A token price of $70ct is used throughout this article.
Exec sum / TLDR
BYTE is the governance token of BinaryDAO. Sort of a crypto hedge fund, not a DAO. BYTE trades at a significant discount to the treasury value. A liquidation / redemption scenario (not likely in the near term) would result in more than 200% upside. In my view it mostly trades at such a significant discount as the protocol owners misled early investors by not communicating the significant amount of funds that would be used for team and development expenses and further communication and transparency issues. We are dealing with a trust issue and in order for this investment to work you have to believe that the team won’t repeat this type of behavior. There are several near term and longer term catalysts that have the potential to narrow the discount to treasury value significantly. While waiting you get paid a c. 25% yield earned by the treasury (non-dilutive).
Still interested?
One more attempt to scare you off, before moving to the good stuff.
The BinaryDAO team, with close involvement from Metis, omitted critical information during the funding round
I didn’t participate in the funding round of BinaryDAO. My views are based on conversations with investors who did as well as the chat history in Discord and Telegram.
A couple of key dates that help to better interpret the below screenshots.
NFT sale March 4th - March 7th 2022
Pre sale March 9th 2022
Public sale started March 11th - March 16th 2022
Based on the information I found it is pretty clear that investors were misled during the funding round as BinaryDAO did not (properly) disclose the amount of funds that would be reserved for team members and future development.
Early investors were first taken by surprise by a 15% token allocation for the team
The team allocation was 15% of the initial tokens minted during the early investing rounds as well as 15% for all future mints.
The 15% was mentioned for the first time in Discord on March 10th 2022, after the NFT and private sale. I understand from early investors that it was added to the docs after March 9th, but have not been able to verify this.
The communication on March 10th was still fishy in my opinion. Saying that there is no team allocation from the total supply during the fundraise process and then counting all BYTE’s from the fundraise as fresh mints to which the 15% applies is at the very least creative and misleading.
Not much later early investors were shocked to find out that the team took another 20% ($2m) of the $10m fund-raise for future development expenses
It is super clear that this was not properly communicated. It is shown in one AMA recap on Medium, while it was not explained in the actual AMA on Telegram and not shown in the docs at the time (and still isn’t).
Supposedly it was also mentioned during a Twitter spaces event. Early investors claim that the Medium document was edited after the raise to mention the 20% allocation. It has been verified that the article was edited, however the content of the edit cannot be traced back. In the Discord the 20% was never clearly mentioned as it was stated that 10% would be used for protocol owned liquidity and 90% for the treasury.
It’s peculiar that Metis employees supported this fundraising process and sort of legitimized the 15% token and 20% fund allocation by referencing the fund allocation model.
Metis explains that they didn’t check whether the BinaryDAO team made the information publicly available. They purely supported the project.
Based on further questions I understand that the fund allocation model was only discussed during non-public meetings between Metis Business development and BinaryDAO’s team. (they also never joined the multi-sig, while they communicated they did).
Based on this information you can form your own view whether Metis was not in the know, or whether they turned a blind eye. In my view it is at the very least gross negligence to not check such important details when you have such a public function in an early investment round.
What makes it worse is Carlos Matos level shilling, the Metis team supported with. If you are helping to sell something so aggressively - you have a duty of care in my view to check the basics. Especially if you also share it via the official Metis Twitter - that creates trust for the average retail investor.
“Unmatched upside”, “On chain Alamada”, “Unlikely to fall below token sale price”
“I see them multiplying” - Twitter thread deleted.
“Amazing yield generation…”
It’s also a pretty bold statement to deny a rug given all of the above.
In my view, if the team would have properly disclosed the token and fund allocation model, they would never have been able to raise $10m.
The team says the following about it:
Of the $2m, at least $0.8m is still on chain (my own quick scan). From community members I understood that there is c. $1.2m on chain in total. The community has asked the team on several occasions to detail all expenses, however so far the team is not willing to do so. I don’t include any of this $2m in my valuation model. I do think that there is a small chance that part of this $2m will be returned to investors (e.g. in case of a full liquidation / redemption). Some investors have joined forces to explore legal steps.
Why isn’t Metis supporting the community to succeed in their efforts to enforce a redemption / liquidation?
BinaryDAO is still important to the Metis ecosystem. At one point they almost represented 25% of the total TVL on Metis (currently c. 14%). This might hold Metis back to support the community to make things right. The community wants a redemption, so this would mean that a large part of the c. $8m in treasury could leave the Metis ecosystem.
Still there?
Great!
This time is different
Early investors clearly have been misled. I think that the odds of the team doing further significant wrongdoing are materially lower.
I believe that they have taken advantage of early investors by operating in a gray area (dark shades of gray), which they simply dismiss as miscommunication.
Using a lot of creativity BinaryDAO could make a weak case that the 15% token allocation and 20% fund allocation were indeed miscommunication, as it was mostly the result of omission of information or vague communication. If it would ever come to court (the main dev has been doxxed to the Metis team) - the odds are definitely not in their favor.
With regard to future use of the treasury the communication has been crystal clear: “…and please be assured that no more funds will be taken out of the treasury under any circumstances”. They would really have to take it to the next level to dupe investors again.
On top of that there are several other developments to reduce the odds of further wrongdoing.
Several savvy (whale) investors have bought the dip and are making efforts to improve governance. These investors are winners and don’t just let go. They have experience with similar situations at other protocols - with success.
Both Metis and BinaryDAO are now subject to a lot of scrutiny from both old and new investors. All on-chain fund flows are being monitored.
The team could have “hard” rugged the treasury over the last months. But they haven’t and they are restructuring their product / building new solutions. They seem to be focussed at long term value creation now.
I know it’s a bit thin. But that is also where the opportunity lies in my opinion. You have to make an educated guess here. Investing is more of an art than a science.
Please… I want to ape, give me some good news - it’s taking way too long…
Ok ok, at your service.
The tokens trades at a huge discount to treasury and there are several near term and longer term catalysts on the horizon to narrow or close the gap.
The treasury is mainly in stables and conservatively managed
Below an overview of the treasury. It is basically fully in stables. If the protocol would be liquidated today BYTE holders would receive $2,58 per token (adjusted for the BYTE owned by the treasury as part of the BYTE/USDC LP).
On the last Twitter spaces the main dev 0xMarin mentioned that BYTE will fully remain in stables until there is a clear trend reversal in the market. As far as I know the treasury has never been invested in something else then stables since the start (April 2022). This has preserved value during the bear market which is great.
There is no track record available to asses 0xMarin’s investing skills. So it has to be seen how well the fund performs in a bull market. Over the last couple of months the farming performance has been lackluster and no value opportunities in the market have been taken advantage of.
All with all I expect the treasury to continue to be managed conservatively, preserving value, but not maximizing returns. I do expect some improvements though due to better alignment of incentives.
There are several catalysts to narrow the gap with treasury value
Improved alignment of incentives
Now you know the BinaryDAO team a bit better, it shouldn’t come as a surprise that they apply their creativity to vesting mechanisms of the 480k team tokens as well.
The tokens were locked for 6 months with a 2 year lineair vesting period. The tokens were recently unlocked and the team decided to stake all of their tokens into the pools which distribute the treasury’s yield farming results, thereby diluting other stakers.
In my opinion it shouldn’t be possible to stake unvested tokens. However, I also understood from community members that the same is being done at other well known protocols such as LooksRare and Fei (I haven’t verified this).
While it dilutes the yield of stakers it also aligns their incentives with those of other stakers - to maximize the yield generated on the stablecoins.
BinaryDAO has a long term partnership with Netswap, of which the details are unknown, but as far as I know it doesn’t really benefit BinaryDAO. I suspect that there are some relationships between BinaryDAO and Netswap we are not aware of. As a result, until very recently the majority of the stables were deployed on Netswap for a low single digit yield.
Simultaneously with the team staking their vested tokens for yield they reallocated over $3m from Netswap to Hummus to optimize yield (x3-4). So while we don’t have the details of the Netswap partnership, we can conclude that it isn’t holy to the BinaryDAO team.
The BinaryDAO team also indicated that they are considering moving funds to Hermes which would further optimize yield.
The current yield is c. 28%. As a promotion of the product restructuring of which the first phase went live on September 1st 2022 (I suggest reading this short article explaining the restructuring) the team decided to distribute 100% of August’s treasury earnings to stakers during September.
After September the distribution of yield will be 50 / 50 between stakers and the treasury in order for BinaryDAO to accumulate governance tokens (e.g. HUM) which allows them to boost the yield on pools where they deploy the treasury. This 50 / 50 split will then slowly move towards 90 / 10 over the following months (distributing the majority to stakers).
The 50% cut for next month is fully off-set by the improved capital allocation at the current NETT, HUM and METIS prices. With further upside if part of the remaining $2.5m on Netswap is reallocated to Hermes or Hummus.
Potential Metis grant
During the latest Twitter spaces the team indicated that they will start applying for a Metis grant as part of the Metis marathon now phase 1 of the restructuring has been implemented. I believe that they have good chances to qualify for Metis grants as:
BYTE has always operated in a Metis friendly way: kept assets on the Metis chain, despite better yield opportunities elsewhere, at some point totalling c. 25% of the total Metis TVL - in order to support the Metis ecosystem
BYTE has a Metis friendly restructuring plan, which reduces sell pressure of farmed tokens
BYTE is still an important protocol for Metis given the size of the treasury which is deployed in the Metis eco
One thing that might hinder the process is that Metis might want to take more distance from BinaryDAO as a result of the shady fund-raising process they were involved with.
The potential of a grant can be very significant for a low market cap protocol like BinaryDAO. Hummus Exchange received c. $2m in grants. If BynaryDAO would qualify for the same amount, this would represent c. 25% of treasury / 80% of the current market cap. This value will not directly benefit BYTE holders, but will have a very significant impact.
Metis marathon and inflow of smart money into the Metis ecosystem
The Metis marathon recently kicked off and is expected to increase activity and TVL on the Metis chain.
“As if Metis 2nd half of 2022 Roadmap wasn’t exciting enough, MetisDAO Foundation has just announced Metis Marathon, a 26-week long builder incentive program that aims to incentivize a fierce development of the Metis ecosystem. Besides introducing some of the Top DeFi protocols by TVL to our ecosystem, the Marathon will also help create a native powerhouse by directly incentivizing some of Metis’ most innovative native dApps.”
As recently shared by Ouroboros Capital (highly recommended follow on Twitter) there is a lot of smart money flowing into the Metis ecosystem relative to TVL growth. If the smart money is right, more TVL will follow. A rising tide lifts all boats.
Small improvements to governance
On September 1st, the team introduced a new “forum” channel on their discord to facilitate governance discussions including capital allocation. Ideas dropped in there will be considered by the team. There hasn’t been any meaningful engagement yet, so we still have to find out whether it really is a step in the right direction.
The team has made it clear that they will move towards a full DAO once the treasury is larger. We are still waiting for more details.
Implementation of restructuring phase 2 and 3
These will be implemented during Q3 and Q4 of this year. I have my doubts whether they will be able to compete with Beefy Finance and others. However, it will at the very least attract new eyes to the protocol. For a protocol like BinaryDAO, any sign of life is good.
Conclusion
I believe that the future of BinaryDAO is brighter than the past. The community wants a redemption (>200% upside). There is no guarantee that will happen and it will take time.
However, you are paid a nice yield while waiting for a potential redemption. And even if the redemption doesn’t materialize - there are several near term and longer term catalysts that will likely narrow the discount.
It’s a very attractive risk / reward opportunity in my view. You can take care of the risk via position sizing.