Discussion Regarding AGP - Aragon Acquisition of DOTs

agp
#21

My work revolves around strategy, negotiations, and asset management. All of my 5 Issues listed above remain and are each independently important for consideration. Aragon should lead by example and create the seed for best practices, best transparency, and avoiding agency problems/COIs when it comes to these types of governance issues. What we make normative now, will reverberate for decades.

I thought Ryan’s answers inspired no faith as they were vague and imprecise and biased by his role as a token broker for the Web3 Foundation. He is literally the proposed counterparty, so that should be expected and he should not be taken at face value. In response to some of the replies, I want to be more clear on one line of analysis, how to get the lowest price for DOTS. If the acquisition of DOTS are to be pursued, I think Aragon insiders have an actual fiduciary duty and ANT holders have an obligation to get the lowest possible price for DOTS possible.

Market Color and Valuation Color on DOTS

I’ll be more clear and give perspective on pricing, which token brokers like the Web3 Foundation usually try and leave opaque so that they can take advantage of information asymmetries, create FOMO in back rooms, and get people to pay bad prices.
The most current round of DOTS sale to insiders has a sticker price of $110 / dot (I am going to use round numbers). This is the price that people paid who got their face ripped off. We can call this tier the “Sticker Price” tier, who were sold a bill of goods by the brokers of the Web 3 Foundation and this price was used to highlight the idea that DOTS were being sold at a $1.1B valuation. For people who don’t know, the supply is 10M DOTS, so valuation is 10M*$110 = $1.1B.

Many other people got discounts. There was a tier at $85. Call this the “Substantial Discount” tier. Spankchain apparently had an opportunity to be in that tier.

Still others who had brands and were famous or insiders got bigger discounts. These were people whose reputations or names could be used to sell DOTS. Let’s for strawman purposes put this tier at $75 and call it the “Hollywood” tier.

This is normal token broker activity. Opaque, asymmetric, it is what it is. I would suggest that anyone who was sold DOTS recently should trade color with people who took similar meetings because you’ll be surprised and get some laughs when you compare and contrast what stories you were told and what price others paid. I don’t know exactly how many DOTS were sold recently, I have heard various numbers, but let’s say, again for strawman purposes, 500,000 DOTS at an average price of $85. That is a $40M raise. As bad as those prices were for buyers, that’s excellent token brokering in a crypto winter.

  • $110/DOT = Sticker Price
  • $85/DOT = Substantial Discount Price
  • $75/DOT = Hollywood price
  • $55/DOT = today’s actual OTC price

Now DOTS are selling OTC at $55. It was $60 last week. So all those people above, the “Sticker” tier, the “Substantial Discount” tier, and the “Hollywood” tier are down while all of crypto is up about 30% over the last few months. That’s not a good sign at all and suggests that technical trading pressure on DOTS has a big overhang to it, of people looking to sell, or that all the recent round was too high.

This price information and that trading movement should be used to inform any analysis of what a “Good price” for DOTS should be and how much of a “substantial discount” to $55/DOT (the current market signal) that Aragon insiders and ANT holders would need before they could recommend allocating Aragon’s treasury into DOTS.

Aragon Has the Negotiating Leverage to get DOTS for Free.

Conditional on allocating treasury resources into more risky venture bets (which I think is inappropriate along several pure treasury management and asset management dimensions), what is the right price for Aragon or an entity in a similar bargaining position to pay for DOTS? The lowest amount possible. I would argue that price is “Free.” I think ANY project examining becoming a parachain should recognize the dominant negotiating leverage they have over Web3 Foundation and should use the following framework in negotiating to get given DOTS for free either now or in the future. On balance, Polkadot needs parachains more than prospective parachains need Polkadot for the next few years.

Aragon’s #1 Point of Leverage: Aragon as an early parachain adds more value to Polakdot than it takes.

Polkadot and DOTS are only as secure and valuable respectively as the parachains that plug into it, so it’s imperative for Polkadot to have used, valuable, and prominent parachains plug into 1 of their 100 permissioned slots. Without any parachains, Polkadot has no value at all. With all their 100 permissions slot filled, the leverage would shift to DOTS holders and Polkadot in terms of who is adding value vs taking value. FWIW I am pretty sure that almost no one involved in DOTS has thought through these equilibria or the cryptoeconomics, maybe when they do they will understand one of the reasons DOTS can’t be money and will have trouble ever having value. But again, that’s beyond the purview of the matter at hand.

On the margin, parachains are creating more value for Polkadot than they are taking and this likely is true at least for the first couple dozen chains. Well the Web3 Foundation’s director makes the case himself by highlighting that Aragon is one of the first parachains.

Aragon’s #2 Point of Leverage: Aragon’s name and reputation has been used by the token brokers of the Web3 Foundation to sell DOTS to 3rd parties.

In pitches, Aragon building on substrate and potentially becoming a parachain has been highlighted and used by token brokers to sell DOTS. Aragon is a highlighted example that has had great value in moving DOTS and validating/legitimizing Polkadot. 1.5M CHF in DOTS would equate to the token brokers of the Web3 Foundation achieving a 4% better price on the DOTS they sold because of Aragon. I would suggest that Aragon’s impact at moving DOTS in the last 3 months has been much higher than that. Look no further than the difference achieved in sales 3 months ago vs OTC price today, which reflect a lower more realistic level for DOTS.

Aragon’s #3 Point of Leverage: If Aragon were to pause its Polkadot efforts, it would be disatrous for Polkadot’s market perception and it would be neutral on Aragon’s market perception (arguably improve it to some ANT holders and for devs who think Polkadot’s security model is unproven and flawed)

This is basic negotiating strategy. If your counterpaty has more to lose than you, you leverage that. I am not saying that Aragon should pause its Polkadot efforts, but it should be willing to do so unless it gets DOTS because DOTS will be worth less and trade down depending on what Aragon does.

Aragon’s #4 Point of Leverage: Aragon has no strategic need to pre-buy DOTS it needs to operate as a parachain at some unknown point in the future.

Polkadot is unlaunched and when it will be launched and the extent to which it will be secure and be operable for Aragon’s purposes is unknowable. Most blockchain launches delay their launches, at times for years. Aragon’s treasury is well endowed and will easily be able to afford DOTS whenever DOTS are needed. There is no reason to pre-buy DOTs strategically. Indeed, if Polkadot’s launch is delayed or it launches at specs less than what has been promised (again this should be expected as a baseline because every single comparable project has launched late and less feature rich than promised), it’s likely that the price of DOTS in the future will be lower than the $55/DOT OTC price today.

The nebulous term “technical diversificiation” was used by Ryan Zurrer in his role as a token broker for Web3 Foundation. This term makes no sense in a treasury context or as to how allocate assets. Aragon achieves “technical diversification” by technical decisions that are separate and distinct from buying DOTS from token brokers today. This looks like an attempt to really blur the lines by a broker.

Aragon’s #5 Point of Leverage: Blockchain venture bets for unlaunched projects are incredibly risky and are not suitable for Aragon’s treasury. This unsuitably requires them to be free.

I think this point would lessen once Polkadot has actually launched and is actually being used by others and one can gauge its trade-offs, but it would likely still remain a highly risky venture bet, one that like most liquid crypto assets can reasonably be expected to be highly correlated with Aragon’s existing portfolio that is dominated by ETH and ANT. Any lack of correlation DOTS have exhibited to date is a largely a function of its current illiquidity. SAFTs and other illiquid digital assets have been less correlated to liquid crypto for the same reason (to be frank, a lot of comes down to irresponsible marking and fair value procedures by crypto hedge funds. I think Ryan is an ex-crypto hedge fund manager so he should understand this nuance well). I would not bet on a lack of correlation continuing once DOTS or any other illiquid asset/SAFT become liquid. To be frank, I expect almost all of them to trade poorly and down once they launch or go liquid for supply (technical overhang) reasons and expectations reasons.

Aragon’s #6 Point of Leverage: ANT Holders are pushing back against what’s been laid out by the token brokers at Web3 Foundation.

This post and my prior post are examples that can be pointed to as to problems ANT holders have with this “deal.” Things don’t happen in a vacuum.

What leverage do the tokens brokers of the Web3 Foundation have over Aragon and ANT holders in a negotiation on DOTS price?

In any negotiation, you want to weigh what leverage your counterparty has. The only thing I can see is that that DOTS are “scarce.” Given that DOTS are trading 50% below the most recent round prices and given that most holders are not strategic users of DOTS but just financial speculators and that DOTS inflation schedule is unknowable, I would not expect that DOTS being scarce either now or for the next several years will be an issue that would constrain anything that Aragon wants to do or to not do with Polkadot. I can’t even ballpark what they would hope to manage inflation to, unlike mature chains like ETH or BTC that are both money today. The scarcity of DOTS is poorly grounded.

TLDR: On balance, Aragon and any other high quality prospective parachain for the next few years has a dominant exploitable negotiating position to get DOTS for free or close to it.

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#22

I find @ameensol’s proposal to sell his DOTs to Aragon elegantly beautiful (better if he wanted to sell them all).

(1) No money is coercively moved from Aragon’s treasury (your money, ICO participant) to Polkadot’s war chest.
(2) Aragon gets more value for its money and can keep up w/ its diversi-plans.

In the end, (2) is the only thing that matters. This is all about Aragon. Aragon is all about transparence and inclusive governance.

It chills my spine to read stuff like:

“We’ve done the work to make a deal that works. I can’t disclose the terms” […]

Let’s NOT foster this kind of behaviour. What are you trying to make me vote into if you can’t disclose its terms? Can you at least refute what Ameen said ($109/DOT + 20% disc.)?

It’s perfectly fine to be against a risky OTC-type trade. But it’s incoherent to see less risk in a private, backdoor’d deal, where no voter is aware of the conditions. It’s even worse to try to mask that.

The Web3 Foundation is not a broker of DOTs. […] discussions between the two entities have implied a substantial discount versus current market signals.

So what you’re saying is “Yes, basically we’re acting as a broker of DOTs”.

That said, much respect for the work W3F’s been doing (technically and politically). There’s rotten apples in almost every basket, but I really want to see Polka flourish and Aragon take off.

This paragraph by @seeking (Discussion Regarding AGP - Aragon Acquisition of DOTs) perfectly resonates with me. It says it all:

“It’s especially important for Aragon and ANT holders to establish a precedent of not just accepting market deals from token brokers […] because of the asymmetry between a centralized negotiator […] and a decentralized but capturable negotiator […] (Aragon insiders and ANT holders like us)”.

We all know this is a plutocracy. Now is a rich learning opportunity. I wonder how hard is it ever going to be to transition to a quadratic-voting (or any power-flattening voting scheme) if this ever has to go through a 1-token-1-vote model AGP.

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#23

This is separate from my prior posts about my 5 Issues and about my 6 points of leverage as to why Aragon has the negotiating leverage to get DOTS for free. Those stand up independently. This is about confusing doublespeak and gaslighting that has no place in this space or in business in general. I think it’s worth highlighting to push back against making it normative.

Indicating that that one can’t opine on a deal without knowing the price as a response to someone specifically saying that no deal in which the price isn’t known is acceptable is some next level gaslighting. Creating opacity and using it as a cudgel against discussion in a space that is about decentralization and transparency and about breaking existing dysfunctional power structures is gross.

Saying a fundraising round is extremely successful, while DOTS trade 50% below the sticker price of that recent round is not reality based.

Ryan Zurrer: "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."

The sentence after saying plainly that the Web3 Foundation is not a “broker of DOTs”, the Web3 Foundation provides color around price in the sale of DOT tokens from Web3 Foundation to Aragon. That is literally brokering.

Worst, the following comment stands out. Ryan Zurrer is the counterparty to the proposed trade, the terms of which he is trying to hide from the public, and he is saying that he has full confidence that the terms that Aragon insiders negotiate with HIM will be good for Aragon. The line of thinking behind what he writes is antithetical to everything we’re doing here.

Ryan Zurrer: “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.”

I hope this is a wake up call about should be acceptable, about who to accept as a counterparty, and about how to conduct business in the blockchain space.

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#24

Will just cross-post Stefano from his clarification

As part of our diligence on the offer, we have asked multiple OTC desks (some of which we are clients of, and some of which we are not) to provide offers on secondaries from earlier rounds participants.

We have heard of mythical lower prices, but we have only found real offers with a price that is extremely close to that offered directly by the foundation.

All I have to say is that it is good to see that the general community sentiment is that Aragon needs to decouple its faith from Ethereum and hedge platform risk.

On the other hand, I’m very confident that the Aragon Association has negotiated an excellent deal price-wise.

That being said, I’d totally understand if some community members decide to reject the proposal based on the price not being public.

As you know, Aragon is all about transparency – and it feels really great to me to see all this oversight from the community, however the votes turn out to be.

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#25

@luis can you provide any objective data point (or more colour) on

“the general community sentiment is that Aragon needs to decouple its faith from Ethereum”?

I’m genuinely curious. I have met much more reactions on the other side (but I recognise being biased and echo-chamber’d).

In this thread alone, I count 2 yes-DOTs (Polka-ppl) and 6 “no-DOTS” (unrelated-ppl); plus 3 Aragon-ppl (plus 1 puppet).

Also, why don’t you even consider the possibility (or better, strive for it) that this price is made public? Doesn’t sound good when you condescendingly write that “maybe some reject this based on the price not being public” and on the next line write that

As you know, Aragon is all about transparency

Sorry if any of this comes out as harsh or offensive. Excited for the vote & outcome. Lots of respect.

1 Like

#26

I would certainly love for the price to be public, and believe me, we tried. Unfortunately, in the world of fundraising and legal agreements, things are not that easy.

We now have the difficult challenge of trying to make strategic treasury allocations, while still being in the open and subject to the upmost public scrutiny. It’s a hard position, and we are all doing our best.

Our goal was to negotiate a great deal on behalf of ANT holders and present it under a vote. What ANT holders do from now on is entirely on them. They either trust the AA and its negotiation skills, or they don’t, which I’m not judging at all. I’m sure ANT holders will do what’s right for them.

1 Like

#27

On that, I think that seeing the uncertainty surrounding Eth 2.0 and the path towards it from Eth 1.0, it makes sense to start thinking about a multi-chain world. Aragon is building something so important that it wouldn’t be smart to lock our future to a particular platform.

I just see Ethereum, Polkadot, etc. as developer tools, and as such, you can have multiple and switch them around at your convenience. For example, maybe Arachain DAOs are virtually free and faster, but Ethereum DAOs have access to more network effects because of all the ERC20 tokens, Maker, Uniswap etc. It’s all about tradeoffs, but if we lock ourselves down to a single platform, we cannot even make those tradeoffs in the first place.

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#28

I took this to mean the general idea of reducing platform risk for the project by pursuing scaling solutions (an aragon sidechain, cosmos sdk, substrate, substrate + polkadot, xdai, etc), rather than a comment about the sentiment specifically about purchasing or not purchasing DOTs.

1 Like

#29

As a long-term holder of ANT, this is the first time I have been compelled to speak up.

Whilst I do appreciate the benevolent intent and sentiment behind the posts, what I am seeing goes against the grain of what Aragon purports to stand for. I write down a lot of it to lack of experience in commercial negotiations and practical governance, however if we have this skills gap, it has to be addressed as soon as possible. “Fight for freedom” or for anything for that matter is impossible without the ability to think adversarially. Pragmatism or good governance is not what - sadly - I am observing this time. For the record, I am agnostic on the issue of DOTs potential purchase - it is the way it has been handled that raised an eyebrow. I care about what Aragon stands for, and this is why voter apathy was not strong enough this time to just walk on by.

Similarly to @seeking, whose posts I was heartened to read, I am very disappointed by what is potentially unravelling here. I have a similar background to @seeking, so my points won’t get lost on him/her. I encourage everybody in the community, but particularly the Founders and Stefano B due positions of influence to pay particularly close attention to @seeking’s analysis - it is professional, balanced, and on point. It may be hard to metabolise for somebody with no experience of financial markets, but all his points are well explained and I’m sure he will oblige if Aragon Association were to seek clarification on any of them.

“I would certainly love for the price to be public, and believe me, we tried. Unfortunately, in the world of fundraising and legal agreements, things are not that easy.”

@luis, with the greatest of respects, things are actually much easier than they seem. May I offer an explanation? What we have here is trivial compared to an average commercial transaction, and ways of dealing with such situations have long been established. Aragon Association and the Founders as de facto fiduciaries of Aragon are absolutely within their rights to request a Most Favoured Nation (MFN) clause from the W3F, and a one-page document confirming such an undertaking MFN can and should be disclosed to the Aragon community, if the intention is indeed to adhere to the high openness and transparency standards that Aragon has set for itself from the outset.

Below is the definition of MFN:

A contractual provision, also known as a most-favored-customer clause, prudent buyer clause, or non-discrimination clause, in which the seller promises the buyer that it will not offer another buyer better terms before offering those terms or better terms to the first buyer. Because of antitrust concerns this practice may be used in an anti-competitive manner, courts will examine these provisions closely using a rule of reason analysis. Courts will determine the enforceability of the MFN provision by balancing the pro-competitive benefits of the provision (such as cost savings for buyers that may be passed on to downstream buyers) against the anti-competitive harms (such as discouraging price cutting and potentially encouraging monopolies).

This is only one of the many tools available to the Aragon Association to be consistent with its goal of being an example of transparent community-oriented governance. This, in fact, is a perfect first use case for testing the robustness of Aragon Court and its principles. Offering to the Aragon community a “take it or leave it” scenario is inconsistent with self-proclaimed values and mission of Aragon, is patronising to the ANT holders and does not offer them any viable choice. More than that, it is factually incorrect to imply that all avenues to uphold transparent governance have been explored.

I am happy to offer practical alternatives, if they are welcome.

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#31

I’m wondering whether there is any chance that Aragon is getting the DOTs for free, and in return they have agreed to not disclose the price. Would be sort of ironic.

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#32

I’m personally very stimulated and torn apart by the debate surrounding this proposal.

I’ve been reluctant to join the discussion as I trust the Association to have brokered a deal with many sweeteners, perhaps so great that Web 3 is reluctant to have this shared publicly! :slight_smile:

However I do feel this is a good opportunity to share some thoughts we’ve been having with @cemfdagdelen about the proposal.

Ideally in this type of deal, Aragon would still buy the tokens to help Polkadot achieve its rounds target and have the investment be used as leverage in negotiations with other power brokers and financiers in the space.

Any ETH green lighted by the association to purchase DOTs should in such a case be for the greater part transferred to a DAO containing these chipped in funds along with a corresponding portion of the DOTs.
Such a DAO would confer governance rights to the Association, Web3, and other stakeholders (3rd party devs, contributors to the projects etc…)

The DAOs treasury would be used to coordinate and fund efforts that are mutually beneficial to both projects: Nests grantees, ETH 2.0 clients, Substrate and Arachain!

This would allow to kill several birds with one stone:

  • a test balloon for ETHDAO with a sizeable multi-stakeholder democracy of open-source development DAOs
  • fund polkadot while developing infrastructure that serves both protocols
  • diversify treasury while incentivising different teams to build
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#33

I thought it was established and explained that we do have indeed an MFN agreement on this.

Additionally, there is no “take it or leave it” situation.

Is the below not of help? If not, please do let me know which parts would need further clarification and I’d be happy to provide them.

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#34

I think if Aragon was willing to commit to developing and building a parachain on polkadot perhaps that could be used as leverage in a negotiation, but I don’t think that at this point it makes sense for the project to make any such commitment and I don’t think the AA is in the position to make such a commitment for the project within the scope of their negotiations.

As far as I understand things, the “Arachain” being built on polkadot is just a potential path towards scalability. One which warrants further research and exploration, but would be extremely risky to make a firm commitment on at this time. Polkadot hasn’t launched yet, and many technical details appear to still be being figured out, and so we can’t even do a full analysis of the technical and economic. I would be strongly against making a commitment like that even if it meant a substantial allocation of free DOTs for the project.

However, allocating a small portion of the projects treasury to DOTs at this point, without any commitments to build a parachain, and assuming the AA is able to negotiate a fair price, seems like a reasonably thing to consider. Polkadot is interesting tech and is exploring a different approach to addressing scalability than Eth2.0.

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#35

Arachain currently being built (i did not realize this) would be enormous leverage, if used correctly. Resources expended (time, labor, attention) is a powerful commitment, probably more powerful than a document of vague promises.

Unfortunately if the leverage is squandered by simultaneously negotiating co-buying discounts (as disclosed by Stefano) for the personal accounts of the negotiators, then of course Aragon, the project supposedly being represented in the negotiations, has no leverage at all. The other side of the table, understanding that the AA negotiators want to get their beaks wet at the currently offered discount, has absolutely no reason to present a better deal, because if the Polkadot negotiator walks away, the AA negotiators lose the personal account co-buying opportunity they want.

The formality of declaring/labeling the co-buying deal ‘independent’ from the aragon buying deal has no real impact of the game theory of the negotiation, especially considering that rzurrer, the seller, publicly bragged on twitter that he owns a “ton of ANT” and turnout is low on ANT ballots. The winner of the ballot may have been viewed as a foregone conclusion in polkadot’s mind.

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#36

The point I was making is that at this point the Arachain is not currently being built, it is very much in a casual research phase and simply an exploration of what might make sense in the future. It has not been funded by any previous AGP process and does not exist on the projects roadmap. Therefore, the notion that there is a strong commitment on behalf of Aragon to leverage Polkadot that could be used in negotiation is false.

1 Like

#37

interesting. i see what you meant. research/planning/exploration is an important and time-consuming part of building, and would be viewed as an ante in other negotiating contexts. In a broader view, the announcement at Aracon was a social commitment, that would give credence to the idea that Aragon is seriously considering building on Polkadot. My main point is that Aragon does have lots of leverage with polkadot.

I do agree that the with strings/without strings prices are different. (and have said so on the twitter-dot-com in the past).

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#38

Just adding this here. The OTC market is in fact booming in the last few days, despite the stated risks.

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#39

As both a sale holder of ANT and DOTs I think both projects are tarnishing their reputations from the manner of this acquisition.

While I agree Aragon needs to hedge platform risk. Polkadots continuing errant behaviour and untested platform ( fisherman unproven , possible plutocratic governance ) in my view does not warrant a paid acquisition by Aragon. It further makes the case for free acquisition as @seeking has elucidated.

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#40

Is there anywhere I can find a list of conflict of interests regarding the parties involved in this? For a deal/topic of this size I would expect to see any potential conflicts outlined clearly so that voters can make an informed decision.

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#41

@seeking Thank you for sharing your thoughts on this. (also thank you to @A.Zhang and many others on this thread). I’ve been trying to stay out of the discussion because I’ve already spent way too much time analyzing and critiquing the governance/token model of Polkadot as well as the recent actions by the W3F team.

This is beginning to get a bit ridiculous though. The entire discussion around DOTs, how it’s being brought up, and the process of selectively disclosing information feels wrong. I don’t like it, not one bit… At this point I’m too burnt out to articulate myself clearly, but you did a great job highlighting many important points so thank you for that :slight_smile:

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