Republic Protocol: Analysis and Valuation (Executive Summary)
Although this executive summary contains the highlights of our analysis, we strongly encourage you to read the full report that substantiates our valuation of REN.
Moniker: Republic Protocol
Ticker symbol: REN
Current price per token: 0.096 USD
Current market cap: 49,887,123 USD
Blocktown Capital is bullish on Republic Protocol as we expect the platform to gain significant market share in the growing yet nascent sector of dark pool digital asset exchanges.
In traditional equity markets, dark pools constitute about 15% of total market volume.
As institutional and high net worth investors enter digital assets, the demand for dark pools will increase.
Republic Protocol will be the first decentralized dark pool with an anticipated launch in Q3 2018.
With an ICO raise of 35MM USD as well as strategic partnerships with institutional funds such as Polychain Capital, Republic Protocol has the resources to launch and grow a viable platform.
Our valuation model implies that the Republic Protocol token REN currently trades significantly below its fair value assuming reasonable adoption of the platform.
Republic Protocol is an open-source, decentralized blockchain protocol facilitating private, over-the-counter (OTC) trades of digital assets on a hidden order book. Employing Ethereum smart contracts and secure multi-party computations, Republic Protocol provides an anonymous orderbook and asset transfer algorithm with the goal of launching the first decentralized dark pool for digital assets. The founding company of 13 team members is based in Singapore with most of the team residing near Canberra, Australia. Development on the Republic Protocol commenced in Q4 2017, and in February 2018, Republic Protocol raised the full amount of 35MM USD through an ICO. REN is currently traded on a number of small exchanges with average total daily volumes between 1MM and 4MM USD.
The objective of the Republic Protocol is to create a decentralized, hidden order book which allows for the matching of orders from two or more parties without revealing any information regarding specific assets, parties or order size. The network is maintained by darknodes that perform order matching and facilitate the exchange of digital assets. Darknodes are rewarded in trading fees in basis points per trade. Any individual or group of individuals can run a darknode by staking 100,000 REN in a bond.
Republic Protocol operates in an attractive vertical with a ready use case. In the digital asset sector, OTC trading platforms (e.g. Kraken, Bitfinex, ItBit, Genesis and Circle) and dark pools are gaining popularity. Although exact volumes are not published, spokespersons for Genesis and Circle each report recent average daily volumes between 50MM and 100MM USD or about 2B USD per month. A decentralized dark pool can mitigate several of the risks and costs that accompany centralized dark pools and OTC platforms. Firstly, decentralized dark pools are less susceptible to regulatory restrictions, which have adversely impacted market share in traditional equity dark pools. Secondly, compliance with these regulations often require expensive intermediaries that drive up trading fees. Finally, decentralized dark pools are not reliant on a single operator, and avoid the risks that accompany centralized dark pools and exchanges, such as token theft, hacking, corruption and government takeover.
REN Token Valuation:
The value of REN is derived from trading fees which are paid to darknodes in exchange for processing orders. Bonds are submitted in REN by both darknodes and traders in order to utilize the network. Fees and bonds are interconnected such that each darknode is required to hold a bond of 100,000 REN to access the network and receive fees. With some basic market assumptions, we diagram base and bull case scenarios for the potential value of REN.
Assuming increasing annual trade volumes of digital assets, trading fees of 40 bps (20 bps each for buyer/seller), a dark pool market capture of 15% of total trade volume and a discount rate of 40%, we employ a DCF analysis model to calculate base and bull cases for REN.
In our base case, we assume Republic Protocol captures a conservative 0.35% of the total digital asset trade volume by the year 2022. This assumption is in line with decentralized exchanges (DEXs) such as IDEX, DDEX and the Waves DEX, which collectively capture less than 0.2% of today’s market. Of note, DEXs have been growing at a remarkable rate and will likely capture much greater trading volume over the next few years. In this base scenario, the resulting price per REN is 1.84 USD, representing a 19x (1,800%) increase from its current price.
Bull Case Scenario
In our bull case scenario, we assume a more aggressive market capture for Republic Protocol, forecasting a capture 1.7% of the total digital asset trade volume by 2022 (approximately 1/10th of total volume traded in dark pools). Based on the revenue (Table 1) to each node, we find that each REN token could be worth up to 9.05 USD, representing a ~94x (9,300% gain) increase from its current price of 0.096 USD.
Table 1. Annual revenue per darknode in bull case.
Republic Protocol faces competition from both digital asset exchanges and OTC platforms. Republic Protocol’s centralized competitors include Circle, Gemini, Coinbase Pro, and Kraken. REN’s biggest competitor, Circle, makes markets for institutions and HNWI in many of the top 20 digital assets. Circle charges no fees on trades, but maintains a bid/ask spread.
While Republic Protocol is slated to be the first decentralized dark pool operator, the platform will likely face competition from several OTC decentralized platforms. Republic Protocol’s main decentralized competitor is Airswap which plans to offer OTC transactions on a decentralized network. Airswap has a similar profile to Republic Protocol, having raised ~32MM USD in its ICO with support from highly regarded investors such as Michael Novogratz. However, in its current capacity, the Airswap order book is not truly hidden and can be pieced together by attempting to place orders. Together, Enigma and Loopring are also potential competitors. While not functional yet, Enigma may eventually offer anonymous smart contracts while Loopring can act as a pooled liquidity provider. If Loopring is overlaid on top of the Enigma platform, one could envision a decentralized anonymous pool of liquidity that could challenge Republic Protocol. Lastly, the 0x Project which powers many decentralized exchanges could eventually have a decentralized darkpool solution with the use of zkSNARKS. However, similar to the aforementioned platforms, this too is not currently functional and could be quite awhile before a detailed roadmap or product release is seen.
There exist a number of risks that could prevent Republic Protocol from succeeding. Firstly, compared to many other blockchain projects, Republic Protocol has maintained a fairly low profile. While this may make REN an attractive investment, in the long run if the team does not increase marketing efforts, then it is possible that the platform will receive little interest and adoption. Another risk is the centralization of some aspects of the platform, such as the token listing process. If limited by regulatory concerns regarding securities laws, the team may be reluctant to add new tokens which could substantially temper trading activity. Finally, incentivizing liquidity on exchanges is always an enormous challenge for any new trading platform.
Republic Protocol was founded by Taiyang Zhang (CEO) and Loong Wang (CTO), and has 13 team members and 5 advisors. This is Mr. Zhang and Mr. Loong’s first blockchain and/or digital currency project.
Republic Protocol sold 60.2% of its fixed supply of REN in its ICO in February 2018 for 35MM USD. The average ICO price was about 0.05 USD between both the Presale and Public Sale. It attracted prominent institutional investors including Polychain Capital, FBG Capital, Signum Capital, ZhenFund and Huobi Capital. The remaining 39.8% of REN are reserved for the team, advisors and community with a portion of REN vested between 6 months and 2 years.
The managing partners do not endorse, or recommend any investment action in Republic Protocol (REN). This document should not be regarded as investment advice, offering document, or as a recommendation regarding a course of action. The managing partners of Blocktown Capital own Republic Protocol (REN) tokens. These views are those solely of the managing partners of Blocktown Capital and do not represent the views of the Republic Protocol team.