For Investors: The Economics of RootProject’s Token
The author, Dr. Nicholas Adams Judge, is a political economist and cofounder of RootProject. The other cofounder is Chris Place, a Y Combinator Fellow. Their nonprofit’s pre-ICO, which carries a 50% bonus, just passed 203% of its goal. The cofounders are taking zero tokens and no compensation beyond a reasonable salary.
RootProject’s pre-ICO is ending in two days. Formally organized the Friday before it launched, it was a purely grassroots crowdsale, intended to raise funds for the exceptional legal complexities of wedding a Swiss-based token-administering foundation with an American on-the-ground nonprofit.
We have more than doubled our pre-ICO goal, in a difficult Ether market, and built a slack team of over a thousand people. Now it is time to reach out to more established investors for the actual ICO — though of course we hope the grassroots attention and investment will carry over to the ICO. The talk thus far has been about the social impact of RootProject. Now let’s focus on the asset itself.
While Chris, myself and our friend Dr. Melissa Mahoney came up with the ideas behind RootProject, as a political economist whose dissertation focused on models used in currency markets, the design of the crypto asset itself was left up to me.
Beyond my quantitative research, I also worked under Berkeley economist Professor Emeritus Jack Letiche, whose work on foreign exchange models and first-hand war stories about some of the currency crises of the twentieth century gave invaluable insight into how to interact with markets in order to preserve value.
A technical whitepaper on the design of the crypto asset, the ROOTS token, will be published for quantitatively sophisticated investors before the ICO. However, the below conceptual sketch conveys in simple language what every potential investor should know.
Time to Get Serious About Liquid Markets
It’s impossible to predict with a high level of certainty how markets will greet a new asset, let alone a crypto asset. However, asset design can be optimized, down to great detail, to endow it with the qualities sophisticated investors look for — something not being done by nearly all cryptocurrency-issuing companies thus far.
There are brilliant people making incredible products and services in the crypto space. It is important to be honest, though: This is the first time that a group of 20 year-olds can launch an asset that interacts with liquid markets before they have gone through the professionalizing process of building a company up to the IPO stage.
The learning curve has not been pretty, and much needless value destruction has taken place — both for investors and cryptocurrency-issuing companies.
Value generation in the crypto space will accelerate as asset design best practices become standard — and as companies learn to communicate to investors effectively. RootProject will work with other organizations during its ICO to standardize these best practices.
The Basics of RootProject
Two Key Design Objectives
ROOTS tokens are designed with two objectives in mind.
- To create a virtuous growth cycle that links asset value and institutional growth (while sheltering the institution from downward shocks to the asset’s price by holding several years’ operating budget in USD).
- To reduce volatility and correlations with the crypto assets that we expect to be held in the same investor portfolios as ROOTS tokens.
The Virtuous Growth Cycle
Growth is achieved by funneling demand from crowdfunded projects into a feedback loop that links organizational growth and asset value. You can read more about our feedback loop here.
Demand for tokens comes from three main sources.
- The crowdfunding fee — that is, the 10% fee on donations to particular projects — is used to purchase tokens on the open market.
- The pension fund contribution — funded like the rest of the project budget, from the crowdfunded donations to a particular project— is also made in the form of ROOTS tokens that are purchased on the open market.
- Large deals with institutional donors — either seeking positive PR or to do social good — involve a small portion of dollars going to the purchase and burn of tokens.
While demand for ROOTS is increased, supply is strictly hard capped. The majority of supply is not released for over half a decade. During and after that time, a substantial portion of ROOTS will be burned.
In short, while one can never predict with certainty future price movements, ROOTS tokens are designed to enjoy increasing demand and reducing supply.
During the pre-ICO, some unprofessional investors have voiced worry that creating an explicit set of linkages between organization size and efficacy and crypto asset value amounts to a ‘Ponzi scheme.’ Two responses are appropriate.
First, their debate is with various Nobel-winning economists or political economists, not Rootproject, whose design is a simple extension of their work into the crypto space. Laureates Elinor Ostrom and Clive Granger are useful examples, among others.
Next, markets establish links between asset value and institutional size and efficacy, whether crypto asset-issuers like it or not. By centering these links around formal organizational rules-based relationships, uncertainty is reduced, creating risk-adjusted value for investors and program participants.
Volatility and Correlations
The second design objective of the ROOTS token is to reduce volatility and correlations with the crypto assets that we expect to be held in the same investor portfolios as ROOTS tokens. This is done by tying market price — as much as is possible — to underlying, predictable token supply and token demand variables.
If the market price strays too far from the published equilibrium price, our real-time data publication and modeling will aid quantitative investors in pushing the price back to the equilibrium.
Because of known difficulties in models of equilibrium price, RootProject’s published data will greatly ease the modeling process, encouraging investor adoption of appropriate models.
This ease of use should also increase ROOTS liquidity, as automated trading strategies will be easy to build, and thus sellers will be able to find buyers with greater ease.
ROOTS tokens are simple assets. Only several rules link their expected future price to the nonprofit institution’s activities: Crowdfunding fees, pension funds payments and negotiated large donor deals.
Even very modest scaling of the crowdfunding platform — say, $10 million raised in a year, as opposed to Kickstarter’s $600 million last year — will lead to substantial, sustained liquid supply reduction of ROOTS tokens on the market.
Because RootProject combines a crypto asset with the very basics of institutional economics and financial econometrics, a new phase in the maturation of the crypto asset space can begin.
Disclaimer: All investing is risky, and cryptocurrency markets are an exceptionally volatile asset space. Never invest with assets you are not willing to lose.