2.0 INTRODUCTION TO PAYMENT SYSTEMS, BLOCKCHAIN & CRYPTOCURRENCIES
3.0 LODE PROJECT
4.0 BLOCKCHAIN MARKET
5.0 PRICING METHODOLOGIES
6.0 PRICING METHODOLOGIES USED - LODE TOKENS AND AGX COINS
7.0 PRICING OF LODE TOKEN
8.0 PRICING OF AGX & AUX COIN
9.0 CONCLUSIONS
10.0 APPENDIXES
11.0 EXHIBITS
Appendix 1 – Terms & Conditions
Appendix 2 – Assumptions of the Report
Appendix 3 – Scope of the Report
Appendix 4 – Qualifications
Introduction & Assignment
1.1 Assignment
Evans & Evans, Inc. (“Evans & Evans” or the “authors of the Report”) was engaged by the LODE1 Anstalt (“LODE1”), a Liechtenstein Establishment, to prepare a Due Diligence & Estimate Pricing Report (the “Report”). We understand the LODE project is a collectively organized community of like-minded individuals (the “LODE Establishment”) who recognize that silver and gold can serve as verifiable and stable mediums of exchange for trade and commerce. The LODE Establishment is in the process of launching its business model, a multi-asset challenger payment platform. There are three assets within the LODE System - the LODE Token, the AGX Coin (one-silver gram) and the AUX Coin (one-gold milligram). The AGX and AUX Coins are asset-backed digital utilities that are designed to serve users globally as borderless, low cost, universal mediums of exchange, an alternative store of value and divisible, fungible, units of account for the settling of trade and commerce.
LODE1 has requested Evans & Evans to prepare the Report to provide token holders of LODE1 with an estimate of the potential price or market value of the LODE Token, the AGX Coin and the AUX Coin as at July 31, 2020 (the “Pricing Date”) incorporating new information as of December 2020. The Report is an update to the Diligence & Estimate Pricing Reports prepared by Evans & Evans and dated August 10, 2018 and October 29, 2019 (the “Prior Reports”).
As Evans & Evans is relying on information, materials and representations provided to us by the LODE1 and associated service providers, the authors of the Report will require that directors of LODE1 confirm to Evans & Evans in writing that they have reviewed the Report in detail and that, to the best of their knowledge, the information and representations contained in the Report are accurate, correct and complete, and that there are no material omissions of information that would affect the conclusions contained in the Report.
Evans & Evans, or its staff and associates, will not assume any legal and financial responsibility or liability for losses incurred by LODE1, Community Ambassadors, and/or service providers and / or any other parties as a result of the circulation, publication, reproduction, or use of the Report, or any excerpts thereto as well as such use contrary to the provisions of this section of the Report. Evans & Evans reserves the right to review all calculations included or referred to in the Report and, if Evans & Evans considers it necessary, to revise the Report in light of any information existing at the Date of Review which becomes known to Evans & Evans after the date of the Report.
Unless otherwise indicated, all monetary amounts are stated in United States dollars.
Introduction to Payment Systems, Blockchain & Cryptocurrencies
2.1 Payment Systems
2.1.1
What is Money?
Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Money provides the service of reducing transaction cost, namely the double coincidence of wants. Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange. Money can be: market-determined, officially issued legal tender or fiat moneys, money substitutes and fiduciary media, and electronic cryptocurrencies1
Money is commonly referred to as currency. Economically, each government has its own money system. Cryptocurrencies are also being developed for financing and international exchange across the world.
Money is a liquid asset used in the settlement of transactions. It functions based on the general acceptance of its value within a governmental economy and internationally through foreign exchange. The current value of monetary currency is not necessarily derived from the materials used to produce the note or coin. Instead, value is derived from the willingness to agree to a displayed value and rely on it for use in future transactions. This is money’s primary function: a generally
recognized medium of exchange that people and global economies intend to hold as and are willing to accept as payment for current or future transactions.
2.1.2
What is a Payment System?
Payment systems, which enable the safe and efficient flow of electronic payments from payer to payee and between financial institutions, are largely invisible. Like the supply of electricity, it is taken for granted that payments will be processed smoothly without the mechanism being noticed2.
Payment systems are viewed not only as standalone entities but also as a part of the wider ecosystem. Given the extensive interlinkages and interdependencies, the safety and efficiency of the financial ecosystem depends not only on the resilience the individual systems, but also on their interconnections with their participants, their service providers and other systems.
Cryptocurrencies are also being developed for financing and international exchange across the world.
Individuals and corporations use various “payment instruments” to purchase goods and services, to make financial investments, and to transfer funds from one person to another. These instruments include cash, cheques, debit and credit cards, and e-money. Except for cash, payment instruments involve a claim on a financial institution, such as a bank. Financial institutions therefore need arrangements to transfer funds among themselves, either on their own behalf or on behalf of their customers. A payment system is the set of instruments, technical arrangements, procedures and rules used to transfer these funds. Payment systems also play a role in clearing and settlement transactions involving assets such as securities, derivatives and foreign exchange.
One of the key aspects of a payment system are the payment rails. A payment rail is any form of digital infrastructure that transfers money form one individual or business to another. The fintech community refers to payment rails as being on “the far side” of a payment transaction–i.e., the rail is the “hidden” portion of the transaction. As opposed to “the near side” of the transaction, which is made up of you and whatever party you’re transferring funds to or receiving funds from.
The three most popular payment rails are:
1. The Automated Clearing House (“ACH”) Network processes approximately $41 trillion annually, making it one of the most popular payment rails worldwide. This transaction category includes automatic bill payments, brokerage account deposits, and direct payroll deposits.
A payment rail is any form of digital infrastructure that transfers money form one individual or business to another.
2. Mastercard is a card rail. A Mastercard payment can take anywhere from 1 to 3 days to processing completely, meaning it is not a realtime payment rail.
3. PayPal s responsible for a huge portion of global payments made today, both in casual and small business payments. Founded in 1998, PayPal is an established global network, though they also own Venmo, a new mobile payment rail in the United States. When you make or receive a payment using PayPal, the app connects to the ACH. PayPal acts as the originating depository financial institution for the ACH transaction. ACH is not a real-time payment method, and it can take anywhere from 3 to 5 days for the funds to settle.
A payment system is different than a network. For example, the Bitcoin Network, as defined below was originally designed as a “peer-to-peer electronic cash system” in its first white paper but today Bitcoin is treated more like an investible asset. Bitcoin itself is not a payment system, but various entities have entered the market to provide merchant services to enable the flow and settlement of Bitcoin transactions.
One of the key aspects of a payment system is “cards” – debit and credit. Debit and credit cards are the original means of digitizing cash. For many digital assets and cryptocurrencies, penetrating the card market (dominated by Visa and Mastercard) is very challenging.
2.1.3 Traditional Payment Systems
The existing incumbent global payment system is based on ATMs and point of sale terminals which are connected to the banking system and the VISA / Mastercard payment network. The ubiquitous nature of the payment system in the developed world is what has led to mass adoption.
While the number of crypto ATMs worldwide has been growing, the infrastructure for the “payment” network for cryptocurrencies is not as widespread as that of the traditional financial system.
A large factor currently limiting cryptocurrencies’ ability to scale as a medium of exchange is the slow processing times relative to other services as outlined in the table below3.
Transactions per Second (“TPS”) Compared to Other Payment Processors
- 24,00 TPS
Blockchain technology can facilitate recording transactions and tracking assets in a network in an efficient manner amongst parties that may not share trust. An asset can be tangible — a house, a car, cash, gold, silver, commodities, land — or intangible like intellectual property, such as patents, trademarks, copyrights, digital rights or branding.
Virtually anything of value can be tracked on a blockchain network, reducing risk, creating efficiencies, removing duplication and reducing costs of facilitating transactions.
Applications can be layered on top of the blockchain, which acts as the foundation or platform. Such applications enable additional functionality such as public or private keys, or self-executing mechanics (e.g. smart contracts), but this isn’t the core functionality of blockchain technology. Blockchain technology is a distributed and immutable (write once and read only) record of digital events or records (referred to as blocks) that is shared peer-to-peer between different parties (networked database systems). Each block in the chain contains a hash (a digital fingerprint or unique identifier), time-stamped batches of recent valid transactions, and the hash of the previous block.
2.2
Overview of Blockchain Technology
2.2.1 What is a Blockchain?
Globalization of commerce has been one of the biggest drivers of growth over the past century and the blockchain is emerging as a technology which has the ability to accelerate the pace of globalization. Blockchain technology has the potential to remove much of the remaining market friction — the speed bumps that throttle the pace of business across a variety of sectors.
A hash function is a type of mathematical function which turns data into a fingerprint of that data called a hash. It’s like a formula or algorithm which takes the input data (any data, whether it’s the entire Encyclopedia Britannica, or just the number ‘1’) and turns it into an output of a fixed length, which represents the fingerprint of the data. There are many types of hash functions, and a common robust one is called SHA-256 (which stands for Secure Hash Algorithm – 256 bit).
Two relevant properties of a good hash function are: (1) it’s hard to back-calculate the original data from the hash; and, (2) if the input data changes in the slightest, the hash changes in an unpredictable way.
The previous block hash links the blocks together and prevents any block from being altered or a block being inserted between two existing blocks. In this way, each subsequent block strengthens the verification of the previous block and hence the entire blockchain. The method renders the blockchain tamper-evident, lending to the key attribute of immutability.
Immutable is used to denote something which can never be modified or changed. In a blockchain, it refers to the global log of transactions, which is created by consensus between the chain’s participants. The basic notion is once a blockchain transaction has received a sufficient level of validation, it can never be replaced or reversed. This marks blockchains as different from regular files or databases, in which information can be edited and deleted at will.
Events in a blockchain can be updated by only the collective consensus of a majority of users and information cannot be erased. The datastore is owned by no one, is controlled by users and is not ruled by any trusted third party or central regulatory institution. Trust is encoded in the protocol and maintained by the community of users. The fundamental strengths of a blockchain system lie in its data integrity and networked data sharing.
There are two types of blockchains - permissioned and permissionless. In a permissioned blockchain, each participant has a unique identity, which enables the use of policies to constrain network participation and access to transaction details. Permissioned blockchains control network participation, i.e., users are restricted, and the consistency of the data that gets appended to the blockchain. In a permissionless blockchain, anyone can join the network and participate in the process
of block verification to create consensus and also create smart contracts (if smart contracts are built into the blockchain). Permissionless blockchains allow every user to create a personal address and begin interacting with the network, by submitting transactions, and hence adding entries to the ledger. Additionally, all parties have the choice of running a node on the system or employing the mining protocols to help verify transactions.
With blockchain, participants share a ledger that is updated, through peer-to-peer replication, every time a transaction occurs. Each participant (node) in the network acts as both a publisher and a subscriber and each node can receive or send transactions to other nodes. Lastly, the data is synchronized across the network as it is transferred. All information is publicly transparent; any user owns a copy of the proof of the timestamped data.
Central Ledger
Decentralized Ledger
The key to the operation of a distributed ledger is ensuring the entire network collectively agrees with the contents of the ledger; this is the job of the consensus mechanism. The purpose of a consensus mechanism is to verify that information being added to the ledger is valid i.e. the network is in consensus. This ensures that the next block being added represents the most current transactions on the network, preventing double spending and other invalid data from being appended to the blockchain.
Each blockchain network can establish the conditions under which a transaction or asset exchange can occur. Participants cannot alter an event or transaction (i.e., a block) once it has been added to the chain. If a transaction occurs in error a new block is added to the chain to reverse the transaction so there is visibility of both transactions. If a party in the network were able to alter a block, their ledger would not match the ledgers of other participants in the network and as such the fraudulent blocks would be evident and rejected by other nodes.
There are two main schemes by which miners can prove the existence of a new coin: proof-of-work (“PoW”) and proof-of-stake (“PoS”).
In PoW systems, validators validate transactions by running an algorithm to solve a cryptographic puzzle, known as mining. PoW is, particularly for cryptocurrencies, the most utilized system of all. PoW is the validation of the work that happened and proving it is correct. Bitcoin and many alternative coins use a PoW consensus mechanism to make sure the authenticity of the chain is good. In blockchains using a PoW consensus mechanism, the network challenges every machine that stores a copy of the ledger to solve a complex puzzle based on its version of the ledger. Machines with identical copies of the ledger “team up” to solve the puzzle they’ve been given. The first team to solve
the puzzle wins, and all other machines update their ledgers to match that of the winning team. The idea is that the majority wins because it has the most computing power to solve its puzzle first. Proof of work is useful on a public blockchain, such as the one used for Bitcoin, but it consumes considerable computing power and electricity, making it an expensive way to reach consensus.
In a PoS system, validators validate transactions by staking (“depositing”) cryptocurrencies, no new coins are (usually) created and validators are rewarded with transaction fees. With a PoS consensus mechanism, to validate transactions, validators must hold a certain percentage of the network’s total value. PoS might provide increased protection from a malicious attack on the network by reducing incentives for attack and making it very expensive to execute attacks. Ethereum is also moving towards PoS with its new “Casper” protocol
2.2.2 Bitcoin Network
Established in 2009 with the publication of a white paper, Bitcoin is the oldest cryptocurrency and the first example of the blockchain. Bitcoin is a decentralized digital currency that enables instant transfers to anyone, anywhere in the world. Managing transactions in Bitcoins occurs via an open source, cryptographic protocol platform known as the Bitcoin Network, an online, enduser-to-end-user network that hosts the public transaction ledger and the open source code that comprises the basis for the cryptographic and algorithmic protocols governing the Bitcoin Network.
The currency unit “Bitcoin”, commonly denoted as “BTC” (alternately, sometimes XBT, or the symbol included in Unicode 10.0 in 2017), is equivalent to (and can be divided into) 100 million “satoshi”. Transactions as small as 5430 satoshis (equivalent to 1/18,416 BTC) are possible on the Bitcoin Network. When transactions occur, a transaction message is broadcast to the Bitcoin Network, where it is received by Bitcoin miners who (with high-performance computers running specialized automatic Bitcoin mining software) verify the transaction, group it with others into a transaction block, and compete to solve the proofof-work cryptographic puzzle that links the new block to the blockchain.
2.2.3 Ethereum
The cryptocurrency Ether, denoted as “ETH” and its corresponding platform Ethereum has been gaining favour as it presents significant technological improvements over Bitcoin, including the ability to build applications and code smart contracts directly into the blockchain.
Ethereum goes beyond the peer-to-peer currency transfer abilities of Bitcoin into other functionality such as global decentralized computing and smart contracts infrastructure. Whereas Bitcoin was originally designed to be a secure digital cash system, the goal for Ethereum was to create a fullyprogrammable blockchain.
First proposed by its inventor, Vitalik Buterin in 2013, Ethereum is a blockchain platform that runs smart contracts and distributed applications (“dapps”), using its integrated cryptocurrency Ether. The primary programming language for Ethereum is Solidity, a high-level contract-oriented language that facilitates the programming of smart contracts and dapps that run on the Ethereum Virtual Machine. Developers can also write programs for the Ethereum platform that integrate as blockchain-based components of more complex web applications.
2.2.4 Syscoin Network
The Syscoin Foundation was established in 2014. Syscoin offers developers a blockchain development platform, removing the middleman and enabling quick transactions. Developers can create their own Syscoin Platform Token (“SPT”), specifically designed to transact quickly and securely, with low costs. The trustless, permissionless two-way bridge makes it possible to tap into Ethereum smart contracts and infrastructure. At the same time, it allows for any ERC20 token to gain near-instant micropayment capability with consensus and finality, cross-chain fractional token supply, and benefit from Syscoin’s Bitcoin-compliant merge-mined security while retaining all the utility of existing Ethereum smart contracts.
Syscoin’s method of consensus is fundamentally centered around Satoshi’s proof-ofwork algorithm. The Z-DAG (Zero-Confirmation Directed Acyclic Graph) protocol is an integral secondary layer of consensus that serves the purpose of permitting transactions to be settled before they are confirmed; Z-DAG cannot exclusively ensure consensus alone. By simultaneously using a DAG and PoW, Syscoin’s approach to solving the fasttransaction problem is both efficient and unique. Many other decentralized services make use of DAG based network structures entirely, and even more continue to use PoW or PoS. Many older services, namely Bitcoin and similar projects forked from it, continue to use PoW for the sake of security, but their users are frequently subjected to slow and restrictive transaction times.
Blockchain Foundry’s Syscoin Notary Platform leverages Syscoin’s Witness functionality to allow for projects to choose how they configure the compliance requirements for a project for each jurisdiction they operate in. This highly customizable pre- and post-transaction compliance check adds a witness signature to validate the transaction meets the requirements of the location of the sending wallet.
The witness signature attests that the transaction meets certain criteria (transaction value surpasses a threshold, multiple transactions surpassing a certain threshold over a period of time, etc. ) prior to posting the transaction to the distributed ledger and blocking the transaction altogether by requiring witness sign off for valid settlement in the decentralized ledger. By layering in a know your client/ anti-money laundering (“AML”) solution to provide validation AML/CFT4 compliance and monitoring onchain, Syscoin Notary Platform offers an innovative solution to meeting e-Money license regulatory requirements.
Blockchain Foundry is also working to bring offchain payments to production within the Syscoin ecosystem. Off-chain payments will support scale capable of surpassing global payment needs all while approving transactions in around 1 second. Fitting this technology together, Syscoin is aiming to meet the needs of the global payment ecosystem far exceeding the needs of any project in the ecosystem including AGX and AUX.
Smart contracts are an import function that can be built into the blockchain.
2.3 Smart Contracts
For business networks, smart contracts are an import function that can be built into the blockchain. A smart contract is an agreement or set of rules that govern a business transaction; it’s stored on the blockchain and is executed automatically as part of a transaction.
Smart contracts may have many contractual clauses that could be made partially or fully self-executing, self-enforcing, or both. Their purpose is to provide security superior to traditional contract law while reducing the costs and delays associated with traditional contracts.
2.4 Cryptocurrencies
Cryptocurrencies, virtual currencies, electronic coins, digital coins, digital tokens and blockchain tokens have become increasingly popular since Bitcoin was first introduced in 2009 by an unknown individual or group using the alias Satoshi Nakamoto.
Coin is a cryptocurrency type which operates independently of any other platform. In other words, a coin has its own platform which is called blockchain.
Cyrptocurrency is a form of money that exists as encrypted, digital information. Operating independently of any banks, a cryptocurrency uses sophisticated mathematics to regulate the creation and transfer of funds between entities.
Digital commodity is an intangible, hard to get asset that is transferred electronically, and has a certain value. Digital currency is another name for a digital commodity.
Token is the digital code defining each fraction, which can be owned, bought and sold. Tokens require another platform such as Ethereum or Omni to exist and operate. Tokens provide a way not only to define a protocol, but to fund the operating expenses required to host it as a service.
(4) Combatting the Financing of Terroism
The attributes of cryptocurrencies that are driving their increasing popularity are safety, anonymity, and their decentralized nature. Unlike fiat currency5, cryptocurrencies are not controlled or regulated by a singular authority, their flow is determined entirely by market demand. Cryptocurrencies are also effectively impossible to counterfeit given the complicated code system that encrypts each and every transfer, ensuring anonymity and safety to each and every user.
Unlike traditional currencies, which are issued by central banks, cryptocurrencies have no central monetary authority. The most popular cryptocurrencies aren’t printed like dollars or euros; they are “mined” by people and increasingly by businesses, running computers all around the world, using software that solves mathematical puzzles. As of July 31, 2020, Coinmarketcap more than 6,000 cryptocurrencies of which more than 700 are mineable. Bitcoin and Ether are both mined, however Ethereum is planning to move to a non-mining model with its new Casper protocol, which has taken longer than anticipated to launch. Once mined, cryptocurrencies can be traded, sold or used to purchase goods and services. A peer-topeer network of computers monitors and approves all transactions involving cryptocurrencies.
As noted above, cryptocurrencies are impossible to counterfeit as they use cryptographic protocols, or extremely complex code systems that encrypt sensitive data transfers, to secure their units of exchange. Cryptocurrency developers build these protocols on advanced mathematics and computer engineering principles that render them virtually impossible to break. These protocols also mask the identities of cryptocurrency users, making transactions and fund flows very difficult to attribute to specific individuals or groups.
With no central government or monetary authority to set policy to inflate or deflate value, the “price” or value of cryptocurrencies are driven by demand and highly complex protocols built into their governing codes. Most, but not all, cryptocurrencies are characterized by finite supply. Their source codes contain instructions outlining the precise number of units that can and will ever exist. Over time, it becomes more difficult for miners to produce cryptocurrency units, until the upper limit is reached and new currency ceases to be minted altogether. For those cryptocurrencies that have a finite supply, this attribute makes them inherently deflationary6, more akin to gold and other precious metals – of which there are finite supplies – than fiat currencies, which central banks can, in theory, produce unlimited supplies.
The activities of miners are critical to most cryptocurrencies. According to the Bitcoin Energy Consumption Index, the annualized total electrical energy consumption of miners is 63.35 TWh, comparable to the power consumption of Switzerland.
Transaction fees may be paid by individuals sending cryptocurrency to incentivize miners to work on that particular transaction, increasing likelihood of a quickly processed transaction, and rewarding the miner(s) for their role in ensuring the smooth operation of the system.
For those cryptocurrencies using PoW that have a finite supply, miners receive fewer new units as ‘Block rewards’ per new block chain as time goes on. Eventually, miners will only receive transaction fees for their work.
Cryptocurrencies are transferred from one owner to another by adding a transaction to the blockchain and blockchains are kept secure from hacking through the work of validators, who validate transactions. Validators are given cryptocurrencies as reward/payment every time they validate a transaction (i.e., cryptocurrencies provide the economic incentive for people to become validators). Validators may also be awarded transaction fees paid by the sender.
As of July 31, 2020, there were more than 6,000 cryptocurrencies trading, up from 800 in July of 20177, with a total market capitalization for all of $359.3 billion, down from the high of $813.9 billion on January 7, 2018. Generally, only the most popular cryptocurrencies – those with the highest market capitalization, in dollar terms – have dedicated online exchanges that permit direct exchange for fiat currency. Those cryptocurrencies that do not have dedicated online exchanges are generally exchanged for more commonly used cryptocurrencies before fiat currency conversion. The lack of liquidity of some cryptocurrencies suppresses demand and as a result their value.
TYPES OF DIGITAL CURRENCIES
Physical currencies act as a store of value, a medium of exchange, and a stable unit of account. Depending on how they are designed, digital currencies serve some or all of these purposes. For example, some digital coins and tokens are intended primarily as an anonymous means of transferring value. Others are meant to expedite transactions. Still others are envisioned as a virtual banknote pegged to the value of existing national currencies. There are more than 50 types of digital currencies in development falling into one of the following general categories.
Cryptocurrencies. These blockchain-based coins enable transactions, although some are also used as a long-term store of value. Because they operate on a decentralized basis and use cryptography for security and anti-counterfeiting measures, they generally afford a certain degree of anonymity in peer-to-peer transactions. Law enforcement and payment processors have no jurisdiction over Bitcoin accounts, yet the anonymity of cryptocurrencies also increases the risk of financial crimes.
Stablecoins. These digital tokens are pegged to a specific asset, such as the US dollar or other national currencies. Fiat-backed cryptocurrencies are the most commonly used stablecoins, but asset-backed coins can also be tied to commodities, such as gold. Most are used as a basic means of exchange for market entry, hedging, storage, and to facilitate transactions between the digital and physical worlds. Examples include USD Coin, Gemini dollar, and TrustToken.
Asset-backed Tokens. Asset-backed tokens are a growing class of digital assets that open the door for compliant and regulated digital ledger investment. These “Security Tokens” are believed by some to be the future of financial transactions for the digital capital markets. To be considered securities, they carry an actual value given that they are correlated — through a collateralization process done with a legal custodian using the chain-ledger — with an external, real-word asset’s value, like a digital twin.
Consortium Stablecoins. Similar to asset-backed stablecoins, consortium stablecoins are issued by groups rather than by individual organizations (e.g. The Libra Association Facebook, Inc.’s Libra). As with other stablecoins, consortium stablecoins enable instant cross-border payments and can be especially appealing for individuals who fall outside the traditional financial system. With Libra, for instance, Facebook and its partners sought originally to create a blockchain-based currency that would be backed by a basket of international currencies such as the US dollar, the euro, and the Japanese yen, in effect creating a supranational currency that would be independent of existing national and international regulatory authorities. Concentrating power in a small number of hands has provoked concern, however. Libra has encountered strong opposition from financial regulators who fear it could threaten national monetary sovereignty.
Corporate Currencies. Primarily used for business-to-business transfers, these currencies take advantage of the transaction speed and efficiency offered by public blockchains while preserving control over the network and the ability to enforce restrictions. Preapproved access can give participants assurance in the network’s legitimacy. Examples of private corporate currencies include Signet and JPM Coin. Some retailers, including Walmart, Amazon, and Rakuten, have also announced the development of corporate currencies to facilitate payments within their networks. Retail banks could also issue corporate coins to replace fiat currencies in
There are more than 50 types of digital currencies in development falling into one of the following general categories.
debit or credit cards. However, a proliferation of corporate currencies would likely create confusion, making it hard for users to understand the relative value of different options.
Central Bank Digital Currencies (“CBDCs”). Issued by a central bank, CBDCs are intended to serve as legal tender. Because they are pegged to existing banknotes, they provide a risk-free alternative to private bank deposits. The first generation of CBDC, introduced roughly a decade ago, had limited interoperability and programmability. The next generation, known as CBDC 2.0, will likely work on a national or supranational level (in the case of the European Central Bank). These currencies could help to automate monetary policies, which could mitigate the risk of hyperinflation in emerging economies and reduce purchasing power inequality. Better traceability would allow nations to curb criminal activities, tax evasion, and drug trafficking. China’s central bank is hoping to launch a digitized version of the renminbi, focusing on a centralized, CBDC 1.0 setup. The virtual banknotes, called the Digital Currency Electronic Payment (DCEP) would be partly based on blockchain technology. Sweden’s central bank has announced a yearlong blockchainbased e-krona pilot for 2020. The ECB, Canada’s central bank, and others are also accelerating their research and development timelines.
2.5 Exchanges
Cryptocurrency exchanges play an important role in creating liquid markets for popular cryptocurrencies and setting their value relative to fiat currencies. However, exchange pricing can still be extremely volatile with valuations seeing double and triple digit increases and decreases in relatively short periods of time.
As most cryptocurrencies are not widely accepted worldwide in business-to-business (“B2B”) or business-to-consumer (“B2C”) transactions, there is a need for matching platforms where supply and demand of traders is matched against each other when prespecified conditions are met. As noted above, more popular cryptocurrencies trade on special secondary exchanges similar to forex exchanges for fiat currencies.
Cryptocurrency exchanges allow holders to exchange their cryptocurrency holdings for major fiat currencies, such as the U.S. dollar and euro, and other cryptocurrencies (including less-popular currencies). In return for their services, exchanges charge a transaction fee.
However, innovation is ongoing in the market and the size of the opportunity continues to attract new users and merchants. Coinpayments.net is an example of an enabling platform that accepts over 1,900 “alt coins”. Coinpayments.net is a proprietary payment gateway for merchants wishing to accept cryptocurrencies and have the tokens converted into several fiat and other cryptocurrencies.
Similar to cryptocurrencies themselves, the number of exchanges also continues to grow. Users look to exchanges for liquidity and the best price, which requires large amounts of users and an active order book. As a result, most people gravitate toward a few core exchanges. Coinbase, founded in 2012, is considered by many as the best exchange for cryptocurrencies like Bitcoin, Ethereum, and Litecoin. Coinbase reports it has more than 35 million users and has traded more than $150 billion in cryptocurrencies. Other major exchanges include Kraken, Poloniex, Bittrex, Shapeshift, Bitbuy, ChangeNOW, Linkcoin, Binance, Gemini, Bitstamp, and Cex.io.
As exchanges grow in size, they are more exposed to hacks and there have been several high-profile exchange hacks which have resulted in significant losses. The most famous hack is generally considered the December 2011 hack of Mt. Geox which was the largest Bitcoin exchange at that time, and it was estimated the losses were $350 million in Bitcoins. Despite increased cybersecurity, hacks continued into 2017 and as cryptocurrencies continue to increase in popularity and price, it is expected there will be an increase in attempts by hackers to target popular exchanges.
In 2018, hackers stole $927 million from various cryptocurrency exchanges and other platforms, according to a report from blockchain security firm, CipherTrace. On January 26, 2018 hackers compromised user accounts of Coincheck, a Japanbased cryptocurrency exchange. A total of 560 million NEM tokens worth around $530 million at that time was stolen, making Coincheck’s hack one of the biggest the industry has ever seen.
There were 12 major cryptocurrency exchange hacks in 2019, and in total over $292 million and over 500,000 pieces of customer data were stolen. The number of hacks in 2019 exceeded those in 2019.
A single cybercriminal group is suspected of stealing $200 million from cryptocurrency exchanges over the past two years. The hackers used spear-phishing attacks to gain access to crypto exchanges’ wallets.
2.6 Wallets
Units of a cryptocurrency (coins and tokens) are actually stored in the blockchain ledger associated with that particular cryptocurrency. “Wallets” are means of securely storing and allowing retrieval of unique information (the private and public keys, defined below) that confirms the holder as the owners of their crypto coins and/or tokens. A popular form of cryptocurrency wallet is a software program (running on one’s own PC) that stores private and public keys and interacts with various blockchains to enable users to send and receive digital currency and monitor their balance.
Many people also choose to use “online wallets”, such as that provided by exchanges, e.g., Coinbase. Users of online wallets must exercise caution in ensuring that the service provider is trustworthy and stable, as the service provider holds the private key(s) for the user’s online wallet. Cryptocurrency funds held in an online wallet provided by an unscrupulous, incompetent, or insolvent company could potentially be stolen, lost, or otherwise not immediately accessible to the user.
Wallets come in many types as of the end of June 2020, there were more than 50 million users of blockchain wallets worldwide.
When cryptocurrencies are transferred from one individual to another, they are essentially approving a transfer of ownership from one wallet address to another. In order to access the coins in a wallet, the private key stored in the wallet must match the public address the currency is assigned to. If the public and private keys match, the balance in the digital wallet will increase, and the sender’s will decrease accordingly. There is no actual “exchange” of crypto coins, per se; the transaction is signified merely by a transaction record on the blockchain and a change in balance of the respective wallets.
The safest way to store cryptocurrencies is in an offline environment, this is referred to as a “cold” wallet or “cold storage”. Cold wallets, or hardware wallets, are a tamperproof means to store private keys of coins in an offline setting. Two popular types of cold wallets are dedicated electronic hardware wallets, and paper wallets (basically paper printed with the public and private keys, often in QR code format that can be scanned by a phone’s camera). The private keys and digital signatures needed to spend the coins are generated via these wallets. There have been no reported thefts of cryptocurrencies from cold wallets, however, the device itself can be lost or stolen.
Mobile wallets are applications which are installable on mobile phones and there are multiple applications for iOS, Android, Windows, and Blackberry devices. Data with respect to mobile wallets is generally stored in the cloud.
Desktop wallets are wallets which are installable on different desktops, and as per the user’s needs, are compatible with Windows, Mac, and Linux. Desktop wallets are only accessible from the single computer in which they are downloaded and as such offer one of the highest levels of security. However, desktop wallets are susceptible to hacks and viruses which may result in a loss of funds.
ARK Investment Management LLC (“ARK”) estimated that there will be 220 million digital wallets in the US by 2024.
Online wallets run on the cloud and are accessible from any computing device in any location. While online wallets are easy to access, the private keys are stored online and controlled by a third party which makes them more vulnerable to hacking attacks and theft.
The LODEPAY Mobile Wallet is a hot wallet designed for commerce and convenience -lightweight and transacts at the speed of modern money. The LODEPAY Wallet is a non-custodial, multi-asset, multi-networked wallet, enabling the movement of AGX and AUX Coins from one blockchain to another, calling upon BATON™ for most of the functionality. It also enables peer-topeer transfers and functions as a simple POS.
The LODEPAY Web Wallet mirrors the functionality of the mobile wallet and is accessible through any web browser on a desktop or mobile device with no download or installation required. The LODEpay Web Wallet offers users the same bank-grade security as the LODEPAY Mobile Wallet.
In its BIG Ideas /2020 report, ARK Investment Management LLC (“ARK”) estimated that there will be 220 million digital wallets in the US by 2024. ARK further notes that based on the lifetime value of traditional bank customers, the digital wallet opportunity could be worth more than $800 billion.
According to ARK, public markets in early 2020 were valuing digital wallets at a significant discount per user to private fintech valuations. ARK is of the view that, at maturity, a digital wallet user should be valued at approximately $3,650, similar to a retail bank customer.
Based on the data from ARK (Page 19), the implied potential for the LODE System is significant as outlined in the following table.
2.7 Accessing Cryptocurrencies
Given their relatively early stage, purchasing cryptocurrency is confusing and challenging for a lot of people. Cryptocurrencies are not a stock or a typical “investment”. As noted above, cryptocurrencies are digital coins or tokens that are stored in wallets. Some cryptocurrencies require proprietary wallets meaning a user might require multiple wallets. Account verification requires a name, phone number and address. Users may also need a valid government-issued photo ID and proof of residence to withdraw money from the exchange, depending on their location.
The entire registration process can take several days, or even weeks, depending on the country of origin and the payment methodology.
To “purchase” a cryptocurrency, most users must open an account with an exchange and provide some form of payment - credit or debit cards, U.S. bank accounts, or even Bitcoin, Ethereum and Litecoin, many other cryptocurrencies can only be bought using Bitcoin, making the process even more difficult for new users to acquire these coins / tokens.
As noted above, CoinBase is one of the most popular exchanges and can be used to acquire the better-known cryptocurrencies. Other lesser-used cryptocurrencies are more difficult to acquire. Kraken, Coinsquare, Binance, Poloniex, Bittrex, Shapeshift, and Bitbuy are examples of other exchanges that enable users to acquire a broader range of cryptocurrencies.
2.8 Decentralized Finance (“DeFi”)
DeFi is an open finance technology movement that utilizes public blockchains to transform outdated financial processes into modern trustless and transparent financial systems that run without intermediaries. DeFi is the idea that crypto entrepreneurs can recreate traditional financial instruments in a decentralized architecture, outside of companies’ and governments control.
The DeFi movement is based on providing a global, open alternative to every financial service people use today and making that service accessible to anyone in the world with a smartphone and internet connection. Decentralized apps or “dapps” are built on decentralized technology rather than being built and controlled by a single, centralized.
2.9
Cryptocurrency Risks
While cryptocurrencies offer many benefits, there are also inherent risks and concerns, some of which are outlined below.
1. Less popular cryptocurrencies can be illiquid as they cannot be exchanged directly for fiat currencies. Many lesser-used cryptocurrencies can only be exchanged through private, peerto-peer transfers, meaning they are hard to value relative to other currencies – both crypto and fiat.
2. Anonymity makes cryptocurrencies popular, but it also increases their risk. As cryptocurrencies are frequently used to facilitate gray and black-market transactions, many countries view them with distrust or outright animosity.
3. Although there has been a slow-down in 2019, during 2018, $11.4 billion was raised through initial coin offerings (“ICOs”), an unregulated means by which funds are raised for a new cryptocurrency venture. An ICO is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists, banks or securities regulators. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies. The lack of regulation means they are susceptible to fraud and the underlying investment thesis can be flawed. In the second half of
2019, the number of ICOs began to decline significantly as can be seen from the following table.
4. One of the biggest risks of cryptocurrencies is their perceived lack of inherent value. Cryptocurrencies are essentially financial assets whose monetary value is entirely derived from people’s perception, by computer power, solving complex mathematical equations, hydroelectric power, strict adherence to issuance rules/ scarcity, governance. Conversely, fiat currencies have central bank reserves backing and ultimately there is no limit on the printing of fiat currency outside government controls. The perceived lack of inherent value, investor speculation and governmental regulatory restrictions have contributed to volatility for cryptocurrencies.
5. The processing speed of most cryptocurrency networks lags behind that of established payment networks. Bitcoin’s framework can only make seven transactions per second, according to a study form Cornell University. Comparatively, VISA’s
credit card network processes and estimated 1,700 transactions per second, while other studies estimate the processing speed at 24,200 TPS.
6. The LODE Sytem is enabled across Syscoin and Hyperledger. As noted above, the Syscoin network has TPS speeds rivaling some of the most established payment systems.
7. Volatility is one of the biggest concerns with cryptocurrencies. In 2017, Bitcoin’s price increased by more than 1000% and Ethereum by more than 2000%. In 2018, both currencies saw significant price declines and the prices rose again significantly in July 2019. For the first half of 2020, most of the major cryptocurrencies saw significant price increases, which some attribute to global economic uncertainty and investors seeking safe havens. Prices might continue to rise, or they could fall significantly. Unlike commodities or equity indexes, cryptocurrencies have no economic function, beyond being mediums for an exchange of value, stores of value and units
of account. Unlike commodities which are used in industry or fiat currencies, and there is often no apparent or fundamental reason for cryptocurrency price movements.
8. Related to the point above is the concern with momentum pricing. Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for anticipated future appreciation in value. Cryptocurrency market prices are determined primarily using data from various exchanges, over-thecounter markets, and derivative platforms. Momentum pricing may have resulted, and may continue to result, in speculation regarding future appreciation in the value of cryptocurrencies, inflating and making their market prices more volatile. However, many industry analysts believe that “crypto tourists” have largely exited the market and in 2020, more institutional investors have begun investing in cryptocurrencies, which is expected to stabilize the market.
9. As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently, with certain governments deeming them illegal while others have allowed their use and trade. Governments may in the future take regulatory actions that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade cryptocurrencies or to exchange cryptocurrencies for fiat currency.
10. Cryptocurrency market prices depend, directly or indirectly, on the prices set on exchanges and other trading venues, which are new and, in most cases, largely unregulated as compared to established, regulated exchanges for securities, derivatives and other currencies.
11. Currently, there is relatively small (but growing) use of cryptocurrencies in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility. Major global payment processing companies have begun to make forays into cryptocurrencies in 2020, which is a milestone in the industry.
12. The current success rate so far for crypto projects is low, which makes projecting cash flows and earnings into the future very difficult, because the going concern assumption may not be valid for many crypto ventures. The success rate and increased regulatory scrutiny of ICOs (particularly in the United States) have led to a slowing of the ICO market.
13. The value of cryptocurrency is usually based on risk, volatility, and scarcity – making many behave like stocks. Therefore, many people hold the currency because they know the value will soon increase, so the majority of those who buy cryptocurrencies are traders and investors.
14. Industry analysts expect it will take another five years before the most promising digital
currency ecosystems reach a critical mass. Building a critical mass of early adopters requires committed collaboration among a broad group of participants. Establishing trust, addressing inevitable tensions, and managing cooperative competition, or “coopetition,” among close rivals takes strong leadership. Decisionmakers for the group and their delegates must have the clout and expertise needed to push through learning-curve challenges and identify needed partners, data, talent, and other foundational elements.
15. One of the challenges with valuing most cryptocurrencies is that holders are not “investing” in these assets as they are not backed or tracked by anything in particular. Conversely if an individual purchases stock in a company, he/she gains partial ownership of that company, no matter how small the stake. There are no balance sheets, earnings reports, and filings with the Securities and Exchange Commission that investors can use to help determine an appropriate value for that cryptocurrency.
16. On March 11, 2020, the World Health Organization declared the global outbreak of COVID-19 a pandemic. Governments worldwide had varying reaction. As government continue to provide pandemic-related economic relief, cryptocurrencies’ long-term value proposition as a hedge against fiat currency debasement continues to grow.
LODE Project 3.0
3.1 LODE Project Overview
Reader Note: Evans & Evans has provided below a brief summary overview of the LODE Project, the LODE Token, the AGX Coin and the AUX Coin which was provided by LODE1. The reader is advised to refer to LODE1’s materials for more detailed descriptions of the manner in which the LODE Digital Precious Metal-Money System operates. Evans & Evans has reviewed such information, including, but not limited to the financial model.
3.1.1 LODE System Overview
The LODE Digital Precious Metal-Money System (“LODE System has been designed and scaled to fit the needs of a global society of sound money advocates who recognize that silver and gold can serve as an affordable, verifiable, safe, and secure store of value, and that when “tokenized” upon the blockchain networks, may become a superior medium of exchange, one that returns to the economic system a fungible, private, resilient, and autonomous unit of account. The crucial vision for the LODE Project is that assets will be used wherever fiat money is used.
The LODE Project’s goal is to restore silver and gold to historic prominence as sound money. The LODE System enables the creation of two asset-backed digital utilities that serve users globally as borderless, low cost, universal mediums of exchange, an alternative store of value and divisible, fungible, units of account for the settling of trade and commerce, the three functions and core-attributes of sound money.
The design of the AGX and AUX Coins has been structured to ensure that they are not considered a security under European law, where the LODE Project has legal jurisdiction.
LODE Token
The first asset, referred to as LODE Token (“LT”), is a security token and it serves as a form of virtual equity, providing a digital bond that represents the receipt for the metal added to the LODE gold and silver bullion vaults (the “LODE Vaults”). Holders of LTs are considered holders of virtual equity in the LODE1 Anstalt (“LODE1”) and will receive full rewards and 100% of all declared profits of the LODE platform.
Virtual equity provides holders of LTs with the financial benefits associated with regular equity structures. The only difference is that the LTs currently hold no voting rights. By excluding voting rights, LTs become more easily transferable and exchangeable around the globe and still rewards the stakeholder with all the financial rights and returns that traditional equity entails. 100% of all profit distributions will be paid to holders of LTs, no third parties or other investors will receive any distributions. If LODE1 is sold, 100% of the net proceeds after payment of debts and taxes will be paid to holders of LTs.
LODE Tokens are purchased with fiat capital, or physical private silver or gold assets. The inflows are utilized to construct a silver and gold monetary mass which is utilized for the tokenization and minting of the systems products - AGX and AUX Coins.
As the LODE silver or gold reserves grow, new silver and/or gold inflows allow for the minting of new AGX or AUX Coins, to be sold to members for use in daily trade and commerce.
Every LT which remains on the LODE System ledger will be entitled to receive micropayouts every 52 days. All payouts are based on the net spread (i.e. cost of silver and gold vs. the selling price). The payouts will be calculated and paid out at a rate of 5.25% of the net spread. The payouts will be paid into the LT holders’ system wallet on Hyperledger8 and paid with AGX Coins.
The intention is to limit the number of LODE Tokens to a maximum of 77 Million.
AGX Coin
The second asset, the AGX Coin, is a stable asset designed for commerce and backed by physically vaulted silver. Designed to be an easy part of everyday commerce, each AGX Coin is backed by one gram of vaulted, audited, and insured 99.99% investmentgrade silver.
AUX Coin
The third assets is the AUX Coin. The AUX Coin is a stable asset designed for commerce and backed by physically vaulted gold. Also designed to be an easy part of everyday commerce, each AUX Coin is backed by a one-milligram gram of vaulted, audited, and insured 99.99% pure gold.
The payouts will be calculated and paid out at a rate of 5.25% of the net spread. (8) The modular blockchain framework that has become the de facto
LODE Technology
From a technology standpoint, an interoperability strategy drives the technology design and stack for the LODE Project. The utilization of multiple chains ensures the project has relevance to a broad community. Additionally, the integration with financial services requires the development of a complex system that addresses multiple technology pillars. The LODE Platform is based on the five key technologies systems: The Bullion Engine, System Ledger & Minting, Payments Platforms, and Monetization. These systems work in harmony with one another to provide a complete monetary system.
The LODE Hyperledger Fabric is a ledger of account that records all transactions and utilization of BATON™. It is the relay that enables the movement of AGX and AUX native coins to a public chain such as Syscoin. BATON™ is a clearinghouse for the community and it is a centralized facility to swap assets between chains.
While minting takes place on the Hyperledger Fabric, AGX and AUX Coin holders will have the ability to trade on public decentralized networks, where supported. As such, a relay is required between the Hyperledger Fabric and the public networks that support AGX and AUX Coins.
3.1.2
LODE1
Legally registered in Liechtenstein, LODE1 is the parent company and administrative body of the LODE Project. LODE1 is a legally and economically independent entity. Unlike a typical operating corporation, LODE1 has no owners or shareholders and it does not issue any equity to stakeholders. LODE1 is governed by the LODE Board of Directors with direct input and guidance from the Non-Executive Board. As well, LODE1 governs the participation of the LODE Community Board, the LODE Service Provider’s Advisory Council (“SPAC”), and the Service Providers Alliance (“SPA”).
The following diagram depicts the structure of the LODE Project and the various companies that have been incorporated in order to facilitate a fully-functioning digital precious metals monetary system.
LODE (Switzerland) AG
AG & Co. KG (Austria)
U.K. LTD
LODE (Switzerland) AG is owned 100% by LODE1 and has been mandated by LODE1 to act as the capital management entity over all fiat transactions which are essential to bridging the current financial system in line with the new tokenized currency economy presently being constructed.
LODE (Austria) AG & Co. KG (“LODE Austria”) is owned 100% by LODE (Switzerland). LODE (Austria) has been mandated to act as the issuing body and for all digital assets. This arm of the organization will enable the creation of AGX and AUX Coin for distribution globally.
Interfix Corporation (“Interfix Corp.”) is owned by 100% LODE (Switzerland) AG and is LODE1’s distribution partner. Operating transparently and in a disciplined manner, Interfix acts as the bullion management and secures vaulting for the project.
LODE U.K. LTD (UK) is owned 100% by LODE (Switzerland) and will serve as the world headquarters for the LODE Project and will have administrative oversight of LODE Payments International LLC, FCA regulations, and all legal requirements.
Lode Payments International LLC (“LPI”) is owned by LODE (Switzerland) AG and is contracted as a Service Provider through LODE (Switzerland) AG and has been mandated to build the payments platform. Administrative oversight for the development contract will be conducted by LODE U.K. Ltd.
LODE (Ireland) Ltd. is owned 100% by LODE U.K. Ltd. and for tax and labour law purposes will function as the human resources and hiring hub for the LODE Project. In the future, all SPA contracts will be managed by LODE Ireland Ltd.
3.1.3 Coin Redemption, Minting & Distribution
The two coins will initially be issued on Hyperledger but will be available to move to additional chains, beginning with Syscoin . LODE will not accept, process, or facilitate the redemption of AGX for silver and AUX for gold prior to an individual completing their know your client (“KYC”) forms.
Both AGX and AUX may be transferred off of the LODE centrally controlled blockchain to a public decentralized network, and vice versa. No money service brokers, custodians, or broker/dealers responsibilities are considered at this time for these transfers.
Similar to LODE Tokens, LODE records AGX and AUX Coin balances in a Hyperledger Fabric-based blockchain. LODE or affiliated vaulting partners are capable of minting AGX/AUX Coins for circulation. Each minting event of AGX/AUX Coins will be backed by a signed attestation that the equivalent value of silver and/or gold is held in reserve. The system will verify the cryptographic signature and offline audits are required to confirm the correct amount of physical metal that is held.
When AGX/AUX Coins are issued, they represent a bearer claim to the value of the appropriate metal backing the coins. Transfers of coins are permitted between members holding a balance of native AGX or AUX Coins on the Hyperledger Fabric chain, or on public ledgers.
3.1.4 Rewards and Payouts
LODE Token Holders are entitled, by way of contractual rights, to 100% of any profit distributions, and all proceeds from mergers or acquisitions. Once there is a steady profit flow, the profits will be distributed on a 52-day cycle.
While the LODE Project is in its growth phase, small payments will still be made each cycle to LODE Token Holders, so as to fulfill the promise of passive income that was made to early investors. The funds for these payments will come from the invested capital until such a time that the LODE Project is fully profitable.
3.1.5 LODE Operations
The LODE Project is powered by a professional Service Providers Alliance (“SPA”) composed of individuals and corporations from around the globe. Currently, there are approximately 71 individuals, across 31 entities, in nine (9) different jurisdictions providing services to the LODE Project with services in seven (7) main areas.
In order to achieve the mandate and objectives, the LODE Project relies upon community members (investors) to build the monetary mass through the purchase and vaulting of silver and gold bullion into the LODE System. As of the date of the Report, the development of the monetary mass is the primary inflow to the system. 80% of this inflow is vaulted and the remaining 20% is utilized for LODE operations, including technology development, marketing and communications, and legal and administration. As the LODE Project expands, further inflows from system fees and utilization will drastically reduce the need to draw on the bullion reserves for operating costs.
The reader is advised to refer to the LODE Business Plan and website (lode.one) for details on the LODE System.
3.2 Why Silver?
For thousands of years, humans have traded valuable commodities as forms of value to facilitate the exchange of goods. While any material that has scarcity, desirability and that can be divided into small amounts works as a unit of exchange, gold and silver were used near universally.
Silver’s three primary users are industry, luxury goods (jewelry and silverware) and investments (bars, coins and exchange traded funds (“ETFs”)).
A number of materials over the millennia have served after a fashion as “money” - essentially functioning as a store of value and as a medium of exchange. However only two, and occasionally a third, copper, - gold and silver - have stood the test of time, because they maintain the attributes which Aristotle listed in the 4th century BC as being essential for good money. It must be: (1) durable - essentially indestructible; (2) divisible - able to be converted into smaller or larger pieces without losing its value; (3) consistent - each piece of a certain size and purity is identical (“fungible”); (4) convenient - considerable value in a “small package”; and, (5) intrinsically valuable - something that many people want or can use.
A sixth attribute is that “good money” should have a certain scarcity - unlike fiat (unbacked) paper money which can - and historically sooner or later always has - been created in practically unlimited quantities.
Silver has the advantage of being rare (although not as rare as gold) and can be easily formed into coins, bars and jewellery. While silver still plays its role against the problem of devaluation (inherent in virtually all fiat currencies), it does not offer as convenient alternative means of exchange as it has in the past. An important advantage that silver has today is that governments can do little to control its price as they no longer hold sizeable stockpiles. Silver retains its inherent value and relative scarcity. Silver is recognized everywhere as having value, even when it is not readily accepted as a direct medium of exchange. Investors view silver as “insurance” against sociopolitical-economic stress or collapse. It is unlikely that silver will ever completely lose its value. Further, the holder of the silver has the sole
claim to value, there is no offsetting liability. Silver offers protection against inflation, fraud and economic collapse.
Silver is invaluable in today’s industry: batteries, LED chips, glass and mirror coatings, medicine, water purification, nuclear reactors, solar energy, RFID chips, semiconductors and touch screens are just some of its more than 10,000 industrial uses, which continue to grow in number and scope. Demand for silver is expected to continue to increase in line with industry growth.
Silver’s three primary users are industry, luxury goods (jewelry and silverware) and investments (bars, coins and exchange traded funds (“ETFs”)). The ETF aspect of demand can be a major swing factor in silver’s supply and demand balance because when ETF redemptions outpace buying, ETFs become a factor of supply and not demand.
The silver price increased 34% in July alone, outpacing every major global financial asset.
According to the latest research from the Silver Institute and as shown in the graphic below, global silver demand increased for the fourth straight year in 2019 nearing 1.0 billion ounces. At the same time, global silver mine production continued to be below demand at 836 million ounces.
After declining in the first quarter of 2020, the silver price has increased significantly, exceeding $28 per ounce in early August of 2020, up from a low of $11.64 in March of 2020, a 140% increase. Silver prices have not seen highs like 2020, since 2013.
The silver price increased 34% in July alone, outpacing every major global financial asset. July represented one of the best months for silver on record, and its highest monthly gain since 1979. The Silver Institute reports that global silver-backed exchange-traded products have posted all-time highs in 2020, currently standing at 1.25 billion ounces, having increased by 296 million ounces between January 1, 2020 and August 6, 2020.
The gold: silver ratio — the quantity of silver ounces needed to buy an ounce of gold –peaked at 127:1 on March 18, 2020 and as of August 6, 2020 was down to 72:1, a decrease of 43%.
3.3 Advantages of LODE Token and AGX / AUX Coins
Evans & Evans identified several advantages of the LODE Token and AGX /AUX Coins as summarized below.
1. The LODE System is not merely a mechanism for creating cryptocurrencies, it is a digital mechanism through which individuals can purchase investment-grade silver and gold in a simple, secure and inexpensive manner with full know-your-client and anti-money laundering protection. LODE has built a complete payment system, bringing on both users and merchants. Industry analysts note that while large organizations are still a hesitant to accept cryptocurrency payments, there is a growing demand for crypto payment services.
2. The desire for a new, unique and reliable digital currency with low volatility has prompted entrepreneurs to the link blockchain technology and mainstream investments, thus creating a new wave of cryptocurrencies backed by commodities or assets. Backing digital currencies with commodities (such as oil, gold, diamonds, etc.) or fiat (such as US dollars, euros, etc.) has many advantages. It reduces price volatility and opens the blockchain to a new kind of investors and traders (without even touching on the use of such digital currencies as actual methods of payment). The LODE System is expected to be one of the first payment systems (i.e., not just a currency). The AGX and AUX Coins should have less volatility than non-asset backed cryptocurrencies because the downside risk is limited to the underlying value of the precious for which AGX / AUX Coins can be redeemed from the vaulted metal AGX Coins are backed by one gram of silver and AUX by one milligram of gold. The price of precious metals increasing, or decreasing may cause them to appreciate or depreciate in value. Overall the LODE System is designed such that over 90% the precious metals in the LODE System are working to create and vault more precious metals. Increasing the amount of precious metals in the vault will increase the rewards available for LODE Token holders.
3. Unlike many coins, the AUX and AGX Coins are backed by actual assets and are redeemable for a fixed amount of previous metal. This reduces the uncertainty of whether or not the LODE System will roll out as anticipated by the directors of LODE1, since these currencies are backed by the tangible value of the asset. In addition, such AUX and AGX Coins can become a replacement for traditional investments in today’s capital markets (since due to smart contracts, the execution of a transaction is faster and easier, and also reduces the costs of capital markets middlemen).
4. One of the challenges facing asset-backed digital currencies, is that commoditybacked digital currencies may be considered financial products and thus require the approval of the relevant financial regulator. On the other hand, fiat-backed digital currencies may be considered as actual currencies that need to be supervised by a central bank. The Directors of the LODE Project have spent several years building a system that creates coins that are not treated as financial products.
5. Evans & Evans found it its research that organizations that have had the most success with related blockchain innovations build robust partner ecosystems based on a shared vision, a well-defined roadmap, and formalized rules of engagement, with clear roles and responsibilities. LODE1 has built the SPA and a detailed project Ethos and road map.
6. Silver and gold are both recognized commodities which trade worldwide on regulated exchanges. As precious metals backed coins, AGX and AUX Coins are backed assets that have clear benchmarks to regulate their value. More and more asset-backed coins have been entering the market to deal with these risks of inherent value.
7. Bitcoin, Ether, and Litecoins are non-physical assets, which do not represent any contractual claims and are not a liability of any entity or person. Conversely both the AGX Coin, the AUX Coin and the LODE Token maintain a unique relationship to the vaulted silver and gold.
8. As of July 31, 2020, the LODE Project has more than 6,100 members worldwide
9. The LODE System acts as the connection between the blockchain and the international precious metals market and as such may ultimately become a large, decentralized platform for trading gold and silver bullion. Without blockchain, the complexity of the LODE System
could not be managed in an efficient and immutable manner.
10. AGX and AUX Coins and LODE Tokens are a market-based alternative to mining. As AGX and AUX Coins are created by the LODE System, they allow for the flexibility and utility of cryptocurrencies without the disadvantages of running machinery and wasting energy. AGX and AUX Coins may also serve to reduce certain inefficiencies that currently limit the use of silver and gold as “money” in the broader merchant marketplace. As has been seen by the rise in the price of silver and gold in 2020, investors flock to these precious metals in times of economic uncertainty
11. Each AGX Coin is anchored to one-gram weight of reserved silver bullion in the vaults and then tethered to it cryptographically by blockchain architecture. The value of one gram weight of silver (i.e. one AGX Coin) will, in the future, be posted live on the LODE website in multiple fiat currencies to provide merchants and speculators with a baseline for price discovery when settling commerce. AUX Coins operate in the same manner, but are backed by one milligram of gold.
12. LODE Tokens, if the LODE System grows as anticipated by Community Ambassadors, represent a source of regular and steady rewards through the issuance of AGX Coins. LODE Tokens enable individuals to make their precious metals work for them and participate in the cryptocurrency market.
13. A LODE Token represents a derivative security with features of a structured bond without a fixed maturity date (perpetual bond). Payments of interests/ dividends are fully linked to the performance of the sale of silver/AGX Coins. Specifically, 5.25% of all AGX Coins that get minted will be set aside for interest payments to LODE Tokens. The effective interest rate will change based on sales LODE Tokens and will be diluted as more LODE Tokens are sold.
14. A LODE Token is a speculator’s asset that has a unique relationship to silver and gold. Crypto traders can purchase a LODE Token if they wish to invest physical silver or gold into the system and speculate on a blockchain enabled digital precious metals-money-system. Crypto traders and/or fund managers of cryptocurrencies and blockchain assets can position LODE Tokens as a means to diversify their portfolios. As outlined later in the Report, there has been a significant increase in institutional in cryptocurrencies. Such interest is largely in Bitcoin, the most recognized crypto and that with the longest history. It is the goal of the LODE Project to create a stable, recognized system that will attract all types of investors.
15. There will be minimal human intervention in the LODE System once it begins operating as it will continue to operate under the pre-set rules. However, while there are no shareholders, there is a Board of Directors with unlimited control.
16. LODE Token holders are the members of the LODE System, there is no ICO and no stock is sold. LODE Token holders collectively earn 5.25% of all new AGX Coins minted.
17. All silver and gold contributed to LODE System is stored in vaults worldwide in the form it is contributed. The storage of actual silver / gold in vaults is important, as there have been concerns in the past that financial institutions claiming to hold gold or silver, had actually converted the gold or silver to paper or electronic claims to physical gold or silver. Vaulting of the physical silver / gold is important as it needs to be available to any participating, authorized bullion dealers who wish to exchange/ redeem their AGX Coin or AUX Coin for the vaulted physical silver or gold.
18. The existing global financial system is based on a combination of cash, ATM’s, credit and debit cards, and point of sale devices. In many western nations, cash is being used less and less,
AGX and AUX Coins and LODE Tokens are a market-based alternative to mining. As AGX and AUX Coins are created by the LODE System, they allow for the flexibility and utility of cryptocurrencies without the disadvantages of running machinery and wasting energy.
with credit cards, debit cards, and direct deposits becoming the de facto standard. The LODE Project will enable the AGX and AUX Coins to function in the same manner by partnering with cryptocurrency exchanges such as Coinbase, Binance, BitMex, and Kraken; CoinPayments; point of sale; and cryptocurrency ATM providers; and by issuing crypto backed debit cards, and developing merchant and barter networks.
19. LODE1 is in the process of developing payment network integrations, shopping cart plugins, ATM integration, and custom wallet integrations, in order to provide an affordable, borderless merchant service offering available to all merchants. LODE provides this channel the ability to leverage the LODEPAY Wallet as is or for larger clients, the ability to leverage the wallet application programming interfaces and development services team to provide ancillary wallet services on top of the platform.
20. LODE is currently working to develop relationships with central banks to offer AGX/AUX Coins as internal exchange payments. It will also allow different agencies from different countries to utilize the AGX/AUX Coins to pay for international trade of goods and services by sending and receiving funds.
21. Transactions in the network are private, which is valued by users. The SEC Commissioner recently highlighted the importance of privacy, stating “You need to think about privacy issues if you’re creating some sort of digital currency. I think that’s a really important question for a society to ask because people don’t really feel comfortable with the government or anybody else monitoring their transactions.”
Blockchain Market 4.0
4.1
Cryptocurrencies
According to coinmarketcap.com, as of July 2020, there were over 6,000 cryptocurrencies active around the world, each touting its own advantages.
Bitcoin and Ether dominate the cryptocurrency marketplace with market capitalizations of $218 billion and $44.3 billion, respectively, as of August 6, 2020. As of August 6, 2020, the remaining of top five cryptocurrencies in terms of market capitalization are Ripple ($13.6 billion), Tether ($10 billion), and Bitcoin Cash ($5.9 billion). Bitcoin is often seen as the ‘reserve currency’ of the cryptocurrency world as increases and decreases in the price of Bitcoin often has a knock-on effect with other cryptocurrencies.
Cryptocurrencies first surfaced in 2009 with the debut of Bitcoin as the world’s first decentralized cryptocurrency. The initial exchange rate (recorded on October 5, 2009) for BTC was 1 BTC = $0.000764. Due to its first mover advantage, Bitcoin has remained the number one cryptocurrency in terms of market capitalization. However, cryptocurrency users have noted BTC’s current disadvantages, including high transaction fees and delayed settlement, and have therefore moved on to the many alternatives available. Bitcoin prices were extremely volatile in 2017 as
prices rose to over $20,000 per BTC in December 2017, only to fall to less than $14,000 by the middle of January 2018 and to just over $6,000 in June 2018. The price of BTC fell further to just over $3,200 in December 2018, representative of August 2017 price levels before the run-up in December of 2017. The prices of BTC rallied again from a low of just over $4,000 in April 2019 to over $12,000 in July 2019 before falling to under $10,000 in September 2019 and under $8,000 in October. In 2020, Bitcoin started 2020 at $7,151 on January 1, 2020, increased to $10,250 in early February 2020, before falling again to $5,500 in the middle of March 2020. As of July 31, 2020, the price of Bitcoin reached $11,373.
Currently ranked as the currency with the second highest market capitalization, Ethereum has 112.0 million ETHs circulating. Ethereum has increased in popularity in recent years due to its smart contract abilities and flexibility in creating new applications. Cryptocurrency users no longer focus on just the peer-to-peer currency transfer abilities of BTC but look for other functionalities, such as global decentralized computing or smart contracts infrastructure. Similar to Bitocoin, Ehereum’s price has been volatile in 2020, starting the year at $130, before falling to less than $170 in the first quarter. As of July 31, 2020, Ethereum’s price had increased to $346.
As of July 2020, there were over 6,000 cryptocurrencies active around the world, each touting its own advantages.
As noted above, there has been an increase in asset-backed cryptocurrencies. In addition to asset-backed cryptocurrencies, there has been the emergence of “Stable coins”. Stable coins are cryptocurrencies whose values are kept stable by pegging them to another asset.
Evans & Evans has highlighted certain asset-backed cryptocurrencies and stable coins below.
Facebook is planning to introduce single currency stablecoins and a multicurrency coin. The goal of the Libra Association is to enable a simple global payment system and financial infrastructure that empowers billions of people. The digital currency is being developed by Facebook and a Switzerlandbased consortium known as the Libra Association, which includes such companies as Visa, Uber and Coinbase. It would be backed by a digital ledger different to Bitcoin’s and, also unlike Bitcoin, assetbacked in order to maintain a stable value. Each single-currency stablecoin will be fully backed by the Reserve, which will consist of cash or cash equivalents and very short-term government securities denominated in that currency.
Founded by Russian entrepreneur Valentin Preobrazhenskiy, the LAToken platform (short for “Liquid Asset Token”) tokenizes virtually anything from real estate, to bank loans, to works of arts or even antiques. LAToken is a blockchain platform for creating and trading asset tokens. It allows cryptoholders to diversify their portfolio by getting access to tokens linked to the price of real assets. LAToken enables asset owners to unlock the value of assets by creating and selling their asset tokens. The LAT platform is already operational: asset tokens can be created, listed for sale and traded on the LAT platform. Tokens linked to the price of shares (e.g. Apple, Amazon, Tesla), commodities (oil, gold, silver) and real estate ETF are already traded on the LAT platform. The LAToken is trading on several and exchanges and as of July 31, 2020, the price was $0.034619 per Coinmarketcap. com, with a market capitalization of $13.2 million. As of July 31, 2020, there were 380,104,462 LATokens circulating of a total supply of 400 million and a maximum of 1.0 trillion.
TrueUSD is a U.S. dollar-backed ERC-20 stable coin with a fully collateralized underlying asset pool that’s held in custody by partner banks. TrueUSD was the first asset token by TrustToken. TrustToken has also introduced several other fiat-backed coins. TrustToken is a platform to create asset-backed tokens that you can easily buy and sell around the world. For example, gold to gold tokens or dollar to dollar tokens. TrueUSD is currently listed on over 70 exchanges. As of July 31, 2020, TrueUSD has a market capitalization of $111.3 million and a circulating supply of 203,751,533 coins.
The Gemini dollar (GUSD) is an ERC20 stablecoin that allows holders to send and receive USD across the Ethereum network. The Gemini dollar can be exchanged for other cryptocurrencies on other exchanges offering different trading pairs. Gemini Trust Company controls the creation or “minting” of all GUSD. Since it’s backed by American Currency on a 1-to-1 exchange rate with the USD, the Gemini dollar can be redeemed at any point for 1 USD on Gemini. As of July 31, 2020, GUSD has a market capitalization of $7.3 million and a circulating supply of 11,539,982 coins.
Paxos is a regulated financial institution building infrastructure to enable movement between physical and digital assets. Since its founding in 2012, Paxos has sought to enable the movement of assets, starting with the launch of the itBit exchange in Singapore. In 2015, the New York State Department of Financial Services granted Paxos a limited-purpose trust charter, thus establishing it as the first company approved and regulated to offer crypto products and services. Paxos has since continued to operate within established regulatory frameworks while creating innovative new products. This includes workstreams in the tokenization of securities, precious metals and commodities, such as the Paxos Standard token, a digital dollar launched in 2018. Paxos has raised over $93 million. Paxos has also introduced AX Gold (PAXG) as a digital asset. Each PAXG token is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brink’s vaults. If you own PAXG, you own the underlying physical gold, held in custody by Paxos. Built as an ERC-20 token on
the Ethereum blockchain, PAXG can be moved or traded anywhere in the world, 24/7.
As of August 14, 2020 PAXG had a market capitalization of $57 million and a circulating supply of 29,099 PAXG.
Kinesis is a monetary system, based 1:1 on allocated physical gold and silver. Kinesis was conceived in 2011 and in 2019, it become the 10th largest capital raising vehicle, selling a total of $190 millin in tokens. The Kinesis Velocity Token (“KVT”) is a digital token which rewards holders in line with the growth of the system. Each time the Kinesis currencies are sent or spent a transaction fee is applied. These fees are accumulated and 20% is proportionately distributed back to the KVT holders. The transaction fee is a fixed 0.45% per transaction. Only 300,000 KVTs will ever exist. Kinesis includes its own exchange, mint (enabling the creation of new Kinesis currencies), a wallet and a Visa pre-paid debit card that enables people to spend gold and silver globally. Kinsesis digital currencies include KAU, KAG and traditional fiat currencies. Evans & Evans could find no data on the current price of KVT, KAU or KAG.
Silvertoken (SLVT) is a digital currency backed by silver, which utilizes the Ethereum blockchain, allowing users to purchase and transact with physical silver. Each Silvertoken represents 1 troy ounce of 99.9% pure investment grade silver bullion. Silvertoken is in a Master Vaulting Agreement with Strategic Wealth Preservation (SWP), a fully-integrated precious metals dealer and vaulting facility located in the Cayman Islands, to oversee the secure storage of the silver reserve for our community.
All SLVT is fully redeemable for the silver they represent. Silvertoken runs on the Ethereum Network and is ERC20 compliant.
Tether is 100% backed by fiat currency assets in a reserve account. The conversion rate is 1 tether USDT equals $1 USD. The Tether Platform is considered to be fully backed if all tethers in circulation is less than or equal to all fiat that is held in the bank account. As of July 31, 2020 Tether had a market capitalization of $35.8 and a circulating supply of 9,998,221,723.
TetherGold (XAU) is available as an ERC-20 token on the Ethereum blockchain and as a TRC20 token on the TRON blockchain. The token can be traded or moved easily at anytime, anywhere in the world. Each XAU represents ownership of one troy fine ounce of physical gold on a specific gold bar. Therefore, holders will obtain undivided ownership rights to gold on the specified gold bar(s). The allocated gold is identifiable with a unique serial number, purity and weight. As of July 31, 2020 Tether had a market capitalization of $333,000 and a circulating supply of 3,990.
All SLVT is fully redeemable for the silver they represent. Silvertoken runs on the Ethereum Network and is ERC20 compliant.
4.2 Demand for Cryptocurrencies
Central banks around the world, including China, Japan and Sweden, are developing their own digital currencies. China’s central bank announced in January 2017 that it had completed a successful trial run of transacting digital currencies among banks. In September 2017, Japan, Sweden and Estonia all announced similar digital currency projects: J-coin for Japan, E-krona for Sweden and Estcoin for Estonia. The United Kingdom, Uruguay and Kazakhstan have all announced plans to create digital fiat currencies. The investment in digital fiat currencies is driven by the move to a cashless society. A report published in March 2019 by Access to Cash in the United Kingdom suggests that cash transactions could fall to just 10% of all payments within the next 15 years. Currently only 13% of the total population in Sweden relies on cash transactions and Sweden is expected to become the world’s first cashless economy by 2023. Sweden plans to introduce its own digital currency in 2021.
Despite the growing governmental interest in cryptocurrencies, the demand for cryptocurrencies that are free of control from any person and institution is not expected to change. “With government cryptocurrencies, you have one institution that controls it, and they can change the rules when they want; they can prevent certain transactions from happening if they don’t trust the party involved. It’s not that that’s bad, but that’s not a cryptocurrency. That’s just a currency that happens to run on a computer.10”
Cryptocurrencies exist because individuals are looking for decentralized, peer-to-peer digital cash, which is not managed by a central intermediary and is beyond the control of a government. Regardless of whether governments begin to introduce their own fiat digital currencies, demand is expected to continue for non-fiat cryptocurrencies which are governed purely by market forces, not government intervention.
Despite the growing governmental interest in cryptocurrencies, the demand for cryptocurrencies that are free of control from any person and institution is not expected to change.
According to CoinMarketCap, the total market capitalization as at August 6, 2020 for all cryptocurrencies is approximately $357 billion. By 2025, total market capitalization could exceed $5 trillion, as crypto wallet penetration is expected to exceed 5% of the world’s population and assetbacked cryptocurrencies give rise to trading asset tokens11
According to BitPay Chief Marketing Officer Bill Zielke, the payment processor facilitated $1 billion worth of cryptocurrency transactions in 2019, the majority involving Bitcoin. Likewise, a Coinbase spokesperson said Coinbase Commerce processed $135 million worth of cryptocurrency payments for thousands of merchants in 2019, which represents a 600% increase in the number of unique transactions via Coinbase Commerce since 201812.
Financial technology companies and incumbent financial services players have increasingly been investigating how to boost their clients’ access to cryptocurrencies as most institutional investors have yet to participate in the asset class. Most analysts believe there are large sums of money from institutions and high net worth individuals about to enter the market through new hedge funds.
Major financial institutions and payment processes have traditionally portrayed a pessimistic stance toward cryptocurrencies in the past several years. Executives of Visa, Mastercard and other financial service providers have previously criticized Bitcoin and other crypto assets. In October 2017,
(10) Jacob Eliosoff, Investment Manager of Trevi Digital Assets Fund
(11) https://medium.com/@xchangeraterobot.io/the-significant-growth-of-the-cryptocurrency-and-a-look-ahead1b5e10cac6a9 - Retrieved July 20, 2018
as Cointelegraph reported, Mastercard CEO Ajay Banga said cryptocurrencies that are not government-mandated are “junk.” Yet on July 2020, Mastercard announced the launch of a crypto card partner program that would allow cryptocurrency companies to distribute Mastercard payment cards through a Mastercard principal membership. Visa, which has also canceled crypto debit cards in the past, established a partnership with Bitcoin Lightning Network startup Zap. Mastercard and Visa’s initiatives to build an infrastructure around cryptocurrencies as a potential long-term strategy have demonstrated the growing perception of cryptocurrencies as legitimate tools of payment and store of value. In June of 2020, there were industry rumors that one of the largest online payment systems of the world might be planning to go enter into the digital currency space. According to various reports, PayPal might be planning to sell cryptocurrency as a new service.
A global company like PayPal or Venmo getting into crypto would be significant to the crypto industry. Industry analysts expect to see more companies following the footsteps of Facebook, and PayPal, to leverage crypto for cross-border payments, settlement, and other use cases needed to optimize for a global economy.
“The future of payments is in cryptocurrencies and P2P transaction settlements. Whether you like it or not, it’s here to stay,” Crebaco founder and CEO Sidharth Sogani also said. “PayPal has been the leader in simplifying online payments, and that’s the reason it recognizes the simplicity and capability of cryptocurrencies.”
In the United States, some merchants are hesitant to accept cryptocurrencies due to their tax treatment. Merchants don’t have to pay capital gains on fiat accepted at point of sale, however with Bitcoin, capital gains are charged.
A recent report from ZUBR Research explains that by 2028, retail demand for Bitcoin will exceed the new supply. The report highlights that in eight years as Bitcoin’s supply rate decreases “retail size addresses [will] begin to eat up all the new supply
alone.” Even the next halving in 2024 could see retail accounting for acquiring 50% of the Bitcoins in circulation.
In May of 2020, SEC Commissioner Hester Peirce, talked about cryptocurrency and digital dollars during a livestream discussion with Crypto Finance Conference St. Moritz. Noting that the Covid-19 pandemic has affected all industries, including cryptocurrency, she said: “As people are more comfortable working in a virtual world in every industry now, I think people are likely to turn more interest to the crypto space.”
4.3 Institutional Investment in Cryptocurrencies
Adoption of cryptocurrencies by institutional investors has long been seen as one of the most important milestones in order to establish crypto as an asset class. A study published by Fidelity in 2020 included 774 firms around the world. As the results of the study show, 36% of the 774 institutions now own cryptocurrencies in some form. The largest percentage allocation among the participants in geographical terms comes from the U.S., with 27% of the 441 American institutions surveyed revealing that they are exposed to crypto, up from 22% in 2019. European institutions have also shown heavy bullishness when it comes to crypto assets, with around half of European participants stating that they are long on crypto. The Fidelity study also showed that market capitalization dominated institutional investment choices, with more than a quarter of respondents holding BTC and 11% opting to include Ethereum.
The Grayscale Bitcoin Trust (“GBT”) is a digital currency investment product that individual investors can buy and sell in their own brokerage accounts. On January 21, 2020, GBT became an SEC reporting company, registering its shares with the Commission and designating the GBT as the first digital currency investment vehicle to attain the status of a reporting company by the SEC. GBT reports an inflow of $1.4 billion in capital in the first six months of 2020.
The GBT is considered an accurate metric to measure institutional demand for Bitcoin since the U.S. and Europe have not yet approved an exchange-traded fund around Bitcoin or cryptocurrencies. The absence of exchangetraded funds in the U.S. and Europe narrows down the options for accredited and institutional investors. Institutions can choose among the Grayscale Bitcoin Trust, custodial services and direct over-thecounter (“OTC”) trades. To date, custodial services are not widely-utilized, and direct OTC dealings can cause security vulnerabilities. GBT reports that it is not creating demand, it is reflecting the demand for cryptocurrency as an asset class.
Cryptocurrency custody solutions are third party providers of storage and security services for cryptocurrencies. Their services are mainly aimed at institutional investors, such as hedge funds, who hold large amounts of bitcoin or other cryptocurrencies. Since January 2020, major banks across Asia, Europe and the U.S. have started to prepare crypto custodial services, indicating that they see a certain level of demand for Bitcoin from clients. In January, Switzerland’s third-biggest bank, Julius Baer, partnered with Seba to launch digital assets services
One of the important aspects of digital tender is they can democratize access to financial systems, allowing “unbanked” populations in poor or remote regions to buy, sell, save, and invest more easily than before. The World Bank estimated in 2018 that 1.7 billion adults remained unbanked, an issue exacerbated by the limited reach of physical banking infrastructure around the world.
Current payments models can be inefficient. Right now, for instance, payments can take days to clear because of complicated national and international gross settlement mechanisms. Payment systems can also be exclusionary. Small and midsize businesses often pay significantly higher fees than larger entities because pricing is generally based on volume. Individuals and institutions in emerging markets can also have a harder time
accessing international payments networks because of difficulties satisfying traditional requirements, such as having a bank account or a welldocumented credit history. Likewise, guest workers often face high costs when transferring money to families in their home countries.
4.4 Cryptocurrency Returns
Evans & Evans has conducted an analysis of several of the most recognized cryptocurrencies in order to provide the reader of the Report with an understanding of the types of returns that can be realized by investing in cryptocurrencies. Evans & Evans reviewed four-year (where available) data on the following cryptocurrencies: Bitcoin; Ether; XRP, Litecoin, Dash, Cardano, EOS and Digix.
Bitcoin is the oldest cryptocurrency having launched on July 18, 2010 at a price of $0.09 per coin. As of the Pricing Date, BTC was trading at $11,373.32 per BTC. As can be seen from the table below, BTC increased significantly in its first 24 months of trading and saw quadruple digit increases in 2017. 2020 has been a rebound year for Bitcoin.
Ether launched on August 7, 2015 and also increased materially in value in its first 24 months of trading. Ether’s initial price of $3.00 increased to over $1,300, in early 2018. Ether did not see the same increases as Bitcoin in 2017, but its declines were also not as material. As at the Pricing Date, ETH was priced at $346.03, having seen greater increases in value in the 12 months preceding the Pricing Date than were realized by Bitocoin.
XRP launched on August 4, 2013 and increased in value by 40% in its first 24 months of trading. XRP’s initial price of $0.01 increased to over $3.65, in early 2018. As at the Pricing Date, XRP was priced at $0.26.
Dash is another well-known cryptocurrency that launched in 2015 and since its price has increased from $10 to $82.94 as at the Pricing Date. Dash saw price increases similar to Ether in 2017 and early 2018, rising to over $900.
Litecoin launched in late 2016 and since that time has seen its price increase by over 17x. Litecoin also saw a significant increase in its first 12 months of trading of over 1200%. Litecoin was trading at $58.40 as at the Pricing Date, down from highs of over $200 in February of 2018.
Cardano is a new entrant to the cryptocurrency space but as at the Pricing Date was in the top 10 in terms of market capitalization, falling from the top five in early 2018. Cardano’s initial trading price was in the range of $0.12 but that had increased by more than 6.5x to over $0.75 in early 2018 before settling back down to $0.14 as at the Pricing Date.
EOS was launched on July 27, 2017 with an initial price of $1.95. Prices spiked to over $12 in December of 2017 but were in the range of $3.10 as of the Pricing Date.
DGX is a gold-back token launched on May 15, 2018 with a price of $44.37 at a time when gold’s price was approximately $45.68 / gram. As of the Pricing Date, DGX was trading at $62.95 with gold trading
at $69.30 per gram. DGD launched on August 10, 2017 at $77.04 and as at the Pricing Date was trading at $66.86.
As can be seen from the following table, in their first 12 to 36 months of operations, the selected cryptocurrencies saw triple, and sometimes quadruple, digit increases in value. For the majority of the crypto currencies the change in value over the first 24 to 36 months was positive and significant. It is important to differentiate, that the following currencies are not directly comparable to the LODE Token or the AGX Coin because they are not asset-backed. There are not currently any asset-backed cryptocurrencies with long-term operating histories.
The reader is advised to refer to Exhibit 1.0 –Cryptocurrency Chart.
Bitcoin is the oldest cryptocurrency having launched on July 18, 2010 at a price of $0.09 per coin. As of the Pricing Date, BTC was trading at $11,373.32 per BTC.
4.2 Demand for Cryptocurrencies
Central banks around the world, including China, Japan and Sweden, are developing their own digital currencies. China’s central bank announced in January 2017 that it had completed a successful trial run of transacting digital currencies among banks. In September 2017, Japan, Sweden and Estonia all announced similar digital currency projects: J-coin for Japan, E-krona for Sweden and Estcoin for Estonia. The United Kingdom, Uruguay and Kazakhstan have all announced plans to create digital fiat currencies. The investment in digital fiat currencies is driven by the move to a cashless society. A report published in March 2019 by Access to Cash in the United Kingdom suggests that cash transactions could fall to just 10% of all payments within the next 15 years. Currently only 13% of the total population in Sweden relies on cash transactions and Sweden is expected to become the world’s first cashless economy by 2023. Sweden plans to introduce its own digital currency in 2021.
Despite the growing governmental interest in cryptocurrencies, the demand for cryptocurrencies that are free of control from any person and institution is not expected to change. “With government cryptocurrencies, you have one institution that controls it, and they can change the rules when they want; they can prevent certain transactions from happening if they don’t trust the party involved. It’s not that that’s bad, but that’s not a cryptocurrency. That’s just a currency that happens to run on a computer.10”
Cryptocurrencies exist because individuals are looking for decentralized, peer-to-peer digital cash, which is not managed by a central intermediary and is beyond the control of a government. Regardless of whether governments begin to introduce their own fiat digital currencies, demand is expected to continue for non-fiat cryptocurrencies which are governed purely by market forces, not government intervention.
Despite the growing governmental interest in cryptocurrencies, the demand for cryptocurrencies that are free of control from any person and institution is not expected to change.
According to CoinMarketCap, the total market capitalization as at August 6, 2020 for all cryptocurrencies is approximately $357 billion. By 2025, total market capitalization could exceed $5 trillion, as crypto wallet penetration is expected to exceed 5% of the world’s population and assetbacked cryptocurrencies give rise to trading asset tokens11
According to BitPay Chief Marketing Officer Bill Zielke, the payment processor facilitated $1 billion worth of cryptocurrency transactions in 2019, the majority involving Bitcoin. Likewise, a Coinbase spokesperson said Coinbase Commerce processed $135 million worth of cryptocurrency payments for thousands of merchants in 2019, which represents a 600% increase in the number of unique transactions via Coinbase Commerce since 201812.
Financial technology companies and incumbent financial services players have increasingly been investigating how to boost their clients’ access to cryptocurrencies as most institutional investors have yet to participate in the asset class. Most analysts believe there are large sums of money from institutions and high net worth individuals about to enter the market through new hedge funds.
Major financial institutions and payment processes have traditionally portrayed a pessimistic stance toward cryptocurrencies in the past several years. Executives of Visa, Mastercard and other financial service providers have previously criticized Bitcoin and other crypto assets. In October 2017,
as Cointelegraph reported, Mastercard CEO Ajay Banga said cryptocurrencies that are not government-mandated are “junk.” Yet on July 2020, Mastercard announced the launch of a crypto card partner program that would allow cryptocurrency companies to distribute Mastercard payment cards through a Mastercard principal membership. Visa, which has also canceled crypto debit cards in the past, established a partnership with Bitcoin Lightning Network startup Zap. Mastercard and Visa’s initiatives to build an infrastructure around cryptocurrencies as a potential long-term strategy have demonstrated the growing perception of cryptocurrencies as legitimate tools of payment and store of value. In June of 2020, there were industry rumors that one of the largest online payment systems of the world might be planning to go enter into the digital currency space. According to various reports, PayPal might be planning to sell cryptocurrency as a new service.
A global company like PayPal or Venmo getting into crypto would be significant to the crypto industry. Industry analysts expect to see more companies following the footsteps of Facebook, and PayPal, to leverage crypto for cross-border payments, settlement, and other use cases needed to optimize for a global economy.
“The future of payments is in cryptocurrencies and P2P transaction settlements. Whether you like it or not, it’s here to stay,” Crebaco founder and CEO Sidharth Sogani also said. “PayPal has been the leader in simplifying online payments, and that’s the reason it recognizes the simplicity and capability of cryptocurrencies.”
In the United States, some merchants are hesitant to accept cryptocurrencies due to their tax treatment. Merchants don’t have to pay capital gains on fiat accepted at point of sale, however with Bitcoin, capital gains are charged.
A recent report from ZUBR Research explains that by 2028, retail demand for Bitcoin will exceed the new supply. The report highlights that in eight years as Bitcoin’s supply rate decreases “retail size addresses [will] begin to eat up all the new supply
alone.” Even the next halving in 2024 could see retail accounting for acquiring 50% of the Bitcoins in circulation.
In May of 2020, SEC Commissioner Hester Peirce, talked about cryptocurrency and digital dollars during a livestream discussion with Crypto Finance Conference St. Moritz. Noting that the Covid-19 pandemic has affected all industries, including cryptocurrency, she said: “As people are more comfortable working in a virtual world in every industry now, I think people are likely to turn more interest to the crypto space.”
4.3 Institutional Investment in Cryptocurrencies
Adoption of cryptocurrencies by institutional investors has long been seen as one of the most important milestones in order to establish crypto as an asset class. A study published by Fidelity in 2020 included 774 firms around the world. As the results of the study show, 36% of the 774 institutions now own cryptocurrencies in some form. The largest percentage allocation among the participants in geographical terms comes from the U.S., with 27% of the 441 American institutions surveyed revealing that they are exposed to crypto, up from 22% in 2019. European institutions have also shown heavy bullishness when it comes to crypto assets, with around half of European participants stating that they are long on crypto. The Fidelity study also showed that market capitalization dominated institutional investment choices, with more than a quarter of respondents holding BTC and 11% opting to include Ethereum.
The Grayscale Bitcoin Trust (“GBT”) is a digital currency investment product that individual investors can buy and sell in their own brokerage accounts. On January 21, 2020, GBT became an SEC reporting company, registering its shares with the Commission and designating the GBT as the first digital currency investment vehicle to attain the status of a reporting company by the SEC. GBT reports an inflow of $1.4 billion in capital in the first six months of 2020.
4.4 Unbanked or Underbanked
Digital technology alone is not enough to increase financial inclusion. To ensure that people benefit from digital financial services requires a welldeveloped payments system, good physical infrastructure, appropriate regulations, and vigorous consumer protection safeguards. And whether digital or analogue, financial services need to be tailored to the needs of disadvantaged groups such as women, poor people, and firsttime users of financial services, who may have low literacy and numeracy skills13.
The LODE System is designed to assist in meeting the growing global challenge of meeting the needs of the unbanked or under-banked.
The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. Its five institutions share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development.
The Global Findex database, created by the World Bank, is the world’s most comprehensive set of data on how people make payments, save money, borrow and manage risk. Launched in 2011, it includes more than 100 financial inclusion indicators. The third edition of the database was compiled in 2017 using nationally representative surveys in more than 140 developing and highincome countries13
According to data from the Global Findex database, globally, about 1.7 billion adults were unbanked in 2017 — without an account at a financial institution
Globally, 1.7 billion adults lack an account Adults without an account, 2017
Source: Global Findex Database.
Note: Data are not displayed for economies where the share of adults without an account is 5 percent or less.
or through a mobile money provider. Because account ownership is nearly universal in highincome economies, virtually all these unbanked adults live in the developing world. Indeed, nearly half live in just seven developing economies: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan.
According to data published by the United Nations Capital Development Fund (“UNCDF”), 2.5 billion adults - more than half of the world’s working adults - are excluded from formal financial services14. This is most acute among lowincome populations in emerging and developing economies, where approximately 80% of poor people do not have access. The UN CDF believes that including the unbanked in the formal economy is a critical contribution to poverty reduction, tackling inequality, and fostering inclusive growth.
UNCDF’s mission is to reduce poverty in the world’s 48 least developed countries (“LDC”s); promoting financial inclusion is one of its key strategies for doing so. UNCDF focuses first and foremost on LDCs with a special commitment to challenging environments – remote rural areas and countries emerging from conflict.
Without access to formal financial services, poor families must rely on informal mechanisms: family and friends, rotating savings schemes, pawn-brokers, moneylenders, money under the mattress. These informal mechanisms are insufficient, can be unreliable, and are often very expensive. Thus, financial exclusion imposes large opportunity costs on those who most need opportunity.
Safe, flexible and easy to manage and low-cost payment systems are required to meet the needs of the unbanked in emerging economies and LDCs. For rural people, this means no more traveling many kilometers and paying fares to go to the bank or ATM.
4.5 Non-Traditional Asset Classes
The LODE System is also designed to meet the needs of individuals / groups that do not use traditional credit cards and payment systems. For example, Islamic finance is the means by which individuals and corporations, including banks and other lending institutions, raise capital in accordance with Shariah15.
Shariah is a body of Koran-based guidance that points Muslims toward living an Islamic life. It doesn’t come from the state, and it doesn’t even come in one book or a single collection of rules. Sharia is divine and philosophical. The human interpretation of sharia is called “fiqh,” or Islamic rules of right action, created by individual scholars based on the Koran and hadith (stories of the prophet Muhammad’s life). Fiqh literally means “understanding” — and its many different schools of thought illustrate that scholars knew they didn’t speak for God. Generally, these principles state that Muslims are forbidden to participate in any financial practices or do business with any money-lending entity that charges interest, known as riba; invokes gharar, or uncertainty, most commonly in the form of variable interest rates; or uses funds for maysir, or gambling16.
Sukuk are financial products whose terms and structures comply with Shariah, with the intention of creating returns similar to those of conventional fixed-income instruments like bonds. Unlike a conventional bond (secured or unsecured), which represents the debt obligation of the issuer, a sukuk technically represents an interest in an underlying funding arrangement structured according to Shariah, entitling the holder to a proportionate share of the returns generated by such arrangement and, at a defined future date, the return of the capital.
(15) Also known as Sharia or Shari’ah (16) https://www.creditcards.com/credit-card-news/shariah-compliant-credit-cards-1273/
Pricing Methodologies 5.0
5.1 Overview
In valuing an asset and/or a business, there is no single or specific mathematical formula. The particular approach and the factors to consider will vary in each case. Where there is evidence of open market transactions having occurred involving the shares, or operating assets, of a business interest, those transactions may often form the basis for establishing the value of the company. In the absence of open market transactions, the three basic, generally-accepted approaches for valuing a business interest are:
(a) The Income / Cash Flow Approach; (b) The Market Approach; and (c) The Cost or Asset-Based Approach.
A summary of these generally-accepted valuation approaches is provided below.
The Income/Cash Flow Approach is a general way of determining a value indication of a business (or its underlying assets), using one or more methods wherein a value is determined by capitalizing or discounting anticipated future benefits. This approach contemplates the continuation of the operations, as if the business is a “going concern”.
The Market Approach to valuation is a general way of determining a value indication of a business or an equity interest therein using one or more methods that compare the subject entity to similar businesses, business ownership interests and securities (investments) that have been sold. Examples of methods applied under this approach include, as appropriate: (a) the “Guideline Public Company Method”, (b) the “Merger and Acquisition Method”; and (c) analyses
of prior transactions of ownership interests in the subject entity.
The Cost Approach is based upon the economic principle of substitution. This basic economic principle asserts that an informed, prudent purchaser will pay no more for an asset than the cost to obtain an opportunity of equal utility (that is, either purchase or construct a similar asset). From an economic perspective, a purchaser will consider the costs that they will avoid and use this as a basis for value. The Cost Approach typically includes a comprehensive and all-inclusive definition of the cost to recreate an asset. Typically, the definition of cost includes the direct material, labor and overhead costs, indirect administrative costs, and all forms of obsolescence applicable to the asset.
The Asset-Based Approach is adopted where either: (a) liquidation is contemplated because the business is not viable as an ongoing operation; (b) the nature of the business is such that asset values constitute the prime determinant of corporate worth (e.g., vacant land, a portfolio of real estate, marketable securities, or investment holding company, etc.); or (c) there are no indicated earnings/cash flows to be capitalized. If consideration of all relevant facts establishes that the Asset-Based Approach is applicable, the method to be employed will be either a going-concern scenario (“Adjusted Net Asset Method”) or a liquidation scenario (on either a forced or an orderly basis), depending on the facts.
Lastly, a combination of the above approaches may be necessary to consider the various elements that are often found within specialized companies and/or are associated with various forms of intellectual property.
Pricing Methodologies UsedLODE Tokens and AGX Coins
6.1 Factors Influencing the Pricing of the LODE Tokens and AGX Coins
Evans & Evans notes that potential value of LODE Tokens and AGX Coins is dependent on a number of factors which include:
1. The number of wallet users in the LODE System. As the number of users increase the volume of precious metals and the number of AGX / AUX Coins increases which creates more opportunity for merchant and users fees which can be used to purchase more previous metals. As of the date of the Report, the Association anticipated the ability to issue credit cards by the end of September. LODE credit cards will enable users to send AGX and AUX coins. In addition, the Association has signed up approximately 400 merchants that will accept AGX and AUX Coins
2. The number of banks. LODE is currently working to develop relationships with central banks to offer AGX/AUX Coins as internal exchange payments. It will also allow different agencies from different countries to utilize the AGX/AUX Coins to pay for international trade of goods and services by sending and receiving funds. Increasing the number of financial institutions in the LODE System increases the liquidity of the AGX and AUX Coins.
3. The market acceptance of AGX / AUX Coins. As with any new product / service, market acceptance will be determined over time. As more AGX and AUX Coins enter the market and the Association is able to expand the number of exchanges which trade AGX and AUX Coins and more trans-
actions occur the inherent value of LODE Tokens increases as a limited number of LODE Tokens shares in the marginal extra volume of silver created from the operations of the LODE System. The amount of silver contributed to the creation of monetary mass to-date does provide some support for the proposed market acceptance of AGX Coins.
4. Utility value. A key factor in the price of any cryptocurrency is its utility. If you cannot use it for something, be it an investment or for payments, then it would have no or little perceived value. Underlying assets also contribute to the utility value as there is the potential to redeem the coin/ token for some value. Accordingly, as AGX Coins are able to be used in more B2B and B2C transactions, their utility increases, which should increase the inherent utility value. An increase in the utility of AGX Coins increases both their value and the value of the LODE Tokens subject to the increase in sales of new AGX Coins.
5. Liquidity. Currently, there is no active effort to position the LODE Project assets on any exchanges. This does not preclude LODE and AGX / AUX being listed, but it will not be pursued in the near term as a means of liquidity. In the future, the LODE Project may explore listing options for the LODE Tokens and AGX Coins if there is significant market demand. Although exchanges are not a primary focus, exchangeability for the LODE Establishment is a primary goal, meaning that liquidity will come initially by means of other internalized mechanisms such as: peer-to-peer trading, card programs and crypto-to-fiat off ramps. Internal to the LODE Ecosystem, tools
such as the Price Oracle and algorithmic curve protocols may offer internal network supervised exchangeability.
6. Rewards. The rewards earned by the holders of LODE Tokens which are paid in the form of AGX Coins through the AGXPay System. LODE Token owners can register their assets and obtain rewards in the form of AGX Coins at 5.25% of the minting of new AGX Coins. AGX Coins can in turn be redeemed for silver.
Financial Modeling
The reader is advised to refer to Exhibit 2.0 for the pro forma income statement for LODE1.
LODE has based its financial model on a transaction model basis using metrics from the payment platform industry and companies such as VISA, MasterCard and American Express. Their metrics include market penetration from the user perspective and merchant usage along with other factors inclusive within the payments platform industry. The LODE System along with the LODEPAY wallet is particularly suited for the emerging markets of South America, Africa, Indian Subcontinent and S.E. Asia.
LODE Tokens represent a contributor’s investment in the LODE Project. The LODE Token provides a unique opportunity for owners of investmentgrade gold and silver bullion to divest their physical precious metals holdings into a perpetual bond. A portion of the contributed precious metals are then used to fund the LODE System, with a portion of the vaulted grams becoming AGX and AUX Coins, ready for circulation. LODE Token Holders will receive variable interest payouts in the form of AGX Coins, with each minting of silver-secured AGX Coins and gold-secured AGX Coins.
The LODE Token value will be driven from profits of the entire LODE ecosystem, this will include sales transactions of the AGX/AUX Coins along with incomes from resellers, affiliates network, profit sharing and the LODE marketplace.
There are two main revenue drivers in the LODE financial model:
1. The bullion engine that processes and ledgers transactions in AGX and AUX and charges a markup on the spot price; and,
2. The payments platform which includes eMoney services along with merchant networks and retail / end-user networks which contain a mix of fee-based and transaction revenue.
6.2 Pricing Methodologies Selected
There are currently multiple methods of attempting to “price” cryptocurrencies in order to provide investors with information as to whether each cryptocurrency is either under- or over-priced in the market. Industry analysts have used macro-financial indicators and cost-of-production models to value existing cryptocurrencies, however, no economic or financial model has been shown to be a reliable indicator of a cryptocurrency’s value in the economy. Further no models developed to-date have been reliable in predicting currency values to the market. Lastly, given the relative early stage of cryptocurrencies, no one valuation model is accepted by the market participants.
Most buyers and sellers of cryptocurrencies are speculating, meaning they are looking at price charts and guessing that it may go up or down with technical analysis as a means of making investing and de-vesting decisions. The challenge with cryptocurrencies is to find the appropriate fundamentals to use to develop value indications.
The LODE Token is a rewards token that derives its value from: (1) participation, i.e., enabling the creation of the monetary mass; (2) participation in the growing ecosystem (exchanging and transacting); (3) scarcity/limited supply; (4) changing exchange rates; (5) market speculation, and, (6) reward (at 5.25% of the gross inflows realized from LODE1 operations).
Considering the above factors as well as the approaches of valuation outlined above, it is the view of the author of the Report that the most appropriate method in determining the range of the potential market value of LODE Token at the Pricing Date were two methods, (1) The Gordon Growth Model (the “GGM”) and (2) Dividend Capitalization Model under the Income Approach.
The GGM relates the value of a stock to its expected dividends in the next time period, the cost of equity and the expected growth rate in dividends.
The AGX and AUX Coins will have a value greater than the spot price of one gram of silver or one milligram of gold due to the premium for retail price of silver / gold as compared to the whole sale spot price...
Value of Stock =
WHERE:
k e – g
DPS1 = Expected Dividends one year from now (next period) Ke = Required rate of return for equity investors g = Growth rate in dividends
Under the Dividend Capitalization Model expected dividends are capitalized at a market capitalization rate to calculate the value of the stock/asset.
Evans & Evans considered a Rule-of-Thumb, Market Approach to arrive at the potential value of the AGX and AUX Coin. A cryptocurrency is made up of its utility value (“UV”) and its speculative value (“SV”). The utility value could be considered the inherent or underlying value that the currency would have if all the hype were stripped away. For the majority of cryptocurrencies, the UV is very low. UV can be impacted by its acceptance as a store of value and the cost to mine. In the case of the AGX and AUX Coin, the UV would be tied to the value of silver / gold exchanged for one AGX Coin i.e. one gram of silver. Since the AGX Coin is an asset backed currency and is backed by one gram of silver, it not likely to have any speculative value. However, the AGX and AUX Coins will have a value greater than the spot price of one gram of silver or one milligram of gold due to the premium for retail price of silver / gold as compared to the whole sale spot price, and the premium for its higher liquidity as a currency as compared to one gram of silver or one milligram of gold.
6.3 Methods Considered but Not Utilized
The reader should note that Evans & Evans also attempted to use a variety of other traditional valuation approaches. In this regard, Evans & Evans examined and considered the following approaches, but were unable to use any of them for the reasons outlined below:
1. Asset Approach. The Asset-Based Approach is generally utilized where either: (i) the nature of the business is such that asset values represent the largest portion of the company’s worth (e.g., real estate holding companies); and, (ii) there are no earnings or cash flow to be capitalized. In the case of the LODE Token there are projected rewards/earnings that can be capitalized. Further, given the AGX Coin has not yet been launched, there is no current asset value to attribute to it. Therefore, an Asset-Based Approach was not considered appropriate.
2. Cost Approach. The Cost Approach is generally appropriate under certain circumstances where an asset is still under development, there is no history of generating cash flows, and future cash flows are so uncertain as to be speculative. A weakness of the Cost Approach is that the cost of the opportunity may bear little relationship to the economic benefits that a purchaser might anticipate deriving from such opportunity upon commercial exploitation of the asset. In the case of cryptocurrencies, the Cost Approach considers the costs of mining new coins or the cost of production. In the case of the LODE Tokens and AGX Coins, new tokens and coins are issued when silver is contributed, not by solving a complex mathematical problem, as such the Cost Approach was not deemed appropriate.
3. Market Approach - Network Value to Transactions (“NVT”) Method. The NVT ratio measures the dollar value of crypto asset transaction activity relative to network value. This is a simple way to compare how the market prices one unit of on-chain transactions across different networks. Generally speaking, a “low” market to transaction value denotes an asset which is more cheaply valued per unit of on-chain transaction volume. Network value consists of the total market value of all tokens in circulation. The transaction element is an estimate of the value of on-chain transaction activity drawn from block explorers and blockchains. As the AGX Coin has not yet been launched, the NTV Method is not appropriate.
4. Income Approach – Discounted Cash Flow Method. In calculating the potential price of the LODE Token, Evans & Evans carefully considered the use of a Discounted Cash Flow Model. However, in the view of Evans & Evans there was insufficient data to assess the reasonableness of the LODE1 financial forecast, which assumes revenues of $243.4 million in year one of operations growing to over $3.1 billion in year 5.
Pricing of LODE Token
7.1 Gordon Growth Model
Exhibit 4.0 calculates the potential market value range of LODE Tokens using a Gordon Growth Method. The result is a potential market value range of $12.17 per token to $15.61 per token with a midpoint of $13.89.
As a starting point for the Gordon Growth Method, Evans & Evans reviewed the LODE1 forecast income statement as outlined in Exhibit 2.0 – Financial Forecast. Evans & Evans thereafter considered the potential dividends which could be derived as outlined in Exhibit 3.0 - LODE Token Dividend and Growth Projections. Capitalizing dividends at a capitalization rate (equal to the discount rate minus the growth rate) provides the net present value of the asset.
In considering the potential dividends that could be generated, Evans & Evans reviewed the dividend policies of certain gold and silver producers in order to establish a baseline. The reader is advised to refer to Exhibit 6.0 for the guideline public company data. Evans & Evans also made certain assumptions as to the number of LODE Tokens in circulation, respecting the Association’s goals to limit the number of LTs to 50.0 million. Evans & Evans considered the dividends that could be generated based on the year 3 financial model of LODE1.
Derivation
of a Discount Rate
In assessing discount rates to management’s projections, Evans & Evans selected discount rates in the range of 18.0%.
A discount rate is used to convert a future stream of cash flows into value, whereas a capitalization rate (equal to the discount rate minus the cash flow growth rate) is utilized to convert a single period’s cash flow into value. When utilizing debt-affected cash flow, the most appropriate discount rate is the Company’s cost of equity.
The cost of equity was derived using the “build-up” method. The method constructs a discount rate by “building up” the components of such a rate. Starting with the riskfree rate prevalent at the Pricing Date, a generic equity risk premium, size premium, industry risk premium and a company-specific risk premium is then added.
An equity risk premium (“ERP”) of 6.17% was utilized based on the Long Horizon expected ERP (supply side) as document in Duff & Phelps 2019 Valuation Handbook – International Guide to Cost of Capital. The build-up method also incorporates a small stock premium of 4.99% based on the 10th decile (market capitalization between US$2.5 million and US$299.3 million) small stock premium as document in 2019 Valuation Handbook – International Guide to Cost of Capital.
Combining the current long-term government bond yield and the equity-risk and small stock premia provides an estimate of the potential return that investors, in the July of 2020 interest rate environment, require for investing in a diversified portfolio of equities. With Canadian bond yields at 0.92% as of the Pricing Date, the implied return requirement for investing in a market basket of publicly traded equities is 12.08%.
The result is a potential market value range of $15.71 per token to $20.57 per token with a midpoint of $18.14.
This estimated required return captures only systematic or market risk and does not address the risk specific to the Association. For this reason, a notional purchaser of LODE Tokes would require a premium to induce investment. A number of factors indicate that an investment in the Association is riskier than an investment in the market. These factors include the risk associated with the stage and scale of operations, the rate of growth and the competitive nature of the market, as well as risk inherent in the industry due to cyclicality and fluctuating crude oil prices. It is our view that an investor would require at least 450 to 700 basis points to compensate for the additional risk to attract investors to the Association’s tokens.
Combining the variables (long-term government bond yield, equity risk premium, and an allowance for size and the risks unique to the Company and its industry) discussed above indicates the required rates of return on equity of 16.6% to 19.1% with a midpoint of 18.0%. The computation is outlined in Exhibit 6.0.
Thereafter, Evans & Evans capitalized the annualized forecast dividends ranging from $0.21 to $3.77 at different capitalization rates calculated using a discount rate of 18.0% and growth rates ranging from 0.5% to 6.5% and consideration of year 4 and 5 financial forecasts. Evans & Evans then considered the potential market value range of $12.17 per token to $15.61 per token with a midpoint of $13.89 for LODE Tokens based on most likely scenarios of future dividends, ranging from $1.89 to $2.26, and growth, ranging from 2.5% to 3.5%.
7.2
Dividend Capitalization Method
Exhibit 5.0 calculates the potential market value range of LODE Tokens using a Dividend Capitalization Method. The result is a potential market value range of $15.71 per token to $20.57 per token with a midpoint of $18.14.
Under the Dividend Capitalization Method, Evans & Evans estimated forward dividend yields for LODE Tokens ranging from 5.0% to 13.5% based on the forward dividend yields of the guideline public companies. Evans & Evans notes that LODE Token is significantly riskier than the equity in the guideline public companies and hence would warrant a significantly higher dividend yield. Refer to Exhibit 6.0 - Guideline Public Companies Forward Dividend Yields.
Evans & Evans capitalized the forecast dividends ranging from $0.21 to $3.77 at estimated forward dividend yields for LODE Tokens ranging from 5.0% to 13.5% and the year 4 and 5 financial results. Evans & Evans then considered the potential market value range of $15.71 per token to $20.57 per token with a midpoint of $18.14 for LODE Tokens based on most likely scenarios of future dividends, ranging from $1.89 to $2.26, and forward dividend yields, ranging from 11.0% to 12.0%.
The Rules-of-Thumb Method is based on the assumption that the potential market capitalization of AGX Coin is equal to its future utility value (UV) plus a retail price premium and liquidity premium.
The UV of AGX Coin is the value of the silver underlying the coin i.e. one gram of silver. In determining the future utility value Evans & Evans used a range of the forecast trading band of silver prices which is generally considered to be $27.00 /oz to $30.00 / oz or $0.87 to $0.96 per gram.
Evans & Evans found in its research that the retail price of silver includes a premium, ranging from 15% to 20%, over the current spot price. AGX Coins would warrant a liquidity premium as AGX Coins will have higher liquidity as compared to one-gram silver bullion bars, rounds and coins. Considering the average discounts for lack of marketability in various restricted stock studies, a liquidity premium in the range of 30.0% to 35.0% is deemed reasonable for AGX Coins.
Based on the forecast silver spot prices of $0.87 to $0.96 per gram, retail price premium of 15.0% to 20.0% and the liquidity premium of 30.0% to 35.0%, the potential value of AGX Coins is in the range of $1.26 to $1.50.
8.2 AUX Coin - Utility Value, Retail Price Premium and Liquidity Premium
The Rules-of-Thumb Method is based on the assumption that the potential market capitalization of AUX Coin is equal to its future UV plus a retail price premium and liquidity premium.
The UV of AUX Coin is the value of the gold underlying the coin i.e. one milligram of gold. In determining the future utility value Evans & Evans used a range of the forecast trading band of gold prices which is generally considered to be $2,000 /oz to $2,500 / oz or $0.066 to $0.08 per milligram.
Evans & Evans found in its research that the retail price of gold includes a premium, ranging from 4.0% to 6.0%, over the current spot price. AUX Coins would warrant a liquidity premium as AUX Coins will have higher liquidity as compared to gold coins and bars. Considering the average discounts for lack of marketability in various restricted stock studies, a liquidity premium in the range of 30.0% to 35.0% is deemed reasonable for AUX Coins.
Based on the forecast gold spot prices of $0.066 to $0.08 per milligram, retail price premium of 4.0% to 6.0% and the liquidity premium of 30.0% to 35.0%, the potential value of AUX Coins is in the range of $0.09 to $0.11.
Conclusions 9.0
It is the view of Evans & Evans, Inc., given the scope of its engagement and with reference to its engagement letter, the potential market value of the assets in the LODE System are outlined in the table below.
by LODE1 is expected to increase. Accordingly, there is the potential for the LODE Token to see significant price increases.
Over the long-term as the LODE System continues to operate and more transactions occur on the system the potential returns to LODE Token holders could increase exponentially. Based on the LODE1’s operating model and the appreciation of existing non-asset backed cryptocurrencies, significant increases in value are achievable in the market.
As outlined in section 4.4 of the Report and in Exhibit 2.0, cryptocurrency prices can increase materially in their first 12 to 36 months of trading. Given the nature of the LODE System, the increase in the value of the LODE Token is not linear, it is exponential, as more silver and gold is added, more AGX and AUX Coins are circulated, more trading occurs, and more merchants join the LODE System, the profit generated
This conclusion as to potential market value as well as the entire Report is subject to the scope of the work conducted as well as the assumptions made and to all of the other sections of the Report.
Yours Truly,
EVANS & EVANS, INC.
Appendix 1 – Terms & Conditions
Appendix 2 – Assumptions of the Report
Appendix 3 – Scope of the Report
Appendix 4 - Qualifications
Appendix 1
Terms & Conditions
RESTRICTIONS & CONDITIONS OF THE REPORT
• This Report is intended for the purpose stated in section 1.0 hereof and, in particular, is based on the scope of work and assumptions as to results that could reasonably be expected at the date of the Report.
• The authors of the Report advise the reader to carefully review the Assumptions of the Report to understand the critical assumptions that the Report is based on. It is not to be the basis of any valuation and is not to be reproduced or used other than for the purpose of this Report without prior written permission in each specific instance.
• Evans & Evans reserves the right to review all information and calculations included or referred to in this Report and, if it considers necessary, to revise its views in the light of any information which becomes known to it during or after the date of this Report. The authors of the Report disclaim any responsibility or liability for losses occasioned by the Association, its participants and all other related and other parties including potential investors as a result of the circulation, publication, reproduction or use of this Report or its use contrary to the provisions of this paragraph.
• The Report is intended for internal purposes may be submitted to existing and potential investors in the Association.
• The Report cannot be submitted to any stock exchange or security commission.
• The Report may not be submitted to any regulatory or tax authority or relied upon in any legal proceedings.
• Any use beyond that defined above is done so without the consent of Evans & Evans and readers are advised of such restricted use as set out above.
• Evans & Evans will rely upon a letter of representation obtained from the officers and management of the Association wherein they confirm certain representations and warranties that they made to the authors of the Report, including a general representation that they have no information or knowledge of any material facts or information not specifically noted in this Report, which, in their view, would reasonably be expected to affect the assessments expressed herein.
• Evans & Evans makes no recommendations, either expressed or implied, as to the suitability of the LODE Tokens or AGX Coins as described herein as rewards token/utility tokens.
• Evans & Evans has not verified the status of any of the Association’s respective officers and directors and shareholders’ potential legal affairs and/or matters and can, therefore, provide the reader no comfort or make any comments as to whether there are any offbalance sheet or contingencies, claims, possible claims, substantial commitments, or litigation pending or threatened against the Association and/or any of the Directors/Officers of the Association.
Appendix 1 Terms & Conditions
• Evans & Evans did rely only on the information, materials and representations provided to it by the Association.
• The Report, and more specifically the assessments and views contained therein, is meant as an independent review of the LODE Tokens and AGX Coins as at July 31, 2020, respecting the date of the Report. The authors of the Report make no representations, conclusions, or assessments, expressed or implied, regarding the LODE Tokens or AGX Coins or events after the Pricing Date.
• • The information and assessments contained in the Report pertain only to the conditions prevailing at the time the Report was substantially completed in July and August of 2020. The Report was updated for new financial projections and a change in the operating structure only in December of 2020.
• Evans & Evans has not carried out any audit procedures on historical expenditures or financial statements nor have the authors of the Report examined the financial accounts of the Association.
• The Report is also not in any manner a tax opinion or a fairness opinion.
• Evans & Evans as well as all of its Principal’s, Partner’s, staff or associates’ total liability for any errors, omissions or negligent acts, whether they are in contract or in tort or in breach of fiduciary duty or otherwise, arising from any professional services performed or not performed by Evans & Evans, its Principal, Partner, any of its directors, officers, shareholders or employees, shall be limited to the fees charged and paid for the Report. No claim shall be brought against any of the above parties, in contract or in tort, more than two years after the date of the Report.
Appendix 2 Assumptions of the Report
ASSUMPTIONS OF THE REPORT
In undertaking the review of the LODE Token, AGX Coin and AUX Coin and in preparing this Report Evans & Evans have made certain critical assumptions:
(a) The Association has satisfactory title to all of its tangible and intangible assets and there are no liens or encumbrances on such assets nor have any assets been pledged in any way unless noted in the Report.
(b) The LODE System operates as indicated by management in its financial forecast.
(c) Management’s representations as to the amount of silver committed to the LODE System are accurate.
(d) The Association is successful in completing the initial offering of LODE Token and AGX and AUX Coins based on the assumptions outlined in its financial model. This is a critical assumption of the Report.
(e) The financial forecast provided by management of LODE represents management’s best estimate of the future economic performance of the LODE System as at the Pricing Date.
(f) The Association and all of its related parties and their principals had no contingent liabilities, unusual contractual arrangements, or substantial commitments, other than in the ordinary course of business, nor litigation pending or threatened, nor judgments rendered against, other than those disclosed by management and included in the Report that would affect the evaluation or comment.
The above-noted assumptions are the critical assumptions upon which the conclusions in the Report were based. Evans & Evans reserves the right to review all information and calculations included or referred to in this Report and, if it considers it necessary, to revise its views in the light of any information which becomes known to it during or after the date of this Report.
Appendix 3 Scope of the Report
SCOPE OF THE REPORT
The authors of the Report have reached the assessments contained here within by relying on the following:
• Reviewed the Diligence & Estimate Pricing Reports prepared for LODE by Evans & Evans and dated August 10, 2018 and October 28, 2019.
• Interviewed management of LODE on numerous occasions to gain an understanding of the development of LODE to-date and the plans going forward.
• Reviewed the LODE Project Business Plan dated May 2020 and updated July 28, 2020 and December 2020.
• Reviewed the Association’s updated management-prepared financial forecast outlining the expected financial performance of the LODE System.
• Reviewed the Associations websites and explanatory videos thereon.
• Downloaded the AGXPAY Wallet on the Google Play store to test the usability of the LODE System.
• Reviewed the document “How the Lode System Works” outlining the flowchart of the complete system of the LODE System.
• Reviewed the Association’s version 5.19 and V3.1 dated June 21, 2019 of the White Papers.
• Reviewed the draft prospectus dated July 21, 2019.
• Reviewed the “Measuring the Discount for Lack of Marketability for Noncontrolling, Nonmarketable Ownership Interests - 2016” report from Willamette Management Associates.
• Reviewed information on modelling the value of cryptocurrencies from a variety of sources.
• Reviewed information on the Syscoin Network as available on the website www.syscoin.org.
• Reviewed the Syscoin White Papers “Z-DAG: An interactive DAG protocol for real-time crypto payments with Nakamoto consensus security parameters” and “Z-DAG: A Practical Performance Analysis”.
• Reviewed the ARK Investment Management LLC February 6, 2020 paper entitled “Big Ideas / 2020”.
• Reviewed the market data of the guideline public companies including Fresnillo PLC, KGHM Polska Miedź S.A., Glencore PLC, Polymetal International PLC, Compañía de Minas Buenaventura S.A.A., Pan American Silver Corp, Hochschild Mining PLC, Wheaton Precious Metals Corp, First Majestic Silver Corp., Newmont Corporation, and Hecla Mining Co.
• Reviewed information on the blockchain and cryptocurrency markets from such sources as: The Economist; Forbes; Deloitte Consulting LLP; IBM; Huffington Post; Statista; Wired Magazine; CB Insights; www.ethereum.org; IBM; CNBC; Business Insider; BI Intelligence; Bloomberg; OakTree Capital Management L.P.; Cambridge Center for Alternative Finance; Pricewaterhouse Coopers, LLP, News BTC; Ethereum.Link; Bitcoin Hub; ZeroHedge; 24gold.com; and, Fortune Magazine.
Appendix 4 Qualifications
QUALIFICATIONS
The Report preparation, and related fieldwork and due diligence investigations, were carried out by Jennifer Lucas and thereafter reviewed by Michael A. Evans.
Mr. Michael A. Evans, MBA, CFA, CBV, ASA, Principal, founded Evans & Evans, Inc. in 1989. For the past 34 years, he has been extensively involved in the financial services and management consulting fields in Nanaimo, where he was a Vice-President of two firms, The Genesis Group (1986-1989) and Western Venture Development Corporation (1989-1990). Over this period, he has been involved in the preparation of over 2,500 technical and assessment reports, business plans, business valuations, and feasibility studies for submission to various Canadian stock exchanges and securities commissions as well as for private purposes. Formerly, he spent three years in the computer industry in Western Canada with Wang Canada Limited (1983-1986) where he worked in the areas of marketing and sales.
Mr. Michael A. Evans holds: a Bachelor of Business Administration degree from Simon Fraser University, British Columbia (1981); a Master’s degree in Business Administration from the University of Portland, Oregon (1983) where he graduated with honors; the professional designations of Chartered Financial Analyst (CFA), Chartered Business Valuator (CBV) and Accredited Senior Appraiser. Mr. Evans is a member of the CFA Institute, the Canadian Institute of Chartered Business Valuators (“CICBV”) and the American Society of Appraisers (“ASA”).
Ms. Jennifer Lucas, MBA, CBV, ASA, Partner, joined Evans & Evans in 1997. Ms. Lucas possesses several years of relevant experience as an analyst in the public and private sector in British Columbia and Saskatchewan. Her background includes working for the Office of the Superintendent of Financial Institutions of British Columbia as a Financial Analyst. Ms. Lucas has also gained experience in the Personal Security and Telecommunications industries. Since joining Evans & Evans Ms. Lucas has been involved in writing and reviewing over 1,500 valuation and due diligence reports for public and private transactions.
Ms. Lucas holds: a Bachelor of Commerce degree from the University of Saskatchewan (1993), a Masters in Business Administration degree from the University of British Columbia (1995). Ms. Lucas holds the professional designations of Chartered Business Valuator and Accredited Senior Appraiser. She is a member of the CICBV and the ASA.
Certification
The fee established for the Report has not been contingent upon any opinions presented. The authors of the Report have no present or prospective interest in LODE or the LODE System, or any entity that is the subject of this Report, and we have no personal interest with respect to the parties involved. We confirm we are independent to LODE.
LODE1 Anstalt
Estimate Pricing Report
Change in Price of Key Cryptocurrencies
Pricing as of July 31, 2020
Source: Coinmarketcap.com
LODE1 Anstalt
Estimate Pricing Report
Forecast Income Statement
Pricing as of July 31, 2020
LODE1 Anstalt
Estimate Pricing Report
Forecast Income Statement
Pricing as of July 31, 2020
Exhibit 3.0
LODE1 Anstalt
Estimate Pricing Report
LODE Token Dividend and Growth Projections
Pricing as of July 31, 2020
(1) Provided by management.
Exhibit 4.0
LODE1 Anstalt
Estimate Pricing Report
Pricing of LODE Token - Gordon Growth Method
Pricing as of July 31, 2020
(1) See Exhibit 7.0.
Based
5.0
LODE1 Anstalt
Estimate Pricing Report
LODE Token Dividend and Growth Projections
Pricing as of July 31, 2020
(1) Based on management provided projections.
(2) Based on the forward dividend yield of the guideline public companies.
