"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.

🎙Listen to the interview in this week’s podcast episode here:

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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?

[ … ]

Paid subscribers have access to the full transcript, including sections on:

• Increasing prediction markets adoption“We should just have prediction markets on all of those [Ethereum] 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.”
• Gnosis Safe “The natural fit is first of all, collective fund management, that's important for companies, for communities, for funds.”“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.”
• Gnosis DEX“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.”“We think this [batch auction exchange] is the future of trade (…) Gnosis protocols version two will have basically the same user experience as Uniswap.”
• SAFE and GNO Tokens “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.”“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”.
• 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 start building a community around what Gnosis does.”“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.”“We are basically turning Gnosis and GNO upside down, the operations change, becomes much more visible what we do.”
• Arca Dispute “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.”“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.”“It's the only thing where I probably agree with Arca, which is that GNO is underappreciated.”

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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.