Grid+ token sale review

Capped ~9x upside makes investing in the token unattractive

Here's a short review of the Grid token and token sale. The Grid+ project, an ambitious Consensys formation, aims to create Ethereum-based financial infrastructure for energy trades. Energy supply from small generators of electricity, such as homeowners with solar panels, shall be matched to demand from other electricity consumers and the corresponding financial transaction executed on the Ethereum blockchain. Grid+, the firm, shall extract revenues (rent) from this match-making and delivery process by charging a price markup to consumers of electricity in systems it deploys.

The project proposes to build multiple components to enable energy transaction infrastructure:

BOLT stable coin: A token system on Ethereum, different from the Grid+ token offered in the crowd-sale, used for actual monetary exchange in energy markets. One BOLT carries a purchasing power equivalent to 1 USD. Hardware smart agent: An IoT device, designed and commercially sold by the Grid+ team, to monitor the generation capacity and consumption demand of an individual home-owner and autonomously make energy trades on their behalf. Energy transactions are expected to be small micro-payments, necessitating automation of trading decisions. The hardware smart agent fulfils this automation role. Payment channels and other software work: Energy markets on Ethereum need high transaction capacity and a communications network. Grid+ shall create this using payment channels and a communications network for hardware smart agents.

Grid+, the firm, shall operate distributed energy markets and earn revenues by charging a markup on each energy unit transacted for and consumed in their energy markets.

Normally, analysis of this project would necessitate an understanding of the demand for such technology, target market size and execution challenges. However, all of this effort can be done away with because of the (unattractive) token structure.

Nature of the Grid+ token

The Grid+ token, being sold in the pre-sale and crowd-sale, is a discount coupon that can be used to purchase electricity at wholesale rates from a functioning Grid+ system. Grid+ tokens do not confer any control rights on the crowd-sale investors. Presumably, there is a privately-held separate asset, the firm shares, which do grant these rights but no details have been released on the firm shareholding structure in the Whitepaper.

A Grid+ token enables the holder to purchase 500kWh of electricity at wholesale rather than retail rates if/when the project succeeds. Therefore, the value of token, in case of project success, can be estimated as:

Maximum value of Grid+token = Amount of electricity receivable × Markup per unit of electricity charged by Grid+

Plugging in values supplied by the whitepaper, we estimate the typical value of a Grid+ token, in case of large project success, to be $10. Amount of electricity receivable is 500kWh per token, and markup per unit of electricity charge by Grid+ is estimated at $0.02 per kWh.

Crowd-sale participants can purchase tokens at a rate of $1.15 per token. Thus, the maximum upside that a crowd-sale investor can expect is 8.7X ($10 / $1.15). Therefore:

Return on Grid+ token when project succeeds = 8.7X

Return on Grid+ token when project fails or is indefinitely delayed = -1X

Timeline of Grid+ token utility is entirely upto the team since token holders do not have any control/voting rights on the project.

Startups building speculative energy infrastructure come with large risk. Can an 8.7X upside be sufficient compensation for that risk? We think not, but for completeness sake, lets review the risks:

Risks inherent in the token

Technology Risk: Ethereum might be a great system for conducting ICOs, but prove insufficient for the needs of distributed energy markets. Transaction costs & latencies (for opening and closing payment channels for instance) are a primary source of technology risk.

A secondary source is that blockchains may not perform any better than traditional financial databases at this particular application. The BOLT stable token could equivalently have been issued on a traditional financial database with universal read access. Competitive Risk: Micro-grid solutions and smart home monitoring devices are a large market with companies such as Tesla, Siemens and a multitude of others. These firms are in the game for providing similar solutions, which creates competitive risk. Control Risk: In exchange for financing the project to the tune of $100 million in total, token sale participants get zero control / voting rights over the project! Token buyers are effectively buying discount coupons instead of equity / voting rights in the project, and are therefore exposed greatly to control risk. What happens when a large company such as Siemens buys a majority of the equity in the project from Consensys in a private deal? Can Siemens be expected to put their full executional resources behind the project as Consensys would do today? Team risk: Grid+ boasts a large and talented team, which ought to reduce the execution risk. However, there needs to be greater clarity on the incentive structure of team members. Are team leads and members Consensys employees that can change their jobs easily or do they hold a meaningful quantity of project shares? What are the vesting schedules on project shares like? Growth risk: Crowd-sale investors shall be able to utilise and liquidate their tokens only when the parent Grid+ company honours these discount coupons. In order for them to honor all the coupons, a minimum of electricity worth $4.5 billion (90 million tokens ×500 kWh per token ×10 cents per kWh) must be transacted on their live grids. There is a non-negligible possibility that Grid+ succeeds but on a scale smaller than that and is unable to deliver the full utility of the coupons to crowd-sale investors.

Conclusion

Given these downside risks, and a maximum upside of 8.7X, crowd-sale investors ought to carefully mull their options before investing.

The cryptocurrency space delivers similar returns on capital, on a time-scale of 3 years, simply by investing in a diversified portfolio of the Top-5 coins. This makes the opportunity cost of capital for crypto-investors much higher than share market participants. For the authors, the Grid+ crowd-sale in its current form is an easy pass.

Disclaimer: this article constitutes our opinions and is for information purposes only. It is not intended to be an investment advice. Seek a duly licensed professional for investment advice.

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