Homebrew.Finance $MUG NFT Index Launch

Last night, after 8PM EST, I commenced trading of the Homebrew.Finance NFT Platform TokenSet. The nine trades cost 0.59 ETH, which, when combined with the deployment transactions, brings the total cost of deploying the Set to 0.94 ETH. This doesn’t include the cost of issuing tokens via wETH, which required conversion, approval and issuance.

Before trading, I updated a spreadsheet with the updated market capitalization from the CoinGecko NFT category page, and began trading. After we made our first trade, into Enjin, we discovered that the second token on our list, Dapper Labs $FLOW token, is not actually an ERC20 token. I had two choices at this point. I could recalculate the index with the next token on the list, but I was afraid this would require me to adjust the amount of Enjin in the set. Given the amount of gas I would need to do this, I decided to continue purchasing the rest of the tokens with the weighting I had already specified, and leave FLOW’s portion in wETH instead.

I don’t necessarily think it’s a bad thing to leave 20% of funds in wETH for the next month, but I also don’t want to make any decisions without stakeholder feedback. Later today I hope to provide a Snapshot.Page for $MUG holders and put up suggestions for people to vote on.

We deployed approximately thirty thousand dollars worth of wETH in the Set. Performance can be tracked on the Zerion page. It’s in USD, but I’m really going to be looking at performance against ETH. Zapper can do the conversion, but it’s missing two of the underlying components and doesn’t have a chart, so I’ll have to figure out the best way to do this. Developer help on this would be great.

At the end of this thirty day period, (actually four weeks ending March 20th), I will liquidate all positions back to wETH, thus allowing additional issuance/redemption of MUG Set tokens. That is, unless I can determine a better alternative. Set Protocol’s basic issuance module allows redemption of Set tokens into the underlying asset, at an estimated gas cost of eight hundred thousand, or about $260 at 160 gwei. Selling out to wETH brings this down to a single token transfer for participants, but will likely cost me another $1400 to perform the trades. And who knows what the price of gas or ETH will be in a month.

I hope that we’ll be able to gather additional public interest in the set during that time, and that we’ll see additional inflows of capital that will justify the cost. Set fees of two percent on the current funds will only come to about $33 during this time, so unless we can get something like two or three hundred thousand dollars in the set for month two, I don’t see that we’ll redeploy. I’ve actually done the math, we’d need in excess of $1.6 million in funds for the streaming fee to pay for these monthly liquidation/redeploy cycles. That’s $33.6 thousand in gas fees, basically.

Ideally, I’d like to use Set’s NAV module, which can compute the Set token value using on-chain oracles and allow issuance using a variety of tokens. The problem here is that the selection of oracles is limited, and having non-supported tokens in a Set prevents this NAV issuance from working. I’m trying to work with the Set team on a technical solution to this problem, but it will likely take months to accomplish.

The other solution is to issue a sufficient amount of MUG tokens to justify creating a liquidy pool on Uniswap. I don’t have an exact number in mind, I’m thinking perhaps $100k worth of ETH or USDC might be sufficient. This is more than I’m willing to stake from my personal funds, so this would have to originate from an outside source. Then there’s also the problem of impermanent or divergence loss. Let’s assume that we start a pool with $100,000 of MUG and USDC, split 50/50. If the price of MUG doubles, LP holders will wind up losing out on about 8.5% of those gains versus if they had simply held on to MUG directly. Pool fees may offset this risk, but therein lies the risk. (An impermanent loss calculator can be found here.)

Other incentives may can be provided to offset this risk, the usual ones being governance rewards. In regards to that, we have not started development of the Homebrew.Finance $BREW token yet, but I am planning on providing rewards for $MUG holders that stay in through these early days. I will work these details out in another post.

Lastly, there are a number of things that can be done to make participation easier. We’ll need to set up some sort of front end, right now the webpage points to the Gitbook, so need to add that to the roadmap. Again, I can do this work myself, but I would appreciate developer help.

That’s all for now, I’m going to hunker down and get to work building. Thank you all for participating!