The Lowdown

If you’re unfamiliar with Gnosis’ proposed token system, hopefully the above anecdote gives you an idea of how it works. ICO participants will buy GNO tokens, which serve no purpose except to generate another set of tokens, WIZ tokens. In order to do this, the GNO tokens must be locked in smart contract; the longer they’re locked the more WIZ you get. WIZ tokens can be used to pay trading fees on the Gnosis platform.

Now before I go any further, let’s just stop right there. WIZ tokens? The team seriously couldn’t think of a better name? When I hear “Wiz” I think of two things, urine and this guy:

Neither are things I would want my token named after, but to each their own. The urine angle certainly brings some humor into reading the team’s blog posts when they include gems like:

The algorithm adjusts the WIZ emission rate constantly to create the right amount

Humorous euphemisms aside, the name is the least of my objections to their ICO and two-token system. Let me run through my concerns:

Objection #1: The timing

The timing of the ICO is quite strange. The normal path in these situations is that a team has an innovative idea, and needs capital to create it, so they offer dApp coins or tokens in exchange for capital, which they then use towards developing the product.

On the other hand, Gnosis has already been in development for over two years. Mr. Koppelmann has stated that they are months away from launch, and anticipates that they will beat Augur to market. So now they need 12.5 million dollars? What for? Asking for $12.5 million at the 11th hour is extremely odd and smacks of a desire to simply cash in on greedy ICO participants. Which is essentially Objection #2.

Objection #2: The underyling motive

So let me just lay my cards on the table here and tell you what I really think. I think the team wanted to have an ICO in order to cash in on ICO-mania, and this whole convoluted double-token system was simply invented because they couldn’t think of any other utility for a coin to ICO. It’s really the only explanation that makes sense.

I’m sure Monsieur Koppelmann will have a rebuttal to this, and I welcome his input. One thing he has pointed out in the past is that Kraken has implemented a similar token system in the past with their KFEE tokens- tokens that can be used as credits towards trading fees, only on the Kraken platform. And this is true, at least it’s true that KFEE tokens are similar to WIZ tokens. Kraken, however, did not take the extra, convoluted step of making KFEE Generating Tokens.

So let’s speak plainly about what both KFEE and WIZ are: They’re fucking gift cards. They’re prepaid services that you can only use at one location, and the merchants that sell them to you are probably hoping that you lose them. This has been a criticism of KFEE in the past, and now I’m happy to point out the same of WIZ. Additionally, to the best of my knowledge, KFEE is really only used when Kraken has promotions and basically gives them away. I don’t have any hard data, but I have to imagine that the % of Kraken fees paid with KFEE is very small. Gnosis, on the other hand, states that

We assume that most fees will be paid in WIZ

Seriously? You assume that the majority of users will take the path of greatest resistance, and rather than just have their transaction cost slightly more in whatever currency they’re trading in, would prefer to turn it into two separate transactions? This brings us to objection 3.

Objection #3: The value proposition to investors

ICO’s are risky propositions to begin with. But let’s just go through the list of things that would have to happen in order for GNO tokenholders to make a profit off the Gnosis platform:

a) Gnosis must produce a working, quality product

b) A significant number of people must choose to use this product over other available options, be it Augur or one of the many centralized platforms.

Now already those are two considerable hurdles. But the thing is, Gnosis could rock those two, Gnosis could be a complete smashing success and do TRILLIONS of dollars worth of trading, and still leave GNO tokenholders penniless, because there is still one last hurdle-

c) People have to choose to to use the platform AND use Wiz tokens to pay their fees, rather than just pay in whatever currency they’re betting with in the first place. This is the ONLY way that GNO tokenholders will get any benefit at all. And for me, this is simply one hurdle too many.

Objection #4: The Oracles

This topic is big enough that it deserves a writeup of its own. See here for my further thoughts on the subject. But to summarize, there are several methods proposed. It appears that the majority of markets will resolve with centralized oracles, in which case why bother even using a decentralized network? You may as well use betfair or fairlay etc. Or there’s what they are calling the “Ultimate oracle”, a decentralized method which relies on other ETH holders to be Gnosis’ policemen by putting up their ETH on markets they probably don’t care about.

#5: The “modified Dutch auction”

So I don’t exactly object to this, but I do believe it reinforces the idea that the team is angling for a cash-grab. In reality, it’s not that horrible of a system. A wise investor would pick a price they’re willing to pay for GNO tokens, wait until the price reaches that level, then buy. If the tokens sell out before that, a wise investor would rest easy knowing that other participants probably overpaid, and would wait until tokens hit the exchanges and would then buy them when the price is corrected by the market.

People are whining that there is a possibility that the cap will be hit very early on, which would result in very expensive tokens, as well as the team retaining up to 95% of those tokens.

And for the team, this is the absolute best-case scenario- they give up almost nothing and receive a huge chunk of cash. Which is a brilliant move if you have a near-complete product, yet believe that people will throw insane amounts of money at you because they think they are “getting in early.” Knowing the current climate in ICO funding, this is definitely a real possibility.

And in regards to that, The team can’t be completely blamed. If people are willing to trade their money for “Wiz,” and mega-overpriced Wiz at that, then they’ll get exactly the return on investment that they deserve.

Conclusion

There are so many good projects in the crypto space. For me, the timing of the ICO, the team’s questionable motives, the token architecture, and the lack of a good decentralized oracle are enough to keep me away from this one.

Disclosure- I hold REP, which could be considered a direct competitor to Gnosis. For information about why I believe Augur/Rep is undervalued, see here.