How DATs Use Locked Tokens for Early Liquidity and Higher Valuations

Transcript

Hi everyone. I'm here with Unchained executive editor Steve Erlick. Welcome Steve. >> Hey Laura. >> You wrote a really interesting article recently about how DATs are using locked tokens in what I will just call creative ways. Um why don't we first start with you know what are some of the common misperceptions about locked tokens? >> Yeah. So this was an important place to to start the story because uh one of the things that we both know is that in crypto they try to sort of appropriate uh traders to make the industry seem more decipherable to uh to people and uh oftentimes I I've seen this over years and years and I'm sure you have too

Laura uh the terms lock tokens and vest and vested tokens or vesting um become conflated to the extent that most people see use them as synonyms, but that's very much not the case. Uh, anyone that's ever held um stock options in perhaps a private uh like ventureback company knows exactly what um vesting means. Typically, it means you get a certain a lotment of shares often with a one-year cliff and then perhaps quarterly or or monthly um vesting um through four or five years. And the key part here is that um with uh options perhaps that are going to vest, they can be forfeited. U they could be forfeited

if you leave the company of your own valition. Uh they can be forfeited if you're terminated um either for a cause or or just downsizing that has nothing to do with your actual cause. Uh nothing to do with your actual performance at work. Uh lock tokens. What I learned in the course of this reporting and it was kind of a suspicion I had as I went about the story is that they can mean a lot of different things and it really just depends on uh the person that you're asking. Uh typically uh lock tokens uh are presented as like these tokens are behind some sort of vault in some sort of smart contract out of circulation and uh and they're not supposed to move or I guess the

perception is or misperception is that they're not going to move until some sort of quote unquote investing schedule has been met. But what I found out um in the course of this reporting, and this isn't even just related to DATs, but lock tokens um they can move um they can move between holders, they can move between custodians. Lock tokens can often be staked. And really, it seems like the only common denominator between all the different ways of using lock tokens is that they don't enter sort of circulation to the extent that you can buy them on spot markets. But there's a lot going on behind the scenes that uh falls under the the I guess the term locked tokens.

>> So what did you find out about how DATs are using locked tokens? So DATs are sort of following the playbook um first started by VC firms that would often buy sizable aotments uh eight nine figures of these tokens uh often at a discount and this discount can vary from 15% I think to as much as 60% is what I found in one of the companies I I investigated and uh and and obviously that can be very uh that can be very profitable for these firms because they're buying at a discount And then because of a lot of the the hype surrounding that, especially in the late spring, early summer, they still traded at a premium despite what could

have been um despite a potential illquidity discount that was applied to the purchases. Um investors in the actual stocks seemed to ignore it. That was all part of the all part of the hype. But then what really was uh I guess doubly beneficial for these companies is that not only were they buying the lock tokens, they were able to get those tokens and then issue shares that um would become liquid much sooner than the tokens that then they could be sold on the public markets. So they got the benefit of buying in bulk at a discount, but then were able to basically sell these shares at a premium that were backed by lock tokens to retail investors. So it's a really

terrific way to juice earnings if you're able to buy at sizable discounts in bulk, but retail investors don't seem to care about that when they're pricing these assets. >> Oh. Oh, actually there was so um so I understand what you're saying, but also I thought that another group that was benefiting is the insiders who um like if they had been allocated locked tokens, then they put them in this DAT and then they get liquid shares back that they that are trading at higher you know MNAV than one and then they can get liquidity faster and also um yeah like a much higher valuation. Is that >> Yeah, that's true. I mean that that's part two because with some of the

companies that I looked at for the story, I mean I looked at Sui Group um which partnered with the Sui Foundation. I looked at Stablecoin X which partnered with the Athena Foundation. Uh I mean there there's there's others too. Um they partnered with the issuers or the insiders of of these tokens and when they got so when those foundations they put those lock tokens into the exchanges they then would get liquid shares back. I mean, Su Group, for instance, um they in the SEC filings in the AK um when all this was announced, um there was language to the to the effect that uh tokens put into the debt were going to be locked for two years from I guess the the finalization of the business combination agreement. And to me, that

immediately led to some questions because clearly they're changing whatever lock schedule was prior to these tokens. If they're going to say there's going to be a new locked um locked schedule from here on out, then what I also saw in the filings is that many of those shares backed by the locked tokens that will in the tokens will be locked for about two years will become unlocked after one year, some as early as 6 months. So that's clearly benefiting some of these insiders. Um those aren't even the most egregious examples. Uh I mean I wrote a story a few weeks ago about an AI focused blockchain called zero gravity. And in that case u and this is a example where virtually everyone in the industry I've spoken to said this is the exact example of what not to do. The founders of that

blockchain put about $300 million of lock tokens into the stat and then they got liquid shares immediately. Uh and that that's the most egregious example but but um this is certainly a way for some of the foundations to get liquidity for liquidity against illlquid assets. So there's a few different opportunities for insiders in these groups uh to really benefit financially from I don't know if taking advantage of is the right terminology but being creative in how they're using these lock tokens. >> And you mentioned Sweet Group and Stablecoin X and as you also said there are other companies that are doing this.

These are just the ones that you happen to write about in the article. Um how did they respond when you asked them you know questions about what they were doing here? So, it's funny. Um, both stable coin X and Swiggroup, um, their rationale basically was, well, we looked at what everyone else was doing and we're the most conservative. [snorts] Um, this is or or something to the effect of this is within market trends. um it wasn't necessarily like well actually to be fair I mean stable coin X they they they gave me a bit of a longer explanation and and they also said that like look for some of these tokens if there's not enough liquidity that can lead to jarring price movements up or down and they want to try to smooth the

market seated it with enough liquidity almost like a market maker to an extent. Um, I'll leave it to people reading the story and and listening to this interview to uh judge for themselves if they think that's a a good enough reason, but it was funny. Um, when I spoke to people, they basically said, "Well, we're not being as egregious as everybody else." That was that was primarily the the rationale. Uh, so I mean that that's kind of what I heard. I mean, there's nothing ostensibly illegal about this from what I can tell. That's just again being very creative and and there's lots of information like this hidden in SEC filings when it comes to these tokens and um it comes down sometimes to the information asymmetries between the insiders who are putting all these deals together and then the retail

investors that um either don't have the time or or don't have um or or just don't know where to look to find out this this information and it's important for people to have. So that's why we write about it. >> Yeah. One other piece of it that I thought about was that by um those insiders who had initially been allocated the lock tokens, by them getting liquidity via the DAT shares, they sort of um you could say, you know, they're kind of like cashing out early and it might decrease their incentive to keep working on the project and to um like it's almost like their incentives are no longer as aligned with the community. So that was like another kind of downside that I thought about.

>> Yeah, absolutely. I mean there's a reason why um there's vesting schedules for key executives uh in in ventureback startups. I mean you want to keep them incentivized to work um over a long period of of time. And uh the same goes for uh token foundations and and blockchain foundations. You you want key people there. Um long-term uh interest alignment is critical. So if there are opportunities for early exits, uh sometimes they can be very difficult to uh to say no to depending on someone's financial circumstances, etc.

>> Yeah. Okay. Well, um that was super interesting. Thanks so much for sharing about your story. >> Yeah. Thanks, Laura.