Sunday, September 25, 2022

The Gnosis Token Sale is Completely Rational

The Gnosis Token Sale is Completely Rational

Gnosis, an Ethereum-based prediction platform, kicked off its token auction on April 24th at 1pm EST to much fanfare. Maybe a little too much fanfare — it raised $13 million USD in 15 minutes. But did the crowd’s behavior make any sense at all?

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The blockchain “oracle” service aims to bridge the missing gap between Ethereum’s smart contracts and real-world occurrences, aiming squarely at applications in sports betting and financial markets. By 1:15pm, the allocated 10 million GNO tokens had been completely sold out, raising 250,000 ETH (roughly $13 million).

Gnosis’ potential business use cases were made all the more interesting by its novel approach to the token sale. Instead of the unit price rising steadily over the course of the auction, the Gnosis team decided to start high, and then let the price gradually decrease over 30 days until the market had found a price it was comfortable with. As the price dropped, more tokens would be made available to the buyers.

In their blog introducing this “reverse Dutch auction” concept, Gnosis representative Matt Liston noted that economic theory “dictates that purchasers should participate only when GNO tokens reach a price they feel is representative of their utility.” Since the price would decrease the longer they waited, rational buyers could theoretically wait it out until their ETH could buy a substantial amount of GNO.

What happened next seemed anything but rational.

Rushing to Buy at Huge Mark-Ups?

In a matter of minutes, the auction had reached its sale target of 250,000 ETH, with buyers rushing in to place their bids at the same time. It was like the first few moments of a Cyber Monday sale, but with all merchandise marked up 10x of normal prices.

By the time the dust had settled, the average purchase price for 1 GNO was 0.66 ETH — approximately $31.25 at the time.

The speed at which the auction was concluded did not just have an impact on the purchase price. It also meant that the Gnosis team did not have to sell many tokens to hit their fundraising target.

Of the 10,000,000 tokens issued, less than 500,000 are now held by the buyers at the auction. Not only did the Cyber Monday shoppers pay 10X of normal prices, but had they waited patiently, there would have been more items available for everyone. Instead, everyone took the irrational course, for the least amount of reward.

From a game theory perspective, it was like watching a real-life proof of the Prisoner’s Dilemma.

The vast majority of the tokens remain under the control of the Gnosis dev team. Since the price of the tokens indicate the value of Gnosis as an investible business entity, the startup now has an implied valuation of $300 million.

Poloniex Says Yes, Yunbi Declines

Some industry pundits have bristled at the results of the auction. Ethtrader admin and Redditor @nooku writes: “The actual value of the [10 million] Gnosis tokens is $13 million USD. That means each individual token now has a factual value of $1.30.”

The implication is that everyone who bought GNO at its opening price have overpaid by as much as $30 for each token purchased.

When the GNO tokens are turned over, buyers will aim to profit from their holdings by reselling them on the crypto markets. Altcoin exchange Poloniex has indicated that they will be listing GNO soon, but others like Yunbi have reportedly declined.

Actually, the Gnosis Sale Does Make Sense

There’s an angle to this controversy where the auction’s outcome makes complete sense, however.

It’s reasonable to assume that a speculative investor would want to keep the available supply of any desirable asset low in order to command the highest unit price when resold. With less than 500,000 units available on the exchanges when the tokens go live, it’s possible that there will be a huge initial runup, followed by a significant price correction.

The Gnosis blog notes that “GNO tokens are not for speculative investment.” Given the events of the auction, the only rational explanation is that the buyers have chosen to ignore that completely.

Does this behavior make sense to you? Do you think others will now try it? Let’s hear your thoughts.

Images via Pixabay, Gnosis 

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