DeGods Ecosystem Research Report

Originally published 12/28/2022

After publishing this report: DeGods ran from ~300 SOL to >900 SOL, y00ts from $7k to $13k, DUST from $0.34 to $2.75

Thesis Statement

DeGods is on track to become a top collection on Ethereum, while y00ts will easily claim the #1 spot on Polygon, and DUST is fundamentally undervalued.

Abstract

Solana’s flagship NFT collection, DeGods, is moving from Solana to Ethereum, where there is more money, people, and liquidity. We expect this to cause a spike in demand that will be reflected in the NFT price.

The DeGods secondary collection, y00ts, is moving to Polygon where it will likely be promoted as Polygon’s flagship collection and used by Polygon to build out their NFT ecosystem.

Sistine Research believes this to be an opportunity with a positively asymmetric risk/reward ratio. This research analysis does not constitute financial advice.

Introduction/Overview

DeGods splashed into the NFT scene in October 2021 after months of successful marketing and hype, only to botch their NFT mint (poor communication caused many to miss out) which was followed by the disappointing delay of their custom marketplace.

It’s important to note that in the hype leading up to the DeGods mint, Solana was undergoing a meteoric rise in price, moving from ~$24 in July of 2021 to its peak of ~$260 in the month after the DeGods mint.

Amidst this bull market frenzy, Anatoly Yakavenko, the CEO of Solana Labs, was gifted a custom 1/1 DeGod which he used as his twitter pfp.

At this point in time Solana’s price was exploding but no chain had yet to successfully challenge the huge NFT scene on Ethereum.

It made sense for Anatoly to show support for the growing NFT community on Solana in this mutually beneficial move with DeGods. This is very important for later.

💡Investing Principle

Social proof in the form of high profile individuals is an age-old marketing strategy (celebrity endorsements) and one that works.

BAYC used it to propel themselves to the #1 spot on Ethereum (Justin Bieber, Jimmy Fallon, Post Malone, Snoop Dogg, Eminem, etc.).

DeGods used it to propel themselves to the #1 spot on Solana (and they’re using it again).

While Solana was taking the elevator to all time highs, DeGods had fallen flat after a disappointing launch. At this point it’s important to stop and understand the DeGods “utility”.

I put utility in quotations because it can hardly be called utility. DeGods introduced the PHB, or “paper-handed-bitch” tax to NFTs.

This is a scheme where sellers are punished with a 33.3% tax if they sell their DeGod for under the price they bought it for, or under the floor price.

This tax goes to the DeGods treasury where it would then be used to buy the lowest priced DeGods and burn them, reducing the supply.

Holders are rewarded while paper-handed-bitches are punished.

This mechanism is similar to that of Safemoon and dozens of other failed crypto ponzis schemes, and the main reason that I personally opted to not buy any DeGods early on.

In essence, DeGods had no utility and were trying to replicate the deflationary ponzinomics that had been seeing success in the raging bull market. It’s what happened next that changed things…

💡Investing Principle

Punishing sellers with a sales tax is usually indicative of a ponzi, cash grab, or scam project. Any asset worth purchasing should not need a mechanism to punish sellers in order to move up in price.

It quickly became apparent that the PHBT was not it. Now at this point you’d expect most founders of a ponzi-like project to walk away with their large stacks of mint fees and royalties. And they certainly could have as the team wasn’t doxxed at this point in time.

Instead they pivoted.

They removed the PHBT in January of 2022, when the bull market was just past its peak and there was still plenty of frothy foam floating around in the cattle trough. And they introduced a token: $DUST.

Here’s the current documentation on $DUST:

$DUST changed everything.

$DUST introduced yield to DeGods. You could stake your DeGod and earn a set amount of $DUST per day, to which the market assigned some amount of value.

But how much value? What was even the utility of $DUST?

Here’s where it gets kind of funny. There isn’t any particular utility.

$DUST is both a nothing token and an everything token.

Used here and there for this and that. Raffles, mints, merch, paid for in $DUST.

Used by both the DeGods team and by other projects who wanted to associate themselves with DeGods.

However, its mere existence solved a pretty big issue with the NFTs as now the NFTs had utility in the form of yield.

Own a DeGod, stake it, earn money in the form of $DUST.

Shortly after the $DUST announcement DeGods announced DeadGods. This is where DeGods erupted. They got something massively right. Multiple things massively right.

Before we go further though, ask yourself what makes a good NFT pfp collection? The average person’s checklist would be:

• Community ✔️
• Clout/Status (like celebrity endorsements) ✔️
• Art ✔️
• Utility ✔️

DeGods already had a passionate community and had already gotten the CEO of Solana to use a DeGod as his pfp ages ago. They were already well-known in the Solana NFT space. Check and check.

But the art was only okay and aside from being a ‘deflationary NFT collection’ there was no real utility.

In one fell swoop DeGods solved the first two with the $DUST/DeadGods upgrade AND created scarcity in the market with staking (you can’t list your DeGod for sale if it is staked).

In late January the team announced the ability to mint a Vial of Stardust with 1,000 $DUST.

The Vial of Stardust would be used to upgrade the art of DeGods to a DeadGod.

From the DeGods Twitter:

Your DeadGod will be added to the metadata of your original DeGod. It's the same NFT, but with 2 versions.

You will be able to switch the image to either version at any time. They'll both have the same rarity.

If you ever sell your DeGod, the new owner will get both versions.

Staked DeadGods earned double the amount of $DUST as staked DeGods, so there was incentive to upgrade.

In a 3 month span:

• They added utility for the NFTs with the launch of staking for $DUST, greatly reducing the sell pressure of DeGods. (You can’t list a DeGod for sale if it is staked and there is less reason to sell if it is earning yield.)
• They gave utility to $DUST by requiring it to upgrade to a DeadGod.
• They gave incentive to upgrade by doubling $DUST rewards for DeadGods over DeGods.
• They greatly improved the art. They went from being okay at best to one of the best looking collections on the market.

But there was still a problem. While the art, community, and status of DeGods were on fire. The “utility” of $DUST was a short-lived phenomenon.

They had essentially just made a better ponzi. A better mouse trap.

$DUST is the utility for the NFTs. The NFT art upgrade was the big utility for $DUST. But it was a one time thing. A one hit wonder.

After the DeadGods upgrade, $DUST briefly peaked at $6 before predictably plummeting, as the demand for it fell off a cliff once everyone had already upgraded their DeGod.

This was a problem. Low demand for $DUST means lower price for $DUST. Lower price for $DUST means lower price for DeGods/DeadGods. Why?

Because the staking mechanism tethers the price of DeGods/DeadGods to $DUST. Let’s do some math.

If $DUST is worth $3 and staking 1 DeadGod earns you 3.75 $DUST per day (the current rate), that’s $11.25 per day, or $4106.25 per year.

At an NFT price of $41k, thats a 10% annual yield. A higher value of $DUST justifies a higher price of the NFT.

Currently $DUST is $0.40 and staked DeadGods earn 3.75 $DUST per day. That’s $547.50/yr. The current floor price on a DeadGod is $4780, which equates to an 11.4% annual yield.

There is another problem though. $DUST is hard capped at a max supply of 33.3M tokens.

At this time nearly 32M have been distributed via staking.

At a rate of 3.75 $DUST per day, the 8,525 staked DeGods are set to dry out the $DUST staking emissions by late February or early March of 2023.

8,525 DeGods x 3.75 $DUST per day = 31,965 $DUST emissions per day.

31,965 x 365 days = 11,667,255 $DUST emissions per year.

This equates to an annualized inflation rate of 35% per year, which will abruptly drop to 0% by late February or early March.

What will happen when there is no more yield tied to DeGods?

What will happen to the price of $DUST when inflation goes from 35% per year to 0% per year?

We’ll revisit this later, but for now let’s get back to the timeline.

Fast forward a few months. The market has crashed and DeGods needs to do something to push create community engagement, and more importantly, create demand for $DUST.

They take another page out of BAYC’s book and decide to launch a secondary collection.

*PAUSE*

Let’s briefly touch on the dynamics of secondary collections. Secondary collections are a completely separate collection that is launched, often in an attempt to expand the brand’s community and provide value to holders of the original collection.

Secondary collections are a very attractive proposition for successful pfp projects.

When you have an NFT collection like DeGods or Bored Apes that is limited to 10,000 pfps. It’s hard to grow past 5,000 - 7,000 unique holders. This means your community is limited in size, which is not ideal if you want to grow a large brand.

Additionally, the NFTs can get so expensive that they price out most new market entrants, further limiting growth.

Launching a larger secondary collection solves 3 problems:

• Lowers the price point to join the community, without diluting the original collection’s maximum supply.
• Creates utility/value for the holders of the original collection as they often get a whitelist spot, discount, or even a free mint.
• Strengthens the community in terms of size.

For example, there are 6,173 BAYC holders at the moment and 12,476 MAYC holders. A community of >18,000 is much stronger and has wider reach than a community of ~6,000.

A secondary collection does cause some supply dilution in the overall number of brand assets, but for successful projects the influx of new community members and new capital usually far outweighs the dilution.

Back to DeGods. Being the #1 collection on Solana with a floor price that priced out most market participants, launching a secondary collection made a lot of sense.

DeGods announced their secondary collection, originally called Duppies but later changed to y00ts, and began a new whitelisting procedure the market had not seen before.

Anyone could apply to be whitelisted for the y00ts mint by linking their Twitter account and Solana wallet to the y00ts website and answering a few questions.

The goal was to grant ‘scholarships’ by whitelisting interesting people and contributors to the space rather than rewarding influencers or bots.

In September of 2022, DeadGods holders and approved whitelisted individuals were able mint a t00b for the price of 375 $DUST.

Once again, this created large, temporary demand for $DUST, pushing up the price of both $DUST and DeGods/DeadGods.

Shortly after the t00bs mint, Dust Labs (the company tied to DeGods & y00ts) announced a $7M seed round. Investors took a 50/50 split of equity in Dust Labs and $DUST tokens.

It’s important to note the role of Dust Labs. Frank and Kevin (the founders of DeGods and Dust Labs) refer to Dust Labs as a tech start-up spun off of DeGods, and not a parent company.

The focus of Dust Labs is to build NFT solutions and tooling for the space.

For example, Dust Labs built the y00tlist scholarships solution that was debuted in the t00bs mint.

In early November of 2022, t00b holders were able to burn their t00b to receive a y00t.

t00bs were simply unrevealed placeholder images for the actual collection. No traits, no rarity.

t00bs all looked like this.💡Investing Principle

In order to mint a y00t, one needed to burn a t00b. Because burning a t00b could result in minting a rare y00t, and because people like to gamble, t00bs became more expensive than y00ts. t00b → y00t is a one way transaction that can’t be undone. This means that as people burn t00bs to reveal y00ts, the total remaining supply of t00bs is deflationary.

Here is the chart of t00bs for reference:

The right move was to accumulate t00bs pre-mint, rather than burn them for y00ts.

The y00ts art is quite good looking, but more importantly, it’s a clean collection. By clean I mean PG.

No cigars, cigarettes, marijuana, tattoos, or alcohol. No super weird traits like unicorn horns or rainbow vomit.

This is important and we’ll come back to it later.

y00ts quickly became the #2 collection on Solana, right behind DeGods.

Along with the launch of y00ts, the team re-designed their staking system for both DeGods and y00ts. With the $DUST emissions running out, staked DeGods and y00ts now earn DePoints at a rate of 1 point per minute staked. DePoints are just rewards points that maintain associated with the underlying NFT, not a cryptocurrency.

All this brings us to November and December of 2022.

As you are well aware, on November 9th FTX and Alameda Research collapsed as the largest scale financial fraud crypto has ever seen was uncovered.

Unfortunately for Solana, FTX and Alameda had serious exposure to $SOL, and Solana had serious exposure to FTX and Alameda, making its token price, TVL, and possibly its future massive casualties in the ensuing fallout.

With Solana’s bleak outlook, little hope of fresh capital injection on a ‘tainted chain’ any time soon, and a need to create hype for the next big DeGods chapter, Frank and Kevin made the decision to migrate the DeGods collection to Ethereum and the y00ts collection to Polygon.

They also announced an NFT accelerator launchpad program without giving much detail.

There has been a mixed response from the community. Many Solana community members feel betrayed, while many DeGods & y00ts community members are excited about the move.

Looking at it objectively, it becomes clear that moving to Polygon & Ethereum opens doors to opportunities that did not previously exist.

Let’s talk about DeGods → Ethereum first, then y00ts → Polygon, then the implications for $DUST.

DeGods → Ethereum

DeGods are moving from a small pond to the blue ocean.

In the last 30 days (since Dec 29, 2022), Ethereum has done 8.4x the NFT trade volume of Solana.

Ethereum also has far more active NFT traders and NFT transactions per week than Solana:

Ethereum NFT Users & Transaction per week/

Solana NFT Users & Transaction per week/

Ethereum has a much higher buying to selling ratio.

Ethereum: ~2.6 buys per sell.

Solana: ~1.6 buys per sell.

Ethereum has 410,000 addresses that hold $10,000 or more.

Solana has an estimated 55,000 wallets that can afford a single DeGod (~$5k currently).

This gap should continue to widen as $SOL price drops in relation to $ETH.

For example, if many wallets on Solana are holding $SOL and $SOL drops to $3, many will lose the ability to afford a $5k NFT.

Ethereum has a market cap of $144B. Solana has market cap of $3.4B.

By all metrics, Ethereum has a healthier NFT ecosystem with more liquidity. More traffic & more wealth should directly translate to more demand and more sales.

Would you rather sell lemonade on the side of the street in a poor neighborhood of 25 homes for 25 cents a cup?

Or would you rather sell lemonade at the Mall of America on the busiest day of the year for $8 per cup?

Yes the Mall of America has more competition, but the difference in traffic and wealth is dramatic.

Since the announcement on December 25, the price of DeGods denominated in USD has remained around $4k- $6k, despite higher volume. Many Solana loyalists abandoning ship, while many are hopping on what appears to be the last life-raft off Solana island.

Let’s now address the ending of the $DUST staking rewards for DeGods. As we discussed, the DeGods floor price is somewhat tethered to the $DUST price.

If $DUST price goes up, it increases the yield on DeGods and pushes the price of DeGods up. It also works in the other direction though. If $DUST decreases in price, the DeGods yield drops and makes it a less attractive investment. Once this yield runs out, it may untether DeGods from $DUST’s poor price performance. With the DePoints staking system already in place, DeGods will still have staking utility and incentives, which still reduces the incentive to list and sell (you can’t stake and earn points if your DeGod is listed for sale).

It is our assessment at Sistine Research that the move to Ethereum will likely have a positive effect on the price of DeGods due to increased demand from the presence of more potential buyers and overall higher presence of wealth on Ethereum.

There are multiple points of risk, however, we believe the risk to reward ratio is asymmetrically in favor of reward.

Risk: Poor reception by Ethereum NFT community. This is unlikely, particularly in a starved bear market where many NFT traders are looking for any catalyst or opportunity they can find. Additionally, DeGods and the founders are quite well known and have broad reach (on Twitter in particular) among the Ethereum NFT community.

Risk: Botched migration. On the tech side, the DeGods team must orchestrate the safe removal of DeGods from Solana and re-mint them on Ethereum. There is potential for this to go wrong, however, it’s a fairly straight-forward process and the DeGods team along with Dust Labs have proved themselves to be quite technically capable.

Risk: Speculating on .jpgs in a recession. The crypto and NFT space is in a bear market with a backdrop of most macro analysts predicting a tough recession in 2023. Assets such as NFTs, regardless of collection, will likely see decreased demand. The counter-argument to this is that once you cross over into the clout/status symbol sector, recessions affect price less.

💡Investing Principle

Luxury goods tend to fare better than other sectors during an economic downturn due to the exposure to high-income consumers whose purchasing power is less affected.

Strategy: To capitalize on this opportunity, one could look to accumulate DeGods in the months leading up to the migration and retrieve initial investment in any high volume waves of speculation once the migration is complete.

There is no announced date for migration yet, though we speculate it will be sometime in March, after the $DUST staking reward emissions end. The reasoning here is that re-building the DeGods/$DUST staking mechanism on Ethereum for less than a month of rewards is illogical.

y00ts → Polygon

y00ts moving to Polygon is also quite logical, though many have criticized the decision as the Polygon NFT ecosystem is considerably smaller than Solana’s:

Solana has done 4x the NFT volume in the last 30 days when compared to Polygon.

Polygon NFT volume is, however, in quite the uptrend.

It should also be noted that while Solana ($3.2B market cap) has more NFT volume, Polygon ($7B market cap) is the larger chain and has considerably more TVL ($1B vs Solana’s $200M)

Additionally, Polygon has focused primarily on establishing partnerships and integrations with large brands.

Nike, Adidas, Disney, eBay, Meta, Instagram, Robinhood, Reddit, Starbucks, Adobe, The NFL, JPMorgan, DraftKings, Shopify, Prada, Bentley, and Coca-Cola are all brands that have used, partnered with, or integrated with Polygon.

Folks, this is what mainstream adoption looks like.

While 2022 was a year of brand partnerships Polygon Studios CEO Ryan Wyatt recently tweeted that in 2023 they will be focusing on NFTs and art:

Note that both Ryan and Sandeep’s (Founder of Polygon) profile pictures are y00ts. Sound familiar? Remember when the CEO of Solana used a DeGod as his profile picture?

While it has not been confirmed at this point, it is quite likely that Polygon paid to bring y00ts over to Polygon.

Polygon has made it clear they are going after the NFT market, and in doing so are seeding it with y00ts, which they are heavily supporting.

It is in Polygon’s best interest to promote y00ts as much as possible to create a case study of NFT success on Polygon and establish y00ts as their blue-chip collection. Because of this incentive from Polygon, we find it likely that y00ts will become the flagship collection on Polygon (like BAYC is for Ethereum and DeGods was for Solana).

The bet on y00ts then, is more of a bet on the successful growth and proliferation of an NFT ecosystem on Polygon, not an individual NFT project. Given Polygon’s success in business development and their expressed intentional focus on growing their NFT and art ecosystem this year, it is likely that the Polygon NFT ecosystem does grow and proliferate, with y00ts leading as its flagship brand.

Polygon’s reach is expansive with 1.8M followers on Twitter and the network of massive brands that they have partnered with.

Aside from focusing on NFT growth, Polygon brings very large potential partnerships to the table for y00ts, and this is an advantage that no other NFT project has at the moment.

In their current state on Solana, y00ts does not have the reach to land a partnership deal with Nike, Adidas, or Disney. But with the help of Polygon, they do.

Remember when we took note of y00ts being a ‘clean’ NFT project? No alcohol, smoking, or drugs in the images? This is incredibly important when it comes to brand image, and makes y00ts a prime candidate for partnerships. We’ve seen many large companies try to launch their own NFTs and fail to get any real traction. That’s because Coca-cola is bad at NFTs. The DeGods and y00ts team is good at NFTs.

In the future it makes far more sense for brands to partner with successful NFT brands rather than try to make NFTs themselves.

What would these partnerships look like?

There are two likely partnership formats:

1. Points. Staked y00ts earn points. These points could be used for perks or discounts of some type on any product promotions.
2. Trait upgrades. Frank has publicly discussed the idea of allowing y00ts with certain traits to vote to change said trait. Now imagine if Nike comes in, gives everyone with the dollar sign hoodie a limited edition hoodie and has y00ts change the trait to a nike logo.

While Polygon doesn’t flaunt the NFT numbers that Ethereum and Solana do, it has seen two major successes in the NFT space:

1. Reddit’s Polygon integration has onboarded over 1M users in to the NFT ecosystem via their avatar and 2022 recap collections.

2. Donald Trump NFTs made a controversial splash by launching on Polygon and to date have done over $8M in secondary sales.

These two launches have something in common. They brought outside capital into the ecosystem even in a bear market. This is an extremely important investing principle to understand.

💡Investing Principle

The injection of new, non-crypto native capital into a project is a major signal for price appreciation. In a bear market especially, crypto & NFTs become a cesspool of the same money swirling around the drain of a few different protocols/projects. New money almost always pumps price in the short term.

Examples: Stepn, Axie Infinity, Donald Trump NFTs, Reddit NFTs

In 2023, Polygon is likely the best shot y00ts has at bringing in outside capital from big brands and their audiences.

It is our assessment at Sistine Research that the move to Polygon will likely have a positive effect on the price of y00ts due to the strong support expected from the Polygon team and from the emergence of large brand partnerships.

Risk: Lack of trade volume on Polygon.

Risk: Brand partnerships may not materialize.

Risk: Botched migration.

Risk: Speculating on .jpgs in a recession.

$DUST

Where does $DUST land in all of this? The staking rewards run out in early march at the latest. $DUST will move cross-chain as well, likely to both Polygon and Ethereum.

Frank and team have announced their plans for an NFT accelerator launchpad program and mentioned that DePoints will be used. There hasn’t been any confirmation yet, but one would imagine that $DUST will be integrated in some way, likely used for minting NFTs (similar to how it was required to mint a t00b and to upgrade a DeGod to a DeadGod). This would create a more stable form of demand for $DUST

As mentioned, in early March, the inflation rate of $DUST will drop from 35%/yr to 0%. While there is no clearly defined source of demand yet, the supply side looks quite attractive.

We also need to remember that half of the $7M that was raised by Dust Labs after the t00bs mint was for equity and the other half was for $DUST.

These investors obviously have an interest in seeing $DUST appreciate in value and it is unlikely they took half the deal in $DUST without a roadmap for its success.

$DUST currently sits at a $10M fully diluted market cap with an all time high of a $200M market cap.

Without a clear roadmap for demand, $DUST may be the highest risk investment of all the DeGods related assets, but at the current valuation and the repeated history of pumps around architected demand spikes from mints and upgrades, there is likely to be significant upside eventually.

For example, if the DeGods launchpad requires $DUST to mint NFTs, and DeGods are no longer earning $DUST, people will have to buy $DUST to mint. A series of successful $500k to $1.5M NFT mints priced in $DUST would push $DUST price considerably higher than it is now.

Final Notes

Having followed Frank, Kevin, and the DeGods project on twitter since their initial mint, I have made some observations that are worth drawing attention to.

• Frank and Kevin recently doxxed themselves publicly. They could’ve rugged and walked away ages ago. Their faces are public and they’ve taken outside investment. At this point a rug-pull is not a likely outcome.
• Frank and Kevin have good backgrounds as entrepreneurs. Frank was a former Y combinator fellow with strong and charismatic leadership attributes who has frequently taken full ownership and responsibility for any mistakes DeGods have made.
• Kevin directed engineering at Zimbra which was sold to Yahoo in 2007 for $350M. He later co-founded Acompli which was sold in 2014 to Microsoft for $200M, after which he joined Instacart as the VP of Engineering in 2018.
• The DeGods team has shown an ability to maintain attention (the most important asset for an NFT project) as well as an ability to rapidly pivot, innovate, and experiment.

💡Investing Principle

When you’re trading NFTs, you’re trading attention. Without constant attention, floor price dwindles as demand slows.

I also want to draw attention to the fact that DeGods and team have not managed their treasury particularly well and this move to Ethereum and Polygon may be partly driven by a need for capital, attention, and liquidity.

Frank mentioned that the DeGods mint proceeds were kept in Solana, which suffered a large drawdown, on top of having to pay a hefty tax burden from the mint revenue itself. The y00ts mint was also conducted in $DUST, which is down >80% since the mint (it’s unclear how much they converted to USD).

Given their $7M raise, it’s likely that they do have plenty of runway to continue building.

We would appreciate your feedback on this research report. Please feel free to share your feedback in the Sistine Research Discord group.

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