- One of the first non-profit and ESG-focused ICOs
- Annual donations above $250 million will lead to falling public supply of tokens, driving the price of ROOT coins up
- Donations to the platform help build community projects and hire homeless individuals
- Trying to combine charitable giving and for-profit investment is a tricky exercise and has never succeeded at scale
- The 10% fee for token investment may be a hard sell for donors who do not directly own the ROOT currency
RootProject is possibly the first non-profit, potentially tax-subsidized cryptocurrency. The project is an ambitious one as the founders plan to be the 7th largest non-profit in America by their 5th year in business with $1 billion a year of donations.
The company will design community projects, which will be funded through donations on a custom crowdfunding platform.
The company will hire homeless individuals as the labour to complete the project and will pay them a salary plus a percentage of their salary in ROOT coins, which will be contributed to a pension fund.
You don’t need to own ROOT coins to use the platform so if you do decide to buy coins, you’re buying them solely as a bet that the value will increase as more coins are bought back by the company than issued to stakeholders.
Chris Place (Co-founder and CEO) – Place is a successful entrepreneur with education in industrial design. He created an iPad stand/handle plus a portable charging cable for iPhones and iPads before he created Prepd (software for debate preparation). He also passed through the well-respected startup incubator Y-combinator.
Dr. Nicholas Adams Judge (Co-founder and Chief Architect) – Dr. Judge is the chief architect behind the RootProject ecosystem. He devised the coin buyback mechanisms explained in the summary and was likely the architect behind the ROOT coin pension fund as well. He’s the face of RootProject and handles much of the social media outreach.
Advisors – The advisor list is well rounded with individuals who have experience in economic theory, non-profit research, and blockchain technology. RootProject is working with three different advisors who have solid experience structuring and executing successful ICOs, such as Tenx, Gifto and Quantstamp.
We’re confident the individuals running this project are real and have the professional qualifications they list in their bios. The co-founders have a very strong list of advisors that will ensure the ICO is structured for success. The founder’s desire to originally own no ROOT coins and the subsequent decision to recycle their coin ownership into other non-profit projects reflects well on their character. We assign a high rating for the team background.
Proceeds to Founders and Quality of ICO
Information is all over the place regarding the ICO value of a ROOT coin and the number of coins that will be sold in the ICO. As far as we can tell, the company is selling 18.5% of supply in the ICO (though the one-pager says 23.5% will be sold).
The business plan says $1 can purchase 36 ROOT coins, which would equal $52 million sold in the ICO, however management says there is a $13 million hard cap on the ICO, but still 1.85 billion coins will be sold. These are important details as they will determine what percentage of supply the public will own. Depending on the ROOT coin exchange rate either 13% or 5% of coins will be sold to the public in the ICO
Regardless of the ICO exchange rate, we think scaling back the ICO from $50 million to only $13 million shows prudence by the management team, though it’s hard to tell if this change was solely because it’s become harder to raise ICO proceeds in 2018 vs 2017.
Founders will be taking 15% of outstanding supply with another 10% going to RootProject employees. If the company does not gain non-profit status from the U.S. government, they will put the 10% of employee coins into the contingency fund that is already 20% of supply. Non-profit status is not guaranteed and is an ongoing operational risk for investors who buy into the ICO before the IRS tax ruling.
31% of coins will be held back and sold into the market at a rate of 2.07% per quarter starting in the 4th quarter of 2018, assuming the ICO is in January. The proceeds of these coin sales will be used for general corporate purposes.
Selling only 18.5% of coins to the public while employees and founders hold 25% seems lopsided to us. We understand some supply is needed for pension fund contributions though only massive growth will require the full number of tokens being held back. Each project costing $27,000 on average will only consume about 86,000 ROOT coins, assuming $0.05 per coin — a minuscule amount of supply. To absorb the 31% of supply being held back for growth, RootProject would have to receive donations of over $1 billion.
The 10% donation fee that goes to buying back coins in the open market will create a steady supply of coins to be contributed into the pension fund or to incentivize project contributors.
Vesting Schedule at ICO
- 10% to employees, which will vest over 12 months, starting 1 year after the ICO is finished.
- 5% to people who create projects for the platform.
- 5% goes to incentivizing developers to work with RootProject.
- 5% goes to a research fund for blockchain-related activities.
- 20% in a contingency fund for special projects. These coins will go towards matching contributions from large donors. Unless these coins go directly to the worker pension fund they will be inflationary.
- 31% of coins will be released over 15 quarters starting around October or November 2018. The founders have said they will adjust the issuance rate if coin buybacks are lower than they expect to make sure coin supply is contracting. This is a very important promise.
- 15% of coins go to founders who said they would roll the profits into other non-profit projects. It’s still unclear if this means they will sell the coins and use the cash on other non-profit programs or will hold the coins for the benefit of the RootProject ecosystem.
- The rest are included in the public ICO scheduled for April 10th.
Coin Owner Protections
Coin owners have no ability to influence the direction of the business and are not entitled to any cashflows generated in the future.
This is in line with most ICOs who have a terrible track record of allowing coin owners to have any say in the future of the business. No coin owner protections map to a 1/5 rating.
Quality of White Paper/Company Description
RootProject provided both a whitepaper and a business plan document. The two papers combined provide one of the most comprehensive ICO plans we have seen to date. The whitepaper mentions strategies to bring large and small donors into the ecosystem, explains how the funding platform will attract ideas and even attempts to forecast financials a few years in the future.
Most of the ICOs we review mention the revolutionary technology the blockchain can bring to the table but spend literally no time discussing how the ecosystem underlying the coins will succeed and flourish. Without a useful product or service, there will be no demand for the currency and coin prices will suffer.
If we had to find a weakness in the whitepaper it would be a lack of technical specifications of how the blockchain and cryptocurrency technology will be used by the RootProject ecosystem. We understand that the founders are not subject matter experts when it comes to crypto, but this is mitigated somewhat by the very strong roster of ICO advisors.
- Where do the ROOTS tokens go that are purchased with the 10% crowdfunding fee. Do they go to the founders, a general fund to be paid out later, or are they retired?
- The business plan says workers are paid in the form of ROOT coins sent to a crypto wallet loaded onto the RootsProject phone which is given to all workers. What if the worker doesn’t have a bank account, how will they convert their pay into fiat currency?
- The company expects the 2% fee from the crowdfunding platform to pay for all admin expenses but in their financial forecast they list admin expenses as no less than 9% of funds raised. This is an important discrepancy.
There are also some inconsistencies in the breakdown of how donations will be used that needs to be cleared up.
Whitepaper says: 87% of donations go to the project, while 10% goes to buying tokens and 3% is for credit card and handling fees.
Business plan says: 85% of donations go to the project. 3% credit card fee, 2% admin fee to pay for RootProject staff, and 10% for purchasing tokens.
Website FAQ says: 88% of donations to the project after 3% credit card fee, 2% admin fee and 7% for purchasing tokens.
So, which is it?
Strength of the Coin Ecosystem/Blockchain
RootProject does have a novel idea: bringing non-profit giving and for-profit investing together in one package. The team’s goal is to convince large investors to donate to funding a community project and invest in the ROOT coin at the same time. The idea is that donors can decrease their cost of giving by making some money on appreciation of the ROOT coin. The idea is interesting in practice but there will be some real-life issues to overcome.
Issues to Overcome for Widespread Coin Adoption
- For-profit investors such as investment funds and the pension funds of corporations almost always have a fiduciary duty to do what is best for their clients. It will be very hard for them to justify ‘giving up’ 20% of capital even if it’s for a good cause, on the assumption that returns on the ROOT coin will make up the lost funds and more. Investment funds never donate to charitable organizations with customer capital.
- Large not-for-profit organizations want funds earmarked for donations to go directly to a project. They also have a fiduciary duty to the mission of the organization and using donations to invest is unlikely to be allowed.
- If RootProject is classified as a non-profit entity, only 80% of each dollar donated will be tax deductible once you exclude the 10% coin repurchase fee, 2% admin fee, 3% handling fee and the extra fee charged to large donors for the purchase and retirement of coin supply (up to 5%). This is a lower rate than most charitable peers and may make it hard to solicit donations from large organizations who are going to be the backbone of ROOT coin demand according to the business plan.
The most realistic source of large donations for the RootsProject is going to come from corporate donors or the investment funds of charities.
A company like Ford, for example, can publicly say they have made a large charitable contribution, but a portion of the donation is going towards buying ROOT coins, which could increase in value lowering the overall cost of the donation to Ford. Companies do run the risk of bad PR if the media or a whistleblower exposed the fact that part of the donation was actually just an investment in cryptocurrencies and only indirectly benefited the homeless population.
A charity could also be interested in buying ROOT coins for their investment funds as they could say ROOT coins are going towards helping homeless people get back on their feet while at the same time offering a potentially sound vehicle for investment.
RootsProject employees may have a hard time finding institutional demand for ROOT coins as this is a totally new vehicle that has not been tested in the charitable giving market before. If RootsProject can’t find large donors to fund projects, it will fall on individual funding, which will be at a much smaller scale and will take the platform longer to scale — meaning there will be less demand for ROOT coins, impacting prices.
Other Issues With the Business Model
- RootProject will market to investment funds and convince them to buy large amounts of ROOT tokens and lock up the coins for multiple years. How will they convince investors to lock up their funds for years in what will undoubtedly be a volatile currency in the medium-term. Investors will only do that if they’re granted a large discount to buy coins, which would not be equitable for prior investors who bought at market rates.
- 20% of ROOT coins are being held back for “special projects”, which the company says is basically a match for large donor contributions. The donor match will put pressure on the coin as RootProject liquidates the coins to pay for their share of the project cost.
- Why would large non-profits or even individuals be willing to give up 10% of their donation to benefit the value of a coin they may not even own? There are hundreds of non-profits out there who don’t charge a 10% ROOT coin purchase fee, which technically means more of a donation would go to the intended source. The 10% ROOT coin purchase fee is also non-tax deductible, making it even less attractive to potential large donors. Projects will have to be very compelling to incentivize large donors and individuals to eat the ROOT coin purchase fee. The project examples on the RootProject.co website give us no indication of the world-class projects management promises.
- RootProject argues that the percentage of funds raised going directly to the projects is competitive with other non-profit institutions, so a donor is having the same impact regardless of which organization they donate to. However, because RootProject is charging a smaller operational fee than most non-profits (2%) that means RootProject needs to operate leaner and more efficiently than the average global nonprofit to deliver on their 85% promise. They have a much more ambitious task ahead of them than the usual nonprofit, including having to build and maintain a competitive crowdfunding platform.
- RootProject says that large donors will be charged an extra fee that will go only to buying ROOT coins on the open market and retiring that supply. Why would a large donor be willing to give up funds to benefit the value of a cryptocoin they likely don’t own? They want as much of every dollar donated as possible to be spent in the community, not on supporting demand for a potentially unrelated investment vehicle.
- 5% of coin supply will go to rewarding top project initiators, but the hurdles to becoming a top project creator seem draconian and could stifle individual contributions. 90% of your projects must reach their funding goals, which means 9 out of the first 10 projects you propose must be a success. RootProject estimates the average project costs $27,000 so you would have to create and successfully execute over $250,000 of projects to start earning ROOT coins from your contribution. The average individual will never earn rewards to incentivize them to contribute ideas. This places more pressure on RootProject employees to create worthwhile projects to grow the platform at inception.
The Dollar Value of Donations Determines Whether ROOT Coins are Inflationary or Deflationary
The most intriguing selling point of RootProject is that, in theory, fundraising will lead to more demand for ROOT coins driving their value up. This is accomplished from a 10% donor fee that purchases ROOT coins in the open market and a contribution of ROOT tokens to a worker pension fund based on the cost of labour for a project (11%-14.5% of each dollar donated, according to the business plan).
In a steady state, once insiders are done selling their coins, pension contributions will equal pension liquidations so net net 10% of every dollar donated will go to buying back ROOT coins, supporting a higher coin price.
For the buybacks to work as intended, more coins must be bought back than issued. Below we have broken out the expected net issuance of coins from all sources (employees, founders, incentives etc.) and then solved for what level of spending will be needed for the net issuance of coins to be 0.
Net Issuance of Coins With $230 million of Donations Per Year
RootProject will need to receive donations of $230 million a year to have no new issuance of ROOT coins over the next 10 years.1
The problem in year 3 and beyond is as pension fund tokens vest and are sold for cash by the workers, they start to overwhelm the buybacks from the 10% fee and other sources. If donations are less than $230 million a year, management will have to decrease the vesting rate of the 31% stockpile of coins they own or else ROOT coins will end up being inflationary in the medium-term by about 5% a year on average.
Using the business plan’s 5-year forecast where donations reach almost $1 billion a year, we can see net coin buybacks could be quite large. The 1.85 billion coins released in the ICO would be bought back in less than 4 years. This analysis assumes ROOT coins stay at $0.05/coin, which won’t be true. Deflation of this magnitude would cause tokens to increase significantly in value. At a run rate of $1 billion a year of donations, we estimate the ROOT coin would need to trade at $0.22/coin for the supply of coins in circulation to stay unchanged.
GROWTH TO $1 BILLION OF ANNUAL DONATIONS WOULD MAKE ROOTPROJECT THE 7TH LARGEST CHARITY IN THE U.S. IN ONLY 5 YEARS. SEEMS UNLIKELY.
Net Buyback of Root Coins Using Management Donation Guidance
The potential appreciation of the currency is huge if RootProject can reach the scale of donations they’re expecting. Tempering our enthusiasm is the lack of a credible game plan to build a team that can create and solicit $130 million of project donations in 2019 from almost nothing in 2018. That’s up to 6,500 projects that need to be created, funded and finished in only one year, a huge undertaking.
RootProject has only 6 projects on its website as of January 2018 and all of them are less than 50% funded. We also noticed the project clock on the website was reset for all 6 projects after they failed to achieve the targeted funding amount. A way for management to disguise the 100% failure rate of the first 6 projects on the platform. Management has a lot of work to do, however a strong overall business plans is worth a 4/5 rating.
Liquidity is supported by high interest in an ICO and in the coin after it begins trading. To judge interest in RootProject we use Google Analytics, Facebook and Twitter. Compared to the peak of search activity in December 2017, searches for RootProject are averaging only 18% of the peak level. This level is in line with a score of (1/5).
RootProject has 4,500k Twitter followers, which is 10% of the ICO group average for a score of (1/5).
RootProject has 1,100 Facebook followers, in line with a (1/5).
Summing up the three sources of interest we arrive at a weighted liquidity score of 1/5.
It’s critically important to the value of the ROOT coin that RootProject solicits millions of donations, and quickly. A significant number of shares will start vesting soon and without a large donation base to cause RootProject to buy back more coins than they issue, the price of ROOT coins could come under pressure.
2 Different Ways to Scale Quickly
GAME PLAN #1 – Partnering with other well-known non-profits at the start to scale quickly, and then as time goes on they will hire their own on-the-ground teams of 4 in different cities around the world to solicit donations and create projects in need of donations.
Problem – The problem we see with this plan is why would a donor go through RootProject to fund their favourite charity and be forced to pay a 10% fee when they can just donate directly to the charity. RootProject seems to assume everyone who donates is also interested in owning ROOT coins as an investment. This may not be the case.
GAME PLAN #2 – A dedicated team from RootProject will initiate large projects negotiated with established institutions that include a special fee on top of the 10% buyback fee the institution pays that will be used to buy back and burn ROOT coins.
Problem – Can they find sophisticated donors willing to eat such large fees in the name of investment returns? If donors don’t own the ROOT coin, they have no incentive to donate to a charity where potentially only 82% of their donation will go to the charity directly. The largest charities in the U.S. send 87% of donations to the project directly.
Professional Project Creators Are a Growth Engine
These are individuals with design and engineering experience who have created many successful projects for the platform and are rewarded in ROOT coins for their work. The projects will primarily be on publicly accessible private property, like the streetfront of a café or the picnic area of a corporation.
Again, there are problems with this approach as the company admits in the whitepaper that some of these projects will not be tax-deductible. The lack of tax deductibility and the 10% buyback fee reduce the attractiveness of these projects to big donors significantly. If RootProject plans to scale rapidly through tax inefficient projects, we would be worried about their ability to meet projections. The team has a lot to prove.
If donations reach $250 million a year or more, the ROOT coin could turn into one of the strongest performing cryptocurrencies so far. However, scaling from a brand new organization to the 7th largest in 5 years is a tall order. When you buy into the ROOT coin you’re supporting a management team that seems to have high moral standards, so for this reason and the attractive mechanics of token supply, we assign a rating of 3.4/5.
OVERALL SCORE: 3.4/5
1 We assume 15% of donor funds are matched by special projects fund until it is used up. Employee, Developer and project creator incentive coins vest and are sold at a rate of 10% per year starting in year 2. Bounty shares are sold over only 2 years. Pension fund has a 2-year lockup and vests over 5 years (20% per year). Founders sell 5% of tokens per year. Research fund sells 10% of tokens a year.