Shapeshift, a non-custodial cryptocurrency platform, made headlines last year when they announced that they were decentralising the entire company, with governance delegated to customers via their FOX token. The company, having been around since 2014, actioned the largest airdrop in history to achieve this: granting 340 million FOX tokens to over a million recipients.
As for what they do, in short they enable a safe, secure and private way for customers to interact with digital assets. This includes trading, tracking and earning yield, and a variety of chains are incorporated on the platform.
Now, the Shapeshift DAO is making headlines again, in conjunction with UMA, an Optimistic Oracle that validates knowledge for Web3 protocols. The duo announced last week that Coinbase Ventures and Chapter One have taken a significant portion of the recently minted FOX Success tokens.
The point of these new tokens is to raise funds for the project without selling tokens at a steep discount, which makes sense. But it’s the names involved that have really made waves; anytime parties like Coinbase Ventures or Chapter One are in the discussion, people are going to take notice.
So, we caught up with Kevin Chan, treasurer at UMA, to get his thoughts on some questions we were eager to ask off the back of the announcement. This includes an area which I think has become increasingly important in the world of crypto – the role of venture capitalism and how incentives align or contrast with ordinary investors, which is especially poignant in the context of how Shapeshift chose to raise these funds.
Cryptoadvisor: The press release states Success Tokens offer an alternative way for DAOs to diversify their treasury – can you please elaborate on this?
Kevin Chan: A majority of DAOs’ treasuries tend to be composed mostly by their own native tokens. Those DAOs also have basic needs to diversify and require various assets on hand so that they can pay their team and other contributors as part of their routine functioning. Because of that, it's important to keep a balance of stablecoins.
After a project is launched, besides selling tokens at a steep discount to investors, there are few alternatives for raising funds. Success tokens offer an important fund-raising alternative. Instead of offering a steep discount upfront to investors, the investors are rewarded with more tokens if a success metric is reached.
Price can be that success metric. Success tokens function like a call option or even a KPI option, providing investor alignment with additional metrics like TVL, volume, new users, etc.
CA: You state the sale of tokens to VC investors in an incentivised manner is also an advantage. Can you detail the role FOX Success has here, as well as give your opinion on the state of crypto VC (given how interesting it has been to track over the last year or two)?
KC: With regards to FOX success tokens, investors are given a call option. Price is therefore the metric we are aligning the investors and ShapeShift community with. If ShapeShift is successful in building out its protocol, then the FOX token should rally. If it rallies, then these success token holders will be rewarded with more FOX tokens.
Prior to the use of success tokens, VCs had generally purchased tokens at a discount in exchange for locking in their investment for a year or two, thereby providing stability and support to the project. However, there are scenarios where this arrangement has created friction between investors and the project and the entire community.
Some community members don’t like the idea of large investors being allowed to purchase tokens at a discount whereas they are working hard for the project and buying tokens at the market price. Also, as you approach the vesting date — and if the tokens have not rallied or sold off — the community and the project team could be worried that these investors would dump their tokens given they bought them at a discount.
Success tokens only reward investors if the token rallies. This makes the community feel more comfortable, and avoids some of the friction described above. VCs should also be attracted to this payoff structure. VCs are not in it for a 25-30% discount; they are looking to make 10x or 100x on these investments. So if they have more exposure to success, it would suit them better too.
CA: Many are worried about the consolidation of wealth as Web 3.0 becomes more established – for example, we saw the airdrop of ApeCoin to Bored Ape Yacht Club holders (currently worth $134,000), 52% of which was locked up by the founders, original holders and those working on the DAO. Do you think this is a concern for crypto, or do you think these are merely growing pains and the vision of Web 3.0 facilitating a more democratic, transparent and accessible environment is on track?
KC: There is concern that crypto wealth is concentrated at the moment, but we are still very early on in the evolution of Web 3.0. An important difference with Web 3.0 is that it is permissionless, transparent and everybody is on an even playing field.
In traditional finance, there are backroom deals that favour people in power and unfairly advantage established "old money" relationships or people with political influence. People with money have access to more investment opportunities because of favouritism and regulations that protect the status quo.
In DeFi, many of these unfair advantages are removed. We can see where the funds are flowing and who’s doing what. You don’t need previous wealth to get access to investments. The main idea and vision is that the benefits, services and products of DeFi are available to everyone.
If you have an internet connection, anybody, anywhere in the world should have the same access to opportunities. Those are the ideals we are striving for, but there is still plenty of work to be done.
CA: Where do you see the crypto market going over the next year? Do you think the geopolitical climate (Russia/Iran etc) or monetary environment (inflation, Fed hikes on horizon etc) paint a bullish future for Bitcoin and crypto?
KC: Yes, there should be long term positive growth for crypto and DeFi. Current geopolitics and monetary policy highlight the need for self-custody and the management of assets that are independent of government influence or control.
Near term, there is still a lot of uncertainty as to how this plays out in terms of regulation and other government responses.
CA: How do you think the FOX Success token would fare in a prolonged bear market?
KC: FOX success tokens will trade just like a regular FOX token in a major bear market, assuming it is significantly below the call option’s strike price. The investor is given a free option. This could cause some investors to lose interest in the project, but that would be the case for many projects in a bear market.
ShapeShift, on the other hand, would have fared better because they didn’t give up the discount upfront and secured more funds now and they can retrieve the excess collateral stored in the success token (for the call option), and use that for future fund raising.
The success token will prove to be more efficient.