This post was last updated on April 26th, 2018 at 01:59 am
Neptune Dash is the first publicly traded masternode company. They currently runs 18 Dash masternodes, each of which generates about 6.8 Dash per month.
Neptune Dash’s business reminds us of proof-of-stake and proof-of-work mining businesses, with some characteristics of direct exposure investment vehicles like the Bitcoin investment trust, but there’s nothing else like this business model around.
I’m presenting this conversation to you as part of our attempt to broadly cover regulated businesses with cryptocurrency roots.
This is an interesting episode because there are no direct analogies to Neptune Dash’s business model in the traditional financial world.
- The interesting origin story of Neptune Dash.
- An overview of how a Dash masternode business works.
- Why Troy and his co-founders decided to start a Masternode business vs. other options, like starting a fund.
- Why Neptune Dash’s stock is in some ways similar to an ETF product.
- Whether Neptune Dash reinvests 100% of their earned Dash into other masternodes vs. diversifying their earnings.
- Whether or not the company plans to pay out dividends.
- Why the company doesn’t vote on Dash governance issues.
- Why taking a venture company public is similar to running an ICO.
- Troy’s biggest challenges and headaches.
- Why Neptune Dash’s stock price is trading at a premium to the underlying value of the Dash assets they own.
- What Neptune Dash’s organizational structure looks like.
Links Relevant To This Episode:
- Troy Wong
- Neptune Dash
- Ryan Taylor
- Evan Duffield
- Troy Wong Reddit AMA
- Mike Novogratz
- First Coin Capital
- Consensus: Invest
Terms Mentioned in the Episode:
Clay Collins: My guest today is Troy Wong, CFO and co-founder of Neptune Dash, which he took public in January of 2018 in Canada on the TSX Venture Exchange. Neptune Dash is the first Dash masternode company, which currently runs 18 masternodes, each of which generates about 6.8 Dash per month. We’ll explain what that means in a bit. I’m presenting this conversation to you as part of our attempt to broadly cover regulated businesses with cryptocurrency roots.
Before we get into the interview, I want to explain just what a Dash masternode company is. In order to do this, I need to first explain one, what Dash is, and two, what a masternode is. Dash is currently the 13th highest ranked cryptocurrency with a market capitalization of just over $3 billion. Dash is a fork of Bitcoin, with a proof-of-work consensus mechanism. But the blockchain also allows masternodes to earn a portion if each block reward. We’ll include a link in the show notes that describes Dash mining in more detail. This is an interesting episode because there’s no direct analogies to Neptune Dash’s business model in the traditional financial world. Sure, Neptune Dash reminds us of proof-of-stake and proof-of-work mining businesses, with some characteristics of direct exposure investment vehicles like the Bitcoin Investment Trust. But there’s nothing else like this business model around.
In this episode we discuss one, the interesting story of Neptune Dash. Two, a review of how a Dash masternode business works. Three, why Troy and his co-founders decided to start a masternode business versus other options, like starting a fund. Four, why Neptune Dash’s stock is in some ways similar to an ETF product. Five, why Troy decided to run Dash masternodes instead of masternodes on the New Economy Movement, or proof-of-stake mining, with a project like Dcred. Six, whether Neptune Dash reinvests 100% of their earned Dash into other masternodes, versus diversifying their earnings. Seven, whether or not the company plans to pay out dividends. Eight, why the company doesn’t vote on Dash governance issues. Nine, why taking a venture company public, is similar to running an ICO. And ten, Troys biggest challenges and headaches. We also discuss why Neptune Dash’s stock price is trading at a premium to the underlying value of the Dash assets they own. Please enjoy my interview with Troy Wong, of Neptune Dash.
Troy, tell me, how did you come upon the idea for Neptune Dash and what is the origin of the business?
Troy Wong: Neptune Dash Technologies Corp. was started on October 31st of 2017. I co-founded the company with Cale Moodie, who’s the CEO of the company. We noticed a need in the marketplace to create a public operating company that exclusively invests in the masternode ecosystem. Right now, in Canadian public markets, there’s a huge demand right now for public mining companies. The general population hasn’t yet gravitated towards masternodes as an asset class. And so as we dug deeper into the possibility of investing into a masternode company we realized this is something that the public really needed.
Clay Collins: Why did you decide to do this as a business, versus, perhaps starting a fund?
Troy Wong: There’s a couple reasons. We’re not a fund, primarily because Canadian securities laws actually prohibits any publicly-traded cryptocurrency fund. The same actually goes towards the US as well. Many people actually look at Grayscale and the public vehicles that they’re building. Most notably the Grayscale Bitcoin Trust, but what people don’t realize is that the Grayscale Bitcoin Trust and the other vehicles that Grayscale has built, actually trade on an exchange called the OTCQX.
It’s actually not a, what I would say, fully-regulated exchange as we would understand it. The OTCQX is technically what’s called the pink sheets, or over-the-counter. And really what the OTCQX has done is found a very clever way to automate the buying and selling of private company shares. For us, it was very very clear that from a regulatory perspective, we wouldn’t be able to take the position where we could take a cryptocurrency fund public, and so we created a public company that has operations that allows us basically to keep 95% of our non-cash assets in digital currencies. From an investment perspective, it’s a pure-play digital currency exposure vehicle. And because we operate masternodes, we earn masternode revenue each month. What was really compelling from an investment perspective on the Dash blockchain, is how high the yield is. Which right now is about eight and a half percent annually. Not only do you get from an investor the ability to basically hold and invest these cryptocurrencies, your earning a nice yield as well.
Clay Collins: Do you see Neptune Dash as primarily solving a problem for investors that are looking to get exposure to cryptocurrency markets? Or is that just one of the benefits, and the other is that you’re solving a real problem for users of the blockchain?
Troy Wong: It solves both aspects. When Cale and I started Neptune Dash, we really viewed crytocurrencies as global commodities. I come from a traditional mining background, where we look at gold, copper, silver, and zinc. They have different investment fundamentals. And the same is to be said for Bitcoin, Ethereum, Litecoin, Dash and Bitcoin Cash. Ultimately, if these blockchains are going to scale globally and have trillions of dollars in market value, one of the only ways to do that is to have institutional investment come in, and begin to invest. The most liquid and obvious example, to allow the public to invest in these asset classes and commodities, is in public markets, which is exactly why we created Neptune Dash.
Clay Collins: Now it’s interesting that you describe yourself as a masternode company. There’s a lot of other ways you could potentially describe yourself. You could have described yourself as a stake-mining company, you could, perhaps it’d be a stretch, but call yourself a value-added custodian, although you’re just a custodian for yourself. Why do you identify first and foremost as a masternode company?
Troy Wong: Well, the Dash blockchain does a really good job of demonstrating that the masternode model, in the sense that we operate low-cost hardware, and we take 1000 Dash digital currency tokens and collateralize them on the blockchain, and actually link our tokens via software and internet protocol, to our hardware. When you link those two components, it’s what’s known as a masternode, which really is the core of our business, so if we were going to call ourselves a proof-of-stake mining company, that suggests that Dash is actually a proof-of-stake blockchain, which it’s not. What’s interesting about Dash is that it’s actually a hybrid of the two, in the sense that they use proof-of-work to gain consensus, but they allow masternodes, or a staking model, to basically explore alternative governance mechanisms that we find quite attractive.
Clay Collins: And to also validate instant transactions?
Troy Wong: The Dash masternodes primarily serve three functions on the Dash blockchain. One of them is instant transaction, which you allude to earlier. The second one is what’s called a private-send feature. It’s really a coin-mixing feature, to increase fungibility on the blockchain, such that a single Dash coin can’t actually be traced back through the full history of its operating life, since the genesis block, which we think is important, and privacy is a really important characteristic for our currency. Then the third, which is the most compelling, is governance, or masternode voting feature, which I’m looking forward to talking to you about because the governance feature allows decentralized stakeholders all around the world, in real time, to instantly gain governance consensus and actually act on it in real time. And it really is a breakthrough in corporate governance that we haven’t seen in modern capital markets.
Clay Collins: What do you think is the best analog to being a masternode in the traditional financial world or do you think one exists?
Troy Wong: That’s a good question. I’ve never heard that before. What would a masternode most compare itself to? I don’t know if there is a comparison, other than simple, traditional, one common share one vote. So to speak, in terms of in global liquid public markets, which was really really good for a hundred years ago, where the concept of actually taking a company and dividing it up into little pieces of ownership on pieces of paper and trading it around on Wall Street was very novel at the time. Now people just trade these pieces of paper around like it’s normal. But a hundred years ago would have been very challenging to wrap your head around. But the problem with the current common share structure, if you will, is the governance model in place. In the sense that if I actually want to enact change as a shareholder, it’s enormously expensive in terms of, I have to hire very expensive lawyers, to fight various proxy battles potentially. I need to accumulate a large common share position in the company that I’m looking to actually enact change.
And thirdly, and most importantly, I have no idea what my other common share holders actually think. Where allowing for a masternode voting system, where any masternode can stake on the network and effectively be known as a trusted actor and then can actively participate. I know in real-time what the other masternode holders think on any given topic. As these blockchains get built out, this sort of decentralized governance model is really going to resonate with people. It’s going to make a lot more sense, and we’re going to see a shift from public companies tokenizing their common shares, and somehow being able to collateralize them on a blockchain or some sort of masternode, and allow for this live-streaming active voting structure that’s currently in place in the Dash blockchain.
Clay Collins: Maybe another way of getting at this, is exploring where your influences lie, or what models you look to. When you were thinking about starting this business, and you were perhaps pitching this to co-founders, or investors, did you make reference to another business? When you were doing financial modeling, is there another public company you looked at? Where did you draw influence from?
Troy Wong: Most of our investors in our initial capital raise are institutional investors varying in various levels of sophistication. Many of them may not know what a masternode is, and so I had to basically explain it to them. And the way that I explained it, and the way that I understand it, is that Neptune Dash is most comparable to an ETF product, in the sense that you have a public vehicle, or a publicly-traded company that holds a massive amount of digital currency on its balance sheet, right?
Such that the value of the company will rise and fall with the underlying commodity price, in our case the Dash blockchain, right? And the bonus really is that we can actually take these tokens, collateraize them on the blockchain, use them for productive use, and actually earn more tokens over time, such that the earnings that we earn from pledging these tokens, negates out our operating costs as a result of running the company. Whereas like most ETFs, traditional capital markets, they don’t have such a high yield because their assets actually aren’t used for anything productive. If you were to buy gold ETF, the gold just sits in the vault. Whereas for us, we’re purchasing these tokens, and actually using them for a productive purpose on the blockchain, and we’re rewarded handsomely for that. The ETF comparison made a lot of sense with our investors.
Clay Collins: Dash is in your name, there are other hybrid proof-of-work, proof-of-stake blockchains like Dcred, I believe it’s pronounced “Piv-ex”, and I believe NEM, the New Economy Movement, also has masternodes. Do you see yourself staying primarily Dash-based? Or do you have plans to extend what you do into other blockchain projects?
Troy Wong: When we looked at Neptune Dash, we started evaluating all of the other masternodes blockchain at the time. And came up to the conclusion that at the time, which was October 31st, it made sense to specialize in Dash because of its large market cap, it’s global trading liquidity, and it’s high trading volumes, relative to the other masternode blockchain, that are actually considerable smaller than Dash. And also the other consideration was that we’re actually going out into the open market and pitching to investors, so we wanted to create a very, very simple vehicle that made the most sense. When you start including multiple blockchains of questionable liquidity, or questionable valuation, and then trying to explain the various characteristics, to relatively unsophisticated investors, lets say, it just became very challenging and convoluted, it didn’t make much sense.
Getting Neptune Dash launched successfully, I think we appropriately chose the largest masternode blockchain that we could, and then the more that we actually researched Dash as a blockchain we realized, wow there’s actually a lot going on under the hood of this DAO, Decentralized Autonomous Organization. In the sense that they have a prolific CEO in Ryan Taylor, who’s an ex-McKinsey alumni and doing a really great job to tackle a lot of the Dash DAO operational issues. You still have Evan Duffield who’s a prolific founder, who’s still sort of active in the Dash community, and working very very hard, and spending a lot of his time studying, and trying to solve the Dash blockchain scaling issue.
We looked at Dash and we thought, wow we can really build an entire business around this particular blockchain, and it makes a lot of sense. Referring back to your original question which was, do you see us actually moving into other blockchains potentially? The company issued a news release two weeks ago, that we are going to be incubating Neptune Stake, which is what would would like to think of as a proof-of-stake validation business. Where we are contributing an undefined amount of capital, to purchase and invest in proof-of-stake coins, where we will be purchasing them, staking them on a blockchain and earning revenues and rebalancing our proof-of-stake portfolio over time. And the plan with that business is to spin it out into a separate public company identified as Proof-of-stake.
Clay Collins: Interesting! Now I know the New Economy Movement as of today, this fluctuates a lot, has a slightly higher market cap than Dash, and a bit less volume. Did you look at the New Economy Movement, and possibly running a masternode there as well? And what were your conclusions?
Troy Wong: Yeah we reviewed the New Economy Movement, that’s definitely a coin that we were going to incubate within Neptune Stake. If you take a look at a little bit more detail in NEM, you’ll see that the majority of the trading volume exists on a single exchange, which doesn’t give us a lot of comfort there. The second thing is that the New Economy Movement doesn’t have a high enough yield, relative to the Dash blockchain. Dash’s yield for masternodes is about eight and a half percent, and NEM’s is about four percent.
Clay Collins: Do you reinvest 100% of the Dash that you receive, back into masternodes? Or do you diversify into other blockchains? Or do you find other ways of reinvesting that capital? Or is it only back into masternodes?
Troy Wong: The goal here right now, is to earn as much Dash as possible, and just keep it on our balance sheet and build more masternodes. So it’s a very very simple model. We’ve been approached with a number of alternative investment opportunities, there’s a number of other companies that are going public in the space. And they’re trying to take on numerous projects all at once, but you have to remember that with every investment decision into an alternative non-masternode project, we have weigh the risks and rewards associated with just actually just keeping Dash, and buying more masternodes. If the Dash price can continue going up, and go up three, four, five, 10x, then our balance sheet just went up three, four, five, 10x. Which is an astronomical win for the company, the company’s balance sheet, and return for shareholders. Versus actually having to go out and actually invest and build an operating business, that is likely not going to go up four, five, or 10x any time in the near future. Although holding such a large amount of Dash digital tokens currency on our balance sheet can be quite risky from an investment perspective, we think that’s why our investors want that type of exposure.
Clay Collins: Does the company plan on paying out dividends? Or is 100% of the return that investors will see from investing in your stock, come from the appreciation and the resale value of the stock itself?
Troy Wong: We only raised 23 million dollars Canadian, so we’re still a small high-growth technology company. As cryptocurrency markets mature, and trillions of dollars enter the space, we expect that a portion of that capital to flow into the Dash blockchain, therefore the Dash price will increase materially, and we can afford to start paying out dividends. But for now, we’re still a very small company. It’s considered a venture level stock on the TSX Venture Exchange. And so we would need to get quite a bit larger in order to sustain the type of cashflow required to pay out dividends to shareholders, but that’s absolutely something that we would consider and anticipate doing, once we grow large enough.
Clay Collins: Very cool. Let’s step back a little bit and explore the 20,000 foot view on masternodes and the masternode business. Just kind of taking it from the top, could you describe what a masternode does, the value that it provides the network, and what is involved in creating a masternode from scratch?
Troy Wong: A masternode represents what is called a level two scaling solution, which is a form of blockchain architecture, that allows one, or a user, to actually stake currency on the network, and link it to a node, which is a server on a blockchain that processes transactions on a blockchain. When you link nodes and tokens together, you’re identified as a trusted actor on the network, and then you can build upon it, and build using advanced functionality. Governance functions is the largest, most well-known application of masternodes, because it evolved out of, I guess the Bitcoin scaling debate that took over two and a half years to resolve. Which is the idea of, what do our users actually think? And how should they actually scale? And masternodes facilitate this voting model, where masternodes can basically actively vote on whatever they want in the community. It allows a decentralized set of users to obtain decentralized governance consensus in real-time. Which to me is sort of the fundamental breakthrough in this type of technology.
Clay Collins: Got it. So if someone wants to start a masternode, they essentially lock up a thousand Dash, and assign it to that node, and it gives them the ability to vote on governance issues, and as you said before, confirm instant transactions, and the third feature is the private set. So, facilitates private transactions on the blockchain. Do I have that right?
Troy Wong: Yeah, and potentially there will be other applications as well, that can be built on top of the blockchain, but those are the three most well known and used.
Clay Collins: Can you describe for us how a masternode gets paid, and when and how much it gets paid? And how all that is determined?
Troy Wong: Just like Bitcoin has its own sort of defined inflation structure, of how Bitcoin enters the ecosystem, through being mined, Dash has a similar protocol, where the block reward is actually split between miners, masternodes, and treasury. The way that a masternode holder would get paid, is that you have this block reward, or a certain amount of Dash, that’s entering the ecosystem with each block that’s being solved. An algorithm basically calculates and allocates the block reward to each masternode in a queue-like format, such that if I have a masternode, I’m plugged into the internet and that I’ve been contributing to the network, and servicing the network for a set period of time, then algorithmically I’ll get my masternode payout, in line. Right now the current yield for a single masternode on the Dash blockchain is about 6.8 Dash per month.
Clay Collins: Digging into the governance aspect of all of this a little bit more. What are some of the governance issues that you voted on recently? And how do you decide, as a company, how you’re going to vote?
Troy Wong: Neptune Dash has actually taken the position not to actively participate in masternode voting protocols. We think that it puts us in a bit of a tricky position with our shareholders, given that the masternodes are the ownership of the shareholders, and we effectively have control over these masternode assets as a board, and so it’d be a little bit centralized if the board was actively voting on the various treasury proposals on the Dash blockchain. I did do a Reddit AMA recently and got a lot of feedback from the Dash community that actually wants us to start actively voting on these treasury proposals. There was a number of good arguments.
They thought that it’s kind of a waste for us to operate these masternodes and actually not be actively contributing in the form of voting. And some people just really like the concept of Neptune Dash and thought that, whatever outcome that we voted on would be well thought out and well-appreciated. That was really great to hear those comments from the Reddit community. But right now we’re in a position where we would rather take a passive view and see how things go. If we receive a bit more comments from the Dash community, and if they really want us to actively vote, then we’ll have to figure out a way to put in place a voting mechanism that works for our shareholders.
Clay Collins: Does the return that masternodes receive for each block diminish as more masternodes spring up? Or does it stay consistent year over year?
Troy Wong: Exactly. That’s exactly how you want to think of it. Right now, there’s about 4800 Dash masternodes, that are plugged into the Dash blockchain. And there’s a finite or a set block reward. That’s split up over an ever-expanding, or ever-decreasing number of Dash masternodes ecosystem participants. Right now we’re actually seeing more masternodes enter the Dash blockchain, so the the actual net payout per masternode is slightly reducing over time.
Clay Collins: I know that Dash will someday stop mining new coins. How will Dash masternodes make money then? Will it be based on a percentage of the transaction fees? Or will masternodes stop receiving payouts at that time?
Troy Wong: The good news is, the Dash blockchain has a similar inflation rate to Bitcoin, whereby the last coin that will be mined and distributed in the block reward, is over a hundred years away. That’s not really a problem that we’re really looking at right now. I like it when everyone asks these theoretical questions. And basically it’s actually in a hundred years that the block reward runs out. The other response is that because we actually have a masternode governance system in place, where those individuals who have actually invested in the blockchain via ownership of assets, are the ones that can actively provide suggestions and come to scaling protocols very very quickly, which is the whole point of a blockchain. The way I like to explain it is, that if we run into these issues about how to actually pay out masternodes, or how to actually scale the Dash blockchain, those issues can just be actively voted on. The majority rules, and then we as a blockchain can move on.
Clay Collins: If a proposal were to emerge, proposing that masternodes pay out increase, or stay constant. You I guess as a fiduciary, would be somewhat obligated to vote on that.
Troy Wong: We would definitely vote on that. We have received a question before like, “Would you vote on increasing your own payout?” But I think that masternode holders are quite intelligent in this sense that there’s no free lunch economics. You can vote to increase the payout to the masternodes, but that’s at the cost of another decentralized stakeholder in the ecosystem, in our case the treasury system, and our miners, which hurts the blockchain as a whole. I think we’ve struck a good balance between payments to miners, masternode holders, and the Dash DAO, that makes a lot of sense. And we don’t see a reason to change it, unless there be some sort of a massive fire or red flags that need to be addressed.
Clay Collins: Another aspect of this is, part of being a fiduciary is taking into consideration, how much Dash you actually hold, so whatever you would be doing, you’re more incentivized to ensure that the value of the Dash you hold increases, than you are to perhaps increase the annual yield from 8% to 12%, right? There’s a lot more in the bank than there is coming as a result of a vote.
Troy Wong: Absolutely. You sparked a really good comparison here, Clay, which is that blockchains really are ecosystems, with all of these economic checks and balances in place, to ensure that if people vote within their own interest, there is a real economic cost to that outcome, in the short and long term. In our case, if the masternode holders vote to increase a larger portion of block reward, well then potentially the Dash price could go down, because the Dash price is less secure, because less miners occur in a chain, and we’re potentially able to be hacked, for example, or a 51% attack on the blockchain. What I like about blockchains in general is this idea of a decentralized ecosystem of a number of different participants all around the world, that are coming together working in their own self-interest, and the outcome of what you see, in the sense of a functional blockchain and a token price, is a perfect symmetry of all of those stakeholders coming together.
Clay Collins: What do your models suggest the decrease in the reward of masternodes over time will be? Even though more Dash are going to be mined for the foreseeable future, the number of Dash mined each year will decrease. What do your models say, for example, the ROI on a masternode will be, potentially 10 years out?
Troy Wong: Always very difficult to model out forecast returns, given the difficulty of forecasting price, right? But what we can say is, we sort of modeled out returns based off sort of current number of masternodes in the Dash blockchain, as well as what the expected payout would be in Dash. Right now we’re looking at a decline of the Dash block reward, paid out to miners and masternode holders, of about 7% a year. Which is relatively low, given the expected increase in price of Dash itself.
Clay Collins: How’s the performance of your stock been as a publicly-traded company? Has it roughly tracked the price of Dash? Or has it done something different?
Troy Wong: Our stock price has done relatively well, all things being considered in the market. We raised money and closed the financing round, I believe the money was deposited in our bank on December 22nd, which was the peak of the digital currency market, if you remember. We went public on January 22nd of 2018, and the prices were actually quite a lot lower and the prices have continued to decline over time, and that has definitely affected our stock price, as well as the stock price of other Canadian public companies that are trading relative to blockchain cryptocurrency prices. We performed in line with our peers, and it hasn’t yet exactly mirrored the Dash price the way that you would expect. What I’ve noticed with taking a venture company public, is that it is kind of similar to an ICO, in the sense that you have a very company with a small number of shareholders, traded on a public exchange, with only a highly speculative investor wanting to invest, very similar to an ICO.
So you have a tremendous amount of short-term speculation in these types of cryptocurrency, or I’d say, junior companies. Neptune Dash’s stock price is no different than any other in this space given its size, but we expect that as more capital comes into the space, and as the market matures, the stock will trade more in line with the underlying digital currency token price. But for right now, the majority of investors out there that are investing in these blockchain companies are relatively unsophisticated.
They’re just buying the company because it’s blockchain. They really don’t have much of an idea of what the difference between a masternode company would be, a mining company would be, what a fund would be, or what a cryptocurrency exchange would be. We’re very very early days, from a public markets perspective, on investing in cryptocurrency companies. I expect it will take anywhere from three to five years before the market catches up and really really knows how to understand these assets, and how to value them.
Clay Collins: If a value investor were looking at your stock, and the value of the business right now, would they find that the value of Neptune Dash, currently, is it valued at more than the value of the owned Dash, at today’s prices, or less?
Troy Wong: Right now if you look at the net asset value of the total Dash the company owns, relative to the market capitalization of the company, we are trading at a substantial premium, which is a win for the company, if you will. But quite frankly, we expected that to occur, given the lack of quality blockchain companies in the space. The most comparable publicly-traded entity that’s most cited is the Grayscale Bitcoin Trust. There’s been a number of articles in the media published, that the premium to NAV of the Grayscale Bitcoin Trust is sort of massively overvalued. I mean sometimes they trade at as low as 0% premium, but as high as like 80% or even more, in some cases.
That really reflects the underlying nature of the lack of quality investor products, in public markets, as well as the level of sophistication of the users that are basically in this space, but then as you already know, these companies trade the way they trade, there’s a number of external factors affecting the price, such as short term traders, momentum traders, high-frequency trading, that can affect stock prices that go beyond a Net Asset Value calculation. That’s kind of why I believe we’re going to expect to continue to see these blockchain companies trade at substantial premiums to their book value.
Clay Collins: I don’t know what kind of analytics you have about the owners of your stock, but can you speak to the percentage of your investors that are outside of Canada versus inside? Have you found that there’s been international demand for what you provide in terms of exposure to the asset class?
Troy Wong: When we closed the financing round, we engaged in a local investment bank here in Canada, and exclusively only raised Canada from sophisticated institutions in Canada. By definition no capital was actually raised in the United States or anywhere globally, and so the only way an external investor would be able to purchase shares in our company, was if their specific broker dealer in the region that they lived, allowed them to purchase stocks on the TSX Venture Exchange. Some brokers allow for that type of access and some don’t.
When Neptune Dash went public it was very well promoted on Reddit and the Dash community, and there were a number of individuals that reached out to us in the US that wanted to invest in the company, but there was no easy way to do it. Eventually we identified a broker down in the US, that does allow for the purchase of our common shares, despite it not being locally traded in the US. But it does take some time and effort to figure that out.
Clay Collins: I know in the United States, going public is a big deal, it’s very expensive, it’s very time-consuming, you might as well just burn about 20 million dollars per year just to be public. What was the experience like, going public in Canada? What are the reporting requirements? What’s the regulatory overhead? What does it take in terms of capital, time, effort, to go public and to stay public in Canada?
Troy Wong: Taking a company public in Canada, I’ve never done it in the US, but we’ve engaged legal council down there, and we know a number of people who have taken companies public, and from what I can tell, it’s much easier and lower cost in Canada. Canada has built out a nice venture market, that allows for venture-style companies to go public and operate at low cost. It’s also a highly-speculative environment, too. Which is really really great for the local economy, because different types of unique businesses that perhaps might not be listed anywhere else globally, can actually find the type of investor that they want as well as the exchange and regulatory environment and the operating costs of professional service providers that allow them to list. For us to go public and stay public, it’s relatively unexpensive. I’m not going to talk specifics about how much it costs, because that’s disclosure of financial statements, but it’s not unduly onerous, or can take a significant amount of time to go public.
For us, the company was incorporated on October 31st, and we were a publicly-traded company on January 22nd I believe. Within a very very short period of time, we actually formed the company and were actually trading in Canadian public markets. We think that that’s part of the appeal of a number of blockchain companies going public in Canada, which I think your viewers will find perhaps the most interesting. From the research that I’ve done, Canada really is basically the only place where these blockchain companies are going public right now. And there’s been a large number of interests from larger American players, seeking a public listing on a Canadian exchange.
The most well-known individual that I can cite right now is Mike Novogratz. He actually purchased a private company out of Vancouver, called First Coin Capital, and is listing First Coin Capital via what’s called a reverse takeover, on the TSX Venture Exchange. My understanding is he’s raised approximately 300 million Canadian dollars, from Canadian investors as well as international investors, but a 300 million dollar raise for a Mike Novogratz backed cryptocurrency company is an amazing feat, and he did it in Canada, and there’s a reason why he came to Canada was because you have a really great venture market here as well as legal and operational structure that make a lot of sense.
Clay Collins: I heard he’s aiming to start the Goldman of crypto. Do you know what the nature of that company is?
Troy Wong: I actually haven’t seen the slide deck with what he’s doing, but I’m sure that whatever Mike does it’s going to be really really interesting. My understanding is there’s a number of different business units that he plans on launching, one of them being an actual trading business, where they trade cryptocurrencies. Another of them being almost like a merchant bank, where they provide financing and go-public services to ICOs and other blockchains. That’s really the extent of my knowledge on that one.
Clay Collins: Let’s talk a little bit about company operations. What does it take to run a masternode business? How many employees do you have? What skills and skillsets do you need to have within the business to operate on a daily basis?
Troy Wong: At Neptune Dash we have four full-time employees, so there’s myself who’s the CFO, there’s my co-founder Cale Moodie who’s the President/CEO, we have a really great Chief Operating Officer, and we have an investor relations person. What’s really good about operating a masternode company is a lot of the operational work upfront is done in just setting up the masternodes. We spend a significant amount of time learning technology, learning how to custody assets, setting up all the processes so that we can safely custody assets in a public company environment. Automating the collateralization process, so that we can stake assets on the Dash blockchain, know what addresses that the currencies are staked at, as well as automate the server process so that our servers are constantly attached to, and hooked up to, the Dash blockchain so that we don’t lose any of the Dash masternode payouts, and once you set up that full process from cradle to grave, it’s a bit of a plug and play aspect. But over at Neptune, we’re constantly trying to innovate and do different things.
Right now I’m working on a company called Neptune Stake which I talked about earlier. We’re setting up the process in our internal controls to set up all of those staking assets, and monitor them as well. A lot of the business is actually investor relations and promotions. So we really spent a lot of time working with investors, and educating them on Dash, on cryptocurrencies, and masternode assets in general. That really has been the largest challenge right now, given how early we all are in the public market’s cryptocurrency investing space. So you have to remember the nature of this venture market is not normal, sort of sophisticated ICO investors that you see on Reddit and Telegram groups potentially.
You really have people who don’t know the difference between potentially Bitcoin, Ethereum and Litecoin, and all blockchains are the same to them. And trying to go to an unsophisticated investor and actually properly break it down, and explain to them the differences in technology, and the value properties that we bring. I spend a lot of my time doing that type of work. Which I think is actually really really important, you know just broadly as a whole, for people to learn about this technology.
Clay Collins: It’s absolutely invaluable work, especially for Dash. I remember, I was at Coindesk’s consensus invest event, and at one point the speaker surveyed the audience, and asked them what crypto assets they held. And a good percentage of them said that they held Zcash, and Ethereum. And then the speaker said, you know, when you say you hold Ethereum, do you mean Ethereum, Or Ethereum Classic? And the majority of the audience said they held Ethereum Classic. And I’ve got to believe that has to do with the Zcash and Ethereum Classic investment trusts, and the education that Grayscale has done around those products, to institutional investors. It can have a really big impact, in terms or educating a core group of people, or a new group of people, to the space.
Troy Wong: Absolutely right. For us as cryptocurrency enthusiasts, for me I really fell down the rabbit hole. I really spent all my time reading about cryptocurrencies, assets, and the technology in the different blockchains. The reality is, most people aren’t going to do that, and it’s completely foreign to them. And so the education process is going to take time. I think that for the broader market to understand it, it’s going to take several years. But hopefully we can do our part over at Neptune Dash, to sort of further the mission of cryptocurrencies by educating the broader market as a whole.
Clay Collins: In terms of operations again, what is your biggest challenge? Is it hiring? Is it identifying technical talent? Is it custodianship? What do you find yourself wringing your hands about most frequently?
Troy Wong: The challenging part right now is the promotions, and marketing this business. And trying to actually properly deploy marketing dollars in the most economic and high-ROI return possible. Once you start a public company, there is a number of different avenues for marketing. They all come with very very high price checks. Knowing how to deploy those marketing dollars, in a way that makes sense is something that’s very very challenging. ’cause ultimately, as I alluded to earlier. Taking a company public kind of is like doing an ICO. And so what drives the value of an ICO is absolutely the community and underlying blockchain technology, but a lot of it is the promotions. And people can’t buy your ICO if they don’t know what it is. And so there’s a whole aspect to, I hate to use the word promoting a public company, but just bringing general awareness to the company’s mission and what the company is doing. And doing it in the most economic way possible. It is by far the largest challenge that we’re facing, right now.
Clay Collins: What kind of activities, as a public company, are you barred from undertaking? Like are you barred from general solicitation? What can you do and not do when it comes to marketing the business and the stock?
Troy Wong: I don’t know in terms of what we can’t do, I can’t speak to that. I mean in terms of the marketing issues that we would like to do, it’s no different than any other business in the sense that, we’ve looked at starting a podcast. We’ve looked at creating a weekly newsletter. We’ve looked at sponsoring conferences and events, in the blockchain space, both locally and internationally. We’ve looked at writing blog articles. The stuff that we’re looking at doing is very grassroots and organic-related. What we haven’t engaged in, is any sort of speculative stock promoting, or paying promoters to purchase our stock, or anything like that. It’s very similar to any other ICO or public company, under the marketing issues that we’re doing.
Clay Collins: For example you wouldn’t allow to take out a radio ad that says, go to www dot neptunedash forward-slash buyourstock
Troy Wong: Uh I never thought about that! I mean I think anything that says “buy our stock” is probably–
Clay Collins: Probably illegal!
Troy Wong: Not legal, compliant with securities laws, and I have to check with our legal council on that, we could purchase a radio interview saying, promoting Neptune Dash as the first Dash masternode company, and inviting investors to come to one of our events.
Clay Collins: What’s your biggest worry right now? When you disclose vulnerabilities, what do you put as first and foremost on that list?
Troy Wong: Our company by design is pure-play cryptocurrency exposure, specifically the Dash blockchain. The underlying cryptocurrency commodity price really is a double-edged sword, in the sense that when things are good, they’re really really good. And when things are bad, they could potentially be very very bad. We could see our balance sheet go up three or four or five X in value, and then it can shrink 60% in value as well. Whereas, compared to cryptocurrency miners, the reality is that investors don’t do them the same way, because most of their capital assets just go to, really a data center and hardware. Their balance sheet isn’t expanding and contracting in value, at the same rate that our business would. But that being said, we think there’s a much higher rate of return owning the token and commodity itself, versus buying mining hardware. And so as long as the Dash ecosystem, and the Dash blockchain continues to go up, then we’re going to be quite happy with the returns on our balance sheet.
Clay Collins: Something I saw on your deck was that a masternode business offers direct exposure, versus a mining company which offers indirect exposure. Is that because a masternode business has to own so much of a cryptocurrency in order to operate, whereas a mining company can just immediately get liquidity on the Bitcoin that they’ve mined, and that crypto asset isn’t required to operate?
Troy Wong: There’s a couple reasons why we think investing in masternodes is simpler than investing in mining. Like traditional proof-of-work mining operations. The first thing is, if you think about it from strictly a capital-raising perspective, we’re approaching investors with a very clear value proposition of what we’re doing. We’re raising capital and the majority of that capital is actually just going to go to the token itself. There’s very little operational risk associated with our management team actually having to build out a high quality data center, that we think is important. The second thing is, since the majority of our assets are actually in a token today, you’re buying digital currency tokens today, right? Whereas, when you’re investing in mining assets, if you think about it, you’re really investing to purchase digital currency tokens some time in the future. Because what you need to do, is you need to go out, you need to raise capital, you need to purchase equipment, you need to set it up, you need to operate in a low-cost operational jurisdiction.
You need to operate those mining hardware profitably for a number of months and recoup all of your capital investment, before you get back to square one. And then, and only then, do you actually start accumulating currency on your balance sheet. The same way that we have the currency accumulate on our balance sheet today. That was meant to sort of illustrate that, that we love proof-of-work miners, we just wanted to point out that there are fundamental technical differences associated with operating a proof-of-work mining company. Which also include a hashing rate and difficulty adjustment that’s relatively unpredictable. We want to just caution investors, that they know the differences between the different types of investments opportunities out there.
Clay Collins: It strikes me that what you’re doing feels a lot more like passively-managed, versus an actively-managed fund. You’re not entering and exiting positions when you think the price is going to drop or rise. You’re not having to worry about reinvestment into other sources of income, or diversifying across asset classes, or crypto assets. It’s a very nice, simple business without a lot of operational overhead or complexity. Which is kind of cool and refreshing.
Troy Wong: That’s the easiest way for these types of companies to go public and trade. Ideally every currency would have masternodes, and then we could have a Bitcoin masternode company, and a Ethereum masternode company. Because it’s simplistic and easy to understand, it allows for the market to quickly value them and for these companies to trade as a proxy to the price, which is the intent. And then you can raise more capital and really build out a very nice balance sheet, that allows for public market capital to enter the cryptocurrency space. Because right now, it’s just very very difficult to do. and there’s very little opportunity for it, which is why, potentially, we’re seeing this decline in price. Because the number of outlets available to pension funds to sovereign wealth funds, to large public companies that are mandated not to take custody of their own assets, for example, to invest in cryptocurrencies. We think that creating the simplest vehicles possible to invest in cryptocurrency assets, makes the most sense. And it’s good for cryptocurrency assets in general.
Clay Collins: Well thank you so much for making time for our audience, Troy. I really appreciate it. It was a fascinating wide ranging conversation. so we appreciate the time, and the thoughtfulness of your answers.
Troy Wong: Appreciate it. Thank you so much, it’s my pleasure.