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.
