eToro Acquisition of Firmo Network

eToro acquires the ability to create and offer a wide variety of smart contract-based cryptoasset derivatives to their clients.

Consumer-focused investing platform, eToro, announced the acquisition of Copenhagen-based Firmo.

Target Description: Firmo Network offers software allowing smart contracts to be created (coded) and executed, regardless of underlying cryptoassets or blockchain utilized. The initial use case is to create and execute smart contract-based derivatives of cryptoassets. Firmo built a proprietary programming language, called FirmoLang, which Firmo claims enable the creation of more secure smart contracts than possible with other available languages such as Ethereum’s Solidity. The value proposition of FirmoLang is well articulated in their published technical paper.

Firmo was founded by Dr. Omri Ross in 2017 in Copenhagen Denmark and is comprised of an approximately 10 person team. We believe the primary competitors have taken an approach to offer purpose-built smart contract-based derivatives vs. offer the foundation language to create such smart contracts. These include groups such as Compound, MakerDAO, Dharma, Augur, dYdX, CDx, bZx and Daxia.

Buyer Description: Founded in 2007, eToro is an investment & trading platform focused on allowing individual investors to invest in a wide variety of financial instruments including equities, currencies, commodities and most recently selected cryptoassets. eToro also incorporates “social investing” features which allow sharing and copying of investment strategies and portfolios.

Historically, eToro has focused on non-U.S. investors (Europe, Asia and the Middle East, 140 countries) and has a claimed 10 million registered users. In March 2019, eToro launched in the U.S. with cryptoassets and intends to offer other non-crypto assets as soon as completing necessary U.S. regulatory licenses and approvals.

eToro has approximately 650 employees, is based in Israel and has raised $223mm in capital from nearly two dozen institutional investors. Early investors included Pitago (Chemi Peres), Cubit (Guy Gamzu) and Spark Capital (Santo Politi). Most recently eToro raised $150mm in early 2018 from China Minsheng Financial (Sing Wang).

eToro competes with other social trading platforms such as Naga Trader, Tradeo and ZuluTrade among others. As eToro has entered traditional equities markets they began competing with a wide range of traditional online brokerages (think Robinhood, E Trade and Ally Invest in the U.S. and Interactive Brokers and XTB in Europe) As eToro has embraced cryptoassets, Coinbase, Robinhood and Circle become relevant competitors.

Strategic Rationale: eToro began offering cryptoasset trading and investing capabilities in February 2017 outside the U.S. and recently entered the U.S. market. As the sophistication of cryptoasset investors increases, there is an increasing desire for more sophisticated financial instruments and trading strategies. These financial instruments include margin lending contracts, cryptoasset borrowing to allow short positions to be established and a wide variety of specialty derivatives to offer both hedging and speculation. These types of instruments are included in what is becoming referred to as part of the Decentralized Finance (DeFi) movement. A great primer of DeFi was recently published by Delphi Digital.

Simply put, Firmo promises to offer eToro the ability to create and offer a wide variety of smart contract-based cryptoasset derivatives to their clients.

Architect Partners Observations: We’re amazed by how quickly sophisticated financial instruments have been created using smart contracts to support the seemly insatiable appetite of cryptoasset investors. This transactions certainly falls into that category and we’re likely to see many similar efforts in the future by both crypto exchanges, crypto investment banks and investor platforms. We do however often ask ourselves whether the market is moving too fast, too quickly with speculative financial instruments vs. more fundamental, non-investor use cases for DLT and crypto assets. Time will tell…