Bostrom Validator Strategy and Emergency Plan
February 3, 2023
Objectives Established by the Client:
- Assess the economic status of the Bostrom Network, identifying current and future risks and opportunities.
- Develop a strategy for Validator behavior.
- Create a short-term plan to improve the economic state of the Validator.
TL;DR: Due to the numerous unknown variables in the situation, it is advised to utilize traditional business methodologies supplemented by specialized AI. Furthermore, to mitigate the impact of uncertainties, diversification is recommended.
Genegated on the prompt: “Artificial intelligence imagines itself as a strategist”
According to the official project white paper, the Bostrom Network functions as a canary network for the upcoming Superintelligence (Super AI) and operates on a decentralized L1 network within the Cosmos ecosystem.
The project is developed by the Cyber~Congress team and was launched in November 2021. The network’s native token, BOOT, is traded on the open market. The project’s tokenomics specify that 70% of the tokens are distributed at no cost to the web3 community via a process known as airdropping.
Project Outlook and Risks
As of the most recent update on January 31, 2023, the project’s market capitalization is approximately $4.8 million. When compared to industry benchmarks in the AI sector, such as PLTR with a market capitalization of around $16 billion and OpenAI with a market capitalization of roughly $29 billion, the potential uninflated upside for token price growth could range from 3,000 to 6,000 times.
High potential typically corresponds to a high level of risk.
In addition to the usual risks associated with investing in web3 startups, such as market rejection, talent acquisition challenges, and regulatory and intellectual property risks, the lack of a business model and partnerships in Bostrom Network’s case raises concerns for potential investors.
Determining the reasons for this based on publicly available information is difficult. However, one possible explanation could be that the product is genuinely innovative and ahead of its time, making it difficult for others to recognize its potential. Alternatively, the project may not be viable, and this fact is evident to everyone.
Given the team’s communication approach and the quality of their public statements, gaining a comprehensive understanding of the project’s operations is challenging. It is presumed that the team has chosen to work in stealth mode.
Conclusion. The project displays all the characteristics of a high-risk investment. As a minority shareholder, the client has no control mechanisms or insight into the project’s ongoing operations. As a result, a 100% allocation to such an asset class without any influence over decision-making would constitute irrational investment behavior.
CyberChurch Validator Analysis
The business model of a validator in a proof-of-stake (PoS) blockchain revolves around generating revenue by participating in the network’s consensus process and securing transactions. Validators are responsible for verifying and validating transactions and proposing new blocks to be added to the blockchain. In exchange for their services, validators earn a portion of the transaction fees and block rewards.
The validator’s earnings directly depend on the number of tokens staked on the network. The more tokens staked, the higher the rewards for validators.
At the time of the last review, the Bostrom network had a total of 85 validators. Among them, the CyberChurch validator ranked 8th based on the size of its delegations, thus holding a 2.8% share of the network’s voting power.
The commission rate offered by the CyberChurch Validator is relatively lower than the market average, standing at 3% as opposed to the average of approximately 5%. The minimum commission rates on the market are set at 1.9% and 2%.
The accumulated equity earned by the validator over its lifetime amounts to ~71 GBOOT, which is equivalent to ~$800 at the current market price. As of January 2023, the validator has generated an income of 3.8 GBOOT, equivalent to ~$40.
Considering the modest revenue streams, the Validator’s overall economic viability appears to be quite fragile.
A retrospective analysis of the variable returns of the Validator revealed a dependence on two factors:
- The continuously decreasing token price. An analysis of the exchange stack indicates that there is no organic demand for the token, and the price is being artificially supported by team members. Additionally, regular price spills are observed on the chart, which may suggest uncoordinated actions by key investors and team members.
- Unpredictable changes in delegation size. In the last month, the voting power of the Validator has decreased by approximately 30% due to the outflow of five delegates, accounting for 3% of the total. Simultaneously, the number of delegates has increased by 5.8% during the same period. Such spontaneous changes in delegation size are deemed unacceptable for a sustainable and predictable business model.
The validator has the ability to influence only the second factor.
Considering the current circumstances, the rational course of action for the Validator in the Bostrom Network is to pursue the following strategies:
- Diversify the delegate stack to a level where the departure of a small portion of the delegation does not result in significant damage to the business;
- Establish an optimal commission rate that takes into account the interests of both delegates and the Validator;
- Mitigate dependence on token price by diversifying the treasury with alternative assets.
Upon analyzing the circulating BOOT token holder list, it was revealed that the largest holders of the token are team members and other Genesis Investors.
Personal holdings of Genesis Investors have seen a significant decrease in market valuation, with a reduction of at least 20 times over the past year (from ~$200 per GBOOT at the end of March 2022 to the current ~$10). This unsatisfactory performance can serve as a starting point for a discussion on enhancing their capital efficiency.
Furthermore, a review of the top 10 validator delegates reveals that more than 80% of their delegate power is concentrated among four dozen addresses and their affiliates. This concentration of ownership in the hands of a single group of individuals is not ideal for web3 projects. However, it does simplify the task of building direct relationships with each stakeholder.
The large delegates on the network can be divided into three groups based on their behavior:
- Validator owners and their affiliates, who delegate to themselves.
- Members of the current Cyber~Congress team, who use their delegations to encourage independent validators and support network decentralization. The criteria for selecting Validators are undisclosed, but it is apparent that well-known Validators are more generously rewarded than unknown ones;
- Budget-conscious accounts that move their delegations for minimal commissions.
CyberChurch can only influence token holders from the latter two groups. Given the goal of diversification and reducing dependence on single large delegates, it is recommended to disregard the corporate interests of team members at the initial stage, as these interests are an unknown variable.
Possible scenarios for changing the validator commission are being considered:
- Maintaining the current rate. This approach will not achieve the goal of diversifying the delegate composition.
- Increasing the rate to the market average. This will result in a 60% increase in validator profitability, but may lead to the outflow of delegates, and the diversification goal will not be achieved.
- Reducing the rate below the market. At a rate of 1.5%, the validator’s yield will drop to 1.9 GBOOT. However, there is a possibility of solving the diversification issue and attracting delegates’ attention to the validator’s communications.
Considering the current yield, the cost of solving the problem of dependence on the mood of individual delegates seems highly profitable.
The proposed plan entails an inherent risk of losing delegations due to potential emotional reactions from major stakeholders towards CyberChurch’s actions, which could result in the validator being dropped from the active set. The client has expressed their willingness to accept this risk.
Revisiting the analysis of the top-10 validators stack and excluding the project’s own validators and incentivized known validators, poorbuthappy emerges as a suitable benchmark.
This validator employs a simple strategy: it attracts a cost-conscious audience by reducing the commission for a period of time, and then returning it to the average level. Given the size of the Cyber~Congress delegation, which is twice the size of the CyberChurch delegation, the team approves of this approach.
We recommend emulating this strategy by providing real value to the market and announcing Superintelligence-as-a-Service.
Specifically, we suggest educating delegates about their ability to directly participate in the development of the CyberChurch validator, from setting commissions to expanding to other networks. An examination of the wallets of many of the Bostrom Network’s majority shareholders reveals that they hold a large number of different assets, which could serve as a solid foundation for the future of the business as a whole.
“The first casualty of any battle is the plan of attack.”
― Cory Doctorow, For the Win
Here is a step-by-step plan:
- Decrease the validator commission to 1.5% and establish it for a fixed period of several months. Despite the decrease in yield, the focus should be on attracting cost-conscious users and establishing direct contact with them. Once a relationship is established, mutually beneficial solutions for commission rates and other terms can be worked out.
- Empower delegates to participate in the governance of the validator business by providing them with clearer information on CyberChurch’s treasury policy. This should include outlining the delegates’ ability to participate in the overall profitability of the validator business. Additionally, offer on-chain tools to facilitate decision-making on the future development of the collaborative business.
- Diversify the validator’s business by validating other chains, thereby reducing the Treasury’s dependence on the unpredictable price of the BOOT token. This strategy will not only diversify the business but also attract members of other networks to the validator tools in the Bostrom Network, expanding its activities. The expanded activities should attract the attention of team members and potentially increase the size of their delegations.
- Launch a proactive marketing campaign for the validator, aimed at promoting its capabilities within the Bostrom Network as well as across other network protocols. Additionally, begin publishing regular updates on the advancements and potential improvements of the artificial intelligence technology utilized by the validator, highlighting its potential for investors and partners alike.
Considering the relatively low activity of other validators in the ecosystem, and leveraging professional promotional strategies and artificial intelligence capabilities, we are confident that the validator has a strong potential to gain attention and establish a sustainable, diversified, and decentralized business for the benefit of CyberChurch, Bostrom Network, and all stakeholders involved.
© SCH: Emerging Market Advisory. Co-authored by MIA GPT.