18Feb 2020

Activist Investing in Crypto

by Henrik Andersson

Happy Birthday, Gordon Gekko

One of our predictions for 2020 is the rise of the DAO. A DAO or Decentralised Autonomous Organisation is a way to organise people in a decentralised system like Ethereum by using tokens to vote. If we want to build decentralised systems, backing them with a DAO instead of a corporate entity or a foundation seem to us to be a more trustless and permissionless way to achieve the same functions as other organisational structures (see our interview with Kain from Synthetix on their move to a DAO structure). DAOs are still experimental and it is not clear how all decisions taken by a DAO can be implemented in a trust-minimised way.

DigixDAO was one of the early ICOs. In 2016 they raised 466,648 ETH, at the time worth $7 million. Digix proceeded to launch a gold pegged stablecoin called DGX backed by physical gold stored in audited vaults in Singapore. The DAO was used for community members to vote on projects that can support the growth of the gold pegged stablecoin. The DAO was controlled by the DGD token. DGD token holders participated in the governance of the DAO by staking tokens. In return they received transaction fees that were collected every time someone moved DGX tokens on the Ethereum network.

With less than $US6 million worth of gold outstanding the yield received by DGD stakers was painfully small compared to the value of the assets in the DAO. As the price of ether appreciated since the ICO, the $7M funding had by the end of 2019 grown to about US$64M of funds.

DigixDAO had the largest ICO war chest.

DigixDAO had the largest ICO war chest.

By not finding worthwhile projects to spend the money in the DAO on, that big war chest moved from being working capital for building an ecosystem to a big asset potentially directly available to DGD token holders.

In August of 2019 there was a proposal for DGD holders to be able to access the ETH in DigixDAO by redeeming their DGD. This proposal ultimately didn’t get enough support but it showed that it was possible to access the funds and the race was on.

By the end of November, the discussion about returning the funds to investors had heated up. The DGD token still traded at less than half the value of the assets in the DAO when project Ragnarok was revealed. It would mean a full dissolution of the DAO where all ETH were to be returned to DGD holders. To us, the risk/reward looked favourable and we took a position in the DGD token.

In January 2020 as the voting got started, it fairly quickly became clear that DGD token holders saw more value in returning the ETH than continuing using the funds to build the DGD ecosystem. DigixDAO thus became the first ‘activist’ DAO trade.

Price of DGD Nov 11 2019 — Feb 11 2019

Price of DGD Nov 11 2019 — Feb 11 2019

If DAOs grows in prevalence we will likely see more traditional corporate style investment strategies applied to crypto assets — watch this space!

Disclosure: We exited DGD in January of 2020 and have no position in DGD at the time of this publication.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.