Alfafrens - The Great Deleveraging

Financial deleveraging is the process by which an entity (individual, company, or financial institution) reduces its leverage or debt levels. This typically involves selling assets, paying off liabilities, or restructuring existing debt.

Deleveraging often occurs during periods of financial distress or economic downturns when maintaining high levels of debt becomes unsustainable. Unwinding a leveraged system can lead to a cascade of asset sales, declining prices, and increased market volatility. However, it ultimately results in a more stable and resilient financial environment.

Applying this concept to Alfafrens, we can understand how the temporary pause in new subscriptions to fix bugs acts as a trigger for a leveraged system unwinding. Prior to the pause of new users, the primary strategy was to aggressively run cash flow negative and subscribe to as many accounts as possible to maximize the generation of Alfa. Users would then self-stake Alfa on their channel to grow subscribers, increase income, and repeat. While perhaps not apparent, the over-subscribing of channels beyond your ability to run cash flow positive is a form of leverage. System-wide, Alfafrens was growing very quickly as a result of massive system-wide leverage. Let's dig into what happens next.

Before a triggering event, several conditions can create an environment where deleveraging becomes necessary. These conditions include:

1. High Levels of Leverage:

   • Borrowing to Invest: Users or entities take on significant debt to invest in assets, aiming to amplify returns. This can occur through margin trading, where borrowed funds are used to buy more assets.

   • Staking for Rewards: In platforms like Alfafrens, users stake alfa to earn income from subscriptions. High leverage occurs when users subscribe to a significant number of channels beyond their ability to sustain the cost of those subscriptions. We call this getting over your skis.

2. Asset Price Appreciation:

   • Rising Asset Prices: As asset prices increase, leveraged investors see substantial gains. This encourages further borrowing and investment, leading to even higher leverage ratios.

   • Overvaluation: Asset prices might become overvalued due to excessive speculative activity, increasing the risk of a market correction. In the case of Alfafrens, the asset price inflating was the monthly subscribers to your channel and the indicative monthly income estimate growing.

3. Access to Cheap Credit:

   • Low Interest Rates: Easy access to cheap credit encourages borrowing. Low interest rates reduce the cost of debt, making it attractive for investors to leverage their positions.

   • Loose Lending Standards: Financial institutions might relax lending standards, providing loans to less creditworthy borrowers, contributing to higher leverage.

   • In the case of Alfafrens, the access to cheap capital was the feature of second by second streaming of income and expenses. You can subscribe to a 500 degen/month channel, but you're paying by the second and not via a lump sum. You can temporarily over leverage in an attempt to outpace via growth.

4. Market Confidence:

   • Optimistic Outlook: High levels of confidence in the market or specific assets can lead to increased borrowing and investment. Investors believe that prices will continue to rise, justifying their leveraged positions.

   • Herd Behavior: Investors might follow the actions of others, increasing leverage because they see others doing the same, creating a feedback loop of rising prices and increasing debt. in Alflafrens, the strategy of over subscribing, self staking, and doing so deeply cash flow negative was the dominant strategy. So long as new subscribers came in, and accounts grew, more people would feed into this same strategy. Subscriber growth (number of channels subscribed to) way outgrew unique user count. Said differently, the average number of subscribed channels per user was much higher than sustainable over a longer period of time.

1. Triggering Event:

   • Pause in New Subscriptions: Alfafrens temporarily stopped new referrals to fix bugs and prepare the site for scaling.

   • Market Reaction: This pause led to no inflow of new subscribers, increasing the competition among existing users to maintain their positions and benefit from the subscription model. The bar for alfa/month to be a competitive subscription continued to inflate.

2. Asset Liquidation:

   • Reduced Income: Without new subscribers, the income from subscriptions decreased, impacting users' ability to earn Alfa.

   • Forced Downscaling: Users anticipating further difficulties or trying to avoid liquidation might start mass unsubscribing or strategically liquidate to secure their position.

   • Price Decline: Increased unsubscribing pressure causes the income from subscriptions to drop, leading to further panic and additional unsubscribing and liquidations.

3. Liquidity Crunch:

   • Credit Tightening: Income from subscriptions begins to materially decrease, causing yet more people to unsubscribe or be liquidated, thus reducing system-wide subscriptions and liquidity.

   • Decreased Value: As subscriptions fall, the value of staked positions decrease, causing more users to face liquidation and further reducing the number of active subscribers.

4. Debt Repayment and Restructuring:

   • User Adjustments: Users might continue to reduce the number of channels they subscribe to or liquidate other assets to remain cash flow positive.

   • Platform Measures: Alfafrens could introduce temporary measures like incentivizing new users (handing out three referrals per user), adding new features, hinting at additional airdrops.

5. Market Volatility:

   • Increased Volatility: The uncertainty and rapid changes in staking and subscription dynamics lead to significant market volatility.

   • Confidence Crisis: Users might lose confidence in the platform's stability, resulting in a broader sell-off and reduced participation.

6. Stabilization:

   • Bottoming Out: Forced unsubscribing slows down, and the equilibrium begins to come into focus. The market begins to stabilize as the market adjusts to the new conditions.

   • Policy Interventions: Alfafrens might implement new policies, such as hinting at an airdrop, offering bonuses to encourage new and existing subscribers to stay engaged, and increasing communications.

7. Recovery and Growth:

   • Normalization: Over time, as the platform stabilizes and the fixes are implemented, the market begins to normalize.

   • Price Recovery: Subscriptions begin to show net positive as the pace of liquidations slow and the pace of new unique users increases. Confidence returns and users reenter the market.

   • Renewed Engagement: As the platform stabilizes, user engagement and subscription rates begin to grow again.

8. Economic Rebalancing:

   • Reduced Leverage: The overall leverage in the system decreases as users adopt more cautious strategies and maintain higher stakes of alfa to avoid future risks. This will slow the pace of growth for the platform, but will be more stable going forward.

   • Improved Risk Management: Both the platform and the users adopt better risk management practices, ensuring a more stable environment for staking and subscriptions.

9. Market Discipline:

   • User Awareness: Users become more aware of the risks associated with high leverage and manage their subscription count and alfa holdings more prudently, ensuring they maintain sufficient buffers to avoid liquidation.

With the pause in new subscriptions as the triggering event, the leveraged system unwinding in Alfafrens involves an initial period of reduced income and forced selling, leading to price declines and increased volatility. The system stabilizes as the platform implements fixes and policies to regain user confidence. Long-term, the platform and users adopt improved practices, resulting in a more resilient ecosystem.

I remain bullish on the Alfafrens ecosystem and platform; however, we must recognize the events that just passed for what they are and find the comparable historical baseline in the market so we can make informed decisions. I believe the above to best represent the current events, and find ourselves in the mid-stages of the deleveraging. I anticipate subscriptions to continue to fall, but note that we are seeing a slow pace of net new users entering the ecosystem. I view this as a turning point, but it may take more time before we see a true equilibrium and recovery. Ultimately, the team has performed well, taken necessary action, and communicated. The platform thesis still is in tact and the outlook remains positive. Just ensure you do not get liquidated and take the long view on building your Alfafrens channel.