Hedge fund Arca, which holds Gnosis tokens, argues the prediction markets protocol should make a tender offer for GNO because the coin is trading below the project’s total assets. While the DAO provides a floor for the token price, it’s not clear what upside it will create, Arca Chief Investment Officer Jeff Dorman said.
Stefan George, Gnosis cofounder and CTO, countered in an interview for The Defiant podcast today that the token is trading close to book value, and that the newly launched GnosisDAO should drive value to GNO going forward.
We gave Arca a chance to comment; below are Jeff Dorman’s emailed answers to our questions.
Why do you think Gnosis should make a tender offer for its tokens?
In 2016-2018, ICOs were done in a rush to raise money and as a result, proper oversight and token governance were not built into the plan. Today, we’re seeing an evolution where tokens are often designed and redesigned with token value accrual and governance in mind. Nowadays, the best companies/projects are introducing tokens at a later stage of company growth (UNI, COMP, AXS, etc) or they are redesigning tokens to better capture and accrue economic value (SNX, MLN, HXRO, AAVE, BAL, YFI etc). Prior to Arca’s constant prodding over the past six months, Gnosis had neither re-issued tokens to bootstrap growth nor revamped tokenomics in line with current industry standards.
There are several reasons why we believe Gnosis should make a tender offer for its tokens:
- Gnosis has deviated wildly from their original (and later restated) fundraising whitepaper published in 2017. None of this has been communicated with GNO investors.
- We believe they are running an unregistered hedge fund strategy by using funds raised from the ICO to yield farm and invest in other ICOs. They are doing this without appropriate and adequate disclosure of risks to GNO investors.
- They have built many costly, ancillary products, none of which were stated in the original white paper nor are accruing value to GNO token holders.
- Gnosis burns approximately $7.5mm per year with 65 employees, despite not generating any revenue or creating any utility value for GNO token holders.
- The Gnosis Board of Directors, which includes Joe Lubin and Jeremy Millar from Consensys, has let Gnosis use investor money as a personal piggy back demonstrating a lack of internal controls and lack of fiduciary responsibility to GNO holders.
This issue of proper governance and money management has become increasingly important in the wake of the recent Cred bankruptcy. The lack of governance, transparency and oversight is incredibly damaging to this industry. If you aren’t going to adhere to basic fiduciary principles, then you should not have a token owned by outside investors. Thus, a tender was the most logical path.
Stefan George’s comments on these claims, which weren’t addressed in the podcast:
We have responsibly managed the Gnosis treasury to ensure that Gnosis can acquire and retain talent and build an active community in both bull and bear markets. For this reason, we made sure that we exchanged crypto into fiat at – what in hindsight – were favorable exchange rates during the 2017/2018 bull market. At the time, this decision was considered conservative. The decision ensured stable working conditions for our team during the 2018/2019 bear market. We also entered strategic alliances with other projects that we considered crucial to the success of our vision and products, usually in the form of transparent token investments and swaps. We participated in some of the recent defi opportunities following thorough evaluation of the risks involved, as did many other projects in the space.
Are you still proposing that Gnosis should offer to buy back GNO tokens at $74? What explains that value?
Gnosis declined our tender offer, but we still believe they should tender, and the price is even higher now. Gnosis raised 250k ETH in 2017, and gave investors 460k GNO in return (worth $12.5mm USD at the time). Today, those 460k GNO are worth $29mm (at $64/GNO), while Gnosis’s balance sheet is worth $114mm purely due to the rise in ETH prices (160k ETH left + $20mm in USD from monetizing ETH) even after spending/burning a large chunk of that money over 3 years. We don’t believe founders or their incubator (Consensys) should get any money until original ICO investors are made whole. Since the GNO token doesn’t do anything, we believe a tender still makes sense. The price of that tender varies relative to the price of ETH, but the balance sheet is now worth 4x the value of GNO tokens (GNO thus trades at 25% of book value). So a tender makes sense at a price somewhere between the current value of $64, and the book value of $247/GNO token ($114mm divided by 460k tokens). When a financial asset trades below book value, it means investors have no faith that management can generate a positive ROI on their balance sheet — therefore, they should give the money back or do something to rebuild confidence. By offering a tender, Gnosis would signal to the market that they care about GNO holders, and that they believe their token is undervalued relative to future value.
Will you make a tender offer to the new DAO?
We are evaluating how best to participate in the DAO, and will likely make a proposal in the near future. However, there are reasons to be concerned with how fair this DAO really is since no vote will pass without Gnosis’s and Consensys’s blessing (as I laid out here). Unfortunately, the DAO is still fully controlled by Gnosis and Consensys. The recent 5% airdrop proposal that failed to reach the requisite number of votes is indicative of this misalignment, as only Gnosis employees voted.
What are your thoughts on the launch of a DAO and plans to transfer ETH and GNO to it?
Well first, no ETH has actually been transferred into the DAO yet (and only a tiny bit of GNO has been). That’s not to suggest that it won’t be, but there has been a history of overpromising and under delivering. Regardless, we are evaluating it. At a minimum, we are happy that Arca has been a catalyst for positive change. When we started our communication with Gnosis and Consensys, there was no public information available, no investor communication, and a severely undervalued GNO token backed by no utility and no financial value. Since then, Mr. Kӧppelmann has indicated that Gnosis will be providing more transparency, they have turned the GNO token into an “asset backed” token (fully backed by the assets in the DAO), and have engaged more openly with investors. It’s a start.
Will it help raise the value of GNO?
As I stated here, there is now a floor for this token. It should never trade below the book value of the DAO, or investors should immediately call for the liquidation of the DAO. So it has certainly raised the floor, eliminating downside risk for token holders. In terms of upside, that will be based on whether or not we can prove that GNO holders deserve more than what was given to the DAO, or that Gnosis and its community can figure out how to create value in ways that we have not thought of. As we discussed with both Consensys and Gnosis during our early discussions, we would happily withdraw our tender offer proposal if they came up with a better way to increase value for GNO than via tender — thus far, we have not seen a better solution. The DAO makes this a possibility now, but it does not guarantee it. Independent of the price of the GNO token, we helped turn an asset that had no value into an asset that is now fully backed by its Treasury. So that’s a win for investor rights, transparency, and for GNO holders.