Note: Placeholder holds Aragon’s ANT.
Over the last three years, Aragon has built a suite of governance tools that allow any organization to legitimately and transparently manage activities like community voting, treasury management, organization ownership, and contributor payroll. It takes less than five minutes and a few dollars to set up your own entity, with six templates to choose from (shown below) and governance as simple as drag-and-drop. The usability has already caught the attention of Brian Armstrong and Tim Draper, and we encourage you to try it here.
Organizations using these tools exist within Aragon’s digital jurisdiction. As with the meatspace, actors in Aragon’s digital space will inevitably encounter disagreements. To further establish the rules of its jurisdiction, and resolve disputes within and between organizations, the team built the Aragon Court, which is now live on mainnet.
To govern the jurisdiction, incentivize jurors in the court, and operate the infrastructure processing transactions, Aragon has a native governance asset (ANT), as well as derivative capital assets designed for specific purposes (ANJ, ARA).
Currently, economics include:
ANT as a governance asset, with planned future economics to reinforce its store-of-value status within the Aragon jurisdiction
ANT staked as collateral to mint ANJ along a bonding curve
ANJ is a capital asset that jurors need to stake to work for the court system.
ANT staked as collateral to mint ARA along a bonding curve
ARA is a capital asset that validators need to stake to validate Aragon Chain, a high-throughput Cosmos zone meant to offload lower-risk transactions.
Here we refer to Robert Greer’s classification of asset superclasses (shown below). For an in-depth review of how each superclass relates to the variety of cryptoassets in the marketplace, see here.
I’ve noted prior that “any cryptoasset that wants to move beyond an asset-bubble and persist in value will need quantitative theories that convincingly explain its price over time.” Once a theory is accepted, we can then expect market participants to converge on pricing assets according to the theory.
Crypto is at an early enough stage that we bicker over both the quantitive theories and inputs to those theories. This is in contrast to most asset classes, where theories are widely accepted, and disagreement occurs around the inputs. This piece is meant as an exploration into the theory of pricing ANT, where it is up to the reader to decide: 1) if they agree with the theory 2) if they do agree, to then choose the inputs they would use in the context of the theory.
ANT as a governance asset, with planned future economics to reinforce its store-of-value status
As the Aragon team wrote in February 2020, “The Aragon Network has always been destined to be governed by ANT holders.” At Placeholder, we think of limited supply assets that govern increasingly valuable fields as a store-of-value. That said, we do not have a model to quantify this store-of-value, which differs from ANT’s other two value-drivers. The store-of-value premium that governance endows on an asset is still nebulous, just as the store-of-value premium that gold trades at above its basic utility value remains nebulous.
One way to conceptualize governance as a store-of-value is by looking at the seats of the Senate, House of Representatives or Presidency in the United States. The number of seats in these entities has been fixed in supply over the last many decades (House of Representatives shown below). Yet, as the value of the United States has grown so too has the value of these seats, as witnessed in a number of metrics, most notably the amounts raised to win these seats.
We expect a similar dynamic to play out for assets that govern networks that provide an increasing amount of value to the world. Such cryptoassets will explicitly quantify the value of governance, as opposed to the implicit values of political capital we see today.
With regard to Aragon, the community is still working through the transition of allowing ANT holders to govern all aspects of the network. Many networks claim they will “decentralize later,” but only a subset has started taking the hard steps to do so. The Aragon team has been working on this succession of power since May 2018, and we have conviction in their commitment to see it through to completion.
ANT staked as collateral to mint ANJ; ANJ a capital asset
Jurors need to stake ANJ to work for the Aragon Court system. ANT creates ANJ by being locked along a bonding curve (shown below). ANJ is therefore underwritten by ANT’s value, with the ratio serving as a price floor for ANJ in ANT terms. You can stake ANT to generate ANJ here, with over 250 jurors already having done so.
Profits come from active cases, as well as a monthly subscription fee that DAOs pay as a retainer to access the court, and are paid out in DAI. This subscription fee flows only to staked and active ANJ, which is the ANJ that could have been drafted to adjudicate disputes during the time that the subscription revenue was generated.
Since jurors need to stake ANJ to work for the Aragon Court system, potential upside in ANJ is based on the cash flows (in DAI) of the jurors, making it a clear capital asset. As a capital asset, ANJ’s value can be approached as the net present value (NPV) of future profits to jurors.
Projecting the future profits of jurors requires a large number of assumptions, but we put together a simple model for ANJ here. We recommend forking the model so that you can change assumptions and also see each input’s impact. Furthermore, this is a very basic model, so we would love to see people incorporate complexities they think are missing, or to provide alternative models. For example, the model provided is built bottom-up, whereas Aragon’s opportunity can also be approached top-down. One way to do this would be to start with the total-addressable market of small businesses and organizations (e.g., 30.2 million small business in the US), and project Aragon’s penetration within that market using adoption curves similar to the INET model (see rows 29-34).
If the ANT underlying ANJ serves as the price floor, the modeled NPV of profits to staked jurors serves as the rational market value for ANJ. If a high density of organizations subscribe to and use Aragon’s Court, the rational market value of ANJ may lift above the ANT-ANJ bonding-curve floor. For a brief period, it will be cheaper to buy ANT and convert it into ANJ, than to buy ANJ directly. There then exists an incentive for market participants to purchase ANT and convert it into ANJ, which one would expect to catalyze ANT’s value until the “NPV-of-ANJ” and “bonding-value-of-ANJ” are aligned. This is an example of how the derivative asset (ANJ) may drive price discovery of the primary asset (ANT).
While the above model will make intuitive sense to traditional equity or bond analysts, what we also anticipate will move the value of ANJ into some form of market equilibrium is how it compares to crypto’s budding yield markets. Crypto’s yield markets come in two forms at the moment:
Financial-yields: driven by lending markets in which cryptoassets are borrowed, mainly for trading purposes.
Staking-yields: driven by asset holders locking assets to earn rewards by performing consensus work or providing other network services.
ANJ will fall into the staking-yields camp, and aggregate juror profits divided by the realized-capitalization of staked-ANJ will give the percent yield on juror-capital. For example, if jurors earn $8M in profit a year while staking off a $20M realized-cap base, those jurors earned a 40% yield (the cost of other capex and opex not included in the denominator). How this yield compares to other available yields — and the capital, labor and risk required to earn those yields — will drive the demand to be a juror. From there follow the market dynamics detailed above.
ANT staked as collateral to mint ARA, a staking and fee-paying token of Aragon Chain; ARA a capital asset
Aragon Chain is part of the community’s effort to globally scale its jurisdiction and make its processes more efficient and responsive. Custody and transfer of ANT will be kept to Ethereum, while lower-risk activities are ported to other chains where costs are lower: “The project will also include a bridge to Ethereum to enable data and value transfer between Aragon Chain and Aragon on Ethereum. Data passed across the bridge will be able to trigger actions on Aragon Chain through an Aragon Agent on Ethereum.”
Here is the team’s rationale around “Why Aragon Chain,” followed by a description of their investigation of Polkadot and Cosmos as two available platforms to build upon, where they ultimately decided to build upon Cosmos. A specification of Aragon Chain is also available.
Similar to ANJ, ARA will be minted by staking ANT. As the fuel for Aragon Chain, ARA will also have straightforward capital asset properties. Similar to ANJ, if the ANT underlying ARA serves as the price floor, the NPV of profits to ARA-staked validators serves as the rational price target. We expect similar yield and bonding curve parity dynamics as described in the ANJ section.
One question we have is if ARA-yield will have to be higher than the yield ANJ offers. The reasoning for a higher yield is that staking ANJ to be a juror will offer value flows in DAI, whereas staking-ARA to validate Aragon Chain will offer inflation rewards in ARA, as well as transaction fees in either ARA, ANT or a stablecoin (TBD) . The riskier the asset(s) that value flows are paid out in, the more validators may want to get compensated for that risk.
We have not provided a model for ARA as too many parameters are yet to be defined, but as Aragon Chain nears launch it will be possible to build NPV models of validator flows similar to what we’ve done with ANJ. From there, an aggregate model that ties together ANJ, ARA and ANT economics will be the final step.
The Future of Software-Based Jurisdictions
Luis Cuende, one of the progenitors of the Aragon jurisdiction, said to me recently, “We’ve delivered everything we set out in the original white paper.” Surprisingly few crypto teams that came to life in the frenzy of 2017 can make a similar claim -- but then again, many Aragon contributors were involved in crypto far before 2017 -- and Aragon’s accomplishment speaks to the community’s commitment to their jurisdiction and its ideals. Despite all their work thus far, they see themselves as only at the beginning.
Having known the Aragon team for many years now, we know they’ll continue iterating on their jurisdiction and economics over time until they’ve found the optimal fit for all participants. As a bellwether of purely-software based jurisdictions, Aragon is onto something, and we recommend getting involved if the cause calls to you. Checking out the precedence campaign, and contributing your thoughts, labor, or capital to build-out the legitimacy of the court, is a good place to start.