"The Only Thing Where I Probably Agree With Arca is That GNO is Under-appreciated:" Gnosis' Stefan George

In this week’s episode I speak with Stefan George, the cofounder and CTO of Gnosis. Gnosis is one of the OG Ethereum projects. It was founded in 2015 by Stefan and Martin Koppelman as a prediction market platform on Ethereum and it’s now an ecosystem of financial applications, with a decentralized multi-sig wallet, called Gnosis Safe, and a decentralized exchange. Most recently, Gnosis announced it will join other DeFi projects and launch a DAO, where it would transfer a large chunk of the ether and GNO tokens in its treasury for the community to manage.

This treasury is sizeable at around $100M dollars, due to the rising price of the 250,000 ETH they raised in a 2017 ICO. And this stash has been the core of a dispute with one of Gnosis token holders, hedge fund Arca. Arca claims the Gnosis token is trading below the value of the Gnosis treasury, and so they have proposed that Gnosis buy back their tokens at a value that’s between the current market value and the value of the treasury —or the book value.

Stefan argues the GNO market cap is miscalculated because it’s not counting the actual number of tokens in circulation and should be higher. He also says the Gnosis DAO should drive more value to GNO holders.

I asked Jeff Dorman of Arca about this and he said while the DAO was a good start and provides a floor for the token price, it remains to be seen whether there will be additional upside. He said Arca is considering whether to propose the tender offer to the DAO but is skeptical of doing so because he believes token votes will be controlled by Gnosis and ConsenSys. Here are Jeff’s comments about the dispute.

Stefan said he encourages Arca to make the tender offer to the DAO. Going forward, he’s excited about shifting the Gnosis model from building in private to building in public, with more community ownership and participation. He’s also excited about experimenting with a prediction market-driven governance model in the Gnosis DAO.

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Stefan George: I got into blockchain already in 2013 when Martin, my cofounder, we started a company based on Bitcoin. That time, we created basically a prediction market for Bitcoin. Then in 2015, we realized that Ethereum has better capabilities to actually offer this fully decentralized, and we met Joe Lubin from ConsenSys, and Joe convinced us to do this as part of ConsenSys.

The next two years, we developed the core Gnosis protocol for prediction markets, and then 2017, we had the opportunity to spin off from ConsenSys, and we did an ICO. We raised $12.5 million in Ether, which was very fortunate timing. At the time, Ether was just $50 and we did treasury management well. As Ether increased, suddenly, we had much more money available for us to build the company. That's why we started building a bigger team that allowed us to do a lot more.

We started, even as part of the ICO itself, to create a multisig wallet, which then turned out to become the standard wallet for securing funds on Ethereum. Because of all the other ICO projects that followed 2017, they basically all use this multisig wallet, and so basically, we then started in parallel to continuously develop this multisig wallet, which turned into the Gnosis Safe, which is now kind of the standard for fund management on Ethereum.

But we also obviously continued with prediction markets. We, developed together with DXdao, the prediction market called Omen, which went live this year. We also looked a lot into the market mechanisms that are needed to actually trade the assets in prediction markets. So basically, we thought about automated market makers very early on, and one of our developers actually came up with the automated market maker design, which later on was utilized in Uniswap, and Balancer. So for us, it was just a research topic that we just did, and we even implemented it. It's even on our GitHub. But we never saw the potential success of it, so we just basically put it aside as we saw the flaws of those automated market makers designs in terms of capital efficiency, and potential front running issues, so what is now called miner extractable value. We saw those issues already at that time.

We did not think that this is actually a concept that would actually be very successful, and instead, we were focusing on more advanced mechanisms, like batch auction designs, and that's basically what Gnosis protocol is today. A couple of months ago, we launched Gnosis protocol, which is a batch auction exchange, basically a way to exchange tokens that is also resistant to mine extractable value, and also has significant advantages in terms of capital efficiency.

It turns out that the specific use case for this is right now specifically IDOs, so initial DEX offerings, a way for new teams to sell tokens. Because in initial DEX offerings, the fact that the initial price is unknown, gives front runner significant advantages in other DEX designs, like Uniswap, and those issues just don't exist this on Gnosis protocol, which is why this became kind of the use case for Gnosis protocol. Now so basically, as you can see, we develop…

“In initial DEX offerings, the fact that the initial price is unknown, gives front runner significant advantages in other DEX designs, like Uniswap, and those issues just don't exist this on Gnosis protocol, which is why this became kind of the use case for Gnosis protocol.”

CR: A little bit of everything.

SG: Exactly. It's also a bit of the criticism that we received is: where’s your focus? You have so much money, what are you doing with all this money? What is the GNO token doing anyway? How does relate to everything that we do? To be honest for a long time, we did not consider this an issue simply because we know we can play the long game, we have significant funds we can operate, assuming that we can operate many years. But it became increasingly an issue for us because we also want to use GNO to incentivize others.

“It's also a bit of the criticism that we received is: where’s your focus? You have so much money, what are you doing with all this money?”

First of all, our own employees, we have actually an incentive program for employees. We give GNO tokens to our employees, and of course, for this, it's very helpful if it's very clear, what the GNO token actually does. That's why at the beginning of the year, we were thinking of how can we basically change the way how Gnosis is operating and how can we again, put the GNO token into the focus of what we do.

Since the beginning of the year, we are thinking about what is now called the GnosisDAO. GnosisDAO is what released just one week ago, and GnosisDAO is basically a new way to organize how Gnosis operates. It is a very exciting experiment, because it's not only a simple DAO that does some Snapshot polling, but it will also have a very significant amount of funds. We publicly committed to transfer 150,000 Ether into this DAO, as soon as possible.

GnosisDAO is a very exciting experiment, because it's not only a simple DAO that does some Snapshot polling, but it will also have a very significant amount of funds. We publicly committed to transfer 150,000 Ether into this DAO, as soon as possible.

CR: That was a big overview, a lot going on. I want to backtrack a little bit before we get to the DAO. First, just on the very early foundation of Gnosis, what was your initial motivation and interest in prediction markets? If you can also touch on the difference between building a prediction market in Bitcoin and Ethereum, I think that's interesting.

Bitcoin Prediction Markets

SG: To be honest, when we started working on the prediction market, using Bitcoin as collateral, I wasn't even aware of the term prediction market. We just saw it like a crude business case, basically, or I can only talk for myself, maybe Martin had other opinions. But basically, we came to realize that the scope of where prediction markets can be applied is much, much bigger. It can be applied to governance, what we're trying now with GnosisDAO. It can be applied for incentives, structuring for bounties. Basically, the applications of prediction markets, there's basically a very big range of where prediction markets can be applied.

When we created the prediction markets for Bitcoin, we realized that it is still a very centralized application. Yes, to the server running, it basically holds Bitcoin in a wallet that is controlled by multisig, but it's not the decentralization that you really would like to have. We saw when we realized basically what Ethereum is, and we realized that we could basically implement the same, but actually decentralized and also opening it up more like a platform for anyone else to integrate. There we just saw a huge potential and I have to say that at the time already, Augur existed. Augur already started trying to do this on Ethereum, but we saw also a lot of room for competition, and we also saw some flaws in the Augur design at that time. That's why we decided, okay, let's try to build a competitor and do this as part of ConsenSys.

“When we created the prediction markets for Bitcoin, we realized that it is still a very centralized application.”

CR: You mentioned Omen is the current interface for the Gnosis prediction market protocol. Wanted to ask you what the status of that is, is it picking up traction? Because I think, prediction markets as you mentioned with Augur, they were part of the Ethereum applications from the very early days, but they've always struggled to really gain volume and adoption. It's been really slow. Why do you think that is and where does Omen stand right now? Do you think that adoption problem is improving?

Betting on Ethereum 2.0

SG: It's a very good observation. I agree, if you just compare the volumes of prediction markets with, let's say, general DEX volumes, and they are still tiny, but there's hope. There are basically two markets that got really significant traction, which I think ought to showcase a bit where we'll be going.

The first market on Omen that got significant traction, and also coverage was the market about the Ethereum 2.0 launch. The reason why this market got a lot of traction was because the market contradicted the public belief. The public belief at the time when the market was launched, was the Ethereum 2.0 would for sure, be released this year. That was the assumption. Then the prediction market was started, and then the prediction market suddenly signaled that the probability of Ethereum 2.0 launching this year would actually be just 40%.

So now, Ethereum 2.0 developers, they basically had the option to say, well, sorry, guys, it's not going to launch this year, or otherwise, if they actually believe it's going to launch this year, then they would actually have to bet against this, because they would actually make a lot of money. What was really cool to see is that Ethereum 2.0 developers started to predict on this market, and they said, I'm putting 32 Ether on, yes, it's going to happen this year. Still, for a long time, the market was predicting maybe 50% likelihood, and then there were some issues and it was delayed.

Now it finally launched. But I think the fact that the launch this year, at least a little bit has been also influenced by the fact that this prediction market was there, and it really triggered the public to now to sort of put pressure or maybe not put pressure, but to really make it part of the conversation and understand why things get delayed, and basically, allow also Ethereum 2.0 developers to speak up and they can be bet on this market.

CR: That's so cool. I didn't realize ETH2 developers were betting on prediction markets on the launch of ETH. So they were able to profit from their success, from delivering their product.

SG: Exactly. We tweeted about it, they saw, okay, the market says we're not going to make it.

CR:But they knew they would be.

Betting on Tech Development

SG: So this is one field where I think prediction markets also today on Ethereum can be extremely helpful by helping to signal like release dates and feature releases. For example, there are many other things that I think would be super interesting, like the gas limit, increasing EIP-1559 is one thing that's so obvious that everyone's interested in. We should just have prediction markets on all of those features to signal when they will be released. To basically have the public market that anyone can follow, understand basically how likely things are going to happen in Ethereum. This is going to be one field.

Then the other is the more obvious one that is also getting traction outside of the crypto space, which is election betting. So basically, the US election obviously is sort of the prime time for political markets. We saw this also with significant volumes across all prediction markets. Polymarket, which is also using Gnosis contracts, Omen, and also Augur and that's for me, very promising. We can see that there’s even though, crypto obviously still has some onboarding issues, there is enough interest also in the existing crypto community to participate in those markets. Political markets also are interesting. I think, these two markets are basically crypto-specific markets, but also political markets, probably also sports betting as I think something that will definitely get more volumes within the next couple of months or years.

CR: I think I forgot that Polymarket was also using Gnosis, I've seen that project really kind of gaining traction recently. The other aspect that I wanted to talk about was Gnosis Safe. Can you explain a bit more how it works and how it compares with other wallets?

Gnosis Safe

SG: Basically, Gnosis Safe is a multisig wallet. Well multisig is something that's so primitive that is even built into Bitcoin, but that is not built into the Ethereum protocol right away, simply because you can basically build as a smart contract and that's essentially, what Gnosis Safe is. Gnosis Safe is the super multisig that you can extend with additional functionality. So you have a core contract, which is very generic, but it also allows you basically to add additional contracts, which allow you to do different things in just multisig transactions.

Because it's super generic, it's used by a lot of different applications to secure funds, or also to be basically the proxy between the user and the application, and this is just a contract. We have been building some UIs around this contract, which is Gnosis Safe. This basically allows you to easily coordinate with others on Ethereum transactions to understand what's going on and to do proper fund management.

One cool thing about this interface is that we, are the only wallet, to my knowledge, to extend this interface with what we call Safe Apps. So as there are a lot of funds stored and saves about a billion dollars worth of tokens in Ether, there's of course, an incentive for the app developers to write applications which can tap into this liquidity. So if someone has funds saved in the multisig, because of security reasons, there's obviously a big interest in using those funds, because of all the opportunities in DeFi right now. The Safe Apps, we allow basically anyone to easily, directly from the multisig interface, participating in any of those applications. So we have integrations with Aave, we have integration with 1inch, with Balancer. Basically all the big DeFi protocols, they all have built-in integrations.

The cool thing is that those integrations don't have to be built by us. We could never integrate all of this, especially with the rate of innovation, it's impossible to keep up with it. So we just said, instead of us building it, we create an API and anyone can basically integrate. This is what Gnosis Safe apps are, and I think that's a very unique feature that got a lot of traction and that will allow also to grow the Gnosis Safe ecosystem.

CR: Is the idea of Gnosis Safe to be used more by applications as a way for their users to interface with their assets? Or do you see it more as a retail wallet for individuals? Because it sounds like it's more directed at developers on that application to use this as a tool.

SG: It's twofold. So on the one hand, first of all, I think the biggest user group are still teams, like collective fund management, that's a natural fit from logistics. It's also used by developers as a way to have a proxy contract between users and the application, but that's still more niche. I personally also use it for my personal funds, simply because multisig also has significant security advantages over ledger wallet.

If you think about Ledger wallet, you have your seed phrase, you have to store your seed phrase, as soon as someone has a seed phrase, your funds are lost. In the multisig, you can have multiple keys, you can have multiple seed phrases, you can store them in different locations, you just have different levels of security that you could never have with a ledger wallet. That's basically I think, also where multisig can be very helpful, I think that's the unexplored area.

The natural fit is first of all, collective fund management, that's important for companies, for communities, for funds. So, all of them have been using the Gnosis Safe for this purpose.

“The natural fit [for Gnosis SAFE] is collective fund management, that's important for companies, for communities, for funds.”

CR: Then the other feature I wanted to dive a little bit deeper on is the AMM, such an interesting background on how you had developed an AMM as research internally, but thought it wouldn't really catch on and then seeing all this success with Uniswap. So what are some of the improvements that you've made with your current AMM design? How is it different from Uniswap?

Batch Auction Exchange

SG: We basically deviated a bit from the automated market maker field as I think there's a lot of competition. What we decided is, we created a different type of exchange, something that we call a batch auction exchange. The main difference is that we collect orders over a period of time and then settle them at once for one specific clearing price. The reason why this is useful, is because as you know, in blockchain basically, there's naturally settlement times every block, but the miner is basically able to solve transactions arbitrarily in a block. This is causing the issue of miner extractable value.

On a high level, basically, someone's trading in an automated market maker, then he's doing a buy order, then essentially, the miner could buy before him then execute the buy order of the user, and then the miner could sell again, and extract value from this trade. This has become increasingly an issue as miners and also bots or anyone who can basically exploit this. That's also why the need is increasing to create mechanisms which are resistant towards this attack. This is what we are working on.

It's a batch auction exchange. We collect orders over time, and we make sure that they are settled at the same time for the same price. So anyone who's trading within this batch is getting the same price. There's no way for miner or anyone else to kind of try to manipulate the price in one direction to extract value.

“It's a batch auction exchange. We collect orders over time, and we make sure that they are settled at the same time for the same price. (…) There's no way for miner or anyone else to kind of try to manipulate the price in one direction to extract value.”

It also has other significant advantages, which is if you basically know that certain orders are available at a certain time, then you can do something with what we call Ring Trades. So let's say you want to trade A for B, I want to trade B for C, and someone else wants to trade C for A, then if those would be basically in different order books, we would not know that this trade can actually happen. But because in a batch auction, we know those orders are available at the same time, we know we can settle them and increase the trading volume because well, we know that all of those trades can be settled at the same time.

Gnosis DEX V2

We think this is the future of trade. With Gnosis protocol, we have been building an exchange that can exactly do this. The first version is up running for some time now. It had also significant tradeoffs in terms of gas costs and execution speed. The bench time in those protocols version one was five minutes. The user experience was also not great, because you have to first deposit a token, then you have to create an order, then you have to wait five minutes, then you have to create a withdrawal request, you have to wait another few minutes, and then you can actually withdraw. For anyone who just wants to swap one token for another, this has not been a destination to use. So those users, they rather go to simple AMM.

“We think this [batch auction exchange] is the future of trade.”

That being said, with Gnosis protocols version two, we’re going to change this. Gnosis protocols version two will have basically the same user experience as Uniswap, while still having the nice properties of a batch auction exchange, so there's no miner extractable value possible, and it still has the possibility to basically maximize the trading volume. It's also very gas cost friendly, which then also allows market makers to integrate.

CR: When do you expect to launch that?

SG: We are hoping that we can have an end-to-end test end of this year. Basically, end of this month, and then hopefully, we can launch it in Q1 2021, February even, but we will see.

CR: This DEX, right now, it's still being used by IDOs, you said. How has that process been? Is that still is still happening? Or was it almost a fad during the DeFi summer? Or are you still seeing kind of demand to sell their tokens through Gnosis DEX?

SG: There's definitely a big demand for it, actually it was really a surprise for us, because we never designed the protocol with IDOs in mind. It's also maybe not the perfect protocol for IDOs, to be honest, but it is still the best available on Ethereum. There is still demand like we just recently had another one. So I would say maybe every week, there is one bigger IDO project. There's continuous demand. Even though DeFi it's not as crazy as in the summer, there's still new projects launching and there's still a huge interest in participating in those. That being said, Gnosis protocol version one, again, has not even been designed with this use case in mind. So we think there are better ways to do it. We're going to make some proposals of how this can be done, and we make those proposals to the GnosisDAO.

CR: I want to get to the topic of the GNO token. You mentioned all these different products that have been built within Gnosis, and you mentioned in the beginning how that might cause confusion with token holders, what does this token actually do? How does it accrue value? How does this token play a part on all these different products? And what's kind of the main value proposition behind the token? I would love your thoughts on that.

GNO Token Use Case

SG: That's a very good question. This is still something that is evolving. But depending on what product you look at, there are different ways how the token could be used. If you look at Gnosis protocol, that's maybe the most straightforward. Gnosis protocol could have a protocol fee which then could be to some extent, given to GNO token holders with Gnosis Safe, it's less obvious. It's a wallet, and the question is, but could a wallet have a token?

When we launched GnosisDAO last week, we made a proposal to GnosisDAO of how GNO tokens could benefit from Safe, and what we propose is that we are creating the SAFE token. The SAFE token is a new token which should be given to those that are using the Safe, and to those that have been developing around the Safe. I mentioned, the Safe apps and other extensions. Anyone who's developing or has been developing around to Safe should become a SAFE token holder. Also, SAFE tokens should be given to those that are basically moving to the Safe that are moving their funds towards the Safe for a period. We are hoping that this can create a nice feedback loop where the more funds are actually in Safe, the more interest is from developers to build around Safe. With a SAFE token, this can be triggered.

The question is now why do we need a Safe token? We see that Gnosis right now, as the trust monopoly for Gnosis Safe, so Gnosis is the one providing the interfaces. Gnosis is the one curating the smart contracts. Whenever there’s a smart contract upgrade, is something that has to be approved only by Gnosis. Gnosis we don't want to be the gatekeeper going forward, but we actually would like the Safe community to be the gatekeeper, if you will. For this, we think the Safe can be very useful.

“We are hoping that this can create a nice feedback loop where the more funds are actually in Safe, the more interest is from developers to build around Safe. With a SAFE token, this can be triggered.”

There is still infrastructure missing in the Ethereum space in terms of, like TCR for smart contracts, or secure smart contracts, TCR for secure user interfaces. Every Safe app has been developed such that it is an IPFS object. We think that a TCR that could manage those and signal to users if this is something that you can trust, is something that still is missing. We saw with all the crazy hacks that happened, there's a lot of misinformation in this space in terms of what can be considered secure. I think the Safe community could help creating this infrastructure. That being said, the question then still remains, how does the GNO token relate to all of this?

CR: I’m wondering why not just distribute GNO tokens to Safe users? Why have that separate token?

SG: Basically, if you look at the GNO distribution right now, then, basically, when we did the ICO, we were able to sell only 400,000 GNO tokens. The company still kept about 8.5 million. It's actually not easy to distribute those tokens right now or it's very difficult to just say, okay, we basically would give all these GNO tokens to Safe users. There is a huge risk to just basically go all in on the Safe.

By creating a new token, we allow two things. One, is we can limit the risk for GNO, but we can also allow the Safe to completely evolve as its own ecosystem without being hindered by distribution of GNO.

There are still ways we can give an upside to GNO there are two ways we see this happening. One is that GnosisDAO, for the creation of the Safe, we basically also get Safe tokens, and the other is that there should be a bonding curve where anyone can trade GNO for SAFE tokens and GNO tokens could be locked up. So basically, we want to create a relation between the success of the GnosisDAO and SafeDAO and make sure that both are incentivized to make the other succeed.

CR: So the Gnosis Safe now has its own SAFE token and also its own Safe DAO?

SG: This is only a proposal. It’s not implemented yet, but this is only a proposal.

CR: There’s also obviously, GNO token and a separate GnosisDAO. The users who get SAFE tokens are those who are using Gnosis Safe. Then the way for GNO holders also get upside is that, you said they will also get SAFE tokens, or is that if they participate in the SafeDAO?

SG: GnosisDAO will also obtain SAFE tokens. So we are thinking about 10% of all SAFE tokens will be given to the GnosisDAO probably also on the vesting schedule to continuously incentivize GnosisDAO also to support the Safe. That's one way. Then the other is that there should be a bonding curve between the SAFE token and the GNO token which essentially, basically connects the success of both projects.

CR: GnosisDAO was announced pretty recently, so can you get into what the purpose of this DAO is and how it functions?

GnosisDAO to Build Community

SG: There's a couple of issues that we try to address with GnosisDAO. At Gnosis, we have been kind of, we’ve been good at building a lot of things, but we have not been really great at building a community. We see GnosisDAO as a way to again, start building a community around what Gnosis does. I think that's incredibly valuable for us, because it will allow us to get feedback much earlier on what we're doing. It will also just distribute the news on what we're doing much earlier. This kind of engagement is something that's also encouraging for everyone working on the product, obviously, is continuous feedback, but also they’re actually caring about what's going on. So that's one aspect.

“At Gnosis, we have been kind of, we’ve been good at building a lot of things, but we have not been really great at building a community. We see GnosisDAO as a way to start building a community around what Gnosis does.”

But then also, they will always ask open questions about GNO, what's going to happen with the 8.5 million GNO which a team just kept after the ICO? There was the open question on what's going to happen with the enormous treasury that Gnosis has. There was the open question of how the Gnosis products relate to the GNO token itself. With GnosisDAO, we are trying to basically address all those open questions.

With the announcement, we committed to transfer a big part of Gnosis treasury into the GnosisDAO, so it’ll be about 150,000 ether, which I think, today's price is maybe around $19 million. It will be immediately the biggest fund the DAO in the space.

We already executed on this to vest the remaining 8 million GNO tokens to the DAO itself. So there's already a vesting contract, which is irreversibly vesting now those GNO tokens over a period of eight years to GnosisDAO. Through the proposals which we are making to GnosisDAO, we are basically showing a path on how GNO can relate to the products like Gnosis Safe

“We committed to transfer a big part of Gnosis treasury into the GnosisDAO, so it’ll be about 150,000 ether (…) We already executed on this to vest the remaining 8 million GNO tokens to the DAO itself. So there's already a vesting contract, which is irreversibly vesting now those GNO tokens over a period of eight years to GnosisDAO.”

CR: Then what will be done with that huge amount of money in the DAO? What will it be used for?

SG: That's a very good question. That's basically up to GNO token holders, but there are many ways we can see this being used. So one is to obviously fund continuing development of what has been started. Continuously developing the Safe ecosystem, because GnosisDAO should be a Safe token holder, continuously developed Gnosis protocol for different use cases. But I can also see that completely new ideas can be funded through GnosisDAO. There are lots of ideas we have, and through our own company, we're actually also kind of limited in how many things we can do. We actually see DAO is also a way to kind of scale the operations of GnosisDAO. We will just make proposals for different ideas we have and see if we can find entrepreneurs who want to execute it.

GnosisDAO has everything. GnosisDAO has the funding. GnosisDAO has a token. GnosisDAO has also a big development team behind it, we have over 30 developers, including auditors. So you kind of can streamline the process of project creation. I see a huge opportunity for Gnosis. Then there's also a lot of other things.

Obviously, GnosisDAO would not be able to spend 150,000 Ether immediately, there's just no way this can be sufficiently used, other than if we also do active treasury management. With a huge opportunity that they are currently on Ethereum, of course, I expect that there will be proposals of how to utilize the 150,000 Ether for things like yield farming to just increase the assets under management.

“GnosisDAO has everything. GnosisDAO has the funding. GnosisDAO has a token. GnosisDAO has also a big development team behind it, we have over 30 developers, including auditors.”

CR: There's a chance for GNO holders to benefit from the gains of those investments, right? Is that the idea?

SG: That’s up to the DAO to decide. With Gnosis tokens, what can you do? You can vote on proposals, and those proposals could be anything. I'm not going to suggest anything, but there are, of course, ways how proposals could be made to eventually give something to GNO token holders directly. But I also would expect the GNO token holders would actually see huge benefit in just cumulating also, assets in this DAO construct. Because the DAO has a strategic advantage in its size which you as an individual will not have.

CR: How do you see that advantage, that size being leveraged?

SG: Right, that's actually something that even today, I would say Gnosis can do. By having all those products, of course, there are effects that you have your user base and certain products and you can use this as leverage in negotiations, basically, to not just get better deals. This is just something that you as individual will never have. I think GnosisDAO really has a strategic position in the ecosystem. As such, it will be able to benefit from. Just an example: with a huge treasury, the DAO could become a liquidity provider for several protocols. That's just an asset to have. Also basically, with Gnosis protocol, there will be an exchange, to say, if you have a wallet with Omen, you have prediction market, so there's already an existing ecosystem, which can be leveraged for different purposes.

CR: Super interesting. I want to spend some time talking about this conflict with Arca, this hedge fund who owns a part of GNO tokens, and who has been trying to get a tender offer. So can you explain what the issue there is?

Arca Dispute

SG: Sure, yes. As you said, Arca is a crypto hedge fund and they got interested in GNO, because GNO was trading under book value. So book value is basically the value assuming all the assets that the Gnosis company currently has. if you just look at the circulating supply of GNO on CoinMarketCap and the money that Gnosis limited has, then it was very obvious that, basically, the market cap of GNO was just lower than the amount of assets. As a hedge fund, what do you want to do? You want to make money. So you're going to buy this token and then you're going to be an activist and try to convince everyone else who has GNO tokens to make a tender offer, which essentially means that GNO should basically be bought back, basically taken from the market for the price of the assets that the company currently holds.

Arca tried to convince ConsenSys actually, to join them and enforce us a tender offer. But well, I think they underestimated that there's obviously a very strong relationship between us and ConsenSys. ConsenSys never, ever even thought about accepting this tender offer. It ended up in a call that we had in June. In this call, again, Arca described their idea of a tender offer which obviously is not the most creative way to solve the issues. We were not very convinced, and we were thinking that we have better plans. Again, at that time, we had already spent significant time on thinking about GnosisDAO and how it could evolve, so it's not a reaction to Arca at all, even though they like to frame it this way.

“We were not very convinced [by Arca’s proposal to do a tender offer], and we were thinking that we have better plans. Again, at that time, we had already spent significant time on thinking about GnosisDAO and how it could evolve, so it's not a reaction to Arca at all, even though they like to frame it this way.”

We are not interested in the tender offer that being said, Arca is a GNO token holder, and as such, they can make a proposal to GnosisDAO and that's why I want to invite them. Now, of course, they can do it anyway. But I specifically also want to invite them to join GnosisDAO as active participants, and just make a proposal to GnosisDAO and let GNO token holders decide on what they think about this tender offer.

CR: Can you say what percentage of GNO token Arca owns?

SG: I don't know. I think it's still significant. But I honestly just don't know and I'm curious myself.

CR: Right now I'm seeing here on CoinGecko, the Gnosis market cap is around 70 million. So that's still below book value?

SG: That depends on how you look at it. So it's also important to note that the circulating supply which is on CoinGecko, on CoinMarketCap is not the correct circulating supply. Basically, we have been trying to change this number for some time on both platforms. I think we're going to succeed now with the public announcement. But for a long time, they were reluctant to do so because they have their own measures on how to identify circulating supply, and of course, they don't tell you those, because otherwise it could be gamed. That's why they we had no chance in changing this number.

But the actual circulating supply is about 1.5 million and so it's higher. That's why also the market cap should actually be higher. Assuming this market cap, and assuming the total assets that Gnosis limited actually holds, I think it's trading at book value, maybe slightly more, maybe slightly less, but it's not such a significant amount.

“Assuming this market cap, and assuming the total assets that Gnosis limited actually holds, I think it's trading at book value, maybe slightly more, maybe slightly less.”

CR: Can you share the tender offer Arca proposed?

SG: Of course, Arca had a different perspective on what the circulating supply is and also how many assets Gnosis hold. So they made quite wild claims on what the actual value of GNO should be. As Ether increased, also, their assumptions obviously increased. So at some point, I think they were asking for $130 or $140 per GNO token. This never made any sense. But basically, their ideas of what GNO’s worth is changing all the time. Actually, the only thing that I probably agree with Arca is that GNO is still in my opinion, that's no advice, it's trading under book value. It's the only thing where I probably agree with Arca, which is that GNO is underappreciated.

“It's the only thing where I probably agree with Arca, which is that GNO is underappreciated.”

CR: Right now, it's trading at $60 and in your view, the market cap should be higher. So is the point of the DAO and this kind of new life on the GNO token a way to drive more value to the GNO token, is that kind of the expectation?

Turning Gnosis Upside Down

SG: I would say so. Because we are basically turning Gnosis and GNO upside down, the operations change, becomes much more visible what we do. I think a lot of the things that we have been doing, we never tried to get a lot of attention for it. Now we kind of changed the way how we operate. Instead of just doing something for years, and then announcing it, we first announced it, understand what the feedback is, and iterate on the ideas and then implement it. I think that's just a much better way to operate.

“We are basically turning Gnosis and GNO upside down, the operations change, becomes much more visible what we do.”

I think Gnosis has an amazing team, we have great researchers, we can execute a lot of things very fast. GnosisDAO has an enormous treasury. We have a lot of great partners that can help us making this a great DAO. The first week of GnosisDAO operating has been, my opinion, extremely successful. So we had over 100 new members joining Gnosis, and we had lots of activity on the forums, new proposal that’s being made. For me, as a founder of this project, it has been very encouraging to see that so many people are interested in fighting for GnosisDAO. It feels a little bit less weight on my personal shoulders to make the success and it's super encouraging for me.

CR: This whole idea of DAO and decentralized governance is just a radical, a new concept never tried before. It's interesting to see it from the perspective of the project behind a DAO, changing the way Gnosis has been run for four years into something completely different. I guess, your first reaction is that you feel relief, to not have all of the responsibility on your shoulders?

SG: In some ways, it's also really great to see. Also, it did not only change the way how we interact with the community, but also changed the way how Gnosis internally is operating. So before this, we had the Safe team, we had the Gnosis protocol team. Because now we have this open forum where everything can be discussed by anyone, people that worked on the exchange, are now commenting and bringing new ideas to the Safe token and vice versa.

The barriers that were created inside companies to make it more efficient are broken down and communication can be done in a very different way. New ideas, they can just be proposed to the DAO. You don't have to come to myself or to Martin, we hardly have time. But you can just make a proposal, and you can just see how the community directs to it. I think that's a super powerful way of operating, and I think that's something we really want to improve on.

There's also a very interesting twist to GnosisDAO governance, which is completely different to all other DAOs operating today, which is that GnosisDAO is utilizing 'Futarchy'. I'm not sure if you've heard about your 'Futarchy', but basically, 'Futarchy' is a term coined by Robin Hanson, and it describes governance through prediction markets.

“The barriers that were created inside companies to make it more efficient are broken down and communication can be done in a very different way.”

CR: That’s very fitting.

Futarchy Meets Crypto

SG: He also, I think, is responsible for this quote, “Vote on values, bet on beliefs”. So the idea of Futarchy is he brought it in the context of nation state governance. Similar to society, you should vote on what you would like to optimize for, so it could be for example, GDP or could be happiness and then you should make great prediction markets, which should predict on, how does a policy influence this metric that you would to improve? So basically, anyone could then make a proposal on this, if we implement A, then this would have a positive for, would have an impact on the GDP.

Then anyone can basically start betting on this market, and bet on how GDP is changing, assuming it would be implemented. If the prediction market is signaling that it has a positive impact on the metric, then yes, it should be implemented. Why is better than just general voting? Both it’s a kind of the same assumption that you have also with prediction markets in general is, well, if you vote on something, then you don't have really something at stake. You can just vote and if something is accepted or not, will not have a different impact on yourself and anyone else voting. In prediction markets, if you want to influence a decision, you have to really put something at stake, you have to bet with your own money. That's, of course, something where you will be much more careful to actually try to manipulate or not manipulate, but to have influence on a decision if you know that your own money is at stake, if your predicting was wrong.

“In prediction markets, if you want to influence a decision, you have to really put something at stake, you have to bet with your own money.”

CR: That's so interesting. Are there any studies on how that influences participation? Because I can see a point going both ways. On one hand, maybe people will be less willing to participate if they can lose money, but on the other hand, maybe they want to have a chance of making money off the vote, and so they will participate. I don't know if you've seen any kind of evidence to how that works.

SG: That's still very early on. But I can tell you already from this one week that GnosisDAO was operating basically had one proposal, and we had already prediction markets as part of this. The prediction markets are so far not binding, they're just informing basically everyone who's voting, but they were there, and we saw quite significant trading volume on those markets. So this was very encouraging to see. But it still remains to be seen, how actively everyone will participate.

Generally, in prediction markets, it's also not absolutely necessary with a lot of people participating, simply because you will only participate if you actually disagree with the market, otherwise you won't, because then you would lose money. If the market’s already kind of signaling what you anyway believe, then you have no incentive to also participate. But that's fine, because the market’s already anyway, representing what you are believing in.

CR: I just wanted to get your thoughts for other projects out there on implementing a DAO has been like? For what kind of projects do you recommend going this decentralized governance route?

SG: Actually, I feel more like someone who's following others here. I feel a lot of DAOs have been started recently. But just from this one week experience, it has been very encouraging for us, because, well, it really opened up Gnosis to the community, and started to actually create a community around Gnosis. That has been, I think, encouraging for everyone working on the project to have this direct feedback to see interest of other parties, and also just having great feedback on what we are building.

'Futarchy' itself is something super interesting, we will keep on experimenting with it. So we are committed to really try this. I know currently, we see many DAOs that voter apathy is a big problem. Most people are not voting. Governance in general is still, I would say, unsolved, and probably hope that 'Futarchy' can be a game-changer here and actually allow to make better decisions. But we also have to see how well this resonates with the community and how many people are actually participating.

The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.

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About the founder and editor: Camila Russo is the author of The Infinite Machine, the first book on the history of Ethereum, and was previously a Bloomberg News markets reporter based in New York, Madrid and Buenos Aires. She has extensively covered crypto and finance, and now is diving into DeFi, the intersection of the two.