Welcome to Money Stuff 2.0 - The Block’s semi-weekly take on crypto markets, companies, and other stuff. The series will feature as part of our pro product offering set to release in late February. This issue of Money Stuff 2.0 is written by Matteo Leibowitz (@Teo_leibowitz).
What bear market?
Bear market? What bear market?
Polkadot, the highly-anticipated interoperable blockchain project led by Ethereum co-founder Gavin Wood, is seeking to raise up to $60 million from a second token sale at a fully-diluted market value of $1.2 billion, having raised an initial $144 million in October 2017. The DOT token serves three distinct purposes: governance over the network, operation, and bonding.
Despite having yet to launch, a fully-diluted market value of $1.2 billion would immediately catapult Polkadot to 13th place in network value rankings.
Polkadot’s latest raise sparks all kinds of questions.
First, who on earth is coming up with these ‘fair’ valuations? What valuation models are they using? Considering the industry has yet to come to consensus on valuation methodology (please, for the love of God, don’t mention MV=PQ !), I can only imagine the Polkadot team took the ‘comparatives’ route, loading up OnChainFX and deciding they warrant a place in the top 15.
Of course, a cunning observer will notice that the projects listed on OnChainFX are actually in production stage. You know, actually chaining blocks and all that jazz. Polkadot, by comparison, has yet to process a single transaction, let alone develop the necessary network effects and monetary premia of their peers.
Second, who on earth is buying DOT tokens at these valuations? What valuation models are they using? What methods are they using to determine the value of governing a protocol? How much upside do they expect to realize on a project that has reached unicorn status two quarters prior to launch?
Considering the vast majority of tokens are currently trading below initial listing price, would it not behoove projects that need DOTs to launch parachains to wait until secondary markets have had their say before scooping some up? Perhaps I’m completely out of touch: after all, Grin, which launched on January 16th, is currently trading at a Year 2050 network value of $10.4 billion. Did someone say ‘efficient market hypothesis’?
Third, who has access to this latest sale? By contrast to Proof of Work projects, Polkadot’s Proof of Stake model requires tokens to be distributed before launch in order for the consensus process to function. The press release notes:
“Beyond existing blockchain projects, development teams and active VC firms are also expected to participate in the upcoming token sale before a public distribution later in the year.”
Does this limited distribution threaten to centralize the project before launch? With the token serving the additional purpose of a voting mechanism, is it not of the utmost importance that distribution be as wide as feasibly possible? Do profit-seeking VC firms necessarily have Polkadot’s best interests in mind? What happens if existing blockchain projects and development teams decide to call it a day or are forced to shut down due to regulatory pressure?
Fourth, can we expect this latest fundraise to put an end to EIP-999, which seeks to recover the 514,000 Ether, the majority of which belongs to Polkadot, stuck in sister-company Parity’s multi-sig wallet? I, for one, certainly hope so.
And so, I return to my first set of questions: Bear market? What bear market? For this is anything but bear market behaviour. And that’s rather frightening, because if this current state of affairs isn’t a bear market then the worst is yet to come.
Kin(da) looks like a security to me…
Social-media startup Kik Interactive is planning to fight an expected enforcement action from the Securities and Exchange Commission (SEC) over their $100 million 2017 token offering, which spawned the confusingly-named ‘Kin’ token. According to CEO Ted Livingston, the legal battle could have broad ramifications for the crypto asset market.
My man, Ted Livingston, fighting the good fight. A ‘utility token’ martyr, perhaps? Saint Livingston certainly has a ring to it. And yet, a deeper dive reveals some slightly insidious details.
Let’s start with some context. Why did Kik feel the need to launch a platform-specific currency in the first place? According to a TechCrunch article from 2017:
“When asked if the unicorn-valued startup had trouble raising additional funding, he demurred but claimed that the ICO is an alternative form of exit.”
Indeed, before the ICO, Kik had already raised a modest $120.5 million across five separate fundraising rounds.
In case you’re struggling to read between the lines, let me spell it out for you: Kik was struggling to monetize and decided to take advantage of the ICO bubble, squeezing out $100 million in return for 10% of its token supply.
Now back to the action, where the SEC is accusing Kik of selling unregistered securities. Kik is pushing back, claiming their token represents a new kind of asset that shouldn’t be subject to the same rules as stock or bond offerings.
Why go to the trouble of battling the SEC, when Munchee, Airfox, and Paragon have all refunded investors as part of their remedial efforts to avoid greater civil penalties?
‘Matteo, can you not see that Kik is sticking their neck out for the wider industry, nobly taking on our regulatory overlords in order to set a precedent for future token sales?’ one might say.
Another person, like Ted Livingston himself, might say that ‘Kin is one cryptocurrency that truly is a currency’ and as a currency it cannot qualify as a security under the terms of the 1934 Securities Exchange Act.
Or yet another group, like Kin’s lawyers at Cooley, will argue that ‘Kik did not offer or promote Kin as a passive investment opportunity. Doing so would have doomed the project, which could only succeed if Kin purchasers used Kin as a medium of exchange’
My less-romantic guess? Kik has already spent that sweet sweet ICO money.
As for the whole ‘dooming the project’ nonsense — if, as Livingston alluded to, the Kik sale was set to serve as an alternative fundraising mechanism, surely the utility component is but an afterthought to the $100 million raise?
My favourite part of Kin’s Well’s Response?
“Kin exceeds Ether and Bitcoin in daily blockchain activity, demonstrating Kin’s wide acceptance and adoption. (See https://blocktivity.info/.) Indeed, of the over 2,000 tokens in circulation, Kin is ranked as having the fifth highest daily blockchain activity.”
The sheer chutzpah of citing an index that ranks TLOS (literally never heard of it) as the second most active token is actually incredibly impressive — snaps to Cooley. In all seriousness, this industry is in drastic need of standardized, un-gameable metrics: props to Nomics for leading the charge on that front.
Wait, what am I saying? The following is clearly the best part:
“The sale of Kin has resulted in no harm to Kin holders to date. If, however, the Commission were to bring an enforcement action, it may inhibit the Kin ecosystem reaching its full potential, ultimately harming each and every Kin holder.”
Oh yeah, those Kin holders?
I think they have seen enough harm, thank you. In fact, perversely enough, the forceful closure of the Kin currency might actually be to their material benefit, providing some much needed emotional closure and a Marie Kondo-inspired cleansing of their portfolios.
To be clear, from my unqualified perspective, not all ‘utility tokens’ should be deemed to be securities. Augur’s REP and MakerDAO’s MKR stand out as legitimate models, and I hope regulators will approach this topic with the sensitivity and precision that it deserves.
But one thing is for sure: if this battle is to be won, we need honest, legitimate soldiers to represent the industry, and it should be remarkably obvious that the Kik team does not check either of those boxes.
Other stuff happened:
Liqui (or should I say…’Illiqui’), a cryptocurrency exchange operating since 2016, is shutting down, citing a lack of liquidity. Users will have 30 days to withdraw their assets from the exchange.
Following in Venezuela’s footsteps, Iran is anticipated to announce a Hyperledger Fabric-based state-backed digital currency.
‘Privacy is the natural state of things.’ Monero lead maintainer, Riccardo Spagni, explains the fundamental importance of privacy to the audience at The Block’s Davos event.