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Today’s Empire features Shaunda Devens of the 0xResearch newsletter discussing the ambitious new Flying Tulip project.

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Flying Tulips

Anyone from the class of 2021 will be familiar with the name Andre Cronje, architect and founder behind Yearn Finance, Keep3r Network, and famously Solidly (a ve(3,3) AMM launched on Fantom in February 2022). Despite collapsing, Solidly inspired future generations of AMMs, such as Aerodrome and Velodrome, which were built from Solidly’s ve(3,3) model. There are many fair criticisms about Cronje, but one thing is clear: He understands how to financially engineer a protocol.

Cronje seemingly kept a low profile this cycle (building at Sonic as CTO, steering the Fantom-to-Sonic transition and its developer fee-rebate model). However, Cronje recently announced that his project Flying Tulip has “raised” $200 million in a private seed at a $1 billion token valuation from Brevan Howard Digital, CoinFund, DWF Labs and others, and will “raise” another $800 million in a public round. 

According to its website, “Flying Tulip introduces several first-of-their-kind onchain financial innovations.” However, in an effort to remain intellectually honest, let's focus on the project in its current state rather than its future promises. Currently, Flying Tulip resembles a financial engineering project leveraging Ponzi-style game theory:

• Flying Tulip is raising $1 billion target raise. They will take the $1 billion and deploy it into diversified low-risk DeFi liquid yield strategies. 

• Investors get 10 FT token / $1 deposited into the raise. However they also get a perpetual PUT option that lets them redeem their deposit 1:1 at any time.

Flying Tulip takes the $1 billion, deposits into DeFi protocols, and earns yield on them (projected $44 million / year). With this, it buys back the FT token and burns it. This allows the protocol to have high “revenue” figures, and gives buy pressure to the FT token. 

Investors are protected with their put option which allows them to get a refund on their original capital whenever they want (remember the users allocation is still inside the protocol earning yield). They burn the FT token and exercise the put that allows them to sell it at 10 FT / $1. The key here is if you sell or transfer any of your FT token then you lose the right to exercise this put.

Therefore, the “raise” works as follows:

1. Smart users trade off the opportunity cost of directly farming stablecoins themselves (approximately 4.4% APY) for a call option to potentially sell FT tokens at a higher price, while still being protected from downside risk.

2. Revenue mints the team's supply, effectively granting them around 50% of the revenue generated by this $1 billion in stablecoins earning yield. When users sell FT at a premium to presale, they forfeit the USD they deposited, which permanently remains in the treasury, allowing the team to earn yield in perpetuity.

In theory, aside from tail risk and opportunity cost, the only possible losers here are those who either (a) purchase FT tokens after the public launch, or (b) incrementally sell FT tokens and thus lose their redemption rights.

Considering these dynamics, Flying Tulip presents a decent opportunity for those who understand its mechanics. In the bear scenario, you retain redemption of your principal; the base scenario offers decent yield if you choose to exit; and in the bullish scenario, should they successfully execute their strategy, it provides exposure to a potentially promising project.

— Shaunda

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