Komodo Investment Thesis


Sylvain 'ArtPlay' RibesKomodo Investment Thesis

A laid-out .pdf version of this article is available: http://tinyurl.com/ybhxg5ff

In this document we present why we believe Komodo to be a sound and lucrative investment, both short-term and long-term. We will start by reminding the reader of the current altcoin background, and then introduce how Komodo, by offering a decentralized exchange solution and running the world’s very first fully decentralized ICO, efficiently answers the most pressing concerns of the cryptosphere.

We will then show how poor communication from the Komodo Team has led the token to remain seriously underpriced in spite of its technical prowess, further increasing its investment potential.

Finally, by analyzing the Komodo token price history and examining both its competitors and underlying protocol capitalizations, we will assess both short-term and long-term expected returns, while analyzing why we believe the involved risk to be comparatively low.

I. Current cryptocurrency ecosystem context

The crypto-currency ecosystem has had an amazing year 2017. As of September 19, Bitcoin price surged from $1.000 to over $4.000. But even this four-fold increase pales in comparison to what happened to the overall crypto-market whose total capitalization went from little more than $17.7 billion to a gargantuan $139 billion.

Excluding Bitcoin, the market cap of altcoins has surged from $2.2b to $73b a 33-fold increase literally dwarfing the massive Bitcoin returns.

That explosion has mostly been fueled by the ICO (Initial Coin Offering) craze that has swept over the crypto-ecosystem, and the exposition it brought along with it. The unspoken promises of higher-than-ever returns are bringing more and more newbies into what was originally a very obscure ecosystem. As of mid-July, $1.3 billion had been raised in 2017[1], and ICO-funding had until recently showed only little sign of slowing down.

While ICOs represent a very good way to launch start-ups while empowering the people with the ability to fund them in transparent terms, it is undeniable that the initial enthusiasm of would-be investors has slowly turned into a frenzy, largely entertained by the start-ups that keep asking for more and more money.

The latest SEC rulings[2] and the more recent Chinese crackdown on ICOs[3] have been a stern reminder for investors and start-ups alike that regulations still applied even to a “tokenized” economy. It has naturally started to weaken the ICO concept: more and more of them have to jump through hoops to avoid being classified as securities, end up banning Chinese or American citizens from participating and force investors to adhere to strict KYC — Know Your Customer — policies. Bittrex, a leader in the altcoin exchanges, in spite of being previously known and criticized for adding just about anything to their platform, has yet to list a single new ICO-token since Civic on July 17.

This is all bringing cryptocurrencies further and further away from their initial ideals of privacy and individual sovereignty. If you’re only ever capable to acquire new tokens (be that currencies or assets) through centralized exchanges that require you to register your passport into their centralized servers, how is that any different from simply applying for yet another bank account at your local branch? Worse, it may end up discouraging legit businesses from raising capital through an ICO.

Solutions have to be found that maintain the appeal of crowd-investing to newcomers and yet guarantee the utmost levels of privacy and freedom to barter, from anywhere, with anyone.

Komodo’s many features solve this predicament perfectly.

II. What is Komodo?

Komodo is an ambitious project that aims at

- Allowing anonymous transactions through a zk-SNARK protocol, - offering a decentralized exchange platform using atomic cross-chain swaps, - running the very first “decentralized-ICO” for a product called Monaize[4].

And securing the whole thing with a “delayed Proof of Work” mechanism (dPoW) that allows Komodo to benefit from the same level of security as the Bitcoin blockchain.

This impressive list of boasts is both Komodo’s strength and weakness. To who takes the time to investigate the project, the value proposition becomes evident, in spite of its challenging aspirations. To those who do not, or lack the knowledge to fully grasp it, it sounds like mumbo-jumbo and they soon discard it as a potential investment. Let’s delve into it.

The Komodo ICO and Zcash

Komodo was initially funded through an ICO. They raised 2636.37BTC, worth $1,983,781 at the time of the sale’s conclusion[5]. Out of it, 90% were distributed in the form of KMD tokens, while 10% were kept for development, marketing and bounties.

Komodo is a Zcash fork, and boasts the same privacy features. Zcash was developed by a team of world-class cryptographers and the way it handles privacy and the anonymity of transactions is arguably the best in the whole cryptospace. Although dubbed a “corporate coin”, its open-source code allowed the Komodo team to integrate Zcash privacy technology into their own platform.

Komodo and Zcash share the same Equihash PoW mining. Without entering into unnecessary technical details, it is noteworthy, since the Equihash algorithm has been designed to be ASIC resistant[6]. Bitcoin’s mining centralization is proving to be a very contentious, almost crippling issue, and it is a step towards making sure neither Komodo nor Zcash suffer the same flaw.

They however radically differ: Komodo adds a second “dPoW” mining layer, and their issuance schedules have nothing in common.

The “delayed Proof-of-Work” mechanism

dPoW is a brand new consensus mechanism that provides Bitcoin security to all other dPoW chains[7]. The objective is two-fold: enhance Komodo’s security and allow third-party blockchains to similarly use the Komodo blockchain as an additional security layer, also benefiting from a Bitcoin-grade security by proxy.

Conceptually, the idea is simple and depends on so-called “notary nodes”. There are in total 64 notary nodes; the people who run them are elected by the Komodo community on the basis of their technical knowledge. Notary nodes have to regularly notarize Komodo’s block hashes by recording them into the Bitcoin blockchain. Thus the Komodo blockchain history cannot be altered without also changing Bitcoin’s blockchain history.

Notary nodes are incentivized by a lesser mining difficulty, which allows them to secure a monthly wage in payment for their technical expertise.

BarterDEX and the SuperNET legacy

Komodo initially started as the flagship token of a broader project called SuperNET. In investment terms, this is clearly another double-edged feature. SuperNET has been around since 2014, and was originally designed to create services on top of NXT.

Much like NXT itself, in spite of getting quite a bit of attention and praise from the technical community, SuperNET always failed to garner momentum and to yield the returns that simpler assets provided.

SuperNET ended up separating from NXT entirely and jl777, the anonymous lead developer, had to entirely re-wire the infrastructure of his ambitious project. Thus Komodo was born to be the cornerstone token of the SuperNET framework. [8]

The team has recently decided to rebrand the whole ecosystem as “Komodo” and “Komodo Platform”, and SuperNET should take the backseat and no longer be mentioned in their marketing material.

The newly baptized Komodo Platform has a host of valuable features. It is worthwhile to mention JUMBLR, a decentralized and trustless mixer, effectively capable of rendering any bitcoin or bitcoin-forked coin anonymous. The platform also supports pegged fiat assets that solve the problem of price volatility by attaching themselves to the value of stable currencies like the Euro or the US Dollar[9].

Given the current regulatory context in the crypto ecosystem the most invaluable product should however prove to be BarterDEX, a fully decentralized exchange that allows people to trade coins without a counterparty risk[10]. It relies on the much discussed atomic swaps to safely and directly exchange ownership of coins on two separate blockchains, and on a system of Liquidity Provider nodes that act as market makers to kickstart the available liquidity.

BarterDEX rids the user of all the usual centralized exchanges problems: listing denial (Bittrex), unilateral coin delisting, and more importantly thefts (MtGox), hacks (Bitfinex) and legal or regulatory seizures (BTC-e).

Within this ecosystem the KMD token will be used as fuel to pay for the JUMBLR and the BarterDEX fees, further increasing its utility and value.

Decentralized ICOs[11]

Whether in the field of decentralized exchanges or privacy protocols and currencies there is an undeniable amount of well-established competition. When the Komodo team announced after much teasing they would be hosting the first ever decentralized ICO, Komodo secured a strong first-mover advantage and took everyone by surprise, for two very distinct reasons.

Firstly because the idea in itself is brilliant. Hosting decentralized ICOs will allow Komodo to showcase all of its best features, from JUMBLR to the atomic swaps, through the notarized security of their dPoW consensus mechanism. The concept will allow willing projects to transparently raise funds while maintaining investors’ privacy. In other words they will be able to free themselves from any legal constraints and regulatory framework if they wish to. Finally, decentralizing the nodes of purchase during the ICO should deter whales from monopolizing most of the initial supply, and later manipulate the market as they see fit[12].

Secondly because the news was delivered in the most disastrous possible way. After roughly 10 days of a very neat and professional social media campaign, the KMD token price had gone from 30.000 satoshis (0.0003 bitcoin) to 80.000 satoshis. The announcement was then made on a YouTube live feed on September 8:

A snapshot from the infamous video announcement

A picture speaks a thousand words, but this one yet fails to convey the full extent of how badly the presentation screamed of amateurism. An ugly setup, a stuttery 8 FPS frame rate, a buggy microphone and three obviously uncomfortable gentlemen triggered an instantaneous and massive dump in the KMD token price. Within minutes it went from 86k satoshis to 66k satoshis. Quickly it hit 50k then 40k, and is now back in the 50k range, as of 26 September.

There is a saying in trading, “buy the rumor sell the news”, that often applies well to cryptocurrencies. But rarely has it applied in such a spectacular fashion, especially not when the news were so positive.

Far from being a crippling blow, this display of PR amateurism should give the savvy investor a cheap entry point into an asset that combines technological prowess with a remarkable awareness of the needs of the crypto-space, catering to its most pressing issues: user sovereignty, privacy, and the empowerment of ICOs potential.

III. Komodo’s strengths and caveats

Aside from Komodo’s strong technical features, many other details bear mentioning that directly influence the current token price and its future evolution.

Interest revenue and inflation schedule

One factor often overlooked by amateur investors and traders is the inflation schedule. 100 million Komodo tokens have been issued after the ICO. The final supply shall be 200 million tokens, and is expected to be reached within 14 years.

The new tokens are minted in two different ways:

- Each newly mined KMD block gives the miner a reward of 3 KMD. A new block is mined every minute. In total, 1.57 million KMD tokens are mined each year. - Each KMD holder is entitled to a 5% yearly interest payment.

As a consequence, even though the total inflation will be 100%, anyone who’s holding KMD tokens only suffers the very mild mining inflation. 1.5>#/strong### in the first year, and decreasing as more and more people receive interest payment.

As a comparison, here are the approximate inflation rates for several well-known crypto-currencies in 2017:

Komodo - 1.5% Bitcoin - 4% Ethereum - 13% Monero - 13% Dash - 10% Litecoin - 10.4>#/strong###

Investment-wise, this is a strong argument in favor of KMD.

Plus, a case could be made that the 5% interest revenue is a particularly effective strategy to attract new money and gather attention. Anything that sounds like “free money!” is usually very attractive to the public. It also encourages long-term holding and thus helps build a strong grassroots community. Finally, more people choosing to keep the token in their own wallet obviously generates scarcity, which drives prices upwards.

A rather obscure product

Komodo is a complex product which is not simply or quickly explained, as this document perhaps shows. What is more, the resources that should explain it are scattered across different websites: the Komodo Website, the Komodo blog, the SuperNET website… and the main Komodo website is being restructured, making many links previously indexed by Google or quoted on forums obsolete.

Seeing how difficult it is to grasp what Komodo is about, how it articulates with the SuperNET project, and seeing how people in 2017 have been flocking towards obscenely well marketed crypto-currencies rather than towards sound technologies, it is already remarkable that it managed to reach a $180 million market cap despite rather poor exposition and advertising.

Far from a liability, in investment terms this could prove a huge advantage. Firstly because the team claims to have learned from the September 8 announcement fiasco, and has “added several new members to [their] team that explicitly focus on: marketing strategy; content creation; social media; and public relations”. If that is done properly it could tremendously bolster Komodo’s attractiveness and price.

Secondly because as far as investment goes, focusing only on positive returns is utterly unrealistic in any market, even more so within the crypto ecosystem. With this year’s explosion in market cap, many people fear an imminent altcoin bubble burst; while it may never happen, it is certainly a good idea to account for the eventuality. And in the event of a crypto-wide price correction, Komodo’s technical and time-consuming barriers to entry will prove to be a strong asset to resist an oversized price drop. Because whenever prices crash, the first individuals to sell are always the ones that bought an asset they did not understand or properly appraised because of a shiny marketing and/or the promise of large returns. Those that took time to study the value proposition usually manage to resist the selling pressure.

An anonymous developer leading a seemingly overreaching project

The mind behind the Komodo platform goes by the name “jl777”. He has been working continuously on SuperNET since 2014, but always remained anonymous. Again, having a pseudonymous developer cuts both ways. This time however, it is mostly a liability: people like being able to reference to a figure of authority. Imagine Steve Jobs, imagine Elon Musk, or think of the god-like status Vitalik Buterin enjoys in the Ethereum community.

The obvious counterexample is Satoshi Nakamoto, the mysterious entity that created Bitcoin. Far from hindering Bitcoin growth’s, Satoshi’s mythical status is now both catalyzing and protecting it, as there is no central figure of authority to slander or attack in any way.

But these perks shall only reveal themselves down the line, if and when Komodo fulfills its goals.

As ambitious as these goals might seem, it is refreshing to notice how grounded they actually are. For once a currency does not aim at “overtaking Bitcoin” or pretend it is “better than Bitcoin”, while in fact necessitating mass adoption to even guarantee the basic security of its blockchain. In that regard, Komodo acknowledges the current superiority of the Bitcoin blockchain, and smartly builds its dPoW layer upon it. This shows an acute sense of realities and a no-nonsense frame of mind, very much like the idea of the decentralized ICOs do. Elegant yet accessible solutions to actual problems.

IV. Price and competition: putting a KMD investment into perspective

Fundamental analysis of traditional, real-world securities usually gives a broad estimate of how stocks should be priced. One could carefully analyze the income statements, cash flows and growth sheet of a given company, deduce that its market cap should be in the ballpark of $10 billion and buy or sell its stock accordingly. But within the crypto ecosystem, it is generally unwise to try and guess what the price of an asset “should” be.

Graham and Buffet rules do not apply in this world

That is because, in spite of its tremendous growth, almost no real-life use-cases exist for cryptos yet, and the entirety of their value is speculation, based on how likely the market deems them to be successful, and on how much it expects they will be worth once they actually deliver.

For that reason, it is generally wise to compare crypto-assets with one another to evaluate their relative value, rather than focusing on a theoretic absolute value. An example would be to reason the following:

“I believe that Monero’s privacy tech is much better than Dash’s. However Monero’s market cap is $1.4b while Dash’s cap is $2.4b. In the long run this makes no sense! Hence I will buy Monero and/or sell Dash.”

The rather uniquely ambitious scope of the Komodo Platform thus makes it even more difficult to ascertain what its price “should” be, because it has no feature-for-feature competitor. Some may however prove useful references. Starting with Zcash, from which Komodo inherited its privacy features, and Dash, one of the top “privacy contenders”.

Komodo and Zcash vs Dash

It does not make obvious sense to compare Komodo’s $180M capitalization with Zcash’s $500M. They are not adversary, but synergetic, as Zcash can be seen as the protocol underlying the whole Komodo ecosystem.

Zcash however is often opposed to Monero and Dash as they are the three most promising privacy-oriented coins.

Zcash’s market cap is currently about $500 million, while Komodo’s is about $180 million. As far as privacy alternatives go, Zcash is often compared to Monero and Dash. Dash is a particularly interesting case study, as its development path has been the complete opposite of Komodo’s.

Dash is the prime example of a marketing-fueled growth. It has most likely been throwing millions at sponsored YouTube shows, Facebook posts and blogs, content creation, even at billboards and bus ads[13]! The marketing campaign worked incredibly well, Dash climbing from a $78 million market cap at the beginning of the year to a staggering $2.6 billion as of 26 September.

And all the while people were buying into the PR campaign, they remained completely oblivious to the numerous critics of Dash’s anonymity, unfair instamine and inactive GitHub page. Even a very recent paper from Princeton researchers, successfully tracking supposedly anonymous PrivateSend transactions, has had no repercussion on its price whatsoever.

In the same paper, researchers conversely reminded that Zcash “[provided] cryptographic untraceability, which is a stronger (and provable) anonymity property”[14].

Marketing-fueled growth can only last so long if it is not backed by trustworthy evidence of a technically sound product. And when Dash loses its position of number one privacy-centric cryptocurrency, both the attention and the $2.4 billion dollars will go flocking towards its competitors, Monero and Zcash, further catalyzing the growth of the leading Zcash implementation: Komodo.

Finally, the Dash example show how profitable a good PR campaign could be for Komodo, if the team makes good on its promise to improve on its communication.

Komodo and BarterDEX vs Exchanges

The demand for decentralized exchanges is obvious. Even the very crude and amateurish EtherDelta, lacking even the most basic order matching feature, sees a daily $7 million volume.

Upcoming projects are numerous. 0x has raised $24 million in an ICO earlier in August, and is already valued at $100 million. The KyberNetwork ICO was a huge success, raising $60 million with absolutely no difficulty in spite of the recent Chinese ICO crackdown, and is already valued over $300 million. Consensys-backed OmegaOne and AirSwap projects should both ICO later this year, and will doubtless value themselves around $100 million.

At the present time, very few people realize that Komodo is about to become fuel for a fully-fledged decentralized exchange, or that the KMD team has actually been pioneering atomic swaps for months[

] and has very recently managed to do so from a light client[]. In the short-term, when BarterDEX goes live for the Monaize ICO, it will undoubtedly garner much of the attention and capital that people have so far been giving to ICO-ed decentralized exchanges and protocols.

The Monaize ICO

It serves well to finally mention the fundraising objective of Monaize, as the measure of success they’ll enjoy should have a very significant impact on the short term price. According to the whitepaper their minimum objective is 1.000 BTC, while they set the hard cap at 10.000 BTC. At today’s rate, that is between $3.6 million and $36 million.

The amount of media exposure of the Monaize ICO will definitely redound on Komodo. But it will also have a much more significant and mechanical impact.

Indeed the token sale process greatly incentivizes people to buy in Monaize by using KMD tokens, by offering a 20% bonus to whomever contributes KMD rather than BTC[17]. This will mechanically affect Komodo’s price, as people will need to first acquire KMD tokens if they want to participate in the token sale.

Komodo’s market cap is around $180 million. If Monaize hardly reaches its minimum cap, the impact will be close to none. If it however enjoys even a half measure of success, injecting as little as $10 million into a $180 million capitalization can go a very long way. It would be very incorrect to think that it would simply bump the capitalization to $190 million: enthusiasm in markets is contagious, and each KMD token bought at a given price makes the next one more expensive.

What is more, the Monaize team has let it be known that they would hold a sizeable fraction of their KMD tokens and not convert them to fiat currency, ensuring that the price will not immediately drop back.

V. Expected return and conclusion

Komodo offers a great investment opportunity, both for the short-term speculator and the long-term investor. The first target should be the Monaize dICO. The fact that after the 8 September fiasco both teams appear to be pulling their weight in the intensifying PR campaign, coupled with the favorable “all things decentralized” climate, should allow Komodo to test its early September highs of 80k satoshis once again. Whether it will later fall back into the current 45k satoshis range, or finally manage to crack that resistance is anyone’s guess, but it will hinge on two things:

- Success of the Monaize ICO. If they reach their 10k BTC hard cap, the massive influx of capital should easily bolster the KMD token price beyond 80k satoshis - User experience with the BarterDEX. A functional, liquid and user-friendly decentralized exchange, will give a tremendous amount of exposure of exposure to KMD, which has so far been relatively unnoticed in the cryptospace.

Although somewhat correlated, a strong success with any of these two things will doubtless bring immediate market awareness to Komodo.

If both missions fail, the downside risk should however be mitigated by a strong support in the 30k satoshis range, and by the aforementioned fact that Komodo’s supporters should prove less fickle than those of most marketing-fueled cryptocurrencies. Many of the core supporters of the currency have been following SuperNET since its inception, and are unlikely to be deterred by short-term market movements.

For the same reason, even if the crypto market as a whole were to crash, it is likely that Komodo would retain more of its value than most other assets, making it a comparatively lower-risk investment.

Many of the top 15 currencies valuations, all over $500 million, are based on the extremely speculative idea that they might overtake Bitcoin or Ethereum. Thanks to its realistic approach to growing a blockchain platform directly pegged to Bitcoin’s security via the Notary Nodes, Komodo does not need a quasi science-fiction narrative to be secured or to succeed, but is very much turned towards the present use-cases of the “blockchain technology”.

Regardless of short-term success, future dICOs and successive technological achievements will put KMD on the map for good. Without showing excess optimism, Komodo should eventually ease itself into the top 15, or even top 10 currencies, which in today’s markets would at least bring its valuation between $500 million and $1 billion, a minimum three to six-fold return from its present price.