Special Edition X11. BearClout: Playing Devil’s Advocate 🐻😈

This is a BitsTODAY op-ed written by @nvo with substantial input, review, and advice from @Doodles, @JoshuaCottrell, and @darian_parrish. All final views, unless otherwise noted or espoused by these creators, are @nvo’s.

Long-term, thesis-driven investing isn’t exactly in vogue. When you see people make 10-1,000x on hot NFT projects, grinding it out in public markets for 20% annually (if you do spectacularly well) or even in mature crypto assets, where you might double your money ever so often, is hard. As many of us have spent 4-5 months on BitClout at this point, and as the initial 🌊s of hype surrounding the platforms’ launch and even the iterative waves of hype surrounding things like NFTs on BitClout subside, we’re hunkering down for a longer ride than some of us perhaps expected. As such, I’ve spent more time articulating a thesis for investing in $clout for the long-haul. The price declines of the past few dates indubitably have lots of folks thinking about their investments, both of capital and time, in BitClout too. Hopefully this piece helps stimulate more spirited discussion 💬.

In approaching my investment thesis, I am starting by taking the road less traveled for those of us who love BitClout, namely a devil’s advocate approach 😈. What factors would lead me to be less bullish, and perhaps even bearish 🐻, on $clout? It’s important that someone take this perspective with good intentions, rather than contributing to (i) the collective high-fiving about $clout that, while fun, was also getting a bit old even before recent $clout price declines 🥴 or (ii) ill-informed bearish takes from intellectually lazy people posting on Twitter about how BitClout is a scam 🙄.

And even despite $clout being down as much as 40% in recent days… I won’t base this note on price action! Nor will I focus on the relatively small daily active user count, as I don’t see this as a compelling line of reasoning. User adoption can scale exponentially further into a projects’ roadmap, given the right conditions. Rather, I’ll pursue 3 primary arguments in this note that could lead an investor to be less likely to invest in $clout:

Opaque and concentrated $clout ownership and distribution

Tl;dr: in this section we explain why concentrated ownership of any entity can be a concern and why we need more transparency with respect to $clout ownership.

When evaluating any investment, who owns what is a key factor 🔑. If I were considering an investment in a public equity, I’d want to know who is on the cap table and who owns a sizable amount of shares. If an activist investor owned a significant percentage of the equity in a business, that could impact future decision-making.

In cryptoassets, distribution + ownership are large weights in my decision making for the two main reasons alluded to above:

Every crypto project has its own supply of ‘equity’ available to investors too in the form of tokens or coins (I will use these interchangeably). Sometimes there’s a cap on how many coins will ever exist. Sometimes there isn’t. Coins can be distributed to users and investors in a myriad of different ways too.

If too many coins are held by too few people, then those people can hold a disproportionate amount of influence. Similarly, if the manner in which coins are distributed doesn’t seem ‘fair’ to investors or doesn’t fit strategically with the project’s long-term goals, that can be a disincentive to invest. We’ll explore this further 👇👇👇.

First, a few corollaries. There are many examples of cryptocurrency projects that have struggled because of how tokens were distributed and/or because of concentrated token ownership 😔.

Here’s what Vitalik Buterin, the 🧠 behind Ethereum, wrote about Ripple in 2013 (called OpenCoin back then). For context 100 billion units of XRP were initially created and held by Ripple Labs when the project launched:

“Because of the monetary distribution, OpenCoin may well face an uphill battle convincing the community that they can be trusted.”

Indeed, while investing in Ripple back then would have netted you quite handsome returns, questions of distribution plague the project to this day.

Another project that botched its initial token distribution was Dash. Chris Burniske and Jack Tatar described the problematic Dash launch well in their book Cryptoassets: The Innovative Investor’s Guide to Bitcoin.

“Dash… got off to a rocky start… 1.9 million coins were created in the first 24 hours. Considering that 3 years later, in Jan. 2017, there were just north of 7 million coins, this was a significant error that drastically benefited the computers that supported the Dash network in the first 24 hours… From our perspective, if there is a major distribution error in the launch of a cryptocurrency that significantly skews distributions… that cryptocurrency should be relaunched.”

In short? Opaque and/or concentrated distribution often discourages new investors, and provides significant ammo for people to spread FUD (“Fear, uncertainty, doubt”) about the project or cryptocurrency 😤.

Let’s turn to $clout. What do we know? We know the total supply is capped at 10.8M $clout, as per the FAQ + posts provided by the core team (see here).

As far as the distribution of $clout is concerned, I don’t know where to start. Allocations of supply that went to venture capital investors like Sequoia, Social Capital, and Andreessen Horowitz aren’t openly documented. Perhaps I could ask 🐋s with whom I’m acquainted. But who else can turn to them for info? The average outside investor certainly can’t.

Similarly, when BitClout first launched, the earliest wave of adopters were able to purchase $clout for prices well below the current price (think single digits). This initial distribution model is nowhere near as flawed as that of Dash described earlier, nor do I imagine concentration of $clout ownership to be nearly as high as in that example. Still, the fact that we simply don’t know how much supply is concentrated among initial VC backers and whales who stocked up in the first inning of BitClout’s existence would give me pause as an investor approaching this project tabula rasa. Would you invest in a new ICO if it were unclear how much of the total supply had been distributed, how, and to whom? Would you invest if 30–40% of the supply were held by a small number of wallets? 🤔

Remember, there’s a bevy of transparent, high utility crypto assets in the marketplace competing for your capital. For additional comparison, competitors to BitClout like Rally.io made their supply schedule and plans for tokens transparent from the jump. Their outline of the supply schedule and token distribution has been open to the public pretty much since inception.

see this? easy to understand, transparent (and lots of supply available for the community)

Anecdotally, I know at least one reputable VC shop that has elected to invest in Rally rather than BitClout in the past month. Transparency of distribution (lack thereof) was no small factor in their decision-making.

What have we learned so far? Distribution and ownership of $clout would benefit from being a lot more transparent. As an investor, I want to easily be able to answer a question like “What percentage of the total $clout supply that will ever exist do the top 10% of $clout holders own?” At the moment, I’m hard-pressed to even come up with a best guess for this figure 😕.

The second reason I am harping on distribution is that concentrated token ownership leads to a more centralized network. If a select group of early investors and VC firms own a substantial portion of the total $clout supply, especially in a future state where BitClout moves its consensus mechanism to Proof of Stake (“PoS”), initial concentration can makes the entire network even more centralized over time. Owners with large $clout positions will see their positions grow more in a future where they can stake $clout and earn interest for doing so; their positions will compound more readily than those of smaller wallets, inflating their control of total supply. Down the road, a consortium of large $clout owners could hold oligarchic influence about the future of BitClout, as their level of supply ownership grows. ⚖️❌

Toby Shorin, Laura Lotti, Sam Hart provided a corollary here in their recent piece Positive Sum Worlds: Remaking Public Goods that I found instructive:

“The equivalence of stake and voice in crypto is reminiscent of early American democracy, in which political representation was conditioned on property ownership. Under this regime, only 6% of the total US population was eligible to vote — a laughably exclusionary idea of the body politic by today’s standards (Ratcliffe, 2013).”

To summarize this section, ownership of $clout may be more concentrated than would be preferable. This concentration may become more acute over time if and when BitClout’s consensus protocol switches to PoS. In a vacuum, these factors might give me pause as a potential investor.

There are solutions to the problems outlined in this section, such as making a full database of $clout ownership (which is a project I imagine community devs and data analysts could take on!) Investors could then evaluate token distribution for themselves and factor it into their theses accordingly. Further, concentration may ameliorate over time on its own as significant $clout owners reduce their stakes, allowing new owners to buy $clout and flatten overall distribution. We have seen this happen this week, with a few large holders selling significant stakes of $clout.

Bonding curve dynamics and skewed incentives

Tl;dr: in this section we explore how BitClout’s bonding curve, a mathematical formula that defines creator coin economics on BitClout, provides outsized returns to early investors and inflated incentives to create new accounts.

Part of the reason that BitClout was so exciting in the early days is that the bonding curve that governs creator coin supply is quite steep. There’s massive returns available to early investors in creator coins. To achieve a 10x + return on investment, one path for an enterprising early investor is to buy the first 5.43 creator coins in a new creator coin (costing them $16 assuming a 0% Founder’s Reward and $clout price of $100 $clout/USD). If another $112 dollars is subsequently invested, there will be a total of 10.86 coins in existence, and each coin will be worth $35.37. At this point, the 5.43 coins purchased by the first investor are worth $192.04 💸.

For the second investor, whose $112 dollar investment also netted them 5.43 coins, to achieve a comparable return, they would need a third investor to add $1,920, at which point there would be 27.36 creator coins in existence at a price of $224.56 per coin. The second investor’s position of 5.43 creator coins would now be worth roughly $1,219.39.

Note: these calcs would be complicated moderately by the fact that the liquidating value of these positions would be lower than as listed; investors would be selling their coins ‘back down’ the same bonding curve. The examples are intended to be illustrative. Interested parties can explore the bonding curve further here.

Let’s take stock of what we have observed here. An investment of $16 in the first ~5 coins was good for a 10x if an additional $112 of subsequent investment was added. The second investment of $112 required an additional investment of nearly $2,000 to achieve a similar return. Clearly, there are significant benefits to investing at the base of the bonding curve 💰.

We all ‘play’ by the same bonding curve on BitClout, so none of this argument should be interpreted as pertaining to ‘fairness.’ More importantly, because of the steepness of the bonding curve, buying the first few coins in an account represents one of the most lucrative (and often easiest) possible economic behaviors on BitClout. This in turn incentivizes the creation of new accounts as one of the primary economic activities on BitClout 🏗️.

To recap, in layman’s terms, one of the easiest ways to make money on BitClout is to launch a new account 💡. We can see these incentives play out in real-time: new accounts are spun up by existing active users every day for all kinds of new projects and initiatives 🤪.

If you’ve spent a few weeks or better yet, months on BitClout, you’ll know what I mean. New projects and accounts appear every day, not inherently because there is a need or strong value proposition for all of them, but because it’s the best way to make money. The release of NFTs on BitClout accelerated this in particular. It’s telling that creators realized the money wasn’t in creating NFTs from their existing accounts; it was in creating new accounts for NFTs. In parallel, many of the most economically successful BitClout users concentrate their efforts on making early investments in new accounts rather than in creating great content or investing for the long haul. I take no issue with this; more power to them 💪.

The problem is that the creation of new accounts and the initial speculation in them cannibalizes attention and capital on the platform. People are less focused on building long-term projects when there’s more money to be made spinning up a shiny new toy that will generate returns for its creators and a handful of confidantes who get in on a pre-sale, only to gather proverbial dust on the shelf a few weeks later.

The opportunity cost of tying up capital in creators or projects who are building for the long-haul is also high. If you can flip $clout investments in new accounts daily, why would you park $clout anywhere else 📈? Another element to highlight the opportunity cost is that a creator coin can reach its terminal growth rate rather quickly. The terminal growth rate is a constant rate at which the coin price will grow going forward (often 0%). The same thing happens as companies mature and their revenue & earnings growth becomes constant, so does their stock price appreciation. In the context of BitClout, creators can consistently provide good content and engage with the community, but if their creator coin price is approaching its terminal value, their coin price remains the same indefinitely (or decreases). Here, the steepness of the curve means there can be diminishing or even 0 investment returns beyond a certain point despite continued value add from the creator 📉.

There are innovative features like creator coin staking that BitClout could introduce that would make the average creator coin more attractive for long-term investors. Still, right now it’s harder to make money investing in well-established creators than it is investing in or spinning up new accounts. This diverts attention and capital from activities that would excite typical users. I’m not sure whether the team behind BitClout would consider changing the bonding curve for creator coins at this point in BitClout’s development. The steepness of the curve could presumably be modified in the mathematical formula itself. I’m equally unsure whether a grassroots movement whereby we all commit to changing our investor behavior would gain any traction without accompanying financial incentives. As always, I’m an open book and would be excited to participate in these conversations 📞.

Recent opacity of operations in the $clout market

Tl;dr: in this section we explore how the option to buy bitclout.com obfuscated real market prices for $clout, dampening community engagement.

At this point there is little doubt that the market for $clout, at least in the short-term, wasn’t exactly ‘free’ for a considerable period of time. $clout hovered around the $100 $clout/USD mark for weeks before its most recent decline. There were times when it moved moderately above that mark, like the day when NFTs first launched, only to fall back to $100 in short order. Similarly, big sell orders on the exchanges triggered precipitous price declines for seconds or minutes, only for support to come in raising the price back to $100. On August 13th, prices for $clout on coingecko.com briefly touched $77.51, before support rushed back in to raise the price to $100.

Now, as we have all likely seen from the past few days’ price declines, the price support at $100 is no more. It appears it may have been reduced to $50. This raises a TON of questions.

Coinbase will purportedly be live within the next 4–6 weeks. We assume that the change to a more ‘free’ market for $clout was made yesterday in part in anticipation of this listing; it’s likely a requirement of Coinbase’s that there be no team operations that artificially inflate price.

With more exchanges online and the price support seemingly gone or being phased out, investors who approach BitClout from a first-principles basis in a month’s time will ideally not encounter these weird dynamics and all the derivative questions they raise. Still, my broader concern here is about how opaque this entire situation has been. If we take the same outside investors’ perspective, the dynamics at play here are confusing and could be seen as inefficient and even harmful. They certainly lack transparency.

On a personal note, wondering what was up with the $100 price floor itself has been one of the least transparent experiences I’ve had on BitClout. Maybe it’s gone now. A number of OG BitClout users who made big amounts of money are certainly gone. Perhaps they’ll be back. Either way, all this has given me some pause, regardless of whether there was insider trading going on around when the price support went out. More than anything else I’ve observed on BitClout to date, this has been weird and likely benefitted folks who were in the know, at least in some capacity. Ideally, the team will be forthcoming with details in short order 🤞.

Thank you for reading, friends. I hope this piece can be seen for what it is, namely a catalyst for conversation and community-led development as opposed to a teardown. I’m a fan of BitClout, and will continue to be active in the coming months (and ideally, years). Here’s to the future 🌙.

Much love,

@nvo

BitsTODAY, a nightly digest of far-out experiments, sick posts, general absurdity, and everything in between happening in the world of DeSo & BitClout… rn.