SAFEMOON Tokenomics: Incompatible with Exchanges
There is a new token on BSC that’s been drawing a lot of interest. It’s called SAFEMOON, and it claims to introduce “a few added features that build on the existing models of static reward tokens to drive the price to stratospheric all time highs.” (That’s a real quote from their whitepaper)
The main feature is a 10% tax on each transaction. 5% is redistributed toward existing holders, in proportion their wallet size, and 5% is added to the liquidity pool on Pancakeswap (first, by selling 2.5%, then by pairing it with the other 2.5%).
Though this feature sounds attractive at first, let me break down exactly why it’s broken.
The key bit is this: SAFEMOON is tied to Pancakeswap. Right now SAFEMOON only trades on Pancakeswap. This is great, and it’s working: fees on BSC are cheap, and the “Safemoon Protocol” interacts directly w/ the Pancakeswap liquidity pool to help manage prices. In just a few weeks, Safemoon has seen over 50,000 buyers via Pancakeswap!
That’s amazing growth — the well-established CAKE has less than double the SAFEMOON holders now (135K)! This proves the draw of SAFEMOON… but it also suggests that SAFEMOON is nearing its Pancakeswap ceiling… the number of available BSC buyers is not enough to sustain the growth.
Why is sustaining growth important for SAFEMOON? Well there’s a 10% tax on the purchase of SAFEMOON, and a 10% tax on the sale of SAFEMOON, so you need a 20% profit before selling SAFEMOON is profitable. Now, the argument is that 5% of each transaction is redistributed to holders, so you will make up the 20% in time from just holding. But if you do the math, this will take a VERY long time. So most of this 20% needs to come from increased price / holder count. And for that to continue, growth must be sustained.
Indeed, the biggest items on SAFEMOON’s roadmap are exchange listings, which is the only realistic way to outgrow Pancakeswap and sustain growth. In Q2-Q3, the team is hoping to sustain growth via “listings on multiple exchanges”.
But as stated above, the SAFEMOON protocol is tied to Pancakeswap. The same disincentives that prevent people from selling SAFEMOON to Pancake also prevent the flow of funds between wallets and exchanges! As soon as SAFEMOON hits an exchange, its tokenomics will fail. Growth will not be sustained. And the token will safely ground. Let me explain.
1. The 10% tax on transactions prevents flow of SAFEMOON between exchanges and wallets. And 10% is simply too high! This prevents reasonable price arbitrage between exchanges, so we can expect to see prices between exchanges vary by large amounts. If prices on one exchange are higher than another, this disincentivizes people from buying on that exchange, and new buyers won’t enter from that exchange until prices are lower.
2. 5% of the 10% tax is used for Pancakeswap liquidity. This suppresses the SAFEMOON price on Pancakeswap (and only Pancakeswap!), making it so that Pancakeswap is always the place to buy SAFEMOON. How does this work? The cost to buy SAFEMOON on Pancakeswap is equal to the ratio of BNB:SAFEMOON in the Pancakeswap Liquidity Pool. Now 5% of the tax is used to buy BNB from the liquidity pool, and then add BNB:SAFEMOON tokens to the pool. This operation is a wash in terms of BNB — the amount of BNB in the pool does not change. But the amount of SAFEMOON increases, which suppresses the price! So there will be downward pressure on the Pancakeswap price, and ONLY the Pancakeswap price, creating natural imbalance between different exchanges and disincentizing new buyers to come in via the exchange.
3. One can argue that holders who hold SAFEMOON on BSC will move their SAFEMOON to the exchange in order to sell it at the higher exchange prices. But the tax makes this risky proposition for them. If that exchange has no volume and they can’t sell their SAFEMOON for a reasonable price, they will lose the 10% tax on the transfer to the exchange, the 5% redistribution they get for holding SAFEMOON on BSC, and then another 10% tax if they want to transfer it back to BSC. So I expect we won’t see many holders moving their SAFEMOON onto an exchange. That suppresses exchange volume further, and creates a self-fulfilling prophecy / vicious cycle of low exchange volume.
So to summarize: the 10% tax disincentivizes flow of funds between exchanges, making it difficult to keep prices stable across exchanges, and disincentivizing exchange volume. At the same time, the 5% liquidity injection suppresses price on Pancakeswap, furthering this cycle. As soon as SAFEMOON is listed on an exchange and people realize this, the “tokenomics” bubble they’ve created will burst, holder count will saturate, and people will realize that the main way for current SAFEMOON holders to exchange their SAFEMOON for real $ is via the SAFEMOON liquidity pool on Pancakeswap. But right now, there is only 5 million dollars of BNB in that pool. So even though SAFEMOON has a reported market cap of $200M, only $5M (2.5%!) of that is left for current holders.
By buying SAFEMOON now, you’re not only incurring a 20% tax (10% to buy, 10% to sell), but you’re also buying into an asset that is only 2.5% backed by real money. Buyers beware.
P.S. I tried to post this in the SAFEMOON subreddit and was instantly removed and me muted 🤔️ So please share it with your SAFEMOON friends. I already got my friends out, but I don’t want to see people lose their money.
EDIT 3/27: Check out my new article on SafeMoon: https://cryptoanalyst69.medium.com/learning-decentralized-finance-by-example-using-safemoon-cb45d61649c7