IMPORTANT. This is a working document. It is here to be improved, so please feel free to engage in extensive (polite) criticism and to suggest corrections and additions. That should be done via the Discord of the IOTA DeFi Builders using the thread dedicated to this project (the thread is currently called 'iota-ecosystem-wagmidao').
There will also be a companion document called for simplicity sake, IOTA Ecosystem Community Fund FAQs. This is where arguments will be set out for and against particular policy decisions - and hopefully will be able to sensibly summarise Discord discussions.
authors: @dumdave and @Camus (Austin) - Discord tags
core team. A core team of seven is being confirmed from within the IOTA DeFi Builders Discord membership
last updated: 22nd Jan 2022
Document summary: Working paper setting out the case for creating an IOTA Ecosystem Community Fund, and the mechanics for doing so.
Important. This document assumes a general knowledge of the Iota project. If you do not already have that then the IOTA Wiki is a good starting place: wiki.iota.org and, thereafter, the Iota Discord for advice on any questions arising.
The year 2021 was transformational for the Iota project. Not only was there a major technical advance in the basic network, the plans for future development became clear. The ambition of those plans is stunning in its audacity. Essentially the aim is to provide a complete base layer and supporting system for a myriad of Smart Contracts and associated projects to use, including the well established Ethereum Virtual Machine (EVM) which is the core logic of Ethereum, the world's number two crypocurrency network.
In addition, there was a huge move forward in 'tokenomics' with the airdrop/staking rewards of Shimmer and Assembly tokens. This is not the place to discuss the detail of that, but it changes very many things - not least because of the involvement of a large amount of venture capital expertise and commitment.
The term "Cambrian Explosion" has been used to describe the possible outcome of this. As Iota seems likely to offer a better technical solution at substantially lower cost than those currently dominating the market, the likelihood is that huge entrepreneurial growth will follow.
With established Decentralised Finance (DeFi) solutions, a large part of the value generated will be drained by predatory speculators. That does not have to be the future though. This project explains how to improve the outcome, to the benefit of both the ventures created on the Iota Ecosystem and the community that helped build it.
The Iota community is diverse. There are 'whales' and there are 'minnows'. It would not be untypical for a member to have about 5 Gi (5 thousand Miota) - obviously the value of that can vary but for convenience here it will be assessed at USD 5 thousand.
Each time a new venture launches on the Ecosystem, the community member suffers two terrors. The first is that they may miss out on something that could grow a hundredfold. The second is that they may lost their investment.
The second of these fears is the serious one. If a community member is offered an 'early stage' opportunity but the minimum investment is 1 Gi (as seems to be normal) then they put 20% of their capital at risk. Furthermore they do not have enough to keep investing in new projects, particularly if they wish to keep a reasonable balance in the core Iota token.
A typical community member also does not have the expertise or, indeed, the time to judge each proposition as it arises. Discord forum 'gossip' about projects is not a good basis for investing a substantial amount of your capital.
This situation is demotivating for the community member. In the long term it could lead to a group of unhappy community members weighing down on the community spirit. It is also unnecessary. In 'real world' finance the ordinary investor does not get involved with evaluating individual investment propositions. Instead there are well established solutions and protections for their investment needs.
In summary, as one community member expressed it recently, "It provides a chance to participate in promising opportunities without entry barriers, without missing some, with better research, and being more protected from rug pulls (a proper due diligence from the DAO should reduce this risk)".
The solution being proposed in this document is based on the concept of the "Unit Trust".
Definition: A unit trust is a collective investment vehicle created under a trust deed with funds managed by a professional fund manager. The fund manager is responsible for investing money which is pooled with funds from other investors. When you invest your money you purchase units at the offer price and sell at the bid price.
There could, of course, be other approaches. In essence this choice reflects the responsibility of creating a financial vehicle that could hold very large funds for a community where many are relatively unsophisticated (in investment).
As will be seen below, the solution here will also offer opportunities for the more sophisticated investor willing to take on greater risk.
Sections below detail how this approach can be mapped to the world of DAOs and Smart Contracts. Before turning to that though, there is an important second dimension
Getting any (serious) new venture off the ground is hard, and this is as true for the world of DAOs and DeFi as elsewhere. Clearly the most often discussed method for raising capital is the 'coin raise'. Typically the early investors are given incentives, perhaps as large discounts to the 'launch price' or as an 'air-drop'. Equally typically, a large number of those early investors then sell as soon as they are able to, once the full price is established. This drains liquidity out of the venture and can leave them with a coin that is difficult to buy and sell.
There are several proposed solutions. What is certain, however, is that any well founded venture would benefit from an IOTA Ecosystem Community Fund. There are many reasons for that:
[a] It is a large pool of capital where involvement could be at the earliest stages.
[b] It is managed by people with appropriate technical skills and experience.
[c] The fund itself does not have stakeholders demanding ridiculous returns.
 The fund has a long term perspective
 The community behind the fund contribute to the evaluation of each project.
This last point is important because of the improved research that a group of experts can make over each one alone. For example, the fund DAO can provide channels where members can collaborate with the research and discussion of a candidate project across different field of expertise:
A New Venture Evaluation Discord is already being planned and should be launched soon - it can come into being immediately, even if the process for making community investments is not yet in place. Within that community skills can be harnessed:
Coding: devs can take a deep look at the project’s code.
Legal: lawyers can take a deep look at compliance, etc.
Finance & accounting: financial experts can take a deep look at the tokenomics & liquidity provision plan.
Business: people working in the project’s sector can check if the business makes sense and is viable.
Of course, some ventures may not wish to share information with the community, insisting that the fund's representatives sign Non-Disclosure Agreements (NDAs). The ones that do share information more widely will, of course, find it far easier to get community agreement to investment.
In short, the IOTA Ecosystem Community Fund is right for the community, and it is right for the ventures that grow out of the Ecosystem.
As a working title with resonance with community members, the DAO involved in organising the IOTA Ecosystem Community Fund will be termed the WAGMI DAO. For those not in the loop, WAGMI stands for "We are All Going to Make It", often invoked to encourage the Iota community. DAO stands for "decentralized autonomous organization".
Here a DAO structure will be used to ensure democratic governance in allocating funding to promising IOTA Ecosystem projects and to ensure a smooth, decentralized process for entering and exiting investment positions.
A wrapped DAO. Clearly the precise legal arrangements and jurisdiction for the WAGMI DAO will be subject to intense scrutiny. Given that the fund could eventually become very large, it is essential that legal aspects are properly researched and advice acted upon. In particular it seems likely that it will be necessary to have a 'wrapped DAO' which means that formal ownership and operation is by a company structure with the 'officers' of the DAO making effectively binding recommendations on the company officers.
The possibility under recent Swiss law of having AG company shares linked to tokens is particularly appealing (see below for more on this).
Legal advice relating to the DAO will be one of the major costs in setting up the IOTA Ecosystem Community Fund. Fortunately there is already inhouse expertise (within the core team) and we have already been offered support in this area by IF.
DAO Voting. Given the impressive achievements of the Soonaverse team, it is assumed that voting will be managed through the Soonaverse system, which is evolving fast. It is likely that there will be two parallel streams of voting for DAO decisions:
For decisions that affect 'economic protection' of assets held by the fund, voting based on token ownership.
For other policy and general investment decisions, a 'proof of humanity' system of some kind. This is necessary to avoid any possible future takeover attempt through majority WAGMI coin ownership. Voting might, for example, be by some form of Governance token gWAGMI where ownership of gWAGMI was one per human according to a measure of contribution to the community.
Note. The voting methodology is an area for community discussion. These are simply suggestions.
Later sections will deal with the methodology for starting the fund. For the purposes of this section, it is assumed that the Fund has been established for a while and that there is a token called a WAGMI that is the unit of transaction.
Scenario Stage 0
There are USD 1 million WAGMI in existence, and they have been purchased at an initial price of 1 WAGMi = 1 USD.
The Treasury owns coins and perhaps even cash to the value of USD 1 million.
Scenario Stage 1
The Treasury at a later point owns coins etc to the value of USD 1.03 million. This is because its holdings have increased in value.
As there are still 1 million WAGMI in existence, the theoretical value of a WAGMI is USD 1.03
There are very many more people who want to buy than sell WAGMI. Rather than have the price inflate, but keep the same number of coins in circulation, when someone wishes to buy, new coins are issued at a price of USD 1.03.
The new income received goes into the Treasury. Logically it should mean that the value of a WAGMI is unchanged by the new sales.
Note. When new investment is added resulting in new coins minted, each individual's value at the time of minting is preserved even though their percentage allocations of the total supply changes.
Also, of course, when someone sells WAGMI the coins are burned.
Liquidity for sales. An area to be discussed is the rrangements of funds to repay those who sell. As many of the investments are early stage and illiquid, at some stages in its development the fund will have limited liquidity. This is normal also in, for example, real world hedge fund investment. There is a policy question here in how this is best handled. Perhaps there should always be a 'stable coin' percentage of the Treasury. Nevertheless, at times the Treasury will need to be locked to withdrawals.
WAGMI Value Increases. So why would the WAGMI go up in price (or down)? Answer: because the value of the coins/tokens/holdings in its Treasury go up (or down). So if the Treasury invests in ProjectJ and then ProjectJ has a 10x value increase, the Treasury value goes up. As ProjectJ is only 10% of its holdings, it only goes up by a small amount, but the diversification of the holdings also mean that adverse events have less effect. Of course, if multiple projects grow over time by large amounts, the growth is significant.
Alternate investment pools. Although there will initially only be a single investment pool, as soon as the fund grows to a reasonable size a second pool with be opened. One of these pools will be high risk, high reward.
Long term potential. If the finance coming into the fund comfortably exceeds the needs for capital of the Iota Ecosystem, the fund can start to finance interesting ventures across the decentralised market. The fund could become very big indeed.
Any entrepreneurial team working within the Iota Ecosystem will have a range of options when looking for investment. They can:
- approach the Venture Capital backing the Assembly initiative.
- talk to the WAGMI DAO and its Ecosystem fund.
- perform an open coin raise or an NFT raise.
- find individual investors who are happy to act as 'angels'.
This is healthy, and as things should be. The WAGMI DAO will have many attractions however, as explained earlier. The WAGMI DAO will also be able to invest at a wide range of stages, down to and including seed capital.
Venture focused capital. The fund benefits when ventures in the ecosystem thrive. Therefore the fund will seek to be supportive by taking a long term 'patient capital' approach to most of its investments. It will also seek ways to ensure that the ventures in which it is invested have liquidity even beyond any direct investment.
This is a matter for the DAO Governance once the DAO is fully established. As discussed, as soon as possible it is intended to have two pools, one of which is high risk high reward. The members of the DAO (which is all investors) will be able to propose and vote on strategy.
There is also a great strength in 'crowd sourcing' investment decisions from DAO members.
Management of the DAO, and Democracy. There are arguments for and against having professional advisors within the DAO central team. Community views on this are welcome. What is certain is that there will need to be a core team elected and re-elected by DAO members to implement DAO decisions. That core team will be remunerated from a small management charge made on the DAO funds. As always, the level of such a charge will be a decision made by the voting of DAO members.
For example, if the fund manages USD 200 million and a management fee of 0.3% annually is set, the DAO would receive USD 600 thousand annually to run its affairs.
Note. Core team advice is always subject to ratification by the DAO voting mechanisms. Decisions will be made on voting and voting alone.
Nobody will receive any special treatment or discounts in purchasing WAGMI tokens.
There will need to be some 'seed capital' raised in order to establish the technical and legal basis of the DAO. Ideally that will be available as a grant, perhaps with one of the new Touchpoint Ecosystems grants .
We are in discussion with a number of possible sources of finance, for example, support for the necessary legal fees. It would not be helpful to publish exact progress on those here. We are also applying for the Iota DAO Pioneers Idea-a-thon grant of USD 20,000 for which final details were just released, deadline date 31st Jan 2022.
Note. The word 'Phase' is used in the following, but there is no reason why both Phase A and Phase B cannot be progressed in parallel. The biggest obstacle to making fast progress with Phase B is raising sufficient seed capital.
The Iota Ecosystem already contains numerous projects which are waiting on funding. Ideally they would be able to receive that before Smart Contracts are available on Mainnet. Indeed, that is the point at which many of them would like to launch.
At the same time, the Ecosystem Fund itself cannot be available with full Smart Contract support for some time.
There is no reason, however, why the WAGMI DAO cannot be formed very quickly and begin the process of inviting projects to 'pitch' and to ask community members to aid in evaluation and selection.
Once a project has pitched and been evaluated, there may then be ways to assist IOTA community members to participate in pre-raise funding opportunities where they are not required to meet a large minimum contribution. That is, the WAGMI DAO can help funnel a large number of investments of varying size in such a way that it is efficient to the pitching project.
Technical ways to achieve this are being investigated
In this phase the more stable long term solution is built and implemented, with the advantage to the core process of 'inviting pitches, evaluating them, and voting on investments' has already been developed in Phase A.
[a] Confirm a small stable team.
[b1] Select a jurisdiction and form a company to hold seed capital. For the purposes of discussion, a Swiss jurisdiction is the default as described further below, which gives us a starting point against which alternatives proposed can be judged. Note the papers in Annex 1 that are relevant.
[b2] Raise and bank seed capital.
NB Seed Capital here means the funds to pay legal fees and other costs such as payments to team members for time spent establishing the fund to the point where it is self-financing.
If Switzerland is used, this would likely be in a simple "GmbH" limited liability company.
[c1] Complete a whitepaper suitable for whichever jurisdiction is chosen.
[c2] In parallel, develop a working Smart Contract model on IOTA (EVM or otherwise).
[d] Set up the company that acts as the DAO wrapper. This is separate to the company in [b2] above as it keeps taxation and purposes clear.
If Switzerland is used then this is likely to be an AG. An AG is a public limited company, its liabilities are covered exclusively by its own assets, and a shareholder with signing authority has to reside in Switzerland.
Classification of WAGMI token. The Swiss regulator is FINMA and it seems certain that, for them, the WagmiDAO token qualifies as a "security token". FINMA uses "asset token" as a synonym for "security token".
Please be sure to read the relevant document in Annex 1 below [A1.3] before commenting on this.
The DAO should already be in existence - see Phase A above.
There is also a need for a clear 'constitution' which binds the actions of the wrapper company to the democratically expressed guidance from the DAO.
[e] As soon as technically practical (on Iota Tech) issue first WAGMI tokens.
This will probably be a simple as 1 WAGMI = 1 IOTA (or Miota etc)
That allows a 'unit price' per coin to be established for future sales.
Rolling launch Given the nature of the fund, is it possible to do a 'rolling launch', in the following way?
i. Five people invest 1 Giota each in the fund, and receive 1000 units each. Assume that at that time, 1 Gioata has value USD 1200.
ii. The fund then has value 6000 and has issued 5000 units. I.e. 1 unit = 1 WAGMI. Until the fund actually makes investments, anybody else can invest at the same rate as the fund value is unchanged.
iii. As soon as the relevant Smart Contracts are operable, and investments start to be made, anybody can find today's unit price and buy units, with a new unit (WAGMI) issued for each unit purchased.
With this approach there is no big fund raise, just a gentle accumulation of funds ready to be invested. Note that the founders get no financial advantage from this as the unit price has no reason to inflate until investments made do well.
[f] Perform initial investments and implement longer term process where investors can buy and sell the token, and ventures can seek investment from the fund.
Everything here is subject to revision once formal legal advice is taken - it may be plain wrong in whole or in part. These are simply snippets of relevant legislation.
"In September 2020, Parliament passed the distributed ledger technology (DLT) blanket act, which selectively adapts ten existing federal laws."
"One of the key changes that will come into force on 1 August 2021 is a licence for DLT trading facilities, i.e. financial market infrastructures for DLT securities that can admit other companies and persons to trading in addition to financial intermediaries. Legal certainty will be increased in insolvency law by explicitly regulating the segregation of cryptobased assets in the event of bankruptcy."
Referring hereafter to the doc at [A1.3] above (The Virtual Currency Regulation Review: etc)
"Asset tokens qualify as securities provided that they have been offered publicly or to 20 or more persons for sale." The WAGMI tokens could be so offered, but there is an alternative where token holders become Shareholders rather than customers. In that case, the licence may not be needed.
"If tokens qualify as securities, they are subject to the regulatory framework of the FinSA and the Financial Institutions Act (FinIA). According to this regulatory framework, a licence as a securities firm is required for any brokerage activities on behalf of clients (other than institutional clients) regarding such tokens and any market-making activities regarding such tokens."
Section vii) deals with "Laws on collective investments". Given the following definition, it seems likely the WAGMI token would be so described.
"For the purposes of the Swiss Collective Investment Schemes Act (CISA), a collective investment scheme is a pool of assets raised from investors for the purpose of being invested collectively managed on behalf of the investors. "
With regard to the Anti Money Laundering Act (AMLA) and Know Your Customer (KYC) requirements, there are several ways in which the WAGMI token would incur obligations.
"The issuance of asset tokens does not qualify as financial intermediation activity pursuant to the AMLA, provided that the asset tokens are classified as securities, and provided further that they are not issued by a bank, securities firm or certain other prudentially supervised entities. However, in practice, issuers of asset tokens are often required to conduct some KYC and identification processes on a voluntary basis owing to the compliance requirements of the banks to which the proceeds of the ICO will be transferred."
"If a service provider offers exchange services with the involvement of a third party (e.g., an exchange platform for tokens), or if the service provider intermediates services relating to the transfer or exchange of tokens or fiat currencies and is involved in the payment process, the services qualify as money and asset transmitting services pursuant to Article 4(2) AMLO and the service provider qualifies as a financial intermediary under the AMLA."
As for the 'legal form' to be used.
"An issuer of an ICO incorporated as a joint-stock corporation must have – unless it is incorporated with a contribution in kind – a paid-in capital of 50,000 Swiss francs (with a minimum share capital of 100,000 Swiss francs)."
But, to finish on some good news, the ground breaking change is that the shares of the AG used can be attached to security tokens.
"As regards the scope of DLT Rights, any rights that could be issued as certificated or uncertificated securities may be issued as DLT Rights. Therefore, they may be used to represent fungible contractual claims (e.g., debt obligations), non-fungible contractual claims (e.g., claims arising from a licensing agreement), membership rights that can be issued as certificated or uncertificated securities (e.g., shares in stock corporations) [...]"
To see how powerful attaching shares to tokens can be, see this early example: Credit Suisse Creates Ethereum-Based Shares in Swiss Resort