Disclaimer: This post is based on outside-in research and might contain unintentional errors and inaccuracies. It is certainly not investment advice.
Disclosures: I’m not affiliated with Dash in any way, and I’m certainly not a “Dash OG”. I might still have a few Dash somewhere, but they would not represent a material portion of my net worth. Lastly, nobody paid me for this post, and all opinions are my own.
TL;DR?!
The goal of this article is to challenge opinions on social media suggesting that Dash is in an existential cash flow crisis. Dash is a DAO structure and uses block rewards to provide a recurring stream of income to the company maintaining the project. If the Dash price — and thus the USD value of block rewards — indeed keeps falling, the company would still have the option to restructure operating expenses and to tap into alternative sources of funding. Nevertheless, the current situation still highlights the importance of treasury management for cryptoasset projects.
What is the story?
After Dash has fallen ~90% from its December 2017 all-time-high (ATH) of >$1,600/Dash, the stability of the whole project is challenged openly.
Users on social media have claimed that the Dash project is about to run out of cash. A recent Dash community proposal is quoted, which criticizes Dash’s monthly cash burn rate and requests the demotion of Dash Core Group CEO Ryan Taylor to an advisory role. In the proposal, Ryan is alleged of irresponsible growth and failure to execute. This article does not directly assess these claims. A large majority of the Dash masternode operators, however, rejected the proposal.
Background: How does Dash actually work?
Dash (formerly known as Darkcoin and XCoin) was started in January 2014, long before $4B ICOs became a thing. Unlike many other projects, Dash has been shipping functioning code for several years now. Dash is mineable, but only 45% of the block rewards go to miners. Another 45% is paid to masternode operators, who — every month — allocate up the remaining 10% to funding proposals. Unallocated coins, if any, are burned.
A company called “Dash Core Group” (“Core”) is responsible for the continued development of Dash. Core currently has ~70 employees, up from ~50 in November 2017. Just like other entities in the Dash ecosystem, Core submits funding proposals every month and uses the raised funds to pay for its operations. Core currently has no other material sources of income.
What are signs that Dash might be in trouble?
Core has high operating expenses relative to the current USD value of block rewards. The company submitted 3 proposals totaling $935k during the September funding cycle. The current monthly block reward available to fund proposals is ~6.2k Dash. Using recent price levels from August 26th (~$140/Dash), this translates to ~$865k — which is 8% less than what Core requested.
The first of the 3 proposals ($600k) covers compensation/benefits and includes $148k as a buffer for future payroll periods. This implies $77k annual pay per head. The second proposal ($210k) is for taxes. Core’s estimated tax liability for 2018 is ~$32k/month. Thus, the proposal covers >6 months. (Taxes mostly arise when Core receives more block rewards than what is spent.) The third proposal ($125k) funds legal services, such as seeking a no-action letter from the SEC, (ideally) confirming that Dash is not a security. Dash has several other expenses, which are paid from accounts already funded in previous cycles.
The income statement for the first half of 2018 shows that Core has been running at an average monthly loss of >$600k before and ~$1.5M after FX-related and miscellaneous expenses. During Q1, Dash dropped from ~$1,100 to ~$300 per coin. The incremental drop in Q2 was far less violent, with Dash closing around $235 on June 30th. This is reflected in the much lower FX losses in Q2.
Besides, there are several non-Core projects with funding needs, some of which actively drive Dash adoption in target markets (e.g., Venezuela) and are critical for ecosystem and valuation growth. Core’s ambition is to use only <6% of block rewards, leaving >4% for other projects. This has clearly turned into a challenge now, given the data points presented above.
So, why would Dash not run out of cash then?
As described previously, Dash’s treasury model is based on a block reward, which basically makes Dash a self-replenishing DAO. For Dash to “run out of money”, a number of conditions would need to hold:
- (A) Dash price drops to and stays at a point where non-discretionary expenses can no longer be covered by the block rewards.
- (B) There are no emergency funding sources available — not even temporarily.
- (C) Core’s cost structure can’t be optimized— not even temporarily.
Were currently seeing the opposite of (A), with Dash prices up >40% over 2 days (~$200 as of August 28th). Assuming a non-discretionary burn rate of $650k/month, the Dash price would almost have to drop to $100 (-50%) to potentially trigger serious consequences. (Please note that this scenario is possible, considering that Dash was already down >90% this year, before rebounding somewhat while this post was written.)
Regarding (B), alternative funding sources, we know that Dash had $1.2M of cash assets at the end of June, spread across multiple balance sheet accounts (see above). A recent proposal will allow Core to reallocate funds as required, e.g., to use marketing budget for higher priority purposes. If, however, all accounts have already been depleted throughout Q3, it is conceivable that masternode operators would donate some of their 45% block reward to save the network, given their investment. A collateral of 1k Dash (currently $200k) is required to operate one masternode.
Dash existed long before the 10% of monthly block rewards were worth millions of USD. Much of Core’s spend is discretionary, making (C), inability to rationalize cost, unlikely. For example, advertising, promotions, and travel represented ~51% of Core’s operating expenses in the first half of 2018. As a management consulting veteran, CEO Ryan Taylor has likely encountered similar situations before.
What are the key takeaways?
In a hyper-volatile space like “crypto”, treasury management is key for projects. A >90% token depreciation should not exclusively be seen as a highly unlikely Black Swan type of event. Projects should maintain fiat buffers generous enough to cover expenses for 6+ months, or at least have a rigorous and tested stop-loss policy. Core’s massive FX-related losses suggest that these considerations were not fully embraced by management.
Besides, Dash highlights specific risks faced by projects that are partially funded by block rewards. Coins can only be converted to fiat after they’ve been mined and distributed. This creates uncertainty around the USD value of funding available in future cycles. Besides, as coin prices typically change between the submission of a funding request and its payout, underpayment can happen. Thus, other hedging strategies should be explored by projects, such as futures-like instruments (if available).
This analysis did not evaluate how many block rewards Core and non-Core efforts collected in recent years, what their USD value was at the time, and how these funds were allocated. However, there’s a great article that addresses this and other questions, and explores the Dash treasury in much more detail.
