The vast majority of A5T are to be ‘mined’ by traders on Alpha5. So how do we estimate what the cost of mining will be? After all, this may affect market behaviour and pricing.
There are 2 components to consider when thinking about the cost of mining:
1. Cost of acquiring A5T (in the distribution)
2. Cost of ‘unlocking A5T’
Let’s go step-by-step!
Cost of Acquiring A5T
Starting March 1st, Alpha5 will distribute tokens as per the emission schedule. This means on Day 1, 88,888 A5T will be distributed to those that pay trading fees on that day on a pro-rata basis.
Let’s assume there are only a few traders that pay fees that day, and you are one of them. Say the total fees paid that day were $10,000 and you paid $5,000 (which is 50% of the total). You would get 44,444 A5T (because 50% * 88,888).
Now how much would one want to trade to get as big an allocation as 44,444 A5T? That comes down to game theory, liquidity, and a whole host of factors. But one thing we can use to approximate ‘acquisition costs’ is daily volumes and the Alpha5 fee structure.
For instance, average volume has been about $25m/day. Let’s assume that with the popularity of ‘trade mining’, the volume shoots up to $50m/day.
In this case, even if all of the volume were at the best tier possible, then 3.5bps would have been paid (Alpha5 — Fees).
That means Alpha5 would’ve made 50,000,000*.00035 = 17,500 $USDT
That was the hard part. Let’s put that to the side for a second.
Cost of Unlocking A5T
Each A5T that is accumulated cannot simply be ‘dumped’ onto the market.
Instead, Alpha5 has made it a rule such that the newly mined A5T token is locked, until 5,000 USDT worth of taker volume is generated, which then unlocks ONE A5T.
So in the above example, assume you had 44,444 A5T. Well, the next day say you trade $5m worth (in fee paying volume). In this case, you will have unlocked 5,000,000/5,000 = 1,000 A5T. And your balance will be:
43,444 A5T Locked A5T +
1,000 Unlocked A5T
The good thing is that the $5m you traded, will count not only towards unlocking your 1,000 A5T, but also towards the volume for accumulating more locked A5T (win-win).
However, there was a cost paid
and just like in step-1, we can assume that the $5m paid 3.5bps to generate $1,750 for Alpha5.
In fact, if we simplify this to:
Each 5,000 requires 3.5bps of payment, that means that simply ‘unlocking’ each A5T will have a cost of 5,000 *.00035 = $1.75.
Now let’s combine the above.
From the exchange’s view, the 88,888 A5T generated 10,000 USDT in fees. Making the cost of distribution effectively 10,000/88,888 = $0.1125
Further, the cost of unlocking would have a floor at $1.75
Making the projected cost of mining/spending A5T $1.86.
Now of course this number can change. But so long as there are minimum fees of 3.5bps on the taker side, there would be a floor at $1.75. And if more volume contributed to mining, it could climb astronomically higher.
Why is this important?
For a few reasons:
1. Secondary markets are priced below the “cost of mining” at times, most recently ranging from $0.70 to $2+, which is materially different (if on the lower end of this range) from the $1.85 projection and $1.75 floor. These are prices that WILL be paid (albeit indirectly) for A5T.
2. This above will hold true for up to 30 Million A5T, 60% of the entire supply.
3. During this time, Alpha5 will continue to buy & burn A5T as per the whitepaper schedule and look to additionally purchase A5T according to the value of its insurance fund if the triggers are met.
As of right now, there are 7m circulating A5T. They are roughly priced at $1.58 now (as of writing, based on Uniswap batch).
The next 30 million that CAN come to market would do involve paying an implicit price of $1.75.
This would begin on March 1st as per the emission schedule