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PIPE Dreams

Our team has started to take a closer look at a number of assets whose market caps have been decimated since the ICO boom of 2017. There are some projects that are well-funded and have good operational traction, with tokens trading at Seed or Series A valuations (≤$15m).

https://messari.io/onchainfx/view/E8C0BEEA

The unfortunate thing about most of these assets at first glance is that their trading volumes are far too thin for any professional investor or fund to take a sizable position.

Yet many are shipping real code and pushing valuable new tools to the market. Their tokens just don’t (yet) seem to capture much value. (For reference, take a look at Spankchain’s work with state channels or Gnosis’s efforts with dxDAO.) If you’re a fund, deploying real capital, how can you make a bet on one of these projects?

One way is through a public investment into a team’s token treasury. We saw this with Maker and a16z in the fall, and in an earlier raise in late 2017. Earlier today, Numerai announced it completed a secondary sale of its tokens for $11m to a group of investors led by Paradigm & Placeholder Capital.

In the equity market, this type of transaction is known as a Private Investment in Public Equity (PIPE). These are quite common. Traditionally, this takes place when a fund purchases a block of assets (usually equity) at a flat price discounted to current market value.

We expect more projects that are holding significant treasury balances of their own tokens (and some who may have mismanaged their ETH/BTC reserves) to begin putting feelers out to crypto venture & hedge funds they feel will support them for the long-term. Like bear cycles in other capital markets, teams will get creative in how they maintain funding, and keep operations humming. Many are positioned to sell a chunk of their proprietary tokens at a discount to market.

In a discussion this morning, Arjun Balaji noted that fund investments in low volume tokens might skew ecosystems to such a degree that it hurts future network functionality. Too much token concentration would be a concern with any “decentralized network” if the primary holders lacked proper incentive alignment.

In this specific case, I would agree with Dan Zuller who said he “views [public token investments] as a positive for the near / medium term, that [creates] a stronger investor base that will likely monetize to the right users as time goes on and these networks are larger and more robust.”

The incentives of the project, the investors, and the ecosystem more broadly can also be better aligned via some financial engineering.

If a project wanted to ensure, for instance, that investors are long-term participants in the ecosystem, they could tie the investments to vesting schedules that prohibit funds from dumping on the market prior to a defined lock-up period. If projects wanted to ensure investors didn’t exert excessive control on the network based on their ownership levels, the token sellers could include buy-back options.

Sophisticated investors may find there are a number of gems to be found in some of the smaller projects in the industry. And there’s certainly something enticing about tokens that have been used, traded, and actually work despite the current bear cycle.

Numerai CEO, Richard Craib, put it best:

“They’re now doubling down and helping us when crypto fundraising has kind of dried up. It’s really a bloodbath. I think this is a great time to be a real project, but there are only a handful of real ones.”

Here’s to more “real projects” shoring up their long-term funding in Q2.

- Ben

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Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

⚠️ [Analysis] Bitcoin vs. Bitcoin Cash: Coexistence or Downfall of Bitcoin Cash? - Yujin Kwon, et al.

Fickle mining refers to the scenario when crypto miners are motivated exclusively by profit, and alternate between tokens with compatible consensus algorithms (e.g. Proof of Work) depending on the profitability of a given asset. This behavior became common among bitcoin miners after the Aug. 2017 hard fork that created Bitcoin Cash ($BCH). Fickle mining between two nominally competing tokens can be studied game theoretically to understand potential centralization concerns and security weaknesses. A token can intentionally weaken the security (via centralization) of a competing token by lowering its own difficulty and stealing miner share. (share or read more)

💔 [Analysis] The Broken EIP Security Incentive - Dean Eigenmann

Following the Constantinople fork, security researcher Dean Eigenmann breaks down the misaligned incentives in protocol auditing and bug reporting. The bulk of any social and economic gains to be had from disclosing protocol flaws isn’t present during early phases of development when finding and patching flaws is most opportune. Instead researchers and communities are incentivized to wait as long as possible before testing rigorously. Usually when a network launch is on the horizon or considerable social attention has accrued. To fix this, Dean suggests introducing an exponential decay on the bounties offered to make early discovery and disclosure more profitable. (share or read more)

Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

🤔 According to Reddit user enriquejr99, the Binance rest API documentation points toward the possible launch of margin trading on the exchange. The user speculates the newest API update code could implement margin trading on the 482 trading pairs in addition to the spot trading available. (share or read more)

🚀 SeriesOne, a crowd-funding patform, and Polymath ($POLY), a securities token protocol platform, are joining forces to launch a digital securities ecosystem. Using Polymath's token protocol creator, developers can launch, manage, and exchange their tokens on a secondary site. (share or read more)

Startup Signals (ICOs, Cryptos, and Startups)

✅ Twitter and Square CEO Jack Dorsey has announced the hiring of 3-4 crypto engineers and one designer for an open source, independent initiative, Square Crypto. Dorsey is looking for freelance Bitcoin ($BTC) Core developers to be paid full time for their inputs into the space. (share or read more)

👀 Since its beta launch in January, BlockFi has received $35 million in crypto for its interest-yielding deposit accounts. Most of the crypto deposits are loaned out at variable rates to institutions, a challenging task when digital asset price fluctuations are taken into account. (share or read more)

The Powers That Be (Legal/Reg/Policy)

📜 Switzerland's legislative body passed a motion to have the Swiss executive body approve cryptocurrency specific regulation. The regulations apply to 'gaps' in current law that could spur illicit activity. (share or read more)

👓 Seven official comments on the proposed VanEck-SolidX Bitcoin ($BTC) exchange traded fund (ETF) turned up mostly negative, asking the SEC to turn down approval for the fund. Of the seven recent comments, five were negative, one positive, and one standing somewhere in the middle. (share or read more)

Did I miss something?

Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).

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