Thread by @1sat1c

Dumping Capacity vs. Skin in the Game 🧵👇🏻

A lot has been written and discussed, including by leading voices in the space, about the gini coefficient, or wealth concentration of different protocols.

Typically, the topic is raised in the context of dumping. Everybody is out looking for the next potential Dumpooor.

Some phrases, like “dumping on their followers”, “bullish unlocks” were used so many times they became part of gripto’s folklore.

Some, as in the example below, r making a case 4 institutional investors as large % holders over individuals, allegedly b/c their inherent nature dictates a lower dumping probability vs. capricious individuals.

https://twitter.com/Arthur_0x/status/1484795175348350977

This will be long, so here’s the TLDR:

- It’s not the type of large holder but their actual identity & characteristics that matter.

- Some individuals have advantages over institutions as large holders.

- Selling doesn’t equal dumping.

- No serious player (almost) ever “dumps”.

- Dumping is more correlated to retail than large holders.

- @FrogsAndOrca r the epitome of accretive individual large holders.

It is true that pump and dumps r commonplace in this space, were so from the beginning, and to date involved a larger % of individual than institutional perpetrators.

Nevertheless, I use a different framework to look at this topic:

Rather than looking 4 dumping danger as reflected in concentration, which is a narrow, quantitative measure, I look on top of that 4 qualitative measures that would indicate skin in the game.

Before continuing let me be clear: tracking the key holders of protocols’ tokens, their identity & past behaviour, tokenomics, emission schedule, and token unlocks are very important tools, r basic if u wish 2 find success, should b part of any DD and is a big part of mine.

But on top of that, (when possible) I look deeper at the key holders, and build an incentive profile, drawing on much more data and time than their mere % holding, to determine if their dominant presence is a dumping danger, or a net benefit to the protocol as skin in the game.

My conclusions, after awhile of doing this:

1. The best large holder a protocol can have is a capable individual with skin in the game.

2. Dumping is a phenomenon much more closely linked with clueless retail behaviour than successful investors, whether institutional or individual.

3. The least less likely 2 dump is a founder who is also a large owner.

What I’m basically suggesting is, instead of looking for potential dumpers, turn the framework on its head and focus your efforts on locating skin in the game instead. B/c when u find that, it’s a big driver of success.

In the context of tardfi, whenever I’m pitched a potential investment, my first question always is how much do the key individuals own.

With small caps, if the answer is anything less than 25% (fully diluted), my DD stops right there.

In tardfi, there’s an inherent tension between shareholders and management.
B/c the 2 groups operate on 2 different metrics (shareholders - share price, management - salary, bonuses etc),

in many cases shareholders interests get the back seat 2 managements ability to extract value from the company.

Hence, it’s important the key individuals have their net worth tied significantly 2 the success of the Co and its share price, not their salaries.

The token model of gripto solves this problem. That’s 1 of the keys 2 the new economy and the tokenisation that will unlock so much value that couldn’t be monetised before.

A great example would b FrogsAndOrca.

Yes these r 3 individuals, not incorporated & unbound by any official internal ties b/w them. And yet, have managed 2 create an amount of value in the space that rivals any VC.

I’ll use their involvement with #Dopex 2 demonstrate my point:

On the surface, these 3 seeded the protocol (with a couple of others), hold a disproportionate # of coins, r not held back by vesting anymore and could potentially dump at anytime.

And yet, onchain investigation shows that collectively as a group not only did they not dump despite the price going 80x from their cost base, but they actually kept accumulating & r in parts responsible 4 the price increases. How come?

1st things 1st: Despite the urban legends U’ve heard, serious players don’t dump.

It’s not b/c they r altruistic, but 4 business reasons: b/c they own large quantities, dumping would bring the price down on themselves, hurting their return, & sometimes their ability to exit.

No serious player ever does that. Professional players build and exit positions gradually. Consistently and gradually. The goal is for the market to never realise they were active in either direction until after the fact, if at all.

Why? B/c it’s enough 4 the mere rumour of a whale involvement in either direction to significantly impact price. Whales r aware of this, and have tools to prevent that from happening.

The game whales play is different than retail. They have issues to deal with retail dont. B/c they deal in size, they need to have a market to exit to, otherwise they may get stuck. Retail doesn’t have this problem.

A rumour a whale is exiting could bring a wall of retail selling that would overwhelm buyers, leaving the whale stuck in a losing position with no market to exit to.

Second, selling doesn’t equal dumping. Everybody can sell some, 4 a myriad of reasons. CEOs sell stock in their companies all the time. It doesn’t mean they don’t believe in the future of their Co.

Dumping is selling large quantities in a short space of time, in a way that negatively impacts price.

Now that we’ve dispensed with the dumping myth, back 2 frogs and orca.
Let’s examine them 1 by 1, and assess their associated dumping probability.
We’ll begin with the mega Chad:

Dopex isn’t merely a gripto investment 4 TZ. He’s the founder. He’s the everyday operator. It’s his baby. It deals with his field of expertise. He is the brain behind the idea and execution. He is the Center of its ecosystem and it’s the protocol linked to him the most.

His investments into Dopex go way beyond capital and include huge amounts of time, effort, brain power, energy, community building and more.

TZ is talented enough 2 b successful in a lot of endeavours. He doesn’t need to build a pump and dump scheme to make a quick buck. What he’s looking to do is build something that becomes a pillar of the new financial paradigm.

A depreciating token price has the biggest impact on him, more than any other holder. TZ tied himself in more than one way to Dopex’s success, and is the least probable to engage in any sort of dumping as he has the most to lose, in more than one way.

TZ is the epitome of skin in the game: his wealth, success, value for time, reputation all closely tied to Dopex’s success.
Bottom line: dumping probability as close to 0% as they come.

On to the fan favourite, the Orca:

I found his case fascinating as there was a huge discrepancy between online pleb speculation and actual on chain and off chain data I could find.

This is where some of the commentary from VCs about anon founders collapses.
The Orca may b anon, but his online alter ego grew 2 the point of cultural significance in gripto.

Memes, art, legends & myths r created around it, 2 the point where it became an important part of crypto’s culture.

This isn’t by accident. The story about the 3rd world immigrant, rich in talent and ability yet poor in contacts, repeatedly rejected by the establishment until he finds his calling,

first as a shrewd crypto operator and later as the leader of an army of plebs, guiding them out of poverty through his Alfa leaks, has captivated new entrants’ minds and serves as hope and inspiration to them.
“If I can do it, U can” is a common theme in his communications.

At this point, I’d say that beyond Satoshi - a passive, very limited, non evolving story, Tetranode is the most mythic character in gripto, partially b/c of his anonymity, which allows the imagination to work freely.

Other doxxed characters, as important as they are, like Vitalik, Sergey, Andre, are revered, but viewed as tech geniuses, living in a different sphere.

Tetranode? He’s one of us. A video game addict that through his acumen and will power alone achieved his prime spot, and has now turned his attention 2 liberating as many plebs as possible from the tardfi shackles.

That’s a very powerful backstory, mirroring some of the most memorable historical leaders.
How much value does that have? To the space, and 2 the person behind Tetranode himself.

Add 2 that the other side of his operations: seeding protocols and guiding/advising them to success. It took nearly 7 years 4 the orca 2 get involved in another project in gripto beyond Btc & Eth. Why?

First b/c there was little else 2 do. The space wasn’t ready. But second, b/c he didn’t have the means.

Once enough time passed and he amassed enough crypto capital, he was ready to use it not only to gain a favourable position for himself, but 2 support the projects he’s involved with through market operations.

If you looked carefully onchain, u could detect significant accumulation on his part post seed, but no selling. Not when Dopex 10x his entry. Not 50x. Not 80x.

Is there a chance I missed it? Definitely. Not everything is transparent on chain.
But I don’t think so. Here’s why:

If U combine these 2, his character’s mythic presence with gripto ppl, and his actual role within these gauntlet projects he’s involved with, you’d realise the asymmetry between what he has 2 gain from these projects’ success, vs. What he has 2 lose if they tumble b/c he dumped.

Last, there’s an ideological aspect to him. He wants Defi 2 succeed b/c like TZ, he recognised the injustice inherent in tardfi, and he wants to create a better, fairer alternative. This is also key.

He doesn’t have financial concerns. He’s not vital to the Eth ecosystem, he just has a lot of it. Where he is vital, where he carries an outsized influence, internally and externally, is Defi.

He repeatedly and publicly supported Dopex and its fundamental importance to Defi. He’s invested in it financially, reputationally, ideologically and intellectually. That’s skin in the game.

Its what you look for in a key stakeholder. Way better than some director who’s there to chew cookies at meetings and clip a salary and bonuses.

On to the outlier, the bad boy, the rockstar of the bunch: DefiGod.
I’m gonna use DefiGod but this applies to David Iach or any other large holder of any token. I chose DefiGod b/c he’s the second frog, and b/c he was publicly accused of dumping another project recently.

The game theory here is different, b/c while he is a seed, and while he is responsible 4 key contributions to Dopex (2 token model), he’s less involved than the other 2, and has his own flagship project, JPEG.

So lets assume DefiGod has his sights elsewhere, needs capital 2 develop other protocols (or mint 20 y/o ehm, never mind), or any other reason ppl have 2 sell good investments sometimes.

Do U think he’ll dump on his 2 frens?
Do U think they’ll let him do it?
Do U think he’ll even want to risk that?
Beyond that, dumping his quantity will cause him to bring down the price on himself. Not a move of a shrewd operator like him.

Instead, if he did want out, he’s much better off conducting a secondary sale to 1 or both of the others, or with other large holders like David, Heartwood, myself, or others.

Yes, he may have to take a quantity discount 2 market in that scenario. But it will be lower than the hit he’ll take if he tried disposing that quantity on the market.

It’s a better option than going the LP route as well.

In summary, this dynamic between capable individuals creates skin in the game 4 all of them, in a way that creates a positive incentive asymmetry tilted towards focusing their abilities on driving success, rather than a pump and dump.

Compare the above with (some) VCs:

1. The relationships b/W them exist, but r way less personal, and cut throat.

2. They are under pressure to show profits and repatriate capital for distributions to their LPs. This creates pressure to realise profits at high multiples.

3. A lot of them can’t buy on the open market according to their mandates and are limited to seed and private rounds. No market support offered.

4. While some of them do fabulous work in support of their investments, they r never founders. Can’t compare their stakes with those of a founder or founding group.

5. There is no personal reputation on the line.

This isn’t an anti VC peace. They have a place and their presence is a positive.
Also, VCs aren’t all made equal. Some r real contributors.
But the notion that they r necessarily superior 2 anon founders is false.

Hope U enjoyed this lil’ break, and you add this perspective 2 your toolbox when judging protocols, and their founders & operators, in the future.