Maker’s Not So Stable Governance
*Originally posted in The Daily Bit.
Yesterday, venture capital firm a16z purchased 6% of the total Maker (MKR) stablecoin supply for $15 million. It’s the latest investment disclosed by the fund since their sizable commitment to the Dfinity Foundation in late August. And with an initial runway of $300 million, more will follow.
On that note, the focus shouldn’t be on why a16z invested in Maker — it’s arguably one of the more promising algorithmic stablecoin projects in the market — but rather how the investment was made.
Meltem Demirors kicked off the conversation, explaining why she believes the sale is a display of poor governance and project management by Maker:
(If you haven’t read the full thread, carve out some time. As us millennials say, it is fire.)
Here’s the condensed argument: Maker’s team made the deal behind closed doors. Given that Maker token holders were expected to have a say in major decisions… that’s problematic.
And the deal is notable. Crunching the numbers, $15m at 6% implies a $250m valuation — a ~20% discount compared to Maker’s current mkt cap of ~$311m.
Which reminds us… market cap is a crummy valuation metric. Watch a couple minutes of Nic Carter’s talk at Honeybadger 2018 or rifle through his slide deckto see what we’re talking about.
Relatively speaking, discounts are nothing new
Venture capital firms and token discounts go together like white on rice. Sure, many kickbacks are outright criminal (advisors have reportedly received discounts of at least 900% for some projects), though there’s no denying that VCs bring a slew of resources to the table.
Not to mention that a16z’s investment is, by all definitions, a smart business play. Passing Meltem the mic once more, a16z is, in a sense, buying distressed companies on the cheap.
With so many ICOs strapped for cash due to 1) poor treasury management and 2) the falling price of ETH, who knows? Similar purchases could become a habitual thing for VCs.
Circling back — what about the voting?
The general consensus is that Maker holders should have been informed of the purchase. However, that’s one of the challenges of capital raises.
Consider this: If token holders were sent a memo explaining that a16z was obtaining discounted tokens for provisioning operating capital… *some* investors might’ve (accurately) viewed that as a distress signal, triggering a selloff and potentially exacerbating Maker’s fundraising needs.
So, while settling the situation in private goes against the tenets of Maker’s governance system, the foundation could’ve been looking out for the financial well being of the company. The question is whether or not that decision was rightfully theirs to make.
Other Reads
U.K. in sights of Gemini crew
Although they haven’t made an official commitment, one thing is certain: the Winklevoss twins are mulling a potential expansion to Great Britain. Gemini’s road to regulatory approval involves an application to the UK’s Financial Conduct Authority, which, if approved, would allow the company to open an exchange.
Contrary to its mild climate, the U.K. is a hotbed for cryptocurrency exchanges. Research from Morgan Stanley shows that north of 20 platforms are legally located in the country — the most in the world. For context, Hong Kong comes in second with ~15 exchanges.
Who’s already there: Fellow American, Brian Armstrong. The Coinbase CEO rowed across the pond this March after receiving an e-money license, which opened the floor for the provision of payment and e-money services to UK customer as well as citizens in 23 EU states.
#TweetCeption: Manipulation in crypto
Multiple strategies can be employed when analyzing markets. The burning question, of course, is deciding what signals to follow. An insightful tweet thread from @cryptorae on “trading by levels” triggered a conversation about manipulation and group behavior can be especially dangerous in crypto.
Following the sentiment has its drawbacks
As @DoveyWan explains, group behavior is never information complete. And in manipulated markets, incomplete info shears sheep. That’s especially true when using technical analysis for short-term trades, and even fundamentals like blockchain transactions, which can be fudged by firing out spam.
CZ @ Binance proposed that the phrase “manipulation” is a more appropriate label for all markets, not just crypto. In aggregate, traditional market makers manipulate more $$$ than crypto swashbucklers — but that’s misleading. Proportions matter and crypto is pound for pound more manipulated than highly liquid, traditional exchanges (s/o Mathias Grønnebæk)
Ari Paul capped off the #TweetCeption, providing several examples of realities within crypto (or lack thereof) that make the markets so prone to manipulation. A couple highlights:
- No fundamental supply reaction (ex: drilling for oil impacts price)
- Lack of quantifiable fundamental value (ex: cash flows & PE ratios tighten ranges)
- Dominance of unregulated or barely regulated exchanges
- Generally unsophisticated investor base
The best way to dodge manipulation? In Ari’s opinion, it’s active trading — and move your assets off of exchanges. Remember, not holding your private keys = not holding your crypto.
