Recently I spoke with Jeff Dorman from Arca around the recent controversy that happened with Aragon and Arca around the DAO. I was passionate to understand what happened here so I learned quite a lot through this episode myself. The conversation is one that I learned a ton from and I think you all will really like it. If you’re running a DAO or plan on starting one, this is a must-listen. I also appreciated the concept of “contructivism” that Jeff talks about in this episode, something I think the space needs a lot more of.
Here’s his Twitter: https://twitter.com/jdorman81
Arca’s Twitter: https://twitter.com/arca
PS: If anyone from Aragon would like to share their side of the story, I’m more than happy to present the other side here! Just drop me a DM on Twitter.
00:00:00
Speaker #0
All right, could you give me a quick rundown of what happened uh with Aragon and Arca and the whole situation in uh from your guys' perspective?
00:00:10
Speaker #1
Sure. And, and probably uh a little kind of pre and post, right? So, you know, a we we're value investors first and foremost, right? We're looking for value at all times and, and that can come in a lot of different ways, right? Sometimes that value is future value. Sometimes it's, you know, financial value, sometimes it's utility value, sometimes it's book value. Um And in this case that, you know, that's one of the reasons that we stumbled upon Aragon, obviously, Argon has been around for a long time, we certainly knew about it um for a long time.
But in terms of being investors, we've been investors for, you know, well around a year uh in the an token, um largely because of how cheap the token was relative to the treasury, right? That's what we mean by book value, right? Basically, there was twice as many assets on the, you know, quote unquote Aragon balance sheet um relative to uh the market cap of the token. So in our opinion. Um That was a good starting point, at least for an investment.
And then from there, you know, the idea is, well, how do you extract that value? And there's not, there's a lot of ways to extract that value, right? One is to force a liquidation which has happened in other dow and other companies where you try to get, you know, a, a vote on your side, try to get them to just take, you know, basically shut down the project and give you the money back. Generally.
That's not the best way to get value though. And that's not at all what we were interested in doing.
Um But basically in the process of owning the tokens and discussing on the forum with other token holders who also were obviously pretty upset with the fact that the Air Gun Token was trading so poorly relative to ease and relative to the Treasury, we stumbled on a lot of other people that were in the same boat as us who also believed that, uh you know, that there were um a lot of levers that could be pulled here to create some more value.
Well, long story short in this process, we actually hadn't done anything yet. We hadn't even made a proposal yet. We certainly hadn't really, you know, done anything that would have been beamed as, you know, quote unquote activist.
Um for whatever reason, the Arogant Association decided to proactively ban us and uh many others who they thought were basically gonna try to blow up the dow. And it's interesting because again, we'll fast forward here in a second to kind of where we are now.
Um, but it was a really interesting defense mechanism or, or poison pill or whatever you wanna call it. It was basically here. We are not only a dow Aragon but also basically a dow of daws. Right.
The whole point of Aragon is to help create and govern other doos and their proactive defense against some angry token holders was to shut them down and, you know, lo and behold, look, it, it didn't go over well on crypto Twitter, it didn't go over well in the air on forums and discords, you know, and, and to their credit, they've walked a lot of this back.
Um You know, they, you know, we're big believers that nothing is set in stone and they get to their credit. They didn't just say, you know, to hell with everyone, this is us and this is what we're gonna do.
They did recognize they made a mistake, probably acted a little fearful rather than rationally. Uh And, and have walked it back.
Um But essentially, you know, during this process, uh my team put out an open letter, there was plenty of other um uh token holders a who also put out either forum posts or, um even some proposals saying this doesn't make a whole heck of a lot of sense here, like what's going on here and, and when we got to the bottom of it, it was, it was really, hey, look, when you uh when you issue a token, regardless of anything else, you now have a fiduciary responsibility to your token holders amongst other stakeholders, right? One of the beauties in my opinion of, of digital assets in the crypto ecosystem is that stakeholders is a very loose word.
Stakeholders can be employees, it can be contributors, it can be token holders, it can be, you know, customers, all of those stakeholders, you have an obligation um and a fiduciary duty to protect and in some cases, uh whether through malicious activities, which I don't think was the case here or just through incompetence, which I also don't really think was the case here or simply just through the course of time and the way things work, token holders were forgotten and where we were coming at was you have all this cash and any time a token or a stock or any financial instrument trades significantly below book value that is investors.
Way of telling you that we don't think you're doing a good job with the money that you have. We don't believe you're gonna have a good, do a good job in the future and, and have any sort of return on investment.
And we think that there should be something done, right? Either that's management change or buybacks or some form of, uh, of, of change. And I think the most important point here is that, that's really what Dow's are supposed to be.
Right, the, the, the token holders of the Dow are supposed to be the checks and balances, um, e even beyond the Dow, right, the, to the token holders or shareholders of any business are meant to be, uh, the checks and balances and you don't need that when things are going great.
Right? Apple, for the most part doesn't really need uh the the board or shareholders to step in all that often because they've done a pretty good job.
But some companies or projects do need that, you need your checks and balances to make sure that the project is going in the right direction and that all stakeholders are being taken care of. And that's really what the duty that we think um is important.
That's a duty that we've taken on multiple times in the past. Um And specifically with a, you know, we want to be um catalyst for change exactly how that change happens.
You know, this is, you know, we can talk further about kind of where we are and where we're headed, but at least we've kickstarted that process.
And I think, you know, it is upon all stakeholders, not just a obviously, we have a bigger platform and maybe a bigger voice um for a variety of reasons, but all token holders should feel like they have a voice and should feel like they can help enact change when it's inevitable and clear, that change needs to be implemented
00:06:19
Speaker #0
completely. It's, I think there's so much that we can talk about when it comes to like the wider crypto ecosystem. But in terms of Argon's specific instance, what is that catalyst of change look like? Because effectively, you're saying that uh the book values twice the valuation of the project at hand. And you guys don't want to completely dissolve the project and force liquidation, but rather a middle ground. So we would love to understand a bit more about that.
00:06:46
Speaker #1
Yeah. And I think, you know, one of the things that happen when you have a publicly traded stock or a token is people tend to be in more of a hurry, right? You know, you can have a private company that for the most part can kind of quietly do things 4567 years, nobody really bothers you, right. Inherently, the value of that company or project is changing.
Like take Robin Hood, for example, I think in a single year before they went public, their valuation changed from a billion to 8 billion. Well, it didn't just go there in a straight line. It probably went like this.
And if they had a publicly traded shares at the time, you would have been like, oh my God, Robin is the most volatile thing ever.
Look how it went from a billion to 500 million to 6 billion to 2 billion to 8 billion over the course of a year. But you don't see that. All you see is two data points.
When you have a publicly traded stock or a publicly traded bond or token, you see all those gyrations at all times and you start to kind of speed up that timeline in your head or you start to get antsy when things don't go. Right.
So there is an element of, well, Aragon started in what 2017, it's only 2023 takes a long time to build some things, especially in a new industry with all this, you know, political and government pressure and all this stuff.
And they should be awarded a lot of more time to ultimately deliver on what that good is. The other element is.
Well, that's all great, but you still need to provide a road map and transparency updates and things that show your stakeholders that you are in fact heading on that trail. Um And they haven't done that.
Um You know, I ironically, one of the things they talk about is about transparency over and over again and again, for whatever reason, they sort of fell down on that transparency initiative.
Um You know, they certainly didn't do all of the things that they should have and basically told stakeholders that they were going to do. So what we think um is we have a couple of choices now, right? And, and before actually before we get to the choices first, you have to define what value is right? Value can be financial value. Obviously, that's an easy one to calculate. The value can come in a lot of different forms, right? Um You know, you might find, uh you know, let's say you have a lot of Delta sky miles or something.
You know, you might find value in the financial translation of those into flights, but you may find more value in just sort of the ability to go to the Delta Lounge or to, you know, get up, you know, things like that, right? There's, there's always different types of value. You can have utility value, you can have financial value, you can have societal value.
Um So it's not just about extracting the financial value of this token, but if the financial value is not there, well, then there has to be something else, right? What are you getting? If you're an ant token holder, are you getting some sort of societal value? Are you communicating with other people in the group? Are you creating friendships? Are you building something that you care about? Right. Is there a reason you might do this? Right? Another example that would be like, you know, take like a, you know, go to an arcade and they have one of those claws that goes down to get the stuffed animals.
But we all know, you know, you're giving your kids $20 worth of tokens to go buy a $6 stuffed animal. Right. So, clearly that's not financial value, but there's obviously an enjoyment value. Right? There's some sort of time value to that. Right.
So, again, value has to be defined in a lot of different ways. So if it's not financial value and it's not societal value, then it has to be something else. Right? Maybe it's utility value. right? What does that Aragon Token do? Um, you know, you can make an argument for example that like, you know, any of the protocols have a lot more utility value than they do financial value and they trade well above what a theoretical book value would be because there is that kind of future value.
What can I do with this Token? What community am I a part of what apps can I build on this? So specifically to Aragon, it was clear that they've fallen down on this, right? And again, it could be malicious. It could be just, they haven't gotten there yet.
It could be a variety of different reasons. It sort of doesn't matter what matters is we kick started the campaign or we, you know, started kicking the tires a little bit and said, ok, we've uncovered a lot of things you guys have done, right? One is, you're kind of, you know, one is that there was a vote already a year ago to put all of the assets in the, from, from the Treasury, away from the Agan Association and into the Aragon Dow.
It was voted on, it was agreed on and it just didn't happen, it was supposed to happen in November of last year. It was supposed to happen in February this year.
And then, you know, it became May and they just started it with like a tiny couple 100 grand transaction out of the 100 million or so dollars. They have. So one is they're not following.
Yeah, so one is they're not following through on things that were already part of government. Um Two is they were supposed to be issuing transparency reports every six months. They haven't done one in two years. So now you have no idea.
Well, how if all this money is at a association instead of at the dow well, who's deciding how salaries are being paid or how money is being um used for taxes or legal or anything else? You know, some form of transparency goes a long way and, and take it for myself who's been running funds for, you know, a variety of a number of years or six years now with Arca and crypto.
But for, you know, decades before that in the debt and equity world, you can't just be transparent when things are good. You have to be transparent in good and bad times, right? It's not like uh it's not a switch that you get to turn on and off.
Um You know, so in that regard, I think they probably got a little bit too loose or maybe just sort of like, well, nobody's watching us, nobody cares. So we don't have to worry about this right now. We're just gonna build and again, this is not finger pointing.
Um You know, they, these, these might be the most talented developers in the world and maybe communication and finance isn't their strong suit and they were just building, building, building and lost track, right? So I think what we were saying was like, ok, you're not honoring the actual votes of governance.
You're not being a good steward of this capital because the market is telling you that and you aren't really giving us anything to sink our teeth in it that says, hey, stick with us because there will be some form of either financial or societal or utility value in the future.
Well, then why the hell would anybody on this token? And I think that was our point was there is a path to success here and that path in our opinion was not to dissolve Aragon.
It was, hey, either come up very quickly with some sort of a road map and a project, uh a development guide that makes us excited about this project and makes us willing to hold on to this token.
Yeah, some come up with some sort of a plan of what you're going to do with this treasury that actually creates some sort of a financial return or even some other type of return from a, from a value standpoint or guess what? You only spend about, uh, $10 million a year on expenses and you've got a $200 million treasury, that's a 20 year runway. That's a lot more than any project or company needs.
Take half of it and buy back the tokens and it doesn't change anything with regard to what your project is, but it turns your token holders instead of angry mob into. Wow, they did the right thing. Now, I'm gonna support them and be an evangelist.
And when you, when you break down, why web three and Blockchain is so important in the first place. That's really all you're doing right.
I mean, tokens are basically the greatest capital formation and customer bootstrapping mechanism we've ever seen where it turns all of your customers into quasi stakeholders who then become power users evangelists and they want to help you grow.
So I i it's just a complete misallocation of capital and resources to let one of your biggest stakeholders, meaning your token holders just die on the vine without doing very simple things that can both return some financial value but also restore health to your project and help it improve and help you actually complete the mission that you set up to complete
00:14:21
Speaker #0
completely. It's uh one thing not sure how much you've uh followed arc but we actually had a similar thing where our valuation trade is significant significantly below book value. So we said, all right, like let's buy out token holders and basically take the token private. So do you think something like that in Argon's instance, would have actually been like a really good move where they say, ok, we've got $200 million.
Let's spend $100 million to buy back the token go private and then give us more time to if we don't want to provide transparency, don't want to provide updates and be beholden to the public market pressures.
We say, all right guys, like we actually just need more time, take your money back, exit out and then we're gonna build and come back to the public markets.
When we've got more transparency, we've got more cash flows and we've got more tangible value in the form of financial or utility for public
00:15:07
Speaker #1
markets. Yeah, I think, look, I think that is a path. Um I don't, I think it's the necessary path here. I think that is a path that could have been done. But again, I think the point you're hitting on is if you started private and or you take yourself private, then everything I'm saying is forgotten because you don't owe anyone anything. It's only when you have a publicly traded instrument that you now owe somebody something.
So that is an option, another option though, which you know, I'm a former capital markets banker. So, you know, I I you did debt and equity deals my whole life and understand like, you know, another thing is you just announce a buyback.
You don't even really have to do it. Let's say, for example, they said, ok, for the next three years, any time the ant token falls below 0.95 times book value, we will bid tokens. Well, guess what happens? Nobody actually sells into it because they're like, well, I could sell it. The bids always there, but I don't have to. It's just a free call option now. So I'm just gonna hold on to it and see if a can actually deliver.
And what happens is you actually spend less capital. So what happens is a lot of times these projects will be like, we're gonna go do a $3 million buyback and that'll show them and all of a sudden immediately $3 million worth of tokens get sold into you.
You use all of your capital, it doesn't do anything for the long term or the short term and the token trades right back down. I mean, uh Nexus Mutual is a good example of that, right? Rap. Nexus has traded below book value forever.
They were like, ok, we're gonna do this tiny buyback. I'm great. You know how fast everybody lined up to hit that bid it was in, you know, there was not, there was never gonna be enough bids to hit.
But if they had said, you know what, we're always gonna bid, that bid will always be there. You can check the Binance or coin base or wherever we're gonna bid through and you can see it.
It's just, uh, you know, we're, we're just gonna put a buy wall up there. Guess what? Nobody feels any pressure to sell. Well, I don't have to sell because the bids there.
So there are ways to do this in a capital, efficient way where it doesn't even use any of your treasury. It just shows the commitment and the support and I think the Aragon Token was up 15 or 20% last month.
It was definitely one of the best performers last month. It's, it's starting to close that gap slowly. It's still, it's still a big gap.
It's still trading um about, I believe the latest is somewhere around, you know, 50 or 60% below book value, but that's up from, you know, 100%. So it is starting to trend in the right direction. But there are simple things like that that you can do.
Um you know, you can also uh uh you know, it reminds me of um uh well, II I there's other ways you can do it besides that, right? I mean, you could also do something along the lines of a tender like anybody who doesn't believe in the long term value, please tender at X price. Um And you know, give them a chance to just get out.
And then basically what you're saying, you know, what you're doing is you're transferring or reallocating tokens from those who don't believe in the long term project to those who do. I think that's less effective because ultimately, what you're doing is you're moving away from what you want.
You want a bigger community that cares about governance, not a smaller community of just whales who own it. Um But again, it's not necessarily that Arca has the only way to fix this. The, the, the real part of this is simply something needs to be fixed.
And the first step to fixing something is identifying the problem. And a lot of token holders don't voice up when there's a problem.
And I think that's something that we don't shy away from when we see something we're gonna voice up, we're gonna put it out there in the public light and then to Aragon credit, you know, this was not meant to be a finger pointing exercise of blame.
I think in the beginning it turned out to be because again, they're, they're, they're proactive defensive moves were, were a little strange again, especially for a dow.
Um But again, they walked it back and then since then they've had conversations with us, they've had very, you know, the, the, the, the forum is alive and, and, and beautiful right now there's tons of people chiming in and that's what you want, right? You want to get to a point where people are like, ok, now they're listening. Finally. Let's get our voice out there and let's come to some democratic solution.
Now, you know, the history of democracy, it's never 100% on the same side, there's going to inevitably be dissension still, but you can still move in the right direction. Uh And I think we're heading in that direction here.
And I think, you know, ultimately, it is just another road map to how to use public governance and how to use uh uh token holder rights to get to the right place. Um The real question and probably what's on your mind? I don't know if I'm skipping ahead here is how do we stop getting into this mess in the first place? How do we build doos better? So it stops doing this.
00:19:29
Speaker #0
Absolutely. It, before we move on though, I just want to touch back on what you said before about like putting up a bid rather than doing like a straight buyback. Because I think from projects perspective, you say, well, if I'm gonna put up a bid, I make the assumption I need to be able to fulfill all of the possible demand that might come in.
And therefore, I need to have that much cash to service uh my commitment to that bid. But in your experience, you're saying it's actually a lot cheaper.
People don't necessarily go for that So, could you touch upon that a bit more because I feel like that's probably what a lot of people are thinking if they heard that, like, at a first, uh, kind of glance.
Well,
00:20:02
Speaker #1
I mean, I mean, here, here's the math right now, right. The Aragon market cap. The ant token is 100 and $40 million market cap. They have over $200 million worth of Ethan stables in their treasures. So if they were to, if they were to bid at say 0.9 or 0.95 time, let's just say 0.9 we'll make it simple math. You're going to bid at 0.9 times book value. Um That's 100 and 80 million.
You still have $20 million left over even if every single token holder hit the bit. Um Right, and that's still two years of runway, which is more than any startup project needs.
Because what happens is when you have too big of a runway is you start to get yourself in trouble just like Aragon has done, which is well, we're paying fat salaries and everyone's fat, happy and lazy and we don't have to do anything.
I mean, Dydx is another great example of that, right. You know, Dydx token holders get nothing. Meanwhile, Tydx is an incredibly profitable company that is just paying, you know, loading up the treasury in favor of D ID X shareholders.
Like you get kind of fat slow and happy when you don't feel the pressure to do anything.
There's a reason that the venture capital world only gives you about 18 months to two years of runaway because they want you to feel some pressure to perform and then hit some Kpis before you go out there and raise money again and will become profitable. Right.
So even in a worst case scenario for Aragon, if they had used every dollar uh of uh or, or uh you know, USB C and E on their balance sheet and everybody sold it, they still would be financially totally fine.
Um So, so in my opinion, that's not a real big risk, right? More likely than not, they would say we're always going to bid until our treasury is depleted.
And as a result, most people won't sell it because why would you sell a free option if you know that bid is always, you know, here's what happens, right? I say I'm gonna bid at 0.9 times, book value forever.
Well, guess where it immediately trades to immediately trades to one times or 1.1 times, book value because everyone's like, well, my upside is infinite, but my downside is only 20%. So I'll never sell this, right. That's the greatest risk reward in the world.
Um So you ultimately achieve your goal of excitement, higher token price engagement, you know, and then you can start doing the things the Dow's are supposed to be doing like, hey anybody here, good at marketing, anybody here, good at finance. Anyone here good at development.
We want all of our contributors and token holders to participate and, and help in this dow.
Um And you get that when people are excited, I mean, you know, obviously B is a, is a touchy subject right now because of all that's going on, you know, certainly here in the US. But like finance is a great example.
The B and B Token, in my opinion is the reason that Binance surpassed every other exchange because immediately what did the BNB Token do? It was part utility, it was part finance, financial value, right? They said if you own the BNB Token, you're gonna basically be a VIP on our platform. You're gonna get, you know, lower fees, you're gonna get to use it as collateral and do all these cool, you know, get back when IC O were a thing.
Get first in line for IC O. It had a ton of utility value, but they also said we're gonna loosely take 20% of our profits and use it to buy back tokens in the open market.
So immediately if you are a Binance customer, you automatically have a financial stake in the upside of that business through the profits and the buybacks. But you also have a utility stake in the usage of that product.
What what happens every single Binance customer becomes a power user and an evangelist and they get, they do all their business there. They're sticky customers. They tell all their friends and family about it. That is a successful coordination of stakeholders.
The opposite is, hey, we got all this money. Your token is trading like crap. We don't care about you. We're not gonna do anything and go to hell, which is a lot, a lot, a lot of these doos again, including um Aragon to some extent have done.
And that's the opposite of what you wanna do. You create angry token holders, you create apathetic token holders, you create, you know, uh uh uh AAA culture of just uh uh anger and, and and apathy.
So immediately just by getting the token price higher using actual cash and or just this perceived bid that may or may not get hit, you immediately fix one of the problems and it's not that hard to be sure.
And, and I think the problem, you know, as much as everybody in crypto hates finance Wall Street, like maybe some of these guys should talk to a former investment banker once in a while and be like, hey, what would you do in this situation? There are things we can succeed with
The full transcript was too long so I had to host it here: https://pastebin.com/ixgLza3G
The Value of Governance Tokens with Jeff Dorman from Arca