Discussion Regarding AGP - Aragon Acquisition of DOTs

agp
#1

This is a discussion thread on the possibility for Aragon to diversify some of its holdings by acquiring DOTs.

Polkadot is a heterogenous messaging protocol and transaction ledger and the principal project under the Web3 Foundation’s stewardship project. It allows independent blockchains to exchange information and trust-free transactions. Notably, it aims at tackling scaling and interoperability challenges currently faced by public blockchains with a new approach to blockchain architecture, deployment, validation and the use of on-chain governance.

With the launch of Polkadot’s mainnet approaching, the Web3 Foundation has been in conversation with the Aragon Association about Aragon being one of the first parachains and thusly taking a position in DOTs. Due to regulatory issues the token price cannot be disclosed publicly with precision, but the current contribution would be at a discount.

A range of important events have occurred over the last number of months that have strengthened the relationship and potential collaboration between Aragon and Polkadot:

  • As Polkadot moves towards launch, there is a strong possibility that Polkadot could support Aragon’s scalability plans and allows for interesting experimentation.
  • Further, the two projects represent a number of synergies as Aragon’s UX/UI could be an important tool for voting and communicating in the Polkadot ecosystem.
  • Aragon DAOs could be launched on Polkadot easily as the network will be optimized for such activity.
  • Should Aragon evaluate the potentiality of it’s own application-specific chain, it would be prudent to hold a number of DOTs such that a long term parachain slot could be locked up to support these endeavours.
  • As cryptocurrency markets have gone through significant volatility over the last several months, there is the recognition that diversification of the asset base, focusing on high quality crypto-assets that represent technically strong crypto-networks.

Thusly, it would be sensible to evaluate the possibility of a purchase of DOTs. Given the close collaboration between the projects and their respective teams, it would make sense for Aragon to have a position in DOTs to be able to stake as a parachain and diversify it’s portfolio.

We invite discussions and questions on this topic.

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Aragon Network Vote #2 Megathread
#2

Some questions that come to mind, that are not strictly related to this proposal but rather of this type of proposal:

  1. Should they be framed generally around approval to allocate some portion of the treasury towards a specific asset but leave the amount up to the discretion of the Association?
  2. Should they include specific amounts, time frames? What does including these things do from a logisitical/tactical perspective
  3. For assets which are not actively traded on exchanges or which lack sufficient market depth for large purchases, is there an expectation around valuation which is relevant to the discussion of such proposals.

Personally lean towards have AGP proposals like this simply gauge sentiment in order to inform the decision of the association, and delegate the tactical treasury management to them.

Interested in hearing thoughts on this from everyone, though particularly @stefanobernardi

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#3

These are good questions to ask. I think framing the proposal as an approval of the general idea of buying DOTs makes sense. The proposal could be specific with timing and amounts, or could be more general. Something like:

ANT voters approve of the Aragon Association purchasing DOTs from the Web3 Foundation at rates and amounts subject to its best judgement

in the latter case, or

ANT voters approve of the Aragon Association spending no more than X% of the ETH held in the Association multisig to buy DOTs from the Web3 Foundation within Y months of this proposal being approved, at the best exchange rate available at the time of the trade

in the former case. Similar to the discussion in the budget and treasury stability threads, it may make the most sense to delegate decision-making about the specifics of the trades to the Association.

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#4

This is a bad and risky proposal. The problems are manifold.

"A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury" is a famous saying for a reason.

1st Issue

This is bad treasury management. Aragon’s Treasury is already highly allocated to a very risky asset, ETH. And it holds an evern riskier and less liquid asset in the form of ANT. There is very little “diversity” gained by adding a highly correlated and far riskier asset, which is also illiquid and unlaunched. This pushes Aragon’s treasury in a dangerous direction.

There’s an argument for Aragon’s treasury to be a mix of ETH and BTC, as the only digital assets that have real traction and are money so far.

Personally, I’d rather Aragon’s treasury be managed with a higher mix of USD & EUR, maybe gold (DGX) and maybe onchain synthetic equity market trackers, rather than its current mix. If the allocation to crypto mix is changing, I’d rather ETH and ANT be sold for BTC.

2nd Issue

Conditional on Aragon and ANT holders wanting to change the mix of crypto assets held by Aragon’s treasury, I would not rank DOTS highly.

DOTS are extremely highly risk, illiquid, and come at an aggressive entry valuation. The recent valuations I have seen people pay have ranged from 4-8x ICO price in value over a timespan since ICO in which BTC has fallen and ETH has fallen by 50%. The most important trait of of both treasury management and investment management is discipline and prudence. Paying a multiple of DOTS ICO price when everything else is lower for something unlaunched is not disciplined and not prudent.

DOTS also do not have the characteristics required to be money and extract the kind of premium that could justify risk adjusted valuations where they are. This is a separate an extensive conversation beyond the purview of this forum.

A quick list of digital assets I would prioritize over DOTS for Aragon’s Treasury: DGX, synthetic equity markets exposure, BTC, ATOMS, MKR, REP, XTZ, MANA some of which are more stable, some less risky and live, others less correlated and tied to different end markets and drivers. This is how one would build a portfolio of digital assets whose portfolio has some diversification. As one example, you can find online several breakdowns as to why ATOMS, a direct comp to DOTS are superior for instance and how Cosmos makes much less risky tradeoffs. Cosmos is also – importantly – actually live.

To be clear though, I don’t think Aragon’s treasury should be allocating into other risky illiquid venture bets because it’s imprudent, undisciplined treasury management. Also, fwiw no real world manager of treasury assets I know would see this as substantively “diversifying.”

3rd Issue

This is a bad deal for Aragon on just a valuation basis. The publicly floated valuation numbers for Polkadot recently were $1 billion but in reality recent participants have been buying in at $500 million (the prices vary based on what participants were able to negotiate and other factors). For the Web 3 Foundation, who have been aggressively selling DOTS to anyone who will buy them, to move DOTS to Aragon, they should be offering a substantial discount and this discount should have to be made public to ANT holders or it should be a non-starter. Aragon’s treasury has scare resources. At my day job we would say, this seems like an attempt to rip the face off Aragon’s treasury. It would invite many more. The fact that this sales pitch was brought up by someone who was a banker at a token hedge fund until recently should give ANT and Aragon decision makers pause.

4th Issue

It’s especially important for Aragon and ANT holders to establish a precedent of not just accepting market deals from token brokers like the Web3 Foundation/Polkadot because of the asymmetry between a centralized negotiator (Web3 Foundations a broker of DOTS) on one side and a decentralized but capturable negotiator on the other side (Aragon insiders and ANT holders like us). To just take offers that show up that are not substantially better than market will lead to many other bad token operations soliciting Aragon’s treasury for token sales like this. It will lead to adverse selection where Aragon token treasury management hinges just on which brokers think they can pick off Aragon’s treasury, not on what’s good in principle for Aragon’s treasury or good in general from an entry valuation/investment POV. At the very least, brokers should have to wow Aragon and ANT holders with discounts to get us to even pay attention, which would mean DOTS sold here at ICO price or lower.

5th Issue

This type of control of the purse opens up pretty huge agency issues and conflict of interest issues. Before making any financial allocation to extremely risky digital assets and blockchain projects beyond which Aragon’s treasury is already exposed to, I would hope that Aragon would have in place a process for insiders to declare their conflicts and recuse themselves from voting their ANT or participating in the direction of centrally controlled ANT or ETH for this purpose. Without such structure in place, on behalf of all ANT holders I’d want to know if any Aragon insiders have participated in recent DOTS rounds and to what extent and at what valuation. This is basic stuff because directing treasury allocations is so vulnerable to agency issues. These are core governance and transparency issues and the standard should be higher than what public and normal companies allow. In my normal company, when I am positions where my personal investments or interests overlap with work decisions I am restricted from participating (fwiw I am also restricting from participating in prospective investments that would cause ongoing agency issues/conflict of interest issues). Aragon should lead by example when it comes to transparency and reducing agency issues, even the optics of agency issues, because it’s core to Aragon’s brand and mission both.

Thanks for your attention.

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#5

Some interesting points regarding treasury management, not sure I agree with them all - hard to call it a “bad deal” without knowing more details.

Have you considered the other side of half of this proposal - that it is not just a treasury diversification proposal but also platform risk mitigation? I think this proposal offers a lot more value to the Aragon community than hedging to BTC or fiat, which don’t have much added value beyond a SoV.

DOTs are required for bonding your own parachains and participating in Polkadot governance, and once your parachain is live your users benefit from an environment optimized for their needs. I’d direct you here for more on what is being discussed regarding AragonChain (which would exist alongside the Ethereum Aragon Network which is launching later this year) here: Preparing for Polkadot

And also to Ryan Zurrer’s comments (Director at W3F): AGP-42: Keep Aragon Focused on Ethereum, not Polkadot

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#6

Thank you for your feedback and commentary.

Issue 1
There is the ability here to firm up the necessary capital to stake on the network in order to be a parachain, which gives the team more optionality going forward to experiment and develop AragonChain should they want to. This is about technical diversification as much as it is about token portfolio diversification.

Do note that DOTs have not shown correlation with ETH and BTC. As you yourself point out in your arguments above, the valuation ascribed to DOT tokens has increased over the last 18months while the others have gone down, thusly demonstrating negative correlation.

Issue 2
This appears to be a matter of opinion regarding Polkadot as a project. You are entitled to your opinion, however I would encourage you to read this excellent comparison of the projects. https://tokeneconomy.co/the-state-of-crypto-interoperability-explained-in-pictures-654cfe4cc167
You can also read more about Polkadot at wiki.polkadot.network and get acquainted with some of the compelling innovations that this network proposes. If you spend some time with us or diving into what Polkadot represents you may also get excited and want to get involved.

Issue 3
This again is a matter of opinion. Should Polkadot deliver on cross-chain messaging, pooled security, easy-to-deploy parachains/smart contracts with Substrate and Cumulus and a host of other innovations inherent, we are optimistic what the implications will mean for early supporters of the network. I believe the Aragon team is also optimistic on the potentiality of Polkadot and DOTs generally.

Issue 4
The Web3 Foundation is not a broker of DOTs. The contributor discussions between the two entities have implied a substantial discount versus current market signals.

Issue 5
This is similar to previous arguments. I would draw attention to the volatility of the current token holdings and resultant value over the last several months. However, it is important to highlight that this is as much about technical diversification as it is about diversifying the token holdings. Taking a position in DOTs now allows AragonChain to be a parachain very early on in the network’s history. That could be strategically advantageous for Aragon.

Best

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#7

“Personally lean towards have AGP proposals like this simply gauge sentiment in order to inform the decision of the association, and delegate the tactical treasury management to them.”

This is an excellent point. As an ANT holder I have a high level of confidence in the Aragon One team and Aragon Association team who are the most dialled into the project and its direction. If they are supportive of a measure like this, then I am likely to be confident that they have negotiated an appropriate deal and we should let them do their jobs.

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#8

Sorry I haven’t been active on here in a few months, but this proposal seems truly insane. As a project with active users and running code, Aragon has far more to offer Polkadot than the other way around.

If Polkadot wants Aragon to bring users to their hypothetical platform, they should grant the necessary tokens, and enough fiat to cover any tax liabilities incurred as a result of the grant.

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#9

Aragon will be subject to multiple grants. Don’t worry about that. But that is independent of this proposal. Nonetheless, we love this team and there are so many synergies between the projects. Numerous opportunities to create value exist here between the two platforms.

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#10

So Aragon will be all set with enough tokens to try out Polkadot if they want then?

Not that it’s relevant, but there exist many blockchain 3.0 scalability projects, some already in production, which do not require a large purchase of tokens just to try out their platform.

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#11

As far as I understand, the primary intention of this AGP is to hedge the treasury. If that is the case, then I consider that this AGP makes sense.

If the intention of the AGP is for Aragon to build on Polkadot, then I agree that Polkadot should grant free tokens to the Aragon Network for that reason. I’m new to the community but I haven’t seen much awareness around Polkadot, while there is a lot round Aragon.

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#12

Can you expand on the other multiple grants? As an ANT token holder, I would like to have more clarity on all the ways that Polkadot aims to help Aragon.

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#13

I remember @ameensol mentioned that SpankChain and Connext, when they decided to work more closely, have exchanged tokens/equity in order to align their incentives.

Hence I’m wondering, would we buy those DOT with ANT or with DAI/ETH? I think if they would consider accepting ANT, it would show their real interest in the success of the project.

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#14

That’s true, but in the other hand I don’t think the Network or the AA would choose to sell ANT at this stage, because of how extremely undervalued the asset is

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#15

Excellent point that hadn’t crossed my mind. I just wouldn’t completely discard this option as the dynamic it creates is quite healthy imho. Maybe using the ICO price of both tokens for the exchange would be a fair deal for instance.

To be clear, I don’t know what is best, only meant as food for thought.

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#16

I wonder how realistic that is, since ANT is trading lower than ICO price, and DOTs seem to have a way higher valuation.

We all concord that ANT is immensely undervalued, however the market doesn’t seem to react.

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#17

Thanks for your proposal Ryan. It’s fun to play this out transparently so we can all learn from the process.

SpankChain was offered DOTs at a rate of $109/DOT by Ryan Zurrer with a 20% discount made available, which Ryan told me was the same discount given to Aragon. I’ll admit to being somewhat confused about why the discretion around the price is necessary. The two best reasons I can think of are:

  1. The discount for Aragon is actually larger than that, and he doesn’t want to show favoritism towards this project and upset other projects he didn’t give the same discounts to.

  2. The valuation of the most recent round ($60M at $1.2B) has been lowered because of non-participation and he would prefer not to disclose that for fear of triggering a spiral.

It could also be some combination of the two. I heard from a credible source yesterday that due to massive amounts of OTC selling from round 1 ICO investors, only $6M of the planned $60M was raised. If this is the case, it is material to this decision, because it would mean that the fair price would be at a lower valuation than what Ryan is trying to sell DOTs at, and that Aragon would be overpaying through this proposal. It’s hard to say without any transparency.

I declined to purchase DOTs from Ryan because I found a better offer on the OTC market. I felt that it was my fiduciary responsibility to the SpankChain community to get the best possible deal for my constituency. Instead of paying ~$90/DOT I paid ~$65/DOT. The OTC price has actually declined since then, and I know there are $1.5M worth of DOTs available at a price of $60/DOT. I would be happy to make the connection.

If it is actually the case (and I urge Aragon to investigate and Ryan to be forthright) that the latest Polkadot round was largely a flop, I will admit to being somewhat less confident in the prospect of the value appreciation of my DOTs in the near-term. If Aragon believes differently, I would be open to selling up to 50% of my DOTs (~1500 DOTs) to them at $70/DOT.

I believe that if Aragon is committed to purchasing DOTs, they should only do so if they also strive to get the best possible price for the DOTs they are buying. And so if community members wish to approve this proposal, they should demand that Aragon make the price public, so the community can verify that Aragon did in fact receive the best price.

That said, I agree with the sentiment that Polkadot needs Aragon to legitimize its platform far more than Aragon needs Polkadot, and would encourage community members to vote against this proposal. If Polkadot loves Aragon as much as Ryan claims, Aragon should be receiving free DOTs.

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#18

How many ANT you got @ameensol? Just trying to get a full picture of your perspective on this matter. I don’t mind you not answering for privacy reasons, but I wanted to ask.

Edit: to be clear, I’m particularly trying to understand if you are here to defend your position on Ethereum, on Aragon, or on both.

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#19

First, I can say your report above regarding the DOT sale proceeds is absolutely not the case. :smiley: Fundraising efforts have been quite successful. As you know, we’ve seen a massive uptick of interest in DOTs as of late. Even before this intense inflow, there has been a substantial number of parties that have purchased DOTs. I’m very optimistic about moving forward and these additional funds will support our accelerated research, grants and community outreach.

OTC markets are very tricky. Note that buyers and sellers share massive private key risk on these OTC markets. You would have to know and trust your seller implicitly. W3F has not authorized nor plans to authorize any commercial transfers of SAFTs. Additionally, the SAFT contract expressly forbids resale. I’ve seen many investors look at OTC deals than walk away because of private key risk.

You very well know that OTC pricing has not gone down in the last month since you did your deal. Interest in Polkadot is up substantially and we all know that. :smiley: Further, crypto markets are up across asset classes. This is further evidenced by the fact that your offer to Aragon above is higher than your purchase less than a month ago. So the allegation that OTC pricing dropped is unsupported.:+1::wink:

The Aragon team are great and we did the work to make a deal that works. I can’t disclose the terms. Again, the nature of this AGP is the community is voting that they trust the Aragon Association management has obtained the best possible deal here. For example, in corporate governance, shareholders usually aren’t privy to the details of a single acquisition. The board handles that with the executive management.

While I respect your opinion, it’s clearly not the case that Polkadot needs this investment for legitimacy. Neither project needs the other for legitimacy at this juncture. I expect the two projects to work together on a variety of items independent of this AGP and will win together. Both Polkadot and Aragon are very legitimate in their own right and I am bullish on the success of both independent of this AGP. I believe that deep down you are too.

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#20

Effectively agreeing to an OTC trade of private keys would subject yourself to the possibility that the person/s has already copied that private key thousands of times and has a bot running for genesis launch no? Or even worse someone’s penthouse girlfriend took a pic the prior owners key and has a friend who is great with computers. Especially since DOTs are untransferable before genesis.

Seems like a very very risky deal to engage in this kind of behavior to me! Wow a violation of the SAFT contract even, classy. No wonder people are trying to swindle others in OTC trades.

Seems I gotta quote biggie on this one

“Rule Number 3, never trust no-bo-dy
Your moms’ll set that ass up, properly gassed up
Hoodied and masked up, shit, for that fast buck
She be laying in the bushes to light that ass up”

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