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Aragon Analysis

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Alex Woodard

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Note: This report was part of the research analyst internship application process for Arca Funds. I am happy to announce that I accepted an offer from the team, and am incredibly excited to work with them this summer. This should not be used as investment advice and represents no one’s thoughts but my own.

Spreadsheets:

Note: A lot of the images didn’t keep their quality when transferring this over to medium. You can view all of the two spreadsheets with the links below!

DCF

Analysis

Executive Summary

— Price: $0.38(2/1/19) — Recommendation: Hold — Target Price: $0.85 —

— Supply issued: 91.16% — Percent down from ATH: 95.24% —

Aragon is a decentralized Autonomous Organization building out the development stack for organizations and individuals to build DAO’s, decentralized autonomous trusts, and structures to raise capital for decentralized organizations. Some of these development tools are governance, payroll, and accounting mechanisms. Aragon is also developing a digital judicial court system to resolve disputes between DAOs.

Aragon was founded by Luis Cuende and Jorge Izquierdo who are now the CEO and lead developer of Aragon One, a DAO under the Aragon Flock program that receives funding from the Aragon Association to develop and build out the Aragon network. The Aragon network is expected to release a 0.7 update named “Bella” which will include an Aragon Mobile browser with notifications for AGP votes, Identity V1 which offers identity features at the local (nonconsensous) level, and it introduces App Center V1 allowing users and DAO developers to do on-chain operations. Aragon plans to be product focused in 2019 continuing to improve the UX of the Aragon Network.

Aragon’s ANT token offers governance mechanisms as well as operates on a variation of the Work Token Model where users must stake ANT in order to provide services and have claims to cash flows. Because of this token model I was able to create a Discounted Cash Flow valuation model using fees from the judicial courts as Cash Flows. This led to a valuation of $0.85, a 99% increase to current prices. However, the judicial court system will not be introduced into the Aragon network until late 2019, and I question just how much revenue they can provide for the Aragon Association. Based on high growth rates in On-Chain volume and low growth rates in expenses I project Aragon to not be profitable until 2027.

In this report, I also express large concerns about the rate in which Aragon spends its capital. Based on their current holdings and recently approved 2019 expenses from their AGP vote, I project Aragon to have a 3.34-year runway before their war-chest is emptied. This leads to a huge reliance on the price appreciation of ETH and ANT for Aragon is going to survive. Overall I give a hold recommendation to not purchase ANT tokens until a sustainable revenue stream through their digital judicial court system is obtained, serious DAO development begins on the network rather than experiments on creating a DAO, or a distressed investing opportunity arises.

Project Structure

The Aragon network is broken down as shown in the graphic on the left. The Aragon Association is a Swiss legal entity that oversees the management and distribution of Aragon’s ICO funds. The Aragon Association was originally founded by Luis Cuende and Jorge Izquierdo the founders of the Aragon network. The Aragon Association recently announced during Aracon 2019 that the association has been handed off to Stephano Bernardi to lead as Luis and Jorge moved into their roles at Aragon One. Besides the management of funds, the Aragon Association is also responsible for approving AGP community proposals and choose which proposals are voted upon in Aragon Network Votes.

 

aragon analysis

 

The Aragon Association is also tasked with upholding the ideals in the Aragon Manifesto. These include:

  • Building free, libre, open source technology to allow the creation and management of decentralized organizations
  • Experimenting with new governance models that comply with the Manifesto’s values
  • Creating a crypto network for decentralized organizations to thrive (the Aragon Network)
  • Building a community that defends the Manifesto’s values
  • Using the token sale proceeds to fund teams that uphold and defend these values, in order for them to carry and accomplish all the aforementioned tasks
  • Working alongside other entities that pledge to support decentralized technologies and build the underlying infrastructure needed for decentralized organizations to flourish
  • Use all of its assets, including proceeds from the token sale, intellectual property, and brand to maintain, spread and defend the above values

Flock Companies are fully fledged Aragon development teams that build the development stack of the Aragon Network. These teams include:

Aragon One– “Aragon One is a Swiss company that encompasses the foundational team working on the Aragon project.” (Aragon One) Aragon One is run by the initial Aragon team, Luis Cuende, and Jorge Izquierdo, and is building out Aragon. Aragon One has rotated from the only team working on Aragon to one of two teams receiving Flock funding from the Aragon Association after the Main-net release of Aragon. They receive funding from the Aragon Association if the Aragon community votes to fund them in Aragon Network Votes and AGPs. Aragon One has been primarily focused on building out Aragon Infrastructure and Governance voting mechanism.

Autark– Headed by Yalda Mousavinia, Autark is a new Aragon Flock company that is currently building out the Aragon Protocol. Autark is currently focused on creating tools that allow DAO’s to operate together more seamlessly by building discussion tools. Autark also has the specific goal to “advancing civilization, with a special focus on DAOs, Aragon, worker-autonomy, and tools to enable open source development of mega-projects.” (Autark)The main mega-project Autark is working on is the decentralization of space exploration.

NEST program- The Aragon Association also funds grants for numerous part-time teams and individuals that are currently working on development in DAOs and across the rest of the crypto ecosystem. There are currently 15 nest projects receiving funding from the Aragon Association with a total of 60 team members.

An Overview of DAOs

Decentralized Autonomous Organizations (DAOs) are organizations run by a series of smart contracts built on top of a baselayer smart contract platform. The idea behind DAOs is that the rules upon which the company functions are enforced digitally. Furthermore, DAO’s can cut out the hierarchy structure of corporations through their transparency, giving direct control to shareholders, and function outside the influence central governments. DAOs key feature is the transparency and immutability of the organization, as all financial transactions, governance votes, and programmed rules are all encoded on-chain.

There are numerous use cases for DAO’s that are an improvement to Corporations and Partnership structures. To name a few, these include decentralized autonomous trusts and capital raising vehicles. One clear cut example where I see DAO’s could have an immediate impact today would be the nonprofit sector. Managing donations and allowing donors to vote on where their capital goes seems like a huge improvement over current nonprofits. In the keynote address for Aracon, Luis Cuende shared this infographic of DAO use cases.

 

 

It is also important to note that the precise legal status of DAO’s is unclear. DAO’s are designed to operate outside the jurisdiction of any country, and therefore outside their laws. “This means potentially unlimited legal liability for participants, even if the smart contract code or the DAO’s say otherwise”. (Wikipedia) Legal risk will be a risk for investors until the SEC or another federal agency gives more clear legal rulings on both DAO’s and cryptoassets as a whole.

DAOs built on Aragon

Though DAO’s are currently a popular topic especially within the Ethereum community, it is clear that very few have received any traction at this point in their development. These would include MakerDAO and Moloch to name two. 293 Decentralized Autonomous Networks built on top of Aragon since the network went live at the end of Q3 2018. Clicking through the DAOs it is clear that almost all (95%) of the DAOs created on top of Aragon were simply experimenting on creating a DAO and are the most basic version DAO as possible. The owner paid for enough gas to create that DAO and name it and that is it. This is concerning because Aragon’s Cashflows specifically come from fees from judicial courts solving disputes for DAOs. With no DAOs being built on Aragon that will garner real use, there are no revenues for the Aragon platform. I would personally wait to see active development on top of Aragon like that of Veil on top of Augur, or Radar Relay on top of 0x before being convinced there is actual demand for Aragon’s services outside of speculation.

Governance on the Aragon platform

Governance Outline

The Aragon Whitepaper outlines the governance on the Aragon Platform as a form of Futarchy. “Futarchy is a form of government proposed by economist Robin Hanson, in which elected officials define measures of national wellbeing, and prediction markets are used to determine which policies will have the most positive effect.” (Wikipedia) However, like much of Aragon, the governance mechanisms are still under active development with no prediction markets backing up the Aragon AGP votes.

Aragon Governance in its current state really comes from two main documents. The first being the Aragon Manifesto which is essentially a call to arms to build a decentralized technological frontier to solidify freedom through truly sovereign assets, fully sovereign entities, truly sovereign identities. Noble, but this is only important for Aragon’s governance system because all future Aragon Governance proposals must align with Aragon Manifesto’s ideals.

The second document was Aragon Governance Proposals (AGP-1) which was approved in the first network-wide governance vote on November 15th, 2018. AGP-1 formulates how the voting process in the future will go. AGP-1 approved the six-stage process for community proposals outlined in the graphic below.

 

 

Voting Stages 1–4 involve drafting a proposal, getting backers for the proposal, as well as sharing it within various governance discussion channels. Stages 4–6 outline how a proposal is voted for approval.

Aragon Association reviews all community proposals and decides if 1) they would be a good use of capital for the Aragon Network development and 2) a priority for the Aragon Network and should be voted on in the next Aragon Network vote. Though the Aragon Association does act as a point of centralization within the Aragon Network, I would argue that active leadership is a good thing for all early-stage crypto projects.

The Aragon Whitepaper outlines 4 major categories in which network proposals would fall under in order from most significant to least.

  • Upgradability: The ability to upgrade contracts that constitute the Network. Granting authority to upgrade contracts is a superset of all other privileges and therefore should require the highest possible authority.
  • Courts: The ability to arrange the court hierarchy and set arbitration fees at the court and network level. Courts are used to enforce agreements within the network, significant changes to the structure and fees of courts should require significant authority.
  • Monetary Policy: The ability to manage price feeds, stability targets, and participation targets that govern the supply of ANT and the stability reserve. These parameters are critical to the stable growth of the network, but changes are constrained such that the impact of any single action is minimized.
  • Fiscal Policy: The ability to direct discretionary funds held in the Network’s treasury. Since the treasury is isolated from the Network’s Stability Reserve, governance of discretionary funds will have a limited short-term impact on the network.

In my opinion, the Whitepaper suggests the long-term vision of Governance on the Aragon Network since the on-chain dispute resolution is not implemented. This will be discussed more in the assumptions section of the DCF. As of now governance on the Aragon Network follows the approved AGP-1 vote which allows four main categories for Aragon Network Proposals. All of which can be seen below in the recent Aragon Network Vote that took place on January 24th, 2019. These proposal categories include:

· Finance- proposals for transferring funds from the Association multisig

· Meta- proposals for changing AGP-0 or AGP-1 (changing Governance)

· Association- proposals for making changes to the Association

· Proclamations- proposals for making a public statement on behalf of the Aragon Network

Voting Results

Aragon Network Vote #1 which was scheduled to take place on January 17th but was pushed back a week because the date coincided with the Constantinople hard fork on Ethereum. The break down can be seen in the tables below. Of the 12 proposals, 9 were approved by the Aragon Association and went to a vote. The 3 proposals that were rejected by the Aragon Association because of the lack of full-time leadership and engineering in the case of Aragon DAC, and to “reduce cognitive load on voters” (Migrate off Alphabet Inc. Services, and Separation of Church-State and Network). The majority of the approved proposals were to fund development for various organizations working on the Aragon protocol. Participation in these votes ranged from 2.38% to 7.81% of the total circulating supply of ANT. In total, the Aragon community approved $7,011,756.00 in funding for 2019.

 

 

The one proposal that was rejected by the network vote was the proposal to extend the AGP vote duration from 2 days to 7 days. The 7-day duration would be similar to that of Politica, the governance voting mechanism for Decred. The vote was denied since Aragon’s current Voting app doesn’t allow changing the duration of votes. This would either require an upgrade to the voting app which would delete all voting history from previous votes. I question the ANT community’s priorities when it comes to rejecting this proposal. I believe they should be doing everything they can to grow the percentage of circulating supply voting for Aragon network proposals. With only 2.63% of the circulating supply voting for AGP-1 and 2.38–7.81% of the circulating supply voting for the first network vote this voter turnout significantly lags behind the 43% of circulating supply voting for the first Decred Politica vote. Governance tokens derive their value from the owner’s perceived value of what they govern. The Multicoin team discussed this idea at their most recent summit where they present the idea that value in governance tokens comes from governing something that is stateless vs stateful. Example being Maker holders govern the 2% of the total supply of ETH that is locked up in CDPs. (stateful) 0x token holders govern the liquidity pools created by the 0x network, as liquidity pools are rather illiquid at this point, this is an example of governing something that is currently stateless. This isn’t to suggest that governance on the Aragon Network is stateless, but the low voter turnout brings up questions about whether ANT holders’ perception of the value of the governance offered by the Aragon network.

Additional Sources:

https://blog.aragon.org/final-results-from-aragon-network-vote-1/

https://blog.aragon.org/final-results-from-the-agp-1-vote/

https://github.com/aragon/AGPs/blob/master/AGPs/AGP-1.md

https://wiki.aragon.org/documentation/governance/

Upcoming Development

2019 was dubbed the year of the product by the Aragon team. After developing the majority of the Aragon Infrastructure and developer stack, Aragon is gearing up to be product focused in 2019. This will include the release of 0.7 Bella designed to improve the user experience and is expected to fully ship Spring 2019, but some “sneak peek” features will be shipping in the next Aragon Update, 0.6.3. This is sourced from the Keynote presentation by Jorge Izquierdo at the recent Aracon Conference which took place January 29th-30th in Berlin. If the project is on track than I would expect some of these sneak peek features to ship sometime late February, early March.

Features from the 0.7 Bella update include:

· The release of the Aragon Mobile App-will allow voting as well as notifications for voting on AGPs as well as future Aragon Network Votes onto Mobile. I see this likely to drastically improve Aragon’s voter turnout.

 

 

· Identity V1- Will also back identity at the local (non-consensus) layer.

· App Center V1-Will allow users and DAO developers to do on-chain operations such as further fundraising, accounting, and a more advanced/reworked payroll system.

Aragon Network V1 is also in development and expected to release in later parts of 2019. The infographic taken from Luis Cuende’s keynote presentation at Aracon shows how the court system will interact with the rest of the Aragon Network. As I mention later in the Token Economics section of this report, as well as the assumptions section of the DCF, I see the court system as a vital development for the Aragon network in order to maintain and produce revenues to fund future development of the Aragon Network.

 

 

Aragon has projected that 2020 will be The Year of Scale for the Aragon Network. Aragon has taken a far more active approach towards scalability development both for Aragon and for Ethereum. Aragon is currently planning or developing three key steps to help Aragon work at scale:

1. Aragon Voting v2-revamp of the voting stack with a layer 2 voting aggregation protocol. This will also allow almost any ERC-20 token will be able to be used for Aragon Voting. I will discuss this more in the Token Economics section below, but I think this undermines the value accrual of the ANT token. In a closed testing environment, this led to proof of concept scaling by 10.72x.

2. Ethereum Serenity- Scaling solution for Ethereum and rolling out Proof of Stake. This will lead to 1024 homogeneous shards of the network. Serenity is a long road ahead for the Ethereum network, this can best be seen with the recent delay to the Constantinople hard fork after a bug was found during the audit process. Aragon is currently giving out grants to Ethereum Serenity developers.

3. Research into Aragon Chain- AragonOS optimized for DAO activity on the Polkadot Network. The Aragon Chain is in the early research phase. Aragon One is not taking on the building the Aragon Chain full time, only doing research, but the Aragon Association is looking for Flock teams to give grants to build the Aragon Chain.

Token Information

Token Presale

The Aragon Token Presale allowed for Aragon to fund operations and development for the Aragon Public ICO. 3 funds and corporations participated in the Presale, CoinFund, ICONOMI, and ShapeShift. Each required to contribute 40,000 USD in ETH at a 20% discount or 120 ANT per ETH. ShapeShift also purchased an additional 10,000 USD in ETH for liquidity purposes. This was purchased without a discount. There were three individuals that also participated in the Aragon Token Sale, Joe Urgo, Daniele Levi, and an unnamed Ethereum founding developer. They were required to contribute the equivalent of 10,000 USD in ETH with the same discount as the funds who participated in the Aragon Presale. In total the equivalent of 130,000 USD in ETH was raised by funds and the equivalence of 30,000 in ETH was raised by individuals, for a total the equivalent of 160,000 USD was raised in the Aragon Token Sale.

 

 

This presale was announced on 5/16/17. To find the amount of ETH raised in the presale and thus finding the amount of ANT distributed, I averaged the ETH price from the two weeks prior to the announcement of completed presale in order to find an accurate price of ETH raised. As you can see in the table on the left the averaged price at presale was 58.85 USD. This led to a total of 2719 ETH raised during the token presale in exchange for a total of 322,201.50 ANT. This is the equivalent to 0.81% of the 2050 fully diluted token supply (Does not include future inflation). I am of the opinion that this is a more than fair presale allocation and distribution.

 

 

As I mentioned above the ETH from the presale was used to fund security audits, legal expenses, and advertisements for the Aragon ICO. After the Presale, Aragon released a presale transparency report, that showed how the initial 160,000 USD raised in presale was used. This can be seen in the table on the left. 725.87 ETH or $45,383.56 USD was scheduled to be spent on preparing Aragon’s ICO. This was 26% of their presale raise. The Presale Allocation can be seen below in the pie chart.

 

 

Token ICO

ANT’s ICO took place on May 17th and only took 27 minutes for the Aragon hidden cap to be hit. (Wiki) Aragon raised 275000 ETH, equivalent to 25M at the date of ICO. There were 2916 transactions purchasing ANT tokens from 2403 unique buyers. ANT was sold at 100 ANT per ETH. That suggests an ANT price of 1.24 USD at ICO. ANT’s token price as of 2/1/19 is down 70% from its ICO.

 

 

The hidden cap, a limit to how much ANT one person could buy per transaction, was added into the token sale in order to prevent large portions of the token supply being owned by a single figure. The Aragon Association also argued that the hidden cap helped attract small buyers to ensure a more even token distribution.

Aragon used the MiniMe standard as an ERC20 token until they released their mainnet in 2018. The MiniMe standard offered flexibility in upgrades as well as clear Governance options. In terms of their distribution of the Aragon ICO, 70% of the ICO proceeds went to purchasers, 15% to the Aragon Association, and 15% as a founder’s reward.

Token BuyBacks

Starting a few weeks after their ICO, the Aragon Association began repurchasing ANT tokens with their ETH supply. In total, they have repurchased 1814776 ANT in 2017 and 1560360 ANT in 2018. This is an estimate because neither the price of ANT, price of Eth, or price of repurchase was included in Aragon’s quarterly transparency reports. I found this by averaging the quarterly price of ETH multiplied by the amount of ETH spent, divided by the Quarterly averaged price of ANT. In total, these buybacks cost the Aragon Association $6,279,741.10. I don’t believe this to be a productive use of capital by the Aragon Association. This represents 8.52% of ANT’s fully diluted 2050 token supply (barring inflation) and 12.34% of the total current circulating supply.

 

 

Aragon argues that this bought back supply will be used to incentivize contributors as well as prize pools for hackathons, hire contractors, pay part-time workers, payouts for bug bounties, as well as a stock option like payouts for Aragon full-time employees. Aragon specifically states that their buyback program is not the same as a traditional buyback and not meant to increase the token value for shareholders. From the investor’s point of view, it acts the exact same way as a traditional stock buyback with the same benefits of decreasing token supply. Tokens purchased in the buyback are not subjected to any lock-up period and will be distributed as the Aragon Association sees fit.

Token Economics

Overview

Aragon Token model is a slightly odd version of the Work token model made popular by Augur. In The Work Token Model, a service provider stakes the native token to earn the right to perform work for the network. In the case of Aragon, Judicial court judges and jury would first stake ANT in order to participate in the court system. Unhonest jurors will be penalized by losing some of their staked tokens. Honest jurors would be rewarded for their work in two ways. The first being they would gain a portion of the Court system fees. They will also be rewarded through a reputation-based system. Jurors with the highest amount of reputation will participate in the supreme court on the Aragon network. This is the top court system where decisions are final and can not be appealed. The work token model is novel because, without speculators, increased usage of the network will lead to an increase in the price of the token.

However, Aragon does/is planning to do a few things within its token model that calls this in to question.

1. Aragon’s monetary policy will be voted upon by the Aragon community, so it will likely not always be fixed. The Work Token Model works because of a simple supply and demand model. If the demand for the court system grows, more revenue will flow to service providers (jurors in Aragon’s case). This will rationally lead to service providers paying more per token for the right to work and earn part of the Cashflow stream. Because Aragon’s supply will likely not always be fixed, the only way this token model will work is if inflation is less than the growth in demand of Aragon’s judicial court system.

2. Agreements between individuals or DAO’s on the Aragon network requires agents to lock up collateral. This is similar to users locking up ETH as collateral to a bet made on Augur or creating a CDP on MakerDAO. Aragon plans allow all forms collateral for agreements similar to that of MakerDAO. However, this is where Aragon plans to do something weird. They argue that using a highly volatile asset like ETH parties expose themselves to volatility and systematic risk. They also argue that using a stablecoin like DAI both parties face opportunity cost on an asset with no upside potential. To solve for this, Aragon plans to “optimize” ANT for usage as a reserve currency. I disagree with using the Aragon Governance token as a reserve currency and optimizing ANT to become the preferred reserve currency for collateralizing agreements because it doesn’t make sense. I believe that in the future, users will want to collateralize whichever Cryptoasset becomes the universally excepted digital currency. I see this likely being either Bitcoin, any base layer smart contract protocol such as ETH or Polkadot, or tokenized assets similar to how one can use their house as collateral to take out a loan. I also see using Aragon to collateralize agreements in contention with Aragon’s governance mechanics. If the majority of Aragon ever becomes locked up in agreements, DAOs would have to void their agreements in order to participate in a contentious AGP vote. I can see that having legal ramifications.

As mentioned above Aragon plans to optimize the ANT token to act as the agreement reserve currency. To do this they will introduce a stability reserve with the purpose to dampen the volatility of ANT. “As the demand for Ant grows and the prices rise, ANT is minted and sold to collateralize a reserve. When prices fall the reserve automatically sells the collateral in order to buy ANT and remove it from circulation.” Since the stability reserve is not operational yet, I conclude that the Aragon Token Buybacks, (can read in the above token buybacks section) are different than the stability reserve buybacks. “If there is insufficient collateral in the reserve to buy ANT and maintain price targets, bonds can be issued to support the network and paid back at a later date…This can be paid back through appreciation of ANT but also from revenue generated by services provided by the network such as the Court.” (Aragon Whitepaper) This price stability through bonds mechanism strikes me as very similar to the Basis stablecoin system. Basis was recently forced to refund investors and shut down due to regulatory concerns. On top of that, my issue with the system is that it seems unlikely that users will want to purchase a bond from a very small, inherently volatile project within an industry that is still very much within the experimental phase. A stability mechanism based on the trust that the project will remain stable seems fundamentally flawed to me. Furthermore, I feel like Aragon counters themselves when they state that the stability mechanism bonds can be paid back partially through the appreciation of the thing that is supposed to stay stable.

Aragon will also hold future AGP votes on the following token economic mechanisms within the protocol.

· Price Target-The price target determines when the supply of ANT is expanded or contracted. Will ideally be based on a CPI.

· Stability Target- Determines how conservative the automated reserve policy is

· Participation Targets- Used to incentives important contributions to the network including maintaining the desired ratio between collateralized and liquid ANT. This will mainly be done through inflation of the network.

Concerns

These token economic mechanisms (also not currently released) cause me to have few concerns about their impact on value accrual of the ANT token ultimately hurting investors. I also believe if all these features are implemented on the Aragon Network, numerous are directly in contention with each other. I believe Aragon would be better off implementing a simpler, Augur like version of the Work token model removing any and all mechanisms that are designed to have ANT operate as a reserve currency. I am off the opinion that ANT used for Governance, collateral for agreements, and staked in the Work token model is asking too much for a single crypto asset and will likely lead to unforeseen economic issues causing Aragon to struggle at scale.

On-chain Metrics

Transparency Reports

Because Aragon releases their quarterly transparency reports, I was able to create an Income Statement like report of all of Aragon’s expenses. Aragon’s main expenses fall under 5 consistent categories, Salaries, Business Expenses, Sponsoring Events, Audits, and Funding Grants. Aragon has spent $1,124,469.65 in Salaries with a 14% increase to salaries per quarter (CAGR) this increase makes sense because Aragon’s team has grown from 2 to 30 team members since 2017. It is also important to note that Aragon has spent a total of 73810.71 ANT on salaries, similar to corporate stock options for employees. In terms of Business Expenses, Aragon has spent a total of $762,384.28, averaging $152,476.86 each quarter. Business Expenses has grown 41% (CAGR) in the past 5 Quarters. Aragon has spent $415,364.61 to sponsor events and pay for event tickets over the past 5 quarters. This does not include Aracon, A conference Aragon hosted January 29th through January 30th. I question if hosting and sponsoring events is the best use of Aragon’s capital even though it does build brand awareness. Aragon also spent a total of $408,603.00 in Q1 and Q2 of 2018. I expect these expenses to increase as Aragon continues to release more updates in Spring of 2019. Aragon spent a total of $ 923,624.68 on Nest grants. This represents a 28% quarterly increase in Nest grant funding from Q1 to Q3 in 2018. Aragon now has 15 teams with 60 members in its Nest program. Once again, I expect this expense to continue to grow was Aragon funds more development grants.

 

 

Overall, Aragon spent a total of $8,074,777.69 between Q3 2017 and the end of Q3 2018. This represents a total of 15540.83 ETH from the Aragon War chest. It is important to note that this does not take into consideration the $7,011,756.00 in funding Aragon will be spending in 2019, voted for in Aragon’s Network Vote.

Some interesting expenses to note are the $4,074,600.00 (7500 ETH at the time) Aragon transferred into other cryptoassets in order to hedge ETH’s price depreciation. The transparency reports did not state which cryptoassets Aragon hedged into, but based on Aragon’s current holdings, (see next section) Aragon most likely hedged into Decred (DCR). I am not a fan of any crypto project holding their ICO reserves in anything besides cash or DAI, but hedging ETH into any crypto asset leads to questions about Aragon’s treasury management. The correlations between all crypto assets represent an incredibly large systematic risk. Currently, all crypto assets are down between 75 and 95% from their all-time highs.

Current Holdings

One of my favorite parts about Aragon is their consistent transparency, you can see their Current reserves here. Based on Aragon’s current holdings, they currently have $24,294,911.87 in capital. However, looking at Aragon’s multisig wallet, Figure 4 in the Appendix, I don’t think this is up to date. Aragon’s Multisig currently holds no Decred suggesting that it was sold. This represents a $240,555 decrease in assets (Decred price from 2/9/19). This leaves Aragon’s total assets at $24,054,356.87.

 

 

Cash Flow projections

As stated above, the Aragon Association has already committed to $7,011,756.00 in funding for 2019. Based on their current assets and next year’s funding expenses, Aragon’s War chest would run out in 3.43 years if the price of ETH and ANT stays the same. This does not include business expenses, salaries, sponsored events, Code Audits, and donations. The 3.43-year projection also holds the $7,011,756.00 constant which shown above in the expense report section seems very likely to continue to grow. This model does not account for revenues from the judicial court system which are not likely to come into effect until late 2019. I also do not expect the court system to lead to any real revenues until a serious, widely used DAO is built on top of the Aragon network. Because of this, in my DCF model, I don’t expect Aragon to be profitable until 2027 using very favorable growth rates. More on this in the DCF section below. Because of this, I see Aragon as incredibly reliant on the price of ETH and ANT to sustain itself for any period of time.

On-chain metrics

Aragon Active Addresses fell pretty much in step with the price decrease, falling 92.68% from its all-time high to its local low, where ANT’s price fell 95.13% from its all-time high. Running a regression where the price was the dependent variable and active addresses was the independent variable, I found a slope of 0.003 meaning per active address, ANT’s price should increase by 3/10ths of a penny. This regression had a low adj-R2 of 0.17 and a P-value well bellow 0.05 meaning that active addresses are statistically significant when it comes to ANT’s price. This regression is Figure 6 in the Appendix. It is also important to note that Aragon’s Active addresses spiked significantly around the time of the AGP votes, but has since fallen back down averaging around 100 active addresses daily.

 

 

In terms of Aragon’s Transaction Volume, we saw very little growth during the last bull run for prices. Aragon consistently had very low network tx volume with random spikes in volume. Though not as sharp of a fall as prices, Aragon’s network tx volume has fallen 62% if outlier spikes in the volume are removed. I also ran a regression with price as the dependent variable and TX-volume as the independent variable. This led to a coefficient of 3.91215E-07 for transaction volume. And though the data was statistically significant(p-value<0.05), the Adjusted R2 was only 0.06 suggesting numerous other factors lead to movements in the ANT token price. The Aragon Transaction Volume regression is figure 5 in the appendix.

 

 

Valuation

— Current Price: $0.43 — DCF target Price: $0.85 — Upside: 99.34% —

DCF Model and why it works for Aragon

A variation of a traditional Discounted Cash Flow Valuation works for Aragon because it uses a Work token model that will take fees through the Aragon’s court system. These fees can be substituted as Cashflows and can be discounted from the future rate back to the present value. It is important to note that Aragon has not yet released its court system but announced that it would be released in late 2019.

Assumptions

Circulating Supply assumptions

I projected the future circulating supply of ANT based on information from Aragon’s ICO and ANTs vesting period. The future token supply can be seen in the spreadsheet screenshot below. I assumed that the lifetime of the Aragon Association (lifetime of foundation) would be perpetuity and used 50 years to project the release of ANT tokens by the Aragon Association to demonstrate this.

 

 

Some other key assumptions in the Circulating supply are listed below:

Inflation– Future APG votes will dictate the rate in which the Aragon fully diluted supply is inflated. You can read more about Aragon’s inflation in the above token information section. To cope for inflation within my model I assumed an inflation rate of 1.5% starting in 2019. I chose 1.5% since it is slightly less than the Federal Reserves 2% US inflation rate. The current Ethos in the space is that base layer crypto assets should act as digital gold, as a hedge against inflation. And though Aragon is a layer two protocol and not a base layer currency, I expect the community to not really distinguish between the two and vote for an inflation rate that would still allow Aragon to be a hedge against inflation. In my model, I assume that inflation starts in 2019 and base the yearly 1.5% inflation rate off of the 2050 fully diluted supply.

Token Buybacks– For token buybacks, I did not estimate future token buybacks and only used the sum of the tokens that have been bought back and released in Aragon’s transparency reports. You can read more about the buybacks above in the Token Information section of this report. I used Aragon’s token buybacks as a subtraction from the total circulating supply because the Aragon Association has not stated that they have sold or distributed any of the bought back tokens. In total, they have repurchased 1814776 ANT in 2017 and 1560360 ANT in 2018.

DCF Inputs and Assumptions

Fees-As I mentioned above, a DCF works for Aragon because they take fees through their judicial court system. These can be used in replace of Cash Flows in a traditional DCF model. Because Aragon has not implemented their judicial court system their extracted fees don’t start until 2020. I gave Aragon’s judicial system a fee of 20% decreasing at a rate of 10% per year. I thought it would be important to decrease the fee rate due to three reasons:

1. Competition in digital judicial courts

2. Commoditization of digital judicial courts

3. Growth in Revenue leading to governance votes to lower prices

With the digital courts not currently implemented into the current iteration of Aragon, and no AGP votes on the topic of Fees yet, I see this as the biggest assumption within my model.

Growth Rates– Since Aragon is still very young, I decided to use a 5-stage growth rate to represent an S-curve, as seen in the Annualized fees graph below. As seen on the network growth rate graph on the left, the first stage growth rate is 20% increase in growth over the next 4 years, the aggressive second stage growth rate is an increase in growth of 45% over the following 2 years. The third increase in the growth rate is 5% for the following two years. The fourth stage growth rate is a subtraction in the yearly growth of -35%. The final fifth stage growth rate is the terminal growth rate of the US economy of a 2.72% increase per year.

 

 

With no way to find typical fundamental growth rates used in DCFs an S-curve typically used in early-stage project valuations seemed like the best choice of growth rates for Aragon. These growth rates are likely to change based on Aragon’s performance and further developments in Cryptoasset valuation models.

 

 

Discount Rates- To find the discount rate used in my Aragon DCF model, I used my Discount Matrix, you can read about that here. The matrix can be found in the linked spreadsheet, or Figure 3 in the DCF section of the Appendix. The matrix works by finding the estimated assets on a projects balance sheet compared to the token’s beta. The beta is compared against Bitcoin because bitcoin makes up 50%+ of the crypto market. In the case of Aragon, the price to estimated assets is negated because of their transparency reports. We can directly see the number of assets that the Aragon Association still has in its war chest. This can be seen above in the key ratio section of this report. Aragon currently has 24.29m assets on its balance sheet. This divided by the fully diluted 2050 circulating supply (not including inflation) finds the number of assets per token, similar to the way a P/E or P/B ratio is calculated. Aragon’s beta is 0.92. Using the discount rate matrix, Aragon would have a discount rate of 20%. But because Aragon is such a new project with a tiny market cap of 14m, I added an additional 10% to the discount rate. The discount rate used in my DCF model was 30%.

Expenses– Since Aragon releases their expenses, I subtracted their yearly expenses from the annualized fees before discounting. Since Aragon’s expenses will continue to grow as the network grows, I increased expenses at an initial rate of 5% and decreased at a 5% rate yearly. The initial 2019 expense was based on the recent AGP-1 vote to fund numerous organizations. The expenses from 2019 were $7,011,756.00.

Takeaways

Based on these assumptions, my DCF price target is $0.85, an upside of 99.34%. My Aragon DCF can be seen here. Some other important take-a-ways from the DCF model. Based on my growth rates to the Extracted Fees, Aragon wouldn’t become profitable until 2027. Some things that would change this include:

· AGP votes to raise the percentage of extracted fees.

· A DAO on top of Aragon receives real-world adoption that leads to a rapid increase to on-chain transactions and digital court use.

I think it is also important to note that DCFs for cryptoassets should be taken with a grain of salt, no valuation model has been accepted by the market yet, and all are still very much in the experimentation phase. Though I do value my model’s output, I think it is most valuable as a clear insight into the token economics of Aragon.

 

 

Correlations

As seen in the chart table on the left or the graph from Coinmetrics bellow, Ant’s token price is highly correlated to ETH’s price. I used weekly prices to find the correlation between ANT and ETH for the last 3 months, 6 months, 1 Year, and Aragon’s lifetime. Aragon has been at it’s lowest correlation levels over the last three months at a correlation of 62%. I would argue that this is because of the 80% run-up of ETH’s price in anticipation of the Constantinople Hard Fork. Since ANT began trading, ANT has been correlated at a rate of 75% with Ethereum.

 

 

This represents two things in my eyes. First is the systematic risk that investing in Aragon takes on in terms of Ethereum. I expect this to decrease as the market becomes more developed, Aragon continues to grow, and if Aragon ever launches Aragon chain on Polkadot.

 

 

The second is an interesting way to trade ANT: Pair Trading. Pairs trading is a market-neutral trading strategy that matches a long position with a short position in a pair of highly correlated instruments such as two stocks. “Traders wait for weakness in the correlation and then go long the under-performer while simultaneously short selling the over-performer, closing the positions as the relationship returns to statistical norms.” (Investopedia) An example of this would be Pair trading Gold price with Gold mining companies.

 

 

Because ANT is highly correlated with ETH, and crypto asset markets are highly inefficient, Pair Trading seems like it would be a highly profitable strategy within the Crypto asset space and a highly profitable trading strategy for ANT. However, there are currently no markets to short ANT, let alone any markets with enough liquidity to short ANT effectively. I also would argue that based on where we are in the Crypto market cycle, there is too much asymmetric upside for ANT and other cryptoassets to short without taking on an enormous amount of risk. Because of that, I think a variation of Pair trading, buying ANT when the correlation between ANT and ETH is low, (such as the last three months) and ETH is outperforming ANT, and selling when ANT’s returns significantly outperform ETH’s. The graph on the left tracks the returns of Aragon and ETH and shows just how correlated they are.

Competition

DAO stack-DAOstack is a platform for decentralized governance that enables collectives to self-organize around goals efficiently. DAOstacks pitches themselves as an operating system for collective intelligence, giving themselves the nickname WordPress for DAOs. DAOstack was founded and began development in spring of 2018. I believe Aragon has galvanized a community around it in a way that DAOstack hasn’t, leading to a competitive advantage over the project.

DAOs building directly on Ethereum– Numerous high-profile projects such as The DAO and MakerDAO have directly built on top of Ethereum. Though both these projects were in development before Aragon’s inception, they show that high profile DAOs can exist without Aragon. I expect high profile DAOs to continue development without Aragon, but see an opportunity for Aragon to corner the market in DAOs that not crypto infrastructure and more user end applications.

Opportunities

The increasing popularity of DAOs– Conversations around DAOs has become an increasingly more popular topic over the latter half of 2018 and so far in 2019. Even though the majority of this analysis has been critiquing Aragon, the Aragon team has positioned themselves very well to corner the market by building out the DAO development stack for when serious development on DAOs begins.

Strong development shipping in Spring 2019– 0.7 Bella designed to improve the user experience and is expected to fully ship Spring 2019. This will include the release of the Aragon Mobile App which will allow AGP votes from your cell phone. Identity V1 and the Aragon App Center V1 will also ship with 0.7 continuing to improve the infrastructure of Aragon and developer experience.

Aragon’s transparency– Aragon’s devotion to transparency makes it easier to predict capital issues for Aragon and exit a position before much of the market is aware.

Distressed investing– Though not currently strapped for cash, I have projected the Aragon Association to be out of capital in 3.43 years if current spending levels stay the same, the price of ANT or ETH doesn’t recover soon, or revenues from the Aragon Court system are not enough. This could allow investors to purchase ANT tokens from the foundation and team’s supply for pennies on the dollar, and in turn, continue development.

Cyberpunk ethos– Aragon is consistent with their cyberpunk, decentralize everything rhetoric. This can be seen in the Aracon conference introduction video, as well as approving the Aragon Fight for Freedom holiday for vote in the first-ever Aragon Network Vote. The holiday takes place on February 10th. This Ethos could appeal to the crypto evangelist community to help develop, purchase ANT, or build DAO’s on the network.

Risks

Questionable Treasury Management- In Q1 of 2018 Aragon Association sold 7500 (4,074,600 USD at the time) for various other cryptoassets as a form of hedging against the price of Ethereum that Aragon raised in their ICO.

Ethereum Scaling issues-If Aragon was to scale 2 orders of magnitude by 2020, and Ethereum were to stay in its current state, Aragon would be using 50% of all Ethereum throughput. This represents a reliance on Ethereum and will likely cause systematic risk for the whole Ethereum Ecosystem. Furthermore, if this ends up being the case, the price to create a DAO becomes orders of magnitude larger described as “this will take my entire month’s salary” by Jorge Izquierdo’s keynote address at Aracon. This severely limits the ability for users to feasibly create a DAO. Voting is the biggest bottleneck of on-chain data for the network, so the development of the layer two aggregate voting protocol as well as Ethereum scalability solutions (sharding, plasma, ect.) will really dictate the severity of this risk.

Token Economic Issues– As stated in the Token Economics section above, I believe Aragon is forcing too much on their ANT token. I believe there will be numerous unforeseen economic issues and bottlenecks at scale. Fortunately, not many outside of the Governance mechanisms are released yet, so I hope Aragon reevaluates their token structure before releasing the stability reserve. The stability reserve will also likely severely limit the upside of ANT’s price for investors.

Development of a Cashflow– Aragon has yet to release their court system which is where fees will be extracted to fund future development of the Aragon Network. The amount of revenue generated for Aragon through this fee system is heavily reliant upon multiple DAOs being built on the platform achieving scale, and heavily using the court system. There are also no guarantees that a DAO built on Aragon will want to use the court system and could decide to solve legal matters off-chain, cutting out Aragon’s fee.

Running out of Capital– As discussed above, the first Aragon Network Vote allocated 7 million dollars for funding of various networks, DAOs, and grants. Based on their current capital reserves, and no substantial cash flows are created this would allow only a 3.34-year runway for Aragon until they run out of capital. I am of the opinion that this is too short of a runway for Aragon to develop meaningful fees to sustain them long-term. This is expressed in my DCF model where Aragon would not become profitable until 2027. This is subject to change, but as of this moment, without the court system implemented, there is no data on Aragon’s revenues.

Aragon dumping ANT buyback supply– Another risk to investors would be the dilution of their position if Aragon ever dumped their ANT buyback supply on the open market. In total, they have repurchased 1814776 ANT in 2017 and 1560360 ANT in 2018, for the equivalent of $6,279,741.10. This represents 8.52% of ANT’s fully diluted 2050 token supply (barring inflation) and 12.34% of the total current circulating supply. These tokens have no scheduled lock-up period and could be dumped onto the market if the Aragon Association becomes strapped for capital.

Systematic risk– Aragon takes on a high degree of systematic risk in terms of building directly on top of Ethereum and being so correlated with ETH. If Ethereum were to fail in its scaling solutions or were to lose market share to other baselayer chains than Aragon would be directly impacted. Furthermore, Aragon’s token governance is meaningless if it does not also align with the Ethereum base layer governance.

Lack of DAO development on top of Aragon– Aragon currently has 293 DAOs built on top of it, almost all are simple experiments on creating a DAO by users. It is impossible to tell which DAO’s are under active development, but I feel confident in stating a very small fraction of the 293 DAOs are serious projects. Also, MakerDAO has shown that DAOs can simply build directly off Ethereum instead of using Aragon’s developer stack or the court system.

Failure of Aragon DAC– Aragon DAC was touted by the Aragon Association as the first outside flock development team contributing to the Aragon network. It received $259,183.95 in Q3 of 2018. However, the Aragon Association shot down their AGP funding proposal because it lacked a fulltime CEO and developer. This again shows a lack of due diligence by the Aragon Association and a willingness to spend its capital reserves.

Development Risk or Failure to ship-Like with all startups, there will be failures and bumps in the road of development. A delay to the 0.7 Bella launch in Spring 2019 could lead to a fall in ANT’s value.

Not enough meaningful liquidity- With no “high quality” exchange listings, and very little volume on exchanges Aragon is currently trading on, it would be hard to build a meaningful position for investors without slippage.

Weird things happening in the Aragon Multisig wallets– This is less of a risk and more of an unanswered question. The majority of transactions on Luis’s, Jorge’s, and the Aragon Association’s Multisig wallets are transactions between each other with 0.00 ETH or 0.00 ANT being sent. Whether this is the group messaging each other on-chain or something else I am not sure. However, it seems like a waste of money due to transaction fees when a simple email could work. This can be seen in Figure 7 in the Appendix.

Conclusion

My view on DAOs is that they are an excellent idea with sub-excellent implementation so far. Though Aragon continues to build out its stack, there is still much development needed before DAO’s are feasible. I expect more high profile DAO’s to slowly come into existence (whether that be built on top of Aragon or just built on top of a base layer smart contract platform) in the next three to five years. For DAOs to revolutionize corporate structures and disrupt a meaningful part of corporations and partnerships I would project this to take a minimum 20–30 years. Aragon has cornered the DAO development market, has a strong and focused team, and continues to ship on schedule. However, there are no real DAO’s in development on top of Aragon at this point and MakerDAO continues to show that a successful DAO can be built directly off Ethereum. Overall it is my worries and continued questions about Aragon’s capital management, lack of cash flows, and continued growth in expenses that lead me to recommend a hold recommendation and not invest in Aragon. Projected out, Aragon has 3.43 years left of capital reserves at current expense levels if ETH or ANT don’t significantly appreciate in value. I am also unoptimistic about Aragon’s court system having enough volume to extend this timeline in a meaningful way. I don’t project Aragon to be profitable until 2027 using high growth rates in on-chain transactions and tiny growth rates for expenses of 5% per year. Overall, I would hold off on investing in Aragon until the court system is in place and meaningful DAO’s are in development on top of the network.

Appendix

Project overview

Figure 1

 

 

DCF

Figure 2

 

 

Figure 3

 

 

Aragon Multisig holdings

Figure 4

 

 

Onchain data regressions

Figure 5-Tx Volume

 

 

Figure 6-Active Addresses

 

 

Aragon Multisig transactions

Figure 7

 

 

Note: If you have any questions, thoughts, or concerns feel free to reach out over twitter!