Will the "Fee Switch" activation make the new stablecoin protocol RESOLV the next ENA?

Original | Odaily Daily Report

Author｜Azuma

On July 25th, Beijing time, the interest-bearing stablecoin protocol Resolv officially announced that it will gradually open the “fee switch,” intending to transfer up to 10% of the daily protocol revenue to the foundation treasury for the long-term value creation of the protocol and to incentivize RESOLV stakers. Specifically, Resolv plans to gradually increase the revenue transfer ratio (2.5% → 5% → 7.5% → 10%) over a four-week period from July 31 to August 21, ultimately reaching the target value of 10%.

The so-called “fee switch” is a commonly used term in DeFi protocols regarding fee allocation. In simple terms, it refers to “a built-in contract function that can determine whether the protocol distributes income to its native tokens.” However, different protocols have their own variations in the specific execution models. Previously, well-known projects like Uniswap and Ethena have discussed the “fee switch” issue, but activation has not been achieved due to community allocation disputes and doubts about maturity conditions.

In general, the “fee switch” commonly implies a direct benefit to the protocol’s native token, as it will directly amplify the token’s value capture ability; however, conversely, since the “fee switch” often transfers part of the income that originally belongs to the protocol users to the token holders, it may to some extent harm the users’ interests. Therefore, major protocols tend to be quite hesitant about whether to turn on the “fee switch”—for example, in the case of Uniswap, liquidity providers (LPs) can originally earn the entire 0.3% trading fee income, but after the “fee switch” is activated, they have to transfer part of their earnings to UNI holders, which relatively harms LPs’ interests.

The positioning and considerations of Resolv

Back to Resolv, similar to Ethena’s USDe, the USR issued by Resolv is also an interest-bearing stablecoin that is collateralized by an equal amount of spot long and contract short positions. Its yield mainly comes from the “staking yield of spot longs” and the “funding rate yield of contract shorts.”

However, compared to Ethena, Resolv has also implemented some additional mechanism designs, such as introducing a risk grading mechanism through the insurance pool RLP, which allows USR to achieve a higher over-collateralization rate; additionally, a larger proportion of liquidity derivative tokens have been integrated, resulting in higher spot staking yields. Under Resolv’s mechanism design, the protocol has achieved an annualized yield of approximately 9.5% since its inception, performing exceptionally well among emerging stablecoins.

At the end of May, Resolv officially launched its governance token RESOLV. Although Resolv has tried to empower RESOLV by offering high staking yields and accelerating the points accumulation rate for the second quarter airdrop, the performance of RESOLV after its launch has still not been ideal. Perhaps in order to boost the token price, Resolv has turned its attention to the “fee switch”.

In the official announcement regarding the opening of the “fee switch”, Resolv mentioned that “the timing and architecture are now mature” - the protocol has achieved real, non-theoretical traction; it has a clear value distribution framework; it has demonstrated resilience - therefore, it has been decided not to further postpone the launch of the “fee switch”.

As mentioned earlier, Resolv plans to gradually increase the income transfer ratio over four weeks, ultimately raising it to 10%. Regarding the specific use of this portion of income, Resolv stated that it “will be used to expand the value provided by Resolv to users and stakers,” which includes: 1) supporting new integrations between DeFi, fintech, and institutional venues; 2) funding ecosystem grants and product development; 3) promoting buybacks and other token-related initiatives. Resolv also mentioned that a dedicated dashboard will be launched in the future to track the use of income.

Resolv also made a rough assumption about the revenue distribution of the protocol after the “fee switch” is turned on. With the current protocol’s TVL of 500 million dollars and an average yield of 10%, it is estimated that an annual revenue of 50 million dollars can be achieved. After the “fee switch” is turned on, 45 million dollars will still flow directly to users through product yields, while the protocol will retain 5 million dollars for long-term value creation.

Is RESOLV more cost-effective compared to ENA?

In last week’s article “Up Nearly 50% in a Week, Will ENA Be ETH’s Biggest Beta?”, we analyzed the logic behind ENA’s recent strong rise; afterward, Ethena launched a treasury reserve mechanism similar to “MicroStrategy” around ENA, further boosting ENA’s price.

With the early launch of ENA, more and more people have begun to focus on the income-stablecoin project Resolv, which has a similar mechanism. So, is RESOLV really more cost-effective than ENA at the moment?

From a static perspective, the current TVL of Ethena is 7.781 billion USD, the circulating market cap (MC) of ENA is 4.016 billion USD (MC/TVL ratio is 0.51), and the fully diluted valuation (FDV) is 9.48 billion USD (FDV/TVL ratio is 1.22); the current TVL of Resolv is 527 million USD, the circulating market cap (MC) of RESOLV is 5.728 million USD (MC/TVL ratio is 0.108), and the fully diluted valuation (FDV) is 20.5 million USD (FDV/TVL ratio is 0.39).

Looking solely at the comparison of MC/TVL and FDV/TVL, RESOLV indeed has a better static cost-performance ratio than ENA. Although ENA currently benefits from the buying power of the treasury reserve strategy, considering that RESOLV will be the first to open the “fee switch,” the prices of both coins are expected to receive some support in the short term.

However, objectively speaking, the current application scope and network effects of USR are far inferior to those of USDe. Additionally, Ethena has a second business line, USDtb, besides USDe, and from the perspective of protocol potential, Resolv still has a considerable gap compared to Ethena.

Additionally, it is worth noting that the previous mention of Resolv regarding the revenue statement in the “fee switch” section is that it “will be used to expand the value provided by Resolv to users and stakers”, but it did not specify what proportion of the 10% revenue will flow to RESOLV stakers. Therefore, it is difficult to estimate the scale of new value capture for RESOLV once the “fee switch” is activated.

Overall, considering that the market cap of RESOLV is at a relatively low level, the current RESOLV is indeed a significant alternative option after ENA’s surge. However, the long-term development expectations of the Resolv protocol itself still need to be assessed, and the detailed income distribution plan after the “fee switch” is opened also needs to be further disclosed. Whether it is worth building a position is something everyone still needs to DYOR.