You will no doubt have heard the news that A16Z Crypto have purchased 6% (or 60k tokens) of the total supply of MKR for $15M, for an implied network valuation of $250M
($250 per token).
In case you missed, here is the announcement
on the MakerDAO blog and the A16Z investment thesis
Many commentators have focused on the governance aspect of this transaction. We'll touch on that too, but we think there are a number of other interesting things to unpack: 1️⃣
in traditional venture capital there are some generally established playbooks on ownership targets and portfolio construction, typically dependent on stage focus and fund size. There's no such thing in crypto yet, major differences being:
a) less dilutive effect from multiple funding rounds
b) liquidity should command a premium
c) ownership concentration is typically undesirable and detrimental
d) no legal recourse over assets.
It is therefore interesting to have these data points on ownership target (6%) and % of fund deployed in a single asset ($15M/$300M=5%) from one of the most respected and active crypto investors. Note that A16Z already held 10k MKR tokens before this announcement.
More broadly, this deal once again shows that there are multiple entry points for VCs in crypto. We've obviously seen many getting involved in private rounds via SAFTs or equity, not too long ago we have seen the likes of Placeholder
building positions in liquid crypto assets from secondary markets and more recently we have even seen some funds
'earning' tokens via "generalized mining" activities. And these avenues are not mutually exclusive. Here A16Z is buying directly from the Foundation treasury itself. 2️⃣
this deal also demonstrates that there are alternative ways of funding decentralized networks other than ICOs and that not all capital needs to be raised upfront. Go figure. MakerDAO is an example of a project that shipped a working product without running an ICO, that now can raise the appropriate amount of funding for the next phase based on what they have achieved thus far. 3️⃣
One of the aspect of this deal that made most noise is the discount A16Z got from market prices. At the time of the announcement MKR was trading at around $450, while A16Z got a sweet $250 per token (equivalent to a 45% discount to market prices). A few things to note about that:
a) The headline market price is somewhat meaningless without accounting for market depth and liquidity. MKR has been quite thinly traded across some obscure decentralized exchanges (and deliberately so, the team wanted to avoid having speculators in the mix): just over $500k per day has been traded since January 1st ($340k over the last 3 months), equivalent to an average of 0.1% of its market cap. It's not at all unusual to see these sorts of “discounts” for large positions trading OTC in illiquid markets.
b) If you even took the $450 as a “real price”, the seller would have effectively left $12M (4-5% of the market cap) on the table for the privilege of having A16Z in the trenches with them deploying their arsenal of operational support over the next 3 years (so $4m a year). We'll let you make up your own mind about that. Interestingly there was no significant price reaction to the news, perhaps down to the illiquid and obscure exchanges MKR trades on.
c) A16Z tokens are under a lock-up, though interestingly not all on the same schedule: according
to Rune the CEO of MakerDAO, 1/3 are locked up for 1 year and 2/3 for 3 years. 4️⃣
Related to one of the points above is the broader topic of VC value add. For all the talk about crypto leading to the death of traditional VC, here's a testament that such claims may be slightly exaggerated. Now, clearly a16z are a unique beast in the marketplace, and not many other investors can offer such a level of operating support, but here's one of the very top projects in the space telling the market that traditional help around "sales and business development (including partnerships), marketing, technical talent, HR operations
” is highly valuable. 5️⃣
Zooming in on the value add bit, there's a more sceptical take on what Maker is actually valuing in this deal. And that is specifically Katie Hauns
, the general partner at A16Z Crypto that led the deal. Katie was hired in June when A16Z announced the spin-off crypto fund. She is a former federal prosecutor at the DoJ and created the government’s first cryptocurrency task force to lead investigations into Mt. Gox and Silk Road. In short, she is possibly the top crypto lobbyist on the market right now. And it's no secret that regulation is top of mind for MakerDAO.
In Rune's words
: “You have to consider that regulation is one of the most important areas we need to focus on in order for the project to succeed.” “To me it is clear that given this is our biggest challenge and threat...” “With Katie Hauns insight from her time as a federal prosecutor focused on cryptocurrencies, we have crafted a very strong plan for getting full clarity about our legal status in the US with the federal agencies that are relevant for the kind of financial activity Maker enables.” 6️⃣
MKR is in large part a governance token
. The ability of governance tokens to capture value has been and continues to be heavily debated, so A16Z endorsement adds some heavy weights to the governance token model camp. The other side of the argument is that VCs have an innate preference for governance tokens because they theoretically give them a say along the lines of what they are used to with traditional corporate governance. 7️⃣
which leads to the topic that was most actively discussed following the news, ie the way the decision to sell a sizeable portion of the token supply was made. Some have rushed to call
it a “massive failure in governance”, others piled in
raising scepticism on the lack of transparency. Those are all fair criticisms for a projects that's committed to decentralization and community led governance, with some caveats though: in Rune's words
, “the community is only meant to be responsible for the long run risk governance of the system”, so weather selling Foundation tokens to A16Z falls squarely into the remit of a community vote is unclear. From our end, we can't quite imagine what it would have logistically and practically looked like to vote on such a deal in the public domain, with risks of leakage, competitive tensions, delays, insider trading and so on.
this complexity nicely: “It’s even easy to imagine how they might have been nervous that public scrutiny could jeopardize a deal that they believed to be essential to the long-term health of their ecosystem, and sought to insulate it from any external court of public opinion.”
Given the stage and complexity of the project, as well as risks and uncertainties still involved, it would be a little premature to expect full decentralization, despite it being the ultimate goal. In this phase flexibility is still paramount, as Rune's said
again on Reddit: “it is simply not possible for a decentralized community to bootstrap a fintech product from scratch with the flexibility required to compete in the marketplace”.
And Gradual Decentralization is one of the core tenets of the Foundation v2 proposal
, that interestingly was just approved
by majority vote of the token holders.
Full decentralization is to be achieved step by step, with tokens being handled by the right stewards at each phase.
Lots of food for thoughts.
(Disclaimer: we are indirectly exposed to MKR via a personal investment in 1confirmation)