Why I am unreasonably long in $DIGG
Let’s be honest, DIGG has not been the most popular coin of late. Rebase tokens, where the supply contracts or expands to meet a price target, break the brains of many people.
It’s hard to escape the familiar mental model of tokens as shares of stock: you buy some tokens and the price goes up or down based on trading in the market.
But in spite of all this (or maybe because of it) I like DIGG… Rather, I love it.
I have over six figures of my net worth in DIGG and it’s one of my biggest positions in DeFi today.
Why you ask?
I wrote this article to break down DIGG in simple terms and explain why I like it, both as a speculative investment and a critical part of the Badger ecosystem.
Let me start with the usual disclaimers: This is not financial advice. I do not work for Badger…. and as I mentioned already, I own DIGG.
Ok, lets gets started….
What is DIGG?
DIGG is an elastic supply token pegged to the price of Bitcoin and governed by BadgerDAO. An initial supply of 4,000 tokens were airdropped to users earlier this year.
DIGG was not the first to pioneer elastic supply and rebasing concepts, as Ampleforth created the first non-custodial stable coin. DIGG was built off the AMPL codebase.
But DIGG takes this one step further: instead of pegging the token against a stablecoin, DIGG is pegged against BTC which can experience tremendous volatility against USD.
The full rebasing mechanics of DIGG have already been covered so I will refer you to this excellent article instead of repeating them here.
But the key point to grasp is this:
When you buy the DIGG token, you get a fixed percentage of the full DIGG market cap.
Like a normal token, the price is set by buyers and sellers on exchanges. But, unlike a normal token, the number of tokens you see in your wallet (or in a smart contract) goes up with a positive rebase or down with a negative rebase. As this happens, your share of the pie always stays the same.
The main takeaway is that you should think about your DIGG position in terms of percentage ownership of the total market cap rather than the number of tokens multiplied by the price per token.
What is bDIGG?
There is one major difference between DIGG and AMPL: the interest bearing form of DIGG known as bDIGG. When you stake your DIGG on https://app.badger.finance/, you will receive bDIGG back in your wallet as a representation of your share in the vault.
At the time of writing, the APY of staked DIGG is 43%. The rewards come in the form of DIGG and they automatically compound inside the Badger vault.
Importantly, your bDIGG balance does not rebase (although your DIGG in the vault continues to rebase as normal). This lets bDIGG play nicely with other contracts that don’t support rebasing tokens.
The bottom line is that you can buy DIGG which imperfectly tracks the price of BTC, stake it in Badger to earn 43% APY, and also get bDIGG tokens back in your wallet that you can use in other places within DeFi.
Who Cares?
Ok, so why does any of this matter? DIGG is basically AMPL, but more volatile and with an interest bearing form of DIGG, known as bDIGG.
Whenever you look at a DeFi project, you need to think about the incentives for the users and for the protocol itself.
They must be aligned to create long-term utility in the market.
If a new protocol distributes all its tokens in the first few weeks, users get a sugar high from the flood of tokens, but then comes the inevitable crash as there is nothing left for the protocol to build with.
But if a token lets both the users and the protocol win, you have the ingredients for long term success.
So let’s think about DIGG, first from the perspective of you the user, and then from the perspective of BadgerDAO.
Value for DIGG owners
Hedge against BTC volatility. DIGG provides a hedge against BTC volatility because the rebases are calculated on a 10 day rolling period, based on the direction BTC price is moving. Sudden moves in the BTC price will take longer to be reflected in DIGG because of this 10 day window.
Bitcoin Denominated Rewards. Badger is entirely focused on bringing BTC to DeFi. And with DIGG, it is one of the few places that offers yield in BTC. In the end, I prefer BTC over “fill in the blank” latest token of the week. Yes, yes, I know. DIGG is not pure, uncut BTC. It is a synthetic derivative. But this is a decision I am comfortable with for the higher risk, higher reward tranche of my portfolio.
De-Risked Model. If you follow the algorithmic stablecoin projects such as ESD, DSD, etc you know that they have not always ended well. If you look at the history of AMPL, however, you can see that it has done a decent job of maintaining the price peg (with some notable swings above and periods below… more on this later).
Crucially, AMPL has been able to hover around peg while exploding from a sub $10m market cap to the $200-$400m range over the last 12 months. All this wealth has accrued to AMPL holders, even as the token price stays near the $1 peg.
Bottom line: the negative feedback loop that many predicted with AMPL has not happened, and the project has reached a degree of homeostasis. This de-risking also applies to DIGG and lets me sleep well at night holding a large position.
Value for Badger DAO
BadgerDAO has a ton riding on the success of DIGG.
It is a main component of their $600M treasury and has been a huge draw on developer time for the last few months, even as they continue to build their cross chain bridge to attract BTC onto the Ethereum blockchain (but this is a story for another article).
Why is DIGG such a big deal for Badger?
No Collateral Required — DIGG is a synthetic representation of BTC on DeFi. This means that, unlike fully collateralized representations of BTC (e.g. WBTC) it does not require BadgerDAO or users to provide collateral (i.e. lots of money) to support valuation. To mint 4,000 DIGG, Badger does not need to have 4,000 BTC (or any BTC at all) sitting in a wallet somewhere.
This is important because collateralized BTC like WBTC require massive amounts of capital to prop up. By using an innovative rebasing mechanism, Badger has created its own representation of BTC on DeFi that operates through the natural laws of supply and demand.
On top of this, DIGG is only one part of Badger’s massive ecosystem of products and robust community focused ENTIRELY on bringing BTC to DeFi.
The ability to create a synthetic form of the very product they are entirely focused on, backed entirely by a non-custodial elastic rebasing mechanism is pure genius.
Long-Term Utility. In a recent podcast, Mark Cuban said that Ethereum is a better store of value than Bitcoin. This is because BTC offers no real world utility in native form, except for someone who wants to buy a Tesla or an incredibly expensive pizza.
In this, he put his finger on perhaps the key problem in crypto: BTC is a great form of wealth storage. But it is clunky, and hard to put to work.
On the other hand, DeFi and ETH are all about doing stuff with your tokens. Lending, borrowing, collecting, trading, gaming, and thousands of other use cases that are yet to be developed.
Wouldn’t it be great if you could take your long term store of value (BTC) and put it to work in the exploding Ethereum ecosystem?
This is the holy grail of crypto. Building a bridge between the two biggest crypto ecosystems in a way that exponentially increases the value of both.
This is why Badger’s focus is becoming a “one-stop shop” for BTC with the ability to integrate both native and wrapped BTC to DeFi to allow users the ability to lend against their positions or earn interest.
The mechanics around DIGG may be different, but the utility remains as DIGG owners are provided BTC in-direct exposure on Ethereum to earn interest (bDIGG, ibBTC), lend against their positions, and (most importantly) as a composable asset in DeFi to do much more!
The opportunity today
If you are not familiar with elastic rebasing tokens, I strongly advise you to go look at the history of AMPL.
As you can see, there was a long, slow grind, followed by a steady upward trend, with some extreme spikes along the way.
Similarly, DIGG is experiencing its first negative contraction…and it has not been fun.
And for the last 2 months DIGG supply has gone from 7,830 in mid-February to 1,299 as of today’s writing. This is similar to AMPL during its early stages, when it went from ~75M tokens to ~8M.
These periods under peg have been particularly painful for DIGG-WBTC liquidity providers in Uniswap and Sushi.
But, if DIGG performs anything like AMPL, there is a light at the end of the tunnel.
Why? The rebasing mechanism works slowly at first, but then tends to explode to the upside.
In the case of AMPL, market dynamics eventually kicked in and not only did AMPL see a 4x price increase, but closer to 15x market cap increase via positive expansion.
Badger has recently released two upgrades designed to help DIGG reach peg faster (not including stabilization vault)
The first of these are known as DIGG KPI options.
Long story short, DIGG holders will be incentivized (in the form of more DIGG) for each positive rebase that occurs within 30 days.
Secondly, Badger launched a game (now finished) where DIGG holders could mine NFTs by depositing their bDIGG into a pool for a limited period of time.
Finally, the stabilization vault will launch soon, where Badger will hold some amount of WBTC or other fully backed BTC token and use it to prop the price of DIGG as needed.
Personally, I would prefer any elastic token first reach peg organically to ensure the market triangulates demand and supply correctly BEFORE any artificial stabilization efforts.
If you do not let a elastic rebasing token reach peg on its own, you will NEVER know if the mechanics work or not.
But what I do know is this: the Badger team owns about 50% of total supply and that DIGG is critical to their missions.
They have huge skin in the game and zero incentive to let DIGG fail.
Mark your Calendars for May 6
This is the date that Badger takes the snapshot of DIGG holders who will be eligible for even more DIGG reward options if peg is reached.
They have been promoting this event heavily and I expect to see additional buying pressure building up to this date.
I believe DIGG is following in the footsteps of AMPL and setting up for a major swing to the upside as the stabilization mechanism kicks in.
The Badger team is doing everything they can to make sure this happens because much of their treasury is in DIGG, so their interests are perfectly aligned with ours.
Special thanks to WasabiBoat who co-authored this article. Follow him on Twitter and check out his BadgerBois NFT collection.
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