Compared to Bitcoin (BTC-USD), SafeMoon (SAFEMOON-USD) is a new kid on the crypto block and with only one other SA article, I thought it was worth the time to explain how the token works. I’ll start with a review of the easier to understand Bitcoin before explaining the core features of the SafeMoon token, ending with a quick comparison of the two. At this point in time, neither cryptocurrency meets my definition of an investment, but for speculators and traders, the reward could be worth the risk.
Bitcoin as a Financial Asset
An investment needs two core attributes, value and scarcity. Bitcoin has both, albeit in unorthodox ways compared to traditional asset classes, hence the volatility in Bitcoin and the entire crypto market.
Since Bitcoin’s primary purpose is as a medium of exchange or currency, I’ll highlight some of the qualities people value in that role.
No centralized government controls Bitcoin’s supply like with fiat currency, and because crypto wallets can exist outside the traditional banking system, they make concepts like FDIC insurance unnecessary. That said, governments can and have restricted crypto usage, although enforcement is another matter.
Whether you’re dealing in laundered cash, gold bars, black-market diamonds or legitimate transaction using credit cards or Bitcoin, no currency transaction is ever completely anonymous. While Bitcoins transactions are traceable, a key feature of the currency, tracing those to an individual can be difficult. I’m not making the case that this is good or bad, only that some people value this property.
Decentralized, Mobile Transactions and Storage
Bitcoin can be sent and received to anyone on the network around the world from anywhere with an internet connection, not facilitated by a centralized intermediary and without having to first store the currency with a financial institution. This means transactions are not subject to banking fees, especially international, or transaction limits imposed by the bank, and can overall be faster, safer, and more convenient.
Bitcoin has more positive qualities and some negatives as well. The purpose here is only to highlight that Bitcoin meets the value criteria of an investment, in other words, there’s a real-world use for Bitcoin that people want. There’s an argument that since Bitcoin’s creation, other currencies have come about that property for property are either equivalent or better than Bitcoin, but I’ll expand on that in the scarcity section.
Bitcoin by design has a finite supply of 21 million, with just under 19 million in existence and over 2 million left to be mined at the time of this writing. The usable supply is even lower as some estimates suggest that 20% of all Bitcoin is permanently lost and unrecoverable. It is technically possible to change the 21 million cap and create additional Bitcoins, but it would require a majority of the network to agree to make that change. What happened in the past, and continues to happen to this day, is the creation of entirely separate systems known as altcoins. The term “altcoin” generally refers to all cryptocurrency other than Bitcoin, for example SafeMoon, as well as the stablecoins, security tokens, utility tokens, etc.
In a round-about way altcoins bring Bitcoin’s scarcity into question. Consider another “older” cryptocurrency called Litecoin. Litecoin improved upon many Bitcoin properties, for example faster transaction times, while sacrificing almost nothing. The unlimited supply of Bitcoin alternatives throws Bitcoin’s scarcity proposition into question, but if this is all too abstract, let me give an example.
The Hunt brothers bought up silver throughout the 70s, and cornered the market by the beginning of 1980 causing a spike in silver prices. This created turmoil for the film and industrial consumers of silver, which in turn led to layoffs and high costs for consumers. Even for businesses that could use a different metal, modifying equipment designs and supply chains could take years. High silver prices eventually pushed people to melt down old jewelry, coins with silver, and so on, until the flood of new silver caused prices to collapse.
Now imagine a 2021 scenario in which three, or more, people cornered the Bitcoin market, buying opportunistically, leveraging up on debt, etc. Just like with silver, cornering the market just means owning enough that a few individuals can significantly alter the price unilaterally. How it happens, or if it even realistically could happen aren’t as important as what would happen next. I don’t have a definitive answer, but I can’t see a desire to conduct transactions in Bitcoin if a handful of players can significantly alter its price, especially when there are equally good, arguably better, and limitless alternatives. In other words, Bitcoin’s once huge technological moat from fiat currency has become a psychological moat from altcoins of which there are currently no limit. To be clear, that psychological moat is big, but it makes Bitcoin very hard, if not impossible, to value.
SafeMoon as a Financial Asset
SafeMoon token is more complicated than Bitcoin, there’s less transparency on how it works, but the cryptocurrency epitomizes one of the current rages within the crypto community, decentralized control of services formerly under the complete control of financial institutions.
SafeMoon Fundamental Concepts
SafeMoon has a website as well a paper that provides some information which I will do my best to distill for readers here. Keep in mind that these are things that SafeMoon promises to be, but it is beyond my ability to definitively prove or disprove whether SafeMoon actually accomplishes its mission. The SafeMoon Protocol is essentially three actions that occur with each transaction, and each requires explanation:
- Liquidity Pool (LP) Acquisition
Reflection is a pretty straightforward concept. When SafeMoon is bought/sold, 5% of the transaction amount is deducted from the seller’s proceeds as a fee, and it is distributed to the other SafeMoon holders based on how much SafeMoon they hold. For example if you own 10% of the entire SafeMoon supply, and a transaction occurs for 1000 SafeMoon, you should in theory earn something close 1000 * 0.05 * 0.1 = 5 SafeMoon tokens. I expect the high 5% sales fee is an incentive to get early adopters to buy and hold. Once the desire switches to have SafeMoon used in transactions, it seems inevitable that the 5% fee would have to come down.
Liquidity Pool (LP) Acquisition
Currently, SafeMoon transactions impose a 10% total fee to the seller, with 5% going towards “reflected” earnings to existing holders as discussed above and the other 5% added to a liquidity pool. Before I can discuss the purpose of the LP, I need to provide some background on market making in traditional markets.
Traditional Market Makers
The role of market makers (MM) on exchanges like the New York Stock Exchange (NYSE) is to ensure investors have the ability to buy or sell at all times. This is known as providing liquidity, and it’s easiest to understand through an example.
Imagine a market maker with the responsibility of providing liquidity for Stock ZZZ last traded at $10/share. The MM might make the following offers:
|Offer to Buy 1000 shares at $9.90||Offer to Sell 1000 shares at $10.10|
If someone comes along and wants to sell 100 shares of ZZZ, the market maker will buy those shares for $9.90 if that is the best offer. Later in the day, someone may want to buy 100 shares of ZZZ and the market maker can sell those same 100 shares at $10.10, again assuming that is still the best offer. In this way, the MM essentially matches buyers and seller that have a desire to buy or sell at different times, and is compensated for the risk that a buyer may not show up willing to pay anything higher than $9.90 for a long time if ever. Market makers sometimes have to cover and suffer a loss, and they utilize various strategies and options to hedge positions.
If this is still too complicated, imagine market makers as honest used car dealers. They might buy a used car today for $5,000 and sell the same car 6 months later for $6,000. The dealer earns a fee for the convenience of providing “car liquidity”, the willingness and ability to buy and sell cars at any point in time.
Decentralized Market Makers
One of the simplest decentralized markets is real estate in which someone that wants to sell a property and another that wants to buy, exchange directly with each other. This is often facilitated by a realtor acting as a broker who is simply matching the buyers and sellers and is not actually performing any buying/selling. On cryptocurrency exchanges, there are different approaches, but the brokers are essentially replaced with some sort of algorithm.
The main difference between traditional market making that would occur on the NYSE and decentralized market making that occurs on platforms like the Binance cryptocurrency exchange is that individuals can provide liquidity, the shares, or in this case cryptocurrency, available to buy or sell, while various, mostly automated, mechanisms determine pricing. Because individuals are providing liquidity, they are subject to many of the same risks and rewards as traditional market makers.
Jumping back to the traditional MM for a moment, as long as the value of Stock ZZZ stays somewhere in the neighborhood of $10/share, the MM can buy and sell all day long providing liquidity and earning a fee on each pair of trades. However, if the market maker had just bought 1000 shares at $9.90, and Stock ZZZ came out with news that it may go bankrupt causing the price to collapse to $0.90, the MM would suffer an “impermanent loss” of $9/share unless the position was hedged. It’s called “impermanent loss”, because the MM hasn’t yet sold for $0.90. If the MM sells at $0.90, the loss becomes permanent.
This example applies to decentralized exchanges with one difference. In the traditional market the MM assumes Stock ZZZ is worth $10/share and provides liquidity, both dollars and shares, depending on whether someone wants to buy or sell. In a crypto exchange, instead of providing liquidity in terms of dollars and shares, they provide it in the form of a crypto pair, for example Bitcoin and Safemoon. For exactly the same reason the MM wants Stock ZZZ to hover around $10/share, the individual providing Bitcoin and Safemoon wants the relative value of Bitcoin to Safemoon to remain constant. Because crypto markets are volatile, providing liquidity is risky, which is why SafeMoon utilizes a different approach.
How SafeMoon Funds Liquidity Pools
Providing liquidity in the crypto markets is risky as discussed above, so SafeMoon decreases its reliance on individuals being willing to provide liquidity by taking 5% of each transaction, part of the total 10% described earlier, and adds that to a liquidity pool. In the same way the traditional MM can’t lose more than the $9.90/share paid, losses can’t exceed the total value of the liquidity provided, in other words the floor for losses is $0. The SafeMoon added to the LP has been “paid for” as a fee during the transaction, and in theory could be proportionately held by all the other owners of SafeMoon token. As SafeMoon matures the reflected portion of the transaction costs could be reduced to 0% allowing the market making activities to generate additional SafeMoon tokens for current users.
CertiK currently lists a “Major” audit finding regarding “Centralization / Privilege” stating that “over time, the owner’s address will accumulate a considerable portion of the liquidity pool tokens. According to the company, if the owner is an external property account (EOA), the entire SafeMoon project could face major consequences.” The audit recommended some actions to restrict LP token management making it more decentralized implying that the SafeMoon creators have too much control currently.
The conceptually hard part is over as burning just handles how token supply is managed to achieve deflation without going overboard. As stated before 5% of transactions are reflected to all users, and since all users are represented by addresses, one of those users is the “burn address”. SafeMoon tokens sent to the burn address are unrecoverable because in theory, the private keys needed to access that address are not obtainable by anyone. In the long term, as the burn address accumulates more and more SafeMoon, it could end up consuming a significant amount of the 5% fee. This quickly dropping supply of total SafeMoon in circulation could lead to quickly climbing prices, relative to dollars or other crypto. This may be good for holders in the short term, but the goal of any currency is price stability relative to other major currencies. Fortunately, the proportion of the 5% burned vs. that sent to other users is adjustable, although this once again raises some centralization concerns.
An initial purchase of SafeMoon is not subject to a fee, because selling is what incurs the 10% fee. Holders are able to earn additional SafeMoon possibly making up for that fee over time. With the exception of a scam, which is still up in the air and discussed later, the path to earning additional SafeMoon is pretty clear, so how would someone buy a real good or service with SafeMoon? SafeMoon isn’t currently supported on Coinbase, but an owner could convert SafeMoon to BNB, transfer to your Binance account and convert to USD incurring fees along the way.
At this time, the 10% fee makes SafeMoon unusable as an efficient medium of exchange, but as liquidity in the LPs is established and transaction volume increase, both the fees for reflection and LPs could drop significantly. Whether SafeMoon can meet those criteria is still undetermined, but if it does that would provide a moat against competitive coins where liquidity and transaction volume still need to be established. Because it’s unclear whether SafeMoon can achieve those goals, the investment grounds are speculative.
One hindrance towards SafeMoon’s mainstream and long-lasting adoption depends on the willingness of holders to accept the centralization that comes with SafeMoon existing within the Binance ecosystem. Because SafeMoon is built on the Binance Smart Chain which uses proof-of-authority, Binance chooses and approves the validators making the blockchain centralized compared to Ethereum’s decentralized ecosystem. I don’t know if this will be a problem long-term because while decentralization is a selling point of crypto dating back to the early days of Bitcoin, the rise of Coinbase and other crypto related third-parties implies a paradoxically huge demand for centralization in the name of convenience.
Is SafeMoon a Scam?
SafeMoon hasn’t proven its long-term viability, but just because a new cryptocurrency doesn’t achieve mainstream adoption, doesn’t mean it’s a scam. There are a number of well-known ICO scams, for example, the “classic exit scam” in which the development team suddenly disappears with investor funds. SafeMoon doesn’t appear to have committed any of these, and each passing day adds to the token’s credibility. The SafeMoon website lists the team members and while they aren’t particularly well known, no one is claiming that the identities are fake which is another good sign. That said, there are some unusual quirks worth noting.
I don’t know if the SafeMoon team members are Spaceball fans or just Spaceballs, but the website offers a surprising amount of merchandise for sale. This would be an incredibly elaborate scam just to sell a few hoodies, and I’m not suggesting that it is, but the rest of the website is unusual too. The whitepaper is less than three pages long including pictures, the website is sparse on details of SafeMoon’s functionality, and it appears you can play a game called Mooncraft.
Duplicates are a fact of life in the crypto space and SafeMoon is no exception. I couldn’t find any affiliation between SafeMoon and SafeMoon2 as the SafeMoon2 website is even more sparse on details. Then there’s SAFERmoon which claims that the SafeMoon Protocol was exploitable, but that the SAFERmoon project has been audited and can be trusted. Then again, SAFERmoon features daily giveaways and the possibility of winning “a laptop, a Tesla, an actual Lambo & literally a trip to space!” SAFERmoon is beyond the scope of this article.
SafeMoon’s short history and unknowns alone put the token squarely in speculative territory. There’s nothing wrong with a bit of speculation, just like there’s nothing wrong with playing blackjack at the casino as long as you go in knowing that you’re probably going to lose
SafeMoon Vs. Bitcoin
Given the limitless number of competitive altcoins that can be created, I can’t see the moat around Bitcoin as anything more than psychological and it would be a complete guess on my part to say whether that moat will grow or shrink going forward. To use a real world example, platinum and palladium have many interchangeable industrial uses and historically when one became too expensive, users begin to slowly switch to the alternative. If Bitcoin becomes too expensive, why wouldn’t people switch to Litecoin or even a future, technologically superior version of Litecoin?
SafeMoon utilizes some revolutionary concepts, but so did Bitcoin when it was created. SafeMoon hasn’t proven itself in the current space as described in the majority of this article, and it could be further disrupted and rendered obsolete as has occurred so many times already in the crypto space. As with Bitcoin, SafeMoon hasn’t established enough of a moat to ensure the “safety of principal” characteristic Ben Graham required to qualify a financial asset as an investment.
I’ve owned crypto currency in the past and am always on the lookout for interesting, new investments, but if I had to choose between Bitcoin and SafeMoon right now, I’d have to pass on both. At the moment I’d rather look for companies that make use of and are advancing blockchain technology with core businesses in a proven space to act as a hedge.