Ethorse Analysis(Bull)
Macro
Upon Ethorse developing a UX friendly and efficient betting platform, it has the potential to attract large amounts of capital as it provides a marketplace to hedge, ‘go short’, and trade ‘quasi crypto options’, which are better suited for the space. Moreover, the protocol will allow for the betting on alt-coins that provide minimal liquidity, and are beyond highly speculative. The tenure of the space shows that participants have a stomach for volatility and speculation, and this platform provides the perfect arena.
Summary
Ethorse is a decentralized protocol built on top of the Ethereum network, and allows users to bet on token price swings within the crypto market. Ethorse users place bets using ETH, and chose a specific token to have the highest % gain against a group of other tokens(realized over a time period). Ethorse utilizes a Parimutuel Betting system, in which all of the same bets are group together(i.e. DASH will have the highest % gain over LTC, BTC, TIX within a 72 hour period). The protocol uses ‘Oraclize’ to fetch prices from exchanges, and in their beta prices were pulled from the coinmarketcap’s API. Ethorse is aware of the potential price manipulation innate in relying on a centralized “database”, and notes the use of multiple exchanges in the future.
“for this purpose, the prices fetched from multiple exchanges will be aggregated instead of using one source”.
Ethorse will take into account trading volume, and the time in which it pulls in prices will be randomized . Payoff odds are shared by all participants of the winning bet, and it is truly a winner take all betting system . Utilizing the ‘blockchain’ all placed bets and payoff odds are seen in an open ledger, and Ethorse believes it will function as a hedging and ‘short sell’ tool for some participants.
Inherent to a decentralized betting system, users do not need to sign up or deposit funds with a centralized entity and the protocol will use Ethereum Smart Contracts to both hold and release funds(i.e. no honeypot, or centralized control within Ethorse, a trustless p2p betting system). For their beta test Ethorse only included their ‘Win’ bet type, in which users select a single token to have the highest % gain. Within their full fledged platform they hope to have multiple bet types(Win, Place, Show) over numerous time periods(24 hours, 72 hours, etc.). Users have 30 days to claim their winnings, and if they don’t claim the funds they are released to the Ethorse Bankroll.
Utility or Security Token
Noted above, bets are placed using ETH, and winnings are denominated in ETH. As such, what is the value of Ethorse’s native token, HORSE, and does it have the potential to be valued? One would hope that HORSE is not distinguished as a utility token, as it is difficult to justify, given that bets can be placed and received in ETH.
HORSE is a security token, specifically a dividend token, as they state.
“HORSE token holders will earn all of the profits generated by Ethorse directly in the form of ETH. Ethorse profits are generated from the takeout, a small cut taken from the betting pool of all races before paying out the winner”.
The current takeout rate is 5%, compared to a 15–25% takeout rate in typical horse betting rings. HORSE holders will receive this dividend in ETH at the end of each quarter, and it will be proportionate to the % of HORSE held.
“For example, a wallet holding 10% of the total HORSE token supply will receive 10% of all the profits generated by Ethorse”.
Under the Howey Test, Understanding Token Types, the HORSE token would fall under the classification of a security, simply because there is an expectation of profit as a HORSE token holder. As noted in the quote from the white paper, there is no debate over this categorization. While all investors in Ethorse should be aware that they are investing in a security token, the regulation of the token is a different story. In the United States Ethorse should be registered with the SEC and subject to certain regulatory filings and disclosures, this fact creates an immense amount of uncertainty and is beyond the scope of this analysis(the Ethorse team blocked all IP addresses from the USA and China from participating in the crowdsale).
“you should not participate in the crowdsale if you are a resident or citizen of the United States of America, including Puerto Rico, Virgin Islands(U.S.) and any other U.S. possession, Singapore, Hong Kong, People Republic of China, or any other jurisdiction in which it is not permissible to participate in token crowd contributions or acting on behalf of any of them”.
Specific Use Cases
Holders of HORSE will receive 5% of the takeout, and the value of HORSE is directly correlated to the total bet amount. A wallet holding 2% of the total HORSE supply, will receive 2% of the profits generated by the protocol(Ethorse takes 5%). The total bet amount will likely reflect the number of coins to bet on, and the types of bets allowed. Ethorse has yet to expand on the ‘types of bets’ aspect, however, as an open source project driven by the power of the network, the ‘types of bets’ will grow to sustain the appetite of its users. In the future using HORSE tokens to bet, will allow the user to both unlock advanced features, and enjoy a smaller takeout. Additionally, HORSE token holders will be able to vote on takeout rates, game rules, and features. These benefits provided in holding HORSE are significant, as the success of a trading/betting platform is often dependent on its fees(often a race to the bottom), efficiency(i.e. spreads), and security. All of these features will be voted upon by token holders, and there inlies part of the value for HORSE holders.
Believing that a centralized Ethorse would best serve the needs and wants of their participants is false. Putting full faith that a centralized Ethorse will develop to attract traditional gamblers, retail investors, and institutional investors is unrealistic, as each participant is highly differentiated. The protocol has solved the problem above, and has mitigated centralization risk through a decentralized protocol. Moreover, while a decentralized network will be created, where no one entity has majority control and oversight, future problems will occur and the network will change(if successful) to accommodate all of their participants. While that can be a bullish argument for all native tokens, through the lense of traditional markets it is realized that trading desks and betting markets are cut throat, inefficient/dishonest participants have minimal chance in succeeding. Additionally, honest and ‘successful’ participants often compete solely off price(fees).
Assuming that traditional trading and betting markets are fierce and ‘overly competitive’, directly precursors the value of HORSE, and to a degree any decentralized exchange(DEX). When betting on cryptos within the platform, the only crypto you need to hold is ETH, as you can place and realize gains with the currency. However, I believe that many participants will hold HORSE because of the enhanced importance on governance, protocol changes, and fees within this market architecture(trading and betting).
Short selling cryptos is difficult, as the marketplace has not fully formed, and when selling short the risk of ‘infinite’ losses is possible. Option contracts are currently available for BTC, however, the contract’s price is correlated to the underlying assets volatility(implied volatility), thus options for BTC are very expensive. Even as the marketplace matures and an options market is made for a large number of cryptos, the greatest use of an option contract may lie within the emerging alt-coin space(where volatility is even greater). While an options market may form for the top 100 or so cryptos’(based on market cap), an ICO 2 months post-sale will not have an options markets made for it, herein the value for Ethorse.
In a scenario where the “herd” enters the space, and the ICO sphere remains robust, larger institutional players who are interested in entering the alt-coin sphere will be deterred by illiquidity, and an overall lack of efficiency in alt-coins. While retail investors, and even the current institutional players(largest crypto-focused has around $250 million in AUM) have an appetite for ‘alts’, future players will be putting more capital at risk and will have tighter risk parameters. The traditional alt-coin market will not be sufficient for these players, and Ethorse provides the perfect derivatives arena for “the herd” to bet on speculative assets. These funds might be restricted in investing in ‘alts’ based on liquidity, worries over fraud(i.e. illicit activity), and may not even be able to directly invest in ICOs. While the current funds in the space(Polychain, Blocktower, Multicoin, Pantera) are purely crypto focused, future funds will not be, and will utilize some sort of mix(i.e. 15% cryptos, 85% equities long/short). Remember that bets are both made and settle in ETH, and holders of HORSE receive their ‘dividend’ payments in ETH.
A decentralized marketplace for the hedging and selling short of cryptos is needed, Ethorse has the prospect of being the perfect speculative home for the betting of illiquid, newly minted alt-coins. Lastly, as crypto attempts to disrupt traditional financial markets, who is to say a traditional options market is justified.
Anonymity of Development Team
The Ethorse team has decided to remain anonymous, and states within their white paper.
“the core team comprises of three members with experience in information security and blockchain development… the team prefers to be anonymous for the benefit of the project until there is a need”.
In an attempt to further ease concerns over their anonymity, the Ethorse team made a blog post summarizing their reasoning. The team believes the best measure of the quality of their work is seen through their Github activity, in which 243 commits have been made to the open source code repository. Each investor must weigh the pros and cons of their anonymity, as each has different criterium.
ICO
Ethorse conducted their phase-1 sale from January 11th to the 16th, and their hard cap was reached in 4 minutes(i.e. raised about $4 million). Ethorse has a crowdsale hard cap of 100 million, and a total fixed token supply of 125 million(i.e. deflationary). The founders will receive 18.75 million tokens(15%) vested over 2 years ,moreover, the tokens will be time-locked and released in trenches every 6 months. Additionally, 6.250 million tokens(5%) have been reserved for bounties. For more information regarding Ethorse, and updates within their ICO, it would be best to follow their social media accounts and online presence(Reddit,Medium, Telegram,Twitter,CoinMarketCap).
Conclusion
Ethorse is an easy to grasp, and understandable protocol. The current value of the HORSE token is entirely dependent on the size of bet pools, and the future variations of ‘bets’ that will be included. Furthermore, in believing a centralized Ethorse could neither fathom or justify trying to serve the needs of all of their participants(protocol changes, governance, fees), and assuming the future value of the token will not be sustained by the current 5% takeout fee. Long term value will be created by the constant changes to protocol(features, bet types), governance and fees, which will drive the price of HORSE as all participants are uniquely different. An understanding of the traditional trading and betting market, shows that all participants in Ethorse, and generally in DEXs, will want a say in the direction of the protocol as exchanges compete on a limited number of factors(factors now decided by network). Upon creating a UX friendly and secure platform, I am bullish on Ethorse.
Valuation
Valuing a token is difficult. In perspective, the parent company of Nadex Binary Options, IG Group, has a market cap of $2.9 billion. The ICE Exchange, parent company of the NYSE, has a market cap of $14 billion. The business structure of both ICE and IG are more complex, and are comprised of a variety of entities and segments, so a direct comparison is not valid. However, with the current market cap of Ethorse standing at less than $20 million there is room to grow. If the daily bet pool for the platform stands at 3,000 ETH(24 hr betting period), and remains close to that for a year period. The summation of HORSE holders would receive 54,570 ETH in that period( assuming a 5% bankroll). Importantly this does not take into account the governance, and protocol utility of the token which I believe will be its main catalyst. Putting a price target on a recent token launch is difficult, often it is binary(i.e. buy/sell), which translates into a speculative price action surge rather than a fundamental one(i.e. valuation ‘buy’). Lastly, speculation is important as it provides fiscal incentives for early adopters, and thus network effects take place.
ETH: 0x49515a8BFa4b489E557C0F207589072cd03D4007
