGR is burnt
- NET COIN SUPPLY -100
What we can take from this is that the blockchain itself is taking on risk by minting coins on winning bets, however, this is offset by the burning of coins on losing bets too. Once we factor in the implied probability of outcomes and the fact that the blockchain is also burning coins on winning bets (the 3% WGR fee burn), this tilts the edge towards the house. i.e. given even odds, more wagerr will be burnt than minted over time.
This is interesting for a few reasons, firstly it means that betting volume directly impacts the value of the coin and by holding the coin you inherently benefit from the house edge. This may bring in the question of who is creating the odds? And again not to detract from the point of our article but to give a full explanation I will summarise below.
- Firstly, odds are taken from an average of the Oracles who supply the data.
- Secondly, a dynamic odds balancing algorithm then adjusts the odds to best minimise the risk of each event.
i.e. we are confident that ongoing betting will reduce the coin supply over a long-term horizon.
Now that we are across how betting occurs on the Wagerr blockchain there are a few more variables to add in which highlights just how complex these mini economies can be and how important it is to understand them prior to investing.
Above, I mentioned that Wagerr was a POS blockchain meaning that it has staking rewards for block formation. Blocks occur every 60 seconds and a total reward of ~3.8 $WGR is minted.
- 25% is given to a staking wallet (~0.95 $WGR)
- 75% is given to a masternode wallet (~2.85 $WGR)
This is approximately 2 million WGR minted every year.
Aren’t they at odds?
If you haven’t picked it up yet we have a staking rewards system that is adding to the coin supply whilst we also have a betting contract that is removing coins from the supply. Again, to summarise:
- ~200 million starting supply
- ~2 million supply increase per year
- An inbuilt edge in betting contracts that burns WGR
The question is obviously; how much WGR is being burnt and is it enough to decrease the supply?…. cue value coupling
Wagerr defines Value coupling in their whitepaper as:
The value of the Wagerr token ($WGR) is systematically tied to the use of the sports betting blockchain.
This is clearly evident once we work through how the WGR price affects the coin burn rate. Without looking at numbers, it’s easy to see that the lower the price of WGR the more WGR would be required to bet and vice versa.
Let’s say the average punter wants to place a $100 bet. At current prices (10c), this is roughly 1000 $WGR.
Now, let’s assume the price of $WGR has risen to $10, the punter still only wants to place a $100 bet. This would require only 10 $WGR.
Ultimately, this means that the $WGR price directly impacts the volume of $WGR that is being used for betting. As long as the burn rate of $WGR is greater than the increase in supply from the staking rewards than we have a deflationary currency. Here is an easy to understand video that helps explain this.
As long as the product itself is successful, i.e people are actually betting then regardless of the price falling, Wagerr will burn coins to adjust the supply and stabilise the currency. Although this model is simple, it is a significant step up from the majority of projects that we see today.
So, how much is Wagerr worth or how do we value it?
No! I have not cracked the code of valuing cryptocurrencies but there is definitely an opinion here on how this project could be valued, so let me entertain the idea with you and you can be your own judge. But first, we need to go back to these oracles.
As mentioned Wagerr has masternode oracles which also need to be factored in when looking at the tokenomics.
To become a masternode on the Wagerr network 25,000 $WGR must be staked. There is an unlimited amount of masternodes that can be on the network (2209 at the time of writing). These masternodes are able to upgrade to an oracle masternode whose role it is to come to the consensus on the results on sporting events, this has higher costs, like a sporting datafeed for example but are rewarded a 2.4% fee of winning bets. However, there is a limit on the amount of masternode oracles to 2000.
- 209 Masternodes staking 25,000 $WGR
- 2,000 Masternode Oracles also staking 25,000 $WGR
With 2,209 masternodes online this immediately locks up 55,225,000 million WGR or 27% of the supply.
Building a Valuation Model
Below I have started to put together a basic model of the Wagerr network. Like with any model there are assumptions that need to be made and I have made a few, with some explanations below. You can see the spreadsheet here.
Betting volume: This is one of the biggest assumptions we have to make. Currently, there has been only one bet on the Wagerr network, which was more of a promotion. This was the Mayweather v McGregor fight. This event took in half a million dollars of bets. The only other guidance is betting on the testnet which is occurring at the moment. Although we can’t extract dollar amounts there are ~300 users, which means that there are at least 300 users who are very keen to start betting. To give some real-world perspective Australia alone spend 580 million dollars a year gambling on sports and NBA Commissioner Adam silver estimates that “$400 billion is illegally wagered on sports each year”.
Either way, I feel an assumption of 10 million for this year is reasonable. The betting volume from there rises quite rapidly and this is debatable but my thought process is that given an unlimited order book, large bets could be taken on chain and this might be a way for big players to hedge risks. Fortunately, we have the ability to watch betting volume on chain and gather better insights as we go.
Even odds: In this model, I have decided to assume that all bets are done at even odds. i.e. 1:1. Although this is not the case in reality, it does allow me to balance between losing and winning bets. Odds that are higher than 1:1 in general just imply lower probability so therefore it would be more likely that the ratio of “losing bets” would be higher and that payouts for the fewer winning bets would be higher.
Floating supply: This is probably one of the more conservative parameters. I have based the floating supply of Wagerr on total supply minus the locked supply from the Wagerr masternodes (2209). However, this doesn’t take into account the number of coins not locked in masternodes that will not be included in a real floating supply i.e. Hodlers, lost coins, people holding whilst betting. I have since updated the model to included a percentage of Hodl’ers to show the effect which I assume could be anywhere up to 30%. Although have left at 0 to be conservative.
Moving on, below you can see what happens if Wagerr was to achieve 100 million in betting volume next year.
Evidently, the $WGR price cannot stay at 10c if it is to support 100 million betting volume as the $WGR burn would be too dramatic and there would be no supply of coins. Over the course of the year, Wagerr would become more scarce and therefore the demand for Wagerr to bet would drive the price upwards.
The price of Wagerr needs to increase to support the betting volume. To do this we take the $WGR burn amount at the current price and divide it by the $WGR floating supply. This gives us a multiple (3.6 in 2019) in which to adjust the price in order to support the burn rate.
From this, we can estimate a new burn rate and a new mint rate (from the winning bets).
Finally, we can take the end supply of $WGR and divide by the adjusted price to give us an expected market cap for Wagerr.
Understandably, this may be hard to pick up immediately, I have included a spreadsheet for people to see and comment on.
Wagerr is a project that really understands the value proposition of their token model and I think that many projects that come to market need to have as in-depth thought process about how their token behaves in certain situations as Wagerr has. Otherwise, you are destined to fail from the start. From an investment perspective, it can be very difficult to determine how value accrues to tokens and rather than shying away from it we need to be shining more light on it so that we understand the risk that we take on by investing.
By no means do I think this model is perfect, however, I do believe it is on the right track and will improve in time. Wagerr, in general, has an easy token model to understand and model out. A standard model to value cryptocurrencies is incredibly difficult to create and so I think we will see more specific models for individual cryptocurrencies like this. I have taken large inspiration from Chris Burniske who understands that we are still paving the way forward with valuation models.
However, in all of this, the Wagerr team deserve credit for bringing this type of token model to market. A token economy that is still (in my books at least) the best to date. I’ll leave you with an extract from their whitepaper.
The Wagerr team didn’t set out to make a “currency.” Instead, the Wagerr team has engineered an economy. The key to the model’s design has been the structuring of incentives to reward and maintain behaviors that add value to the Wagerr network, and devising subsystems that translate the Wagerr network value to the WGR token value.