Overnight Tokenomics

September 12, 2023

Overnight is an asset-management protocol specializing in delta-neutral yield generation. Its core product is USD+, a yield bearing stablecoin, fully collateralized, mostly by delta-neutral strategies.

Typically, stablecoin protocols trade on FDV/TVL ratio, with current trading levels ranging from 0.8x to 1.1x See table below

Market Trading comparisons

	Angle	Lybra	Frax
FDV (M USD)	31	150	547
TVL (M USD)	27.5	152	693
P/TVL	1.1	1.0	0.8

Source: DefiLama for TVL, CMC for FDV, September 8th, 2023

In January 2022, more than 1.5 years ago, Overnight raised funds at 10 M USD FDV. Over the last 6 months Overnight’s TVL has fluctuated in the range of 30-50M USD, revenue – in the range of 100-220K USD per month. Sensitivity analysis of Overnight’s FDV indicates a conservative FDV in the range of 24-50M USD, with upside potential of 3-5x from these levels, organically.

Overnight FDV Sensitivity Analysis

	Scenario 1	Scenario 2	Scenario 3
FDV (M USD)	24	50	120
TVL (M USD)	30	50	100
P/TVL	0.8	1.0	1.2

Source: Trading comp analysis, historical performance

The above does not include opportunities such as (1) expansion to the Ethereum mainnet (2) the launch of ETH+ etc.

For OVN token to reach and exceed these levels, it must serve as a means of protocol value transfer to its token holders and carry significant utility. This is detailed below.

Value creation and value transfer

At present, Overnight generates revenue in the range of 0.3-0.5% of its TVL per month, or 4-5% annually. The revenue consists of rebase skimmed from liquidity pools and margin retained on delta-neutral strategies, typically, 20% of the daily yield. Overnight spends between ½ to ¾ of its revenue on liquidity incentives, i.e. rewards and/or bribes depending on the model utilized by the partners.

Currently,Overnight pays incentives in cash, i.e. in USD+. With the introduction of OVN token, Overnight will redirect the cash currently spent on liquidity incentives to bribe its OVN pools. In turn, USD+ pools will be bribed with OVN tokens. This should grow Overnight’s working capital, unleashing its TVL and revenue growth potential, while transferring value created to OVN holders.

An important point is that in the vast majority of the cases, OVN pools will be rewarded/bribed not with OVN, but with USD+, i.e. with cash. As we look to grow liquidity on DEXes where bribes exceed revenue generated by the bootstrapped TVL, this mechanic would ensure that cash revenue generated exceeds OVN emissions from bribes, thus creating upward pressure on OVN.

OVN utility

Overall the goal of issuing OVN is twofold: (1) promote and popularize USD+, which is achieved with using OVN for bribes, and (2) establish a robust & decentralized risk monitoring and management processes at the protocol level.

OVN token will provide standard voting rights which will be key to realizing the vision of decentralized risk-management. OVN token should help align community incentives with this goal: to reward for supporting conservative risk decisions, and for vetoing aggressive ones.

After a period of testing, Overnight will introduce Overnight Insurance Vault (1 per chain), where OVN holders will be able to stake OVN in exchange for insurance premiums. Staked OVN will receive a part of the yield generated by the insured strategies (not all strategies will be insured) and in case the strategy is unprofitable on a specific day the entire incurred loss. During profitable days excess yield generated by the strategies will accrue to the Insurance Vault and will be used to buy OVN off the market and add to the vault; In case of a loss, the opposite would happen. As these vaults won’t be immediately redeemable, stakers will have a vested interest to support strategies with optimal risk reward upfront.

We believe that Insurance Vaults would play an important role in scaling Overnight while maintaining attractive yield for USD+ holders and creating upward pressure on OVN. The way USD+ is designed is that this is the token that should be profitable every day. This leaves a lot of solid strategies outside of scope:

High-quality softly pegged CDP stables: Examples include crvUSD, GHO, LUSD as well as a whole lot of upcoming LST-backed stables, including Hay, peUSD, etc. LUSD is particularly good example: it is a very high quality stable, with solid liquidity, yields and track record, the one which USD+ cant hold in its collateral without insurance as LUSD’s peg tends to fluctuate in the range of 0.99-1.03;
Uni V3 and upcoming Uni V4 delta-neutral strategies: delta-neutral strategies (“ETS”) based Uni v2 volatile curve are Overnight’s bread and butter; Overnight spent about 9 months building and experimenting with delta-neutral strategies based on Uni V3 CL – as these are significantly more profitable and most importantly scalable; despite its attractiveness, we still cant hold these strategies within USD+ collateral at scale without insurance as these strategies, even if managed perfectly, do generate 3-5 negative days per month due to extraordinary volatility
“Spot+Perp” delta-neutral strategies due to similar reasons as CL delta-neutral strategies, further complicated by high fees for entering and exiting such strategies

In sum, OVNs utility would be to enable Insurance for specific strategies, thus not only de-risking the protocol, but also enabling it to scale. We believe Insurance Vault should represent an attractive investment, which should take the market a lot of time to price adequately. Thus, It is our intention to allocate part of OVN token supply to providing Insurance and benefitting from yields it will generate.

OVN token distribution

OVN will have a fixed supply of 1,000,000 tokens. No emissions of additional OVN is planned.

33.5% of total supply is reserved for the team and pre-seed investors. These tokens will vest over 30 months (see below). Up to 12.5% is reserved for the pre-sale and public sale, unsold excess tokens won’t be burned, but returned to the treasury.

Token allocation	Share (%)	Vesting terms
Pre-seed investors	8.5%	6 months cliff followed by 24 months linear vest
Team	25.0%	6 months cliff followed by 24 months linear vest
Pre-sale	2.5%	25% on end of sale, 75% 4 week linear vest
Public sale	10.0%	25% on end of sale, 75% 4 week linear vest
Insurance fund	20.0%	10% on end of sale, 90% 6 months linear vest
Treasury	34.0%	10% on end of sale, 90% 6 months linear vest

The remaining parts include Treasury, which will vest over 6 months, and will be used for seeding liquidity to OVN pools, incentivizing USD+ pools via bribes and other forms of incentives. The remaining 20%, once vested, will be used for staking into specific Insurance Vaults. The revenue generated from seeding liquidity and insurance staking would be included into protocol’s revenue and treated as such.

How you can benefit from OVN token

There are multiple strategies that can help you benefit from OVN token:

Buy on pre-sale, sell after the public sale – we really don’t mind
Buy and hold – the tokenomics is designed to maximize the value of 100% of the token supply over the next 30 months, so buying and holding through that period is the most straightforward way to get exposure to OVN
Buy OVN and stake OVN/USD+ LP – should generate additional yield on the LP from revenue, however, would limit maximum upside and reinforce downside through impermanent loss
Buy OVN, stake into Insurance Vault – should generate additional yield from insurance premiums, however, potential downside in case of a potential loss on a strategy