Deep Dive: DGD, Digix DAO

NB: this is an example of how one can do a deeper analysis of a token, from an amateur perspective. It is not exhaustive; I am not a professional investor, but this can be helpful.

Introduction

Digix Global aims to create a tradable, divisible stable coin on the Ethereum blockchain called DGX. DGX tokens will be backed by one gram of LBMA gold bullion physically held in a vault in Singapore, with digital Proofs of Asset held on the blockchain. Users can buy bullion from Digix Global and have DGX tokens created, or they can send DGX tokens to Digix Global and redeem physical gold bullion. Digix will reward ICO participants with DGD tokens, which are used for governance and rewards. The whitepaper can be viewed here.

Product Vertical

The digital gold storage market is still in its infancy. GoldMoney, a Canadian based company, is the market leader in digital gold storage, with revenue of $524 million for 2017 and a current market cap of $254 million. The company offers low cost investing in gold bullion and other precious metals held in a vault, which can be spent using a debit card. GoldMoney has a small peer to peer network that uses legacy, non blockchain technology. It is currently a growth company that lost $0.11/share in the trailing twelve months of Mar 2017.

The total cryptocurrency market cap in March of 2016-the time of the Digix ICO-was about $8.2 billion. As a stable coin, DGX’s price is independent of Bitcoin and Ethereum. Furthermore, the price of gold is far less volatile than Bitcoin [1], making it especially good for traders. The current leading stable coin is Tether, with a market cap of $1.5 million [2]. DGX requires a much greater demand for a stable coin than $1.5 million. (Note, today Tether market cap is $442 million, with far less transparency than DGX offers)

Product Market Fit/Sources of Demand

Future ICOs. Ethereum and Bitcoin are incredibly volatile assets. ICOs wanting to balance predictability in costs/spending with asset transparency on the blockchain will want to use stable coins like DGX.
Traders. Traders wishing to remain 100% on blockchain will find DGX a useful coin that is not correlated to ETH and BTC. Daily volume of USDT is $50 million to $225 million and growing in 2017.
Consumers. Peer to peer transactions using DGX will make gold backed currency possible again. Anyone with a smartphone will be able to send or receive DGX. Gold’s place of honor as the world’s reserve currency for thousands of years gives it instant credibility and independence from government monetary disasters. This is likely to be more popular in countries with corrupt monetary systems first.

Cryptoeconomics of DGD

DGD are Digix DAO (Decentralized Autonomous Organization) tokens, which are used for governance of the ICO funds held by the Digix DAO. The first product that Digix will release is a gold backed token, DGX. DGD and DGX are both fully tradable on the Ethereum blockchain, allowing gold to be used as a currency.

DGX tokens charge 0.13% for on chain transfers. DGX holders pay an annual 0.6% fee for the storage costs associated with storing their gold. One third of that, or 0.2% per annum, goes to the DGX reward pool that pays DGD holders for voting.

DGD’s valuation is based on control and as a source of cash flow. DGD holders vote for various proposals made by the community. The greater one’s holdings of DGD, the greater their influence and DGX earned. This chart is a guide to determine how much to expect in returns. Conservatively, at $50 million in DGX held and $1 million in daily transactions made, the fair market value of one DGD is $14.36. The ICO is selling 1.7 million tokens at a market cap of $5.5 million, for a purchase price of $3.23 per DGD.

Team Due Diligence

CEO: Kai C. Chng. Chng is a 2011 graduate of NYU’s Leonard Stern School of Business. Before founding Digix, he was a forex trader for HSBC. Chng’s profile has over 500 connections, with recommendations focused around the skills an investment banker/forex trader/commodities professional would have.

Chng’s Reddit profile is kcchng, and his two year old profile is solely focused on Digix Global. He posts regular updates to reddit about development of Digix Global, including audits, timelines, bugs found, etc. His posts reflect honest assessments of Digix: there is plenty of “bad news” that is shared with the good. Digix does not have a hype machine in its front office.

Shaun Djie is the cofounder of Digix. Djie also has experience as a trader in Singapore. He has been the Lead Coordinator of the Ethereum Singapore Meetup since May 2015. His profile also has over 500 connections. Djie has uploaded Webinar Q&As on Youtube before the crowdsale featuring Chng and Djie.

By every measure, the team shows a great amount of transparency in their motivations and actions, and a great deal of knowledge in their product and Ethereum. Further due diligence of founders/startup members is removed due to length constraints.

Crowdsale Analysis

The crowdsale was conducted March 30, 2016. This was the first crowdsale that was hosted directly on Ethereum. A short time before the crowdsale (it may have been weeks or a month), a $5.5 million hard cap was placed on the sale-a good sign of fiscal discipline as hype for Digix was growing on Reddit. Ethereum was about $11.50 per ether when the sale began, one DGD sold for $3.23, and the cap was reached in 12 hours. 1.7 million tokens were sold, with 300,000 tokens reserved for the team and early investors.
Participants who successfully sent ether to the crowdsale address would be given DGD in return. ICO investments greater than $15,000 received a proposal badge, a third token given to “whales” that allows them to propose ideas for DGD funds.

Conclusions

Team Expertise-Team has strong leadership in finance, precious metals, and technology
Capped Crowdsale-team could easily have put $20 million or more and chose not to
Creates “Gold Dollar” on the internet; ability to copy-paste for other precious metals/commodities
No competitors at time of crowdsale
High upside of Fair Market Value of token, even with conservative numbers

Risks

$5.5 million could burn/lose value before team completes DGX product
First ICO on Ethereum carries obvious risks: regulatory, software bugs, etcetera
Demand for DGX may be less than expected
Counterparty risk of gold being stolen

Mitigating Factors to Risks

Team using VC/Angel funds during development; cannot touch ETH deposit until DGD can be used to vote on it
First ICO gives first mover advantage [3]
Gold is insured and audited by trusted third party

Note
I participated in the Digix crowdsale and hold DGD tokens. The above is for educational purposes only and does not imply whether DGD is a "buy, sell or hold" right now. Use this as a starting point for research on other tokens.

[1] https://www.buybitcoinworldwide.com/volatility-index/
[2] The $1.5 m number is from March 2016 data on Coinmarketcap, with $500 mi market cap today.
[3] In hindsight, their proof of ICOs working smoothly on Ethereum may have saved the platform after The DAO fiasco. If The DAO had been the first ICO, Ethereum may be nowhere near as strong today as it is