DeFi Kingdoms: Play-to-Earn Exposure for 2022

Hello there!

After my previous article on the Harmony blockchain, I received a couple of queries regarding DeFi Kingdoms (DFK), Harmony’s main decentralized application (dApp). In this article, I aim to address a few concerns and explain the rationale behind my investment in DFK.

What is DFK?

DFK is the largest dApp on the Harmony chain.

As can be seen above, DFK has a Total Value Locked (TVL) of 280 million USD. This represents more than half of Harmony’s TVL of 505 million USD. In contrast, the second biggest dApp on Harmony, SushiSwap, has a TVL of slightly over 80 million, much lesser than DFK’s TVL. This goes to show the significance of DFK in Harmony’s ecosystem.

Essentially, DFK is able to garner such a high TVL because it embodies the functionalities of a DEX, AMM, play-to-earn (P2E) game, NFT marketplace for its game and Metaverse.

DEX: DFK Marketplace

The DFK Marketplace functions as a decentralized exchange (DEX) that allows users to swap between tokens instantly with minimal cost.

AMM: DFK Gardens

The DFK Gardens functions as an automated market maker (AMM) that provides sufficient liquidity for token swaps to be executed efficiently on the DEX.

P2E NFTs: Heroes

Heroes are playable NFTs in DFK’s game and they can be bought from the Tavern, DFK’s NFT marketplace.

The Heroes can then be used to participate in in-game quests under DFK Professions. Currently, only Foraging and Fishing quests are available.

Future Plans (PvP and Metaverse)

Subsequently, Mining quests and Gardening quests will be made available.

Additionally, DFK’s roadmap indicates that PvP tournaments between teams of Heroes will be implemented in the future.

DFK is also planning to embrace the Metaverse through its World Map expansion and making its land plots available for purchase through an auction. Buildings can be built within this plot of land to establish a player’s Kingdom.

Metrics

In light of these developments, the transaction volume on DFK is now ranked 2nd, just behind Axie Infinity.

With all these in mind, I shall introduce my investment thesis on DFK.

Disclaimer: This is not meant to be construed as financial advice. Please do your own due diligence before investing your hard-earned money!

The main token for DFK is JEWEL and here are 3 main reasons why I’m invested in JEWEL:

1. JEWEL as a proxy to Harmony’s TVL growth

As mentioned in my previous article, I am rather bullish on the TVL growth in Harmony’s ecosystem as they have a good AMM to attract liquidity and a money market protocol to compound that liquidity in the ecosystem.

Based on prior observation, when a blockchain’s TVL skyrockets, the native token of the blockchain will skyrocket as well. But going one step further, I have also noticed that the blockchain’s AMM’s token will similarly follow suit. This is typically because more liquidity tends to increase transaction activity which makes staking the AMM token and LP-ing attractive for yield farmers as they earn transaction fees. Furthermore, the highest yielding farms on the AMM usually have its own token as one of the LP pairs. As such, this bolsters demand for the AMM's token.

Since DFK is Harmony’s primary AMM, I believe an explosion in Harmony’s TVL will be a significant catalyst to JEWEL’s price.

2. Organic demand from in-game asset sales

With that being said, while the AMM’s token price will skyrocket initially, it will eventually come crashing down because most farm tokens go to 0. This is because these farm tokens have no utility other than being used to farm for more yield, which is issued in the form of the farm token itself. As a result, after the initial hype and rise in price, most yield farmers will take advantage of the higher prices to harvest their yield and sell the tokens, resulting in farm-and-dump price action. When this selling pressure causes a drop in the price of the farm token, farming yields will be revised downwards, rendering it unattractive, thus resulting in lesser demand for the farm token. This vicious cycle will eventually cause the price of the farm token to fall significantly.

An illustration here is Saber, which is the primary AMM within Solana’s ecosystem. Below is a chart depicting Solana’s TVL growth.

Notice how the TVL of Solana jumped from 1.2 billion USD in late July to 12 billion in early September. Meanwhile, the chart below depicts the price of Saber’s token.

I started farming Saber on 27th July when it was around $0.02 and sold at $0.55 when Solana’s TVL peaked in early September. I clearly did not catch the top but that’s not the moral of the story.

The point of this illustration is to observe how the price of Saber crashed by more than 90% following its September ATH, while Solana’s TVL remained stable. This is thus a representation of the farm-and-dump price action that most farm tokens follow.

But I believe JEWEL is a special farm token that will not follow this farm-and-dump pattern. This is because unlike other farm tokens with no utility, JEWEL has organic demand stemming from its in-game asset sales. JEWEL is used to buy/sell Heroes on the NFT marketplace, and I believe subsequent sales like Land Auction will also require JEWEL. Hence, after the initial pump in JEWEL’s price, I believe it will not dump and will instead remain stable or even pump higher due to its in-game utility.

3. Proxy to other ecosystems’ growth

DFK is planning for cross-chain expansion and it recently announced DFK: Crystalvale on Avalanche. CRYSTAL token will power Crystalvale’s in-game asset purchases, and CRYSTAL can be earned by staking JEWEL.

Therefore, this further increases demand for JEWEL, especially since the chains DFK plans to expand to has far greater liquidity and activity than Harmony.

Bridging JEWEL is also simple as the Dockmaster in DFK’s Docks will redirect the user to Anyswap, which is the cross-chain bridge connecting Harmony to other chains.

Strategy

My strategy is pretty much the same as delineated in my previous article. I started buying JEWEL at $3 in early October, and I am holding half of it in DFK’s Bank which is yielding an APR of 35-40%.

The rest of the JEWEL is LP-ed with LUNA in DFK’s Gardens which is yielding an APR of 700%. If you noticed from my earlier article, I was farming JEWEL-ONE previously, and I made the switch to JEWEL-LUNA because I am more bullish on LUNA than ONE, and the yields are comparable. Ever since I started farming in October, my monthly passive income is over S$40k/month! Excluding my locked rewards, my passive income is around S$13k/month!

As for the queries regarding LP lock-up mechanism, we need to understand what an Epoch is. In Harmony, an Epoch is 302,400 blocks. Assuming a speed of 2 seconds/block, this is around a week long. But given recent congestion in Harmony’s chain, an Epoch takes slightly longer than a week now.

When JEWEL is issued by your farms, a certain portion will be locked. This locked portion will start unlocking in Q3 2022, and it will be linearly unlocked till Q3 2023. This portion of locked JEWEL will decrease after every epoch.

Eg. According to Harmony Block Explorer, we are now on Block 20423666, which is in Epoch 14. This means that if a user claims his rewards, 31% of JEWEL rewards will be unlocked immediately, while 69% will remain locked. If a user chooses to wait a week longer and harvest his rewards in Epoch 15, then 33% of JEWEL rewards can be claimed immediately. As such, this incentivises long-term farming to unlock more rewards instantly.

Do note that rewards are automatically harvested and locked accordingly upon depositing/withdrawing LP positions.

Moreover, after every epoch, the yields from farming will drop as issuance rate of JEWEL drops. This is to reward early adopters and ensure the long-term sustainability of JEWEL’s price.

I hope this article is able to shed some light on how DFK works and why I view JEWEL as a good investment. I did not mention much about Heroes and the Quests because I am not involved in the game. If you’re interested, do check out these youtube channels here and here. If you want to go more in-depth in DFK, do check out their docs!

Cheers!