#68: MakerDAO+A16Z

+ governance, unwinding ICOs & more

📦Unpacking MKR+A16Z

You will no doubt have heard the news that A16Z Crypto have purchased 6% (or 60k tokens) of the total supply of MKR for $15M, for an implied network valuation of $250M ($250 per token).

In case you missed, here is the announcement on the MakerDAO blog and the A16Z investment thesis.

Many commentators have focused on the governance aspect of this transaction. We’ll touch on that too, but we think there are a number of other interesting things to unpack:

1️⃣ in traditional venture capital there are some generally established playbooks on ownership targets and portfolio construction, typically dependent on stage focus and fund size. There’s no such thing in crypto yet, major differences being:

a) less dilutive effect from multiple funding rounds

b) liquidity should command a premium

c) ownership concentration is typically undesirable and detrimental

d) no legal recourse over assets.

It is therefore interesting to have these data points on ownership target (6%) and % of fund deployed in a single asset ($15M/$300M=5%) from one of the most respected and active crypto investors. Note that A16Z already held 10k MKR tokens before this announcement.

More broadly, this deal once again shows that there are multiple entry points for VCs in crypto. We’ve obviously seen many getting involved in private rounds via SAFTs or equity, not too long ago we have seen the likes of Placeholder and Blueyard building positions in liquid crypto assets from secondary markets and more recently we have even seen some funds ‘earning’ tokens via “generalized mining” activities. And these avenues are not mutually exclusive. Here A16Z is buying directly from the Foundation treasury itself.

2️⃣ this deal also demonstrates that there are alternative ways of funding decentralized networks other than ICOs and that not all capital needs to be raised upfront. Go figure. MakerDAO is an example of a project that shipped a working product without running an ICO, that now can raise the appropriate amount of funding for the next phase based on what they have achieved thus far.

3️⃣ One of the aspect of this deal that made most noise is the discount A16Z got from market prices. At the time of the announcement MKR was trading at around $450, while A16Z got a sweet $250 per token (equivalent to a 45% discount to market prices). A few things to note about that:

a) The headline market price is somewhat meaningless without accounting for market depth and liquidity. MKR has been quite thinly traded across some obscure decentralized exchanges (and deliberately so, the team wanted to avoid having speculators in the mix): just over $500k per day has been traded since January 1st ($340k over the last 3 months), equivalent to an average of 0.1% of its market cap. It’s not at all unusual to see these sorts of “discounts” for large positions trading OTC in illiquid markets.

b) If you even took the $450 as a “real price”, the seller would have effectively left $12M (4–5% of the market cap) on the table for the privilege of having A16Z in the trenches with them deploying their arsenal of operational support over the next 3 years (so $4m a year). We’ll let you make up your own mind about that. Interestingly there was no significant price reaction to the news, perhaps down to the illiquid and obscure exchanges MKR trades on.

c) A16Z tokens are under a lock-up, though interestingly not all on the same schedule: according to Rune the CEO of MakerDAO, 1/3 are locked up for 1 year and 2/3 for 3 years.

4️⃣ Related to one of the points above is the broader topic of VC value add. For all the talk about crypto leading to the death of traditional VC, here’s a testament that such claims may be slightly exaggerated. Now, clearly a16z are a unique beast in the marketplace, and not many other investors can offer such a level of operating support, but here’s one of the very top projects in the space telling the market that traditional help around “sales and business development (including partnerships), marketing, technical talent, HR operations” is highly valuable.

5️⃣ Zooming in on the value add bit, there’s a more sceptical take on what Maker is actually valuing in this deal. And that is specifically Katie Haun, the general partner at A16Z Crypto that led the deal. Katie was hired in June when A16Z announced the spin-off crypto fund. She is a former federal prosecutor at the DoJ and created the government’s first cryptocurrency task force to lead investigations into Mt. Gox and Silk Road. In short, she is possibly the top crypto lobbyist on the market right now. And it’s no secret that regulation is top of mind for MakerDAO.

In Rune’s words:

“You have to consider that regulation is one of the most important areas we need to focus on in order for the project to succeed.” “To me it is clear that given this is our biggest challenge and threat…” “With Katie Hauns insight from her time as a federal prosecutor focused on cryptocurrencies, we have crafted a very strong plan for getting full clarity about our legal status in the US with the federal agencies that are relevant for the kind of financial activity Maker enables.”

6️⃣ MKR is in large part a governance token. The ability of governance tokens to capture value has been and continues to be heavily debated, so A16Z endorsement adds some heavy weights to the governance token model camp. The other side of the argument is that VCs have an innate preference for governance tokens because they theoretically give them a say along the lines of what they are used to with traditional corporate governance.

7️⃣ which leads to the topic that was most actively discussed following the news, ie the way the decision to sell a sizeable portion of the token supply was made. Some have rushed to call it a “massive failure in governance”, others piled in raising scepticism on the lack of transparency. Those are all fair criticisms for a projects that’s committed to decentralization and community led governance, with some caveats though: in Rune’s words, “the community is only meant to be responsible for the long run risk governance of the system”, so weather selling Foundation tokens to A16Z falls squarely into the remit of a community vote is unclear. From our end, we can’t quite imagine what it would have logistically and practically looked like to vote on such a deal in the public domain, with risks of leakage, competitive tensions, delays, insider trading and so on.

Nathaniel captures this complexity nicely:

“It’s even easy to imagine how they might have been nervous that public scrutiny could jeopardize a deal that they believed to be essential to the long-term health of their ecosystem, and sought to insulate it from any external court of public opinion.”

Given the stage and complexity of the project, as well as risks and uncertainties still involved, it would be a little premature to expect full decentralization, despite it being the ultimate goal. In this phase flexibility is still paramount, as Rune’s said again on Reddit:

“it is simply not possible for a decentralized community to bootstrap a fintech product from scratch with the flexibility required to compete in the marketplace”.

And Gradual Decentralization is one of the core tenets of the Foundation v2 proposal, that interestingly was just approved by majority vote of the token holders.

Full decentralization is to be achieved step by step, with tokens being handled by the right stewards at each phase.

Lots of food for thoughts.

— -

(Disclaimer: we are indirectly exposed to MKR via a personal investment in 1confirmation)

🔥Thoughts

If you feel like diving into blockchain governance after reading about MakerDAO, Peter, who just joined Project 0x as governance researcher, has published a in depth essay on the topic.

Of particular relevance to Maker/A16Z is the part on user-owned vs investor-owned platforms, which touches on the trade-offs between financing a project and remaining accountable to end users.

And to close the loop on blockchain governance this week, Vlad Zamfir dropped a post where he shares his current thinking on the subject.

It’s quite related to Nathaniel’s post we linked to in the MakerDAO commentary, as in it touches on the inevitably blurring lines between governance and politics.

Specifically Vlad outlines what he thinks will be five possible outcomes of blockchain governance and encourages people to drop the innate apathy and get actively involved in it:

“It’s early enough that your committed individual participation can and will have a big impact on the future of the blockchain space.”

We have mostly shied away from talking about prices, but it’s undeniable that they do play a role in the evolution of a network, whether we like it or not, certainly in the earliest bootstrapping phase.

Here Tony Sheng introduces a conceptual framework that ties in price movements with fundamentals, expanding on the concepts of reflexivity and growth loops.

The idea is that price movements attract (or detract) speculators, who in turn may start (or stop) being actual users. The more (or less) users a network has, the more it reinforces the belief (or disbelief) of “utility”, with has a reflexive impact on prices, driving more speculation (or dumping). And so on a so forth.

The key take away for founders here is that most of these variables can be controlled and optimized and that we may soon have some crypto playbooks and best practices.

Ok sorry, it’s about prices again :)

But this piece does an stellar job at dissecting the current bearish crypto narrative and is a good follow up to Tony’s post above.

“What is left is an asset class for which selling pressure is significant and constant, buying pressure is temporarily subdued, and longs should not be expected to spike for a while (yes, that’s bearish). An asset class for which valuations and usage provide no floor.”

The folks at Loom Network are doing excellent work on making crypto more user friendly for the masses. And they are doing so in a refreshingly pragmatic way, having come to the conclusion that “Blockchains Don’t Just Have a Scaling Problem — They Have a USER ADOPTION Problem”. Amen!

So their plan to fix that is to first build a UX that is on par with centralized alternatives (which they claim they have mostly done already) and then build killers apps and release the tools for 3rd parties to also do that.

Their view is that the most sensible place to start experimenting with killer apps is games, due to the fact that there is already a very large captive audience eager to experiment with new things AND blockchain can actually provide tangible benefits in the game play.

Related to the topic of driving mass adoption, our friend Leland from Blockchain at Berkeley dives into the merits of economic abstraction of base layer fees.

The method he proposes involves an off-chain delegator that pays the transaction fee on behalf of a signer and gets rewarded with a fee denominated in the native token.

This is a bit at the edges of what we typically cover, but it gives a sense for the types of problems “crypto” is supposed to be addressing, with user privacy being high up at the top of the list.

It’s a rant on a recent change in Google Chrome policy (forced login) by a cryptographer and professor at Johns Hopkins University.

Worth a read if you are an active Chrome user.

Blockchain.com have started to publish research and it’s really high quality.

The paper on stablecoins is a monster, with technical in-depth analysis of all the active and in development projects and a primer on taxonomy. Bookmarked.

Source: Blockchain

As a follow up to last week news of the vulnerability found in the Bitcoin Core software, Jimmy Song published a detailed technical dissection of the attack vectors.

His conclusion is that the economic game theory of the potential exploits makes the bug less severe than what it looks like on the surface. Highlighting how robustness is not just built in the code itself.

+ flagging two excellent deep dives this week that we’ll probably read on our next flight:

-> IPFS by Zk Capital

-> Cosmos by Julian Koh

💥Newsy stuff

Last week we covered the Cofound story and we closed our commentary with the following words:

“For now we’ll file this one under the ‘unwinding ICOs’ folder alongside Digipulse detokenization that we covered in #61, but buckle up as similar stories emerge over the next 6–12 months.”

We didn’t have to wait long for the next chapter, as just this week Iconomi have announced a plan to “securitize” their token, by allowing ICN token holders to convert their supposedly “utility” tokens into security tokens representing equity in Iconomi, a newly formed joint-stock company incorporated in Liechtenstein (or get ETH in at a set exchange rate instead).

As a reminder, here’s a post where the Iconomi team described the utility of the ICN token. One paragraph really stands out while re-reading it in light of this week’s news:

“ICONOMI’s original vision was a dividend structure, but due to worldwide regulations, it’s almost near-impossible to offer a realistic dividend structure to accompany the masses. A full list of the crazy amount of dividend tax regulations around the world can be found here, no seriously, look. This is another reason why ICONOMI should be praised for initiating buybacks. It’s a genius way to accumulate wealth for investors without the regulation headache.”

That “genius way” didn’t age too well clearly.

As a side note, the various security token issuance platform have a massive captive market to go after now: the hundreds of projects that sold a security disguised as a utility token.

In other news:

Ads. Google is following Facebook in reversing the ban on crypto ads for regulated exchanges in the US and Japan.

Google is following Facebook in reversing the ban on crypto ads for regulated exchanges in the US and Japan. ExOduS. BlockOne employees #2–5 have departed the company to start another project, currently in stealth but seemingly inspired by EOS itself (also, did USV really invest directly in EOS or was it through Multicoin?). And to add to that, there are rumours of a document circulating that would show collusion among BPs. Standard week in EOS-land.

BlockOne employees #2–5 have departed the company to start another project, currently in stealth but seemingly inspired by EOS itself (also, did USV really invest directly in EOS or was it through Multicoin?). And to add to that, there are rumours of a document circulating that would show collusion among BPs. Standard week in EOS-land. Bitmain. The IPO prospectus has been published and Bitmex Research team have dissectedit. Q2 was a tough quarter, as expected.

The IPO prospectus has been published and Bitmex Research team have dissectedit. Q2 was a tough quarter, as expected. Metamask . Big news for Dapps as Metamask rolls out support for Ledger hardware wallets.

. Big news for Dapps as Metamask rolls out support for Ledger hardware wallets. Coinbase. They have released a new set of products clearly aimed at new entrants, including a bundle of coins that can be purchased with a single transaction, informational asset pages and an educational portal. On the new listings front, there’s a new process now where anyone can apply (via a Google form). Massive data capture exercise at the very least.

They have released a new set of products clearly aimed at new entrants, including a bundle of coins that can be purchased with a single transaction, informational asset pages and an educational portal. On the new listings front, there’s a new process now where anyone can apply (via a Google form). Massive data capture exercise at the very least. Jobs. Almost 1k vacancies are open across the DCG portfolio. 124 at Coinbase, 42 at eToro, 43 at Ripple, 22 at Basis. Impressive.

Almost 1k vacancies are open across the DCG portfolio. 124 at Coinbase, 42 at eToro, 43 at Ripple, 22 at Basis. Impressive. BitTorrent. More details on how it will integrate with Tron blockchain. A fascinating experiment, like it or not.

😎 Cool new projects

We can’t help but be fascinated by these experiments.

You’ll remember satoshi.place (an online collaborative canvass powered by Lightning Network). Pixel Master is a similar concept, but with some of the Fomo3D game mechanics sparkled on top. The author calls this trend “ponzification”.

“Users can pay a set price to paint a pixel on the canvas. That includes painting over other people’s previously painted pixels. The person that paints over your pixel needs to pay 35% more than you did. You receive a full refund of your initial purchase, PLUS 75% of the extra 35% they paid. The 25% remaining from the extra 35% gets allocated in a variety of different ways.”

It’s also built on EOS and the 4th most popular dapp on there at time of writing.

Super interesting application built on top of Augur to create and allow trading of synthetic indexes of prediction markets tracking the success of individual celebrities.

Here’s the founder’s post outlining his motivations.

“Someday people will be able to trade shares in a Lebron James index fund just as easily as they can shares in an S&P 500 ETF.”

Source: Pdot Index

Circle’s stablecoin USDC, a fully-compliant and transparent USD 1:1 collateralized digital dollar on the Ethereum blockchain, goes live on Poloniex and Circle Trade and is accepted by 20other companies.

Alternatives to Tether are starting to be abound.

(This section was unusually dry this week, what cool stuff have we missed?? )

Curated on a Product Hunt collection!

💸 Funding rounds

Ex UBS bankers on the move to build a fully FINMA licensed crypto-friendly bank offering the full range of custodial services, trading and liquidity management, crypto corporate finance advisory and crypto asset and investment management services.

Their lingo is second to none:

“leveraging state-of-the-art FinTech and best-in-class service partners to deliver military-grade secure traditional and crypto banking experiences.”

Enterprise blockchain still sells, with London-based Gospel raising a £5M Series A round from IA Ventures and Salesforce Ventures.

Congrats to the team and to our friends at Localglobe who backed them from Seed (only 7 months ago!).

👮 This week in regulation

Three US lawmakers have addressed a letter to SEC Chairman Clayton urging for more clarity on how the agency is intending to regulate token sales.

“current uncertainty surrounding the treatment of offers and sales of digital tokens is hindering innovation in the United States and will ultimately drive business elsewhere.”

In the meantime it looks like there has been another wave of subpoenas going around, with some investors going as far as putting US deals on hold until more clarity is provided.

The SEC and the CFTC have filed charges against 1Broker and its CEO for solicitation of “investors from the United States and around the world to buy and sell security-based swaps” using bitcoin and with no KYC/AML, without transacting on a registered national exchange nor registering as a security-based swaps dealer.

The domain has been seized by the FBI and the company claims funds are safe.

If there were any doubts, the hand of the SEC is far reaching: 1Broker is incorporated in the Marshall Islands and its CEO is based in Austria.

Another interesting data point spotted by Oguz: the FBI agents who personally traded on the platform to demonstrate the fraud conducted such trades in *2016*. So it took 2 years for the charges to materialize. 2019 should be wild…

Small fry in the grand scheme of things, but an interesting ruling nonetheless that shows how little crypto is still understood in courts.

In the context of a lawsuit brought by the CFTC to “My Big Coin Pay” (🤦🏻), a federal judged has ruled that all digital currencies are to be considered commodities, meaning that the CFTC has jurisdiction to prosecute in crypto.

Follow up here for an excellent Twitter thread on why thing ruling is flawed, by Jake Chervinsky.