The plutus.it crowdsale has been announced and will commence today on June 20th, 2016 at 8 PM GMT, lasting only 9 days.

Plutus is a semi-decentralized contactless payments platform enabling users to make payments at NFC-enabled merchants using Bitcoin, Ether, and the platform’s native cryptocurrency, Plutons. The system is implemented with a combination of Ethereum smart contracts, virtual debit cards, and a special decentralized exchange called PlutusDEX which provides instant conversions between cryptocurrencies and fiat currencies like USD and GBP. You can read more about Plutus in their whitepaper, their AMA, and the crowdsale announcement.

The following analysis is summarized from the discussions on the CoinFund Slack, and we welcome your feedback.

Supply and valuation

The initial sale will distribute 4.25% of the 20M supply of Plutons, or 850K PLU in an effort to initially price the cryptoasset. Reddit entertained some discussion that this would result in a highly inflated implied valuation based on total supply. Typical in crowdsales, the product team will keep a portion of the cryptoasset supply to use as compensation; those assets are in direct possession of the product team and are salable on exchanges. However, in the case of Plutus, the remaining supply of PLU is locked into an Ethereum smart contract and is distributed slowly and automatically by the system as rebates (see below). Since the product team does not control the excess supply, PLU market capitalization should be based on available supply and not total supply. The reasoning: during an investment round, the team would have trouble including the total, inaccessible supply in their valuation and would be most likely to have to valuate on recurring revenue.

Revenue and rebates

Users on the platform will be able to convert BTC, ETH, or PLU into fiat for real-world NFC payments (“the tap and pay balance”). Where using BTC or ETH would incur transaction fees (estimated at 1–4%) at fiat conversion time, deployment of PLU for payment would be fee-less. This is intended to incentivize users to prefer Plutons for payments. Additionally, during BTC or ETH conversion, the system would issue users fee rebates in PLU. “You earn a 3% amount of Plutons every time you convert BTC to contactless balance on the app,” the Plutus team stated in their Slack. According to the whitepaper, the rebate rate fluctuates between 1% and 3% proportionally to historical BTC turnover on the platform with higher turnover resulting in lower rebates.

The slow and steady release of Plutons through rebates creates a small, variable inflation rate on the available supply of Plutons and therefore an interesting dynamic for price — turnover on the platform may translate both into price increases (with respect to speculative trading of Plutons) and decreases (with respect to inflation due to rebates). The inflation due to rebate emissions is expected to be quite low, however, as long as there is sufficient utilization.

Transferrable fungibles

Initially, the Plutus team gave guidance that Plutons bought at crowdsale would be locked in the platform and could only be transferred outside of the ecosystem through fiat conversions on PlutusDEX. The team has since modified the scheme and will be allowing free transfer of the asset as a standard Ethereum token immediately after the sale. In my opinion, that property is crucial for crowdsale investors for liquidity and from the standpoint that it will enable 3P exchanges, crucially, to trade and set market prices for the asset. Without an independent market for PLU, it is difficult for users entering the system to assess the value of a fee-less payment and convert the asset into other cryptocurrencies.

While Plutons will be distributed to Ethereum wallets immediately after the conclusion of the sale (June 30th), there are no 3P markets yet available for the Pluton asset. Investors would need to use OTC trading, counterparty swap contracts, or make payments through the Plutus app in order to gain liquidity.

An experiment in “speculative capital”

(Full credit for the term “speculative capital” in the context of cryptoasset-backed systems goes to Ned Scott and the SteemIt team.)

In our context, my understanding of speculative capital is the idea that, given a blockchain-based economic system, business models may employ the expectation of capital flows furnished by the speculative market value of a cryptoasset. While sounding like a risky proposition given the typical volatility of cryptomarkets, speculative capital nevertheless provides an interesting dynamic for systems to essentially pull capital out of the universal fabric at a lowered risk. They must then hope that the economics of these speculative capital flows come to an equilibrium that is sustainable.

In Plutus, the company maintains revenue flows through transaction fees on fiat conversion. Beyond that, users are not charged fees on per-payment basis and traders are not charged fees on the PlutusDEX. In this scenario, actual tangible revenue is directly proportional to platform turnover: if $1M worth of Bitcoin is converted for payments on the platform in the first year, the company can claim at most 3% — or, $30,000 — in revenue. Given that turnover assumption, this revenue is quite low to begin with for a 9-person angel-funded team, though it must be noted the statistics on utilization of Bitcoin for payments are quite murky. Additionally, costs of processing PLU payments must be covered by Bitcoin and Ether conversion revenue, and so, much depends on the market capitalization and price dynamics of PLU.

Crowdsale investors should hope that PLU becomes a rare and highly sought asset, yet must find equilibrium with a healthy flow of PLU for payment purposes. Purchasing the relatively small supply and keeping it close to their chest can eventually result in PLU appreciation, but investors will need to worry that the platform is otherwise being utilized for Bitcoin and Ether payments. Poor platform turnover in PLU depreciates the speculative capital it provides. Yet, the value proposition of using PLU — that the user is waived fees during fiat conversion — only makes sense in a world of 3P markets with good PLU liquidity: otherwise, an onboarding user cannot measure the utility of a fee-less payment and cannot tell if the costs of conversion are actually hidden in the PlutusDEX market price.

Investors should look for multiple unknowns to come into equilibrium for Plutons to stand up as a worthwhile cryptoasset investment:

The crowdsale should have a healthy raise. At the moment, this is complicated by an exceptionally short and unusual sale horizon of 9 days. Will the Plutus marketing in the last months have been enough to create awareness? Moreover, in the aftermath of the DAO attacks, participants may be feeling conservative. Pluton owners should use the platform and ensure there is Pluton flow. Integrating PLU into 3P markets should be a highly prioritized short-term goal for the product team. Bitcoin and Ether turnover on the platform should be closely monitored. Early inefficiencies in the PlutusDEX platform may lead to skewed pricing for Bitcoin and Ether conversions, similar to LocalBitcoins. This is a boon for traders, but may be a deterrent for users.

Product opportunity

Overall, the Plutus platform creates an interesting value proposition for long-time Bitcoin owners. There is now a substantial constituency of people who hold vast Bitcoin resources and would welcome the opportunity to easily convert their wealth into products and services through convenient traditional means. For instance, at the end of 2015, Coinbase was quickly closing in on 3M users.

The Plutus platform has one potential competitor that I know of, ShakePay, which however focuses on Bitcoin tap and pay only.

According to the team, Plutus is also looking at the cross-border fiat conversion market. “Even though Plutus was designed primarily to be built for the Bitcoin user, there are several other use cases with a sizable impact, especially when one considers the growing numbers of remote freelancers and entrepreneurs around the world who receive cross border payments,” they told CoinFund on Reddit.

It remains to be seen whether an effective Pluton-based payment system can be built on its speculative capital, and the Bitcoin payment statistics we will be able to glean from platform usage will be invaluable data for the cryptocurrency world.

One final consideration should be the tax implications for using cryptocurrency for contactless payments. While in the US the IRS is being lobbied to simplify cryptocurrency treatment, current guidance will treat payments as capital gains events with a substantial accounting burden for users.

We are looking forward to following the Plutus product developments and wish the team the best of luck in their sale.