I have a total holding of 16.2 DGD and 28th June 2019 marks the end of the first quarter in Digix’s Decentralised Autonomous Organisation (DAO) system. Digix did a crowdfunding sale in 2016 raising $5.5 million worth of Ethereum. At that point of time, $5.5 million translates to approximately 465,000 ethers in total.
DAO in its simplest form is an organisation that is run by a decentralised network or group of people around the world. There is no CEO, CFO, COO, CMO or any hierarchy in the organisation. The direction of the company is run by the token holders. Hence, the term decentralised autonomous organisation. Anyone can be part of this network as long as you hold at least 10 DGD tokens. DGDs are governance tokens that allow the owner the right to participate in the voting system.
Proposals can be submitted by anyone and the role of those who own at least 10 DGD tokens is to vet through the proposals and vote whether to agree or reject the proposed idea. The outcome of the proposals would be based on weighted-average votes, similar to the process of AGM votings. This is how the governance platform looks like.
To incentivise one to vote “properly”, reputation points are earned if the outcome of the vote matches your voting decision. Reputation points are included as part of the calculation in computing the amount of DGX rewards. So what is DGX and what rewards are you talking about?
In return for the effort put in, DGD token holders are rewarded with a portion of DGX (a token backed by gold). DGX would be paid out every quarterly based on the volume of transactions and the amount of DGDs that are being staked. Buying DGX is equivalent to buying real gold that is being stored in physical vaults in Singapore. DGX is the tokenisation of physical gold into digital form and 1 DGX represents 1 gram of gold.
DigixGlobal would first buy physical gold before issuing DGX tokens. This is to ensure that the supply of DGX matches the physical quantity of gold that is being stored. All information regarding the gold would be uploaded on the blockchain for transparency, traceability and verifiability. This is to prove that you are the rightful owner of the gold bars that are being purchased. Here are some of the documents that you would see.
In this way, a 1KG gold bar can be broken down and divisible into 1,000 DGX tokens that can be sent, transferred, stored or spent. It allows retail users to participate in the gold market by making micro-payments for a few grams of gold. Audit checks, custodian checks, gold bar purchases check and details of the gold are all verifiable by anyone on their Asset Explorer. That is the power of DGX.
Owning DGX requires you to pay an annual demurrage fee of 0.60%, which is considered low by market standards. Additionally, there is also a 0.13% transfer fees when you transact and send gold to one another. So where do all these collected storage and transaction fees go to? You guess it right. It goes to DGD token holders. DGD token holders vet proposals by ensuring that the ideas to enhance the gold ecosystem is sound. They receive quarterly rewards in DGX gold tokens.
Everything seems good, the idea is exciting and that was the initial reason why I purchased some DGD tokens to participate in the process. I locked up 16.2 DGD in the smart contract and I have voted for a few proposals over the past 3 months. The first quarter has officially come to an end, which means I would be receiving my first DGX payout. Let’s see how much we got.
I staked 16.2 DGD tokens and I received 0.016 DGX. At the time of writing, 1 gram of gold is worth around US$46. So 0.016 DGX is equivalent to US$0.73. Earning US$0.73 for 3 months!? My average cost for each DGD token is around US$25. The market price now is around US$27. I did a simple calculation on the kind of yield I am getting and that figure turns out to be less than 1%.
Annual DGX rewards: 0.016 x 4 x US$46 = US$2.94
Cost of 16.2 DGD tokens: US$25 x 16.2 = US$405
Yield on Cost: 2.94 / 405 = 0.73%
This means that for one to earn a decent 3% yield, 2 out of the 3 scenarios must happen. Either the price of gold has to double or the volume of gold transactions has to double or the price of DGD has to drop by 50%. The current price of gold is around US$1400. A 100% return means breaking the all-time high of US$1900 around 2011. For that to happen, either we are facing a recession or the fiat dollar is collapsing.
How about doubling the volume of transaction. That is very possible but I don’t know how long would it take. The proposed ideas in the DAO are mostly marketing related with the aim to spread awareness of DGX. As more people get involved in DGX, the volume would naturally spike up. But for now, the volume seems rather lacklustre, despite the increase in appetite for gold. This was taken from GitHub.
The last scenario is when the price of DGD drops by 50% to US$12~. This was the price when I scooped up 11 DGD around Dec in 2018. This was covered in my previous post when I did an update on my transactions. I am glad I made that decision as it has brought down by average cost significantly. Only when DGD falls to around that price level, would I consider getting back into position.
I am just taking a very simplified logical approach in calculating the yield. The most significant factor that I am not accounting for is the tons of ether reserves that are worth hundreds of millions. Remember that there is 465,000 ether in the DAO and 1 ether is worth US$300+ at the moment. You can check out their public address on Etherscan. There is approximately $120 million inside. How the money is being spent depends on what kind of proposals are submitted. No one can touch the money except through proposals that are voted “YES” by the majority of DGD stakeholders.
Nevertheless, it just does not make much sense to me at the moment. As you would have known, I lean more towards dividends and the economics of the yield just doesn’t make the cut to me. The thought of getting a few pennies doesn’t appeal much to me right now. Even though it is pure gold money.
Furthermore, the US is not allowed to participate in the DAO governance yet. If they ever come in, the total staking pool would increase and the rewards would decrease as it has to be distributed over a higher number of people.
For this reason, I sold away ALL my DGD tokens and converted them to BTC. The total average cost of investing in 16.2 DGD tokens is $554, I sold it for $583 and converted them to BTC.
My initial thought was to wait for DGD to pump up before selling them off. But I realise that this might be some kind of bias in behaviour thinking. The unwillingness to execute a non-winning trade. This is definitely not a decision to be celebrated for, as you can see from the ridiculously low profits. DGD was once worth US$500 at its peak.
I had many opportunities to sell at US$300, 200, 100 or even US$50. But I just want to experience the entire process of the DAO voting process, waiting for the quarter to end and claiming my DGX rewards. So I delayed till today 28th June 2019. Furthermore, DGDs that are locked in within the quarter are not allowed for withdrawals. So I have to wait till the quarter ends, which is on 28th June, before taking them out.
On second thought, If I anchor my thinking on the cost price, then I have not lost anything. I am indifferent than if I were to put the money in my bank over the past few years. I have given it a shot, experimented with it, been through the DAO voting cycle, collected the DGX rewards and it just does not make much sense to me. If that’s the case, then why would I still hold it? I decided to break off that emotional attachment and just rely on my judgement and logical thinking.
Additionally, I have always wanted to get some position into BTC. My biggest mistake in crypto investing is going all-in on Alts. The initial line of thought was to invest solely on staking tokens; tokens that distribute rewards or dividends. But the problem with this is that when BTC rises, alts will get crushed. BTC is the king and it would be unwise to ignore the coin that news media and institutions are focusing on.
BTC still holds a significant portion of the market dominance in crypto. It’s better to take a position in say 50% BTC and 50% alts or 30% BTC and 70% alts or whatever. At least in this way, you get to ride on the BTC bull-run as well as the alt-season cycle. Having a mix of BTC and alts is also a good hedge in a crypto portfolio. When one falls, the other rises, when one rises, the other falls.
The last reason that I made the switch from DGD to BTC is because I want to reduce my alt holdings. I have 7 different coins (OMG, NEO, ONT, BAT, ETH, DGD, ICX) and I feel that is too diversified. It really makes no sense to spread out the bullet too much. There is too little firepower in each segment. I am planning to reduce it to just 5 good solid tokens. Keep it clean and keep it simple, that’s all. I would be cleaning up my portfolio along the way as it looks pretty bad right now, in terms of asset allocation.
I have tried out DGD and the returns don’t meet my expectations. But it’s okay as investing in crypto is all about speculations and uncertainties. It is somewhat like venture capitalists investing in private equity companies. When the fundamentals change and it doesn’t really quite fit what you thought out to be, then readjustment and reallocation are needed to be done. It’s just like my previous post. I thought of how PAY has no utility token and I swapped them to BAT. I just make buy/sell decisions that match my logical rationalisation, gut feeling and judgement.
While I sold off my DGD tokens, I still believe that DGX is a solid product. It is the place I would go to if I am thinking to get some position into gold. The traditional way of participating in the gold market is either you visit a physical gold bar dealer, invest in gold ETFs or invest in goldmine companies.
A physical gold bar is usually priced at a premium and is rather illiquid. When you invest in gold ETFs, you don’t own any gold and no gold belongs to you. Investing in goldmine companies is complicated and greyish. I have no idea how goldmines work as I have not touched such companies.
With DGX, it really opens up the opportunity for anyone in the world to buy & own real gold at a small cost. If you have 100 DGX, you can actually head down to their physical vaults located at Changi to do a 1-to-1 exchange for a real 100g gold bar. Do check up their site if you are keen on getting DGX.