Method to the Madness - Vulture Capitalism Comes to the Blockchain
"From up here, Steem funds sure look tasty..."
Here, I propose that you consider another layer to the situation to better comprehend the current upheaval on the Steem blockchain following its abrupt sale to Tron.
Justin Sun and his representatives have likened themselves to Venture Capitalists and as investors in Steem promising to take the platform to new heights.
However, an argument can be made for a more accurate description of the VC monicker:
Venture vs. Vulture
There are quite a few investors in the crypto-space that view themselves as VCs looking for diamonds in the rough to get behind. Venture Capitalists play an important role in building up industry and expanding the market place.
Venture Capitalists are praised for their savvy investing and for providing much needed funding to start-ups in an effort to bring their emerging projects to market. A clear-cut example of successful Venture Capitalism would be early investors in Google such as Sequoia Capital.
A venture capitalist will typically look for companies that have growth potential and will provide capital to startup ventures. They may also support small companies that wish to expand but do not have access to equity markets. Venture capitalists will usually invest in these kinds of companies because they can earn a large return on their investments if these companies become successful and profitable
But, what exactly is the difference between a Venture Capitalist and a Vulture Capitalist anyways?
There are several particular features that distinguish Vulture Capitalism from the traditional version.
Preying on distressed companies
Highly aggressive behavior
Taking control of decision making and management
Aim to make a quick turnaround and profit
What is a Vulture Capitalist?
Here's how investopedia.com describes the phenomenon:
A vulture capitalist is an investor who buys up distressed companies in order to turn them around so he can sell them at a profit. Vulture capitalists are often criticized because of their aggressive behavior.
A vulture capitalist is a type of venture capitalist who looks for opportunities to make money by buying poor or distressed firms. They are also known for taking control over someone else's innovations and, as a result, the money that person would have acquired from those innovations. The term is slang for someone who is an aggressive venture capitalist, and as such is believed to be predatory in their nature. Just like the bird they are named after, vulture capitalists will wait until they see the right opportunity and swoop in at the last minute, taking advantage of a situation with the lowest possible price.
Sound familiar to anyone?
Aggression | Hostile Takeover
Vulture capitalists are often criticized for their aggressive behavior because they are seen as preying on the companies they buy in order to make a profit. They are called out because they will seek out the most distressed companies at really low prices. They will go to great lengths in order to keep their costs down so as to make the most profit. A venture capitalist may look first at cutting down staff, which can lead to unemployment and cause a ripple effect in the economy.
Since the announcement of Steem inc.'s sale to Justin Sun and the Tron Foundation, the Steem community reaction was a mix of surprise, confusion, anticipation and even dread.
Concern quickly turned to anger when all top-20 elected witnesses were instantly removed by Tron/Steem inc. and replaced by sock puppet witness accounts.
For a taste, check the hundreds of outraged comments by the Steem community to the announcement of HF 22.5.
An Open Letter to the Steem Community HF 22.5
While it has been argued by Tron that "malicious hackers" attempted to freeze the assets of token holders, it's clear that no token holder funds were ever at risk with a temporary reversible softfork implemented by the elected representatives of Steem's DPOS governance body and block validators - the witnesses.
These actions were taken to protect the Steem blockchain as attempts to communicate with Steem's new overlords were ignored for a considerable amount of time.
This mischaracterization of the witnesses as "malicious hackers" is, itself, a spiteful and degrading label and a complete dismissal of our community's governing process.
Additionally, these labels and false allegations were willfully spread across social media. Ultimately, this demonstrates either 1 of 2 things.
1) Deep and complete ignorance of decentralization and DPOS
2) Flagrant distain for the rules that govern the Steem blockchain.
That's it, it's either one or the other or a combination of both.
If it's entirely the latter, then this constitutes a form of extreme aggression towards the community and its membership.
As communication channels were finally opened up between Tron and the consensus witnesses we saw another curious phenomena take place. While both sides met and attempted to explain their side in various Discord discussions, some headway appeared to be slowly taking root. However, any notions of progress were dashed by completely contradictory statements issued elsewhere by Tron representatives.
New, immensely damaging and hypocritical, social media posts made by Tron's CEO Justin Sun soon appeared on Twitter and in Steem posts (now deleted, but still on the blockchain). Here's just a taste of some of those highly inflammatory statements.
Any progress that was being achieved through negotiations quickly evaporated. Tron's sincerity in understanding the community's sentiment was immediately called into question and suspicion of ulterior motives spread throughout the blockchain.
Former Steem inc. CEO, and crypto charlatan Ned Scott, even joined in with statements describing the witnesses as "thieves", "bullying" and "liars".
After being completely absent from the community for over a year while he shopped Steem to buyers in the shadows, Scott smeared those who committed countless hours to maintaining and developing the platform after suffering through 4 years of the CEO's incompetence and mismanagement.
A cowardly slap in the face by the very person who, in reality, sold the platform and the community down the river leading to the current fiasco.
vulture capitalists will usually look for distressed opportunities or companies that are failing. They will provide funding as a last-ditch effort to these companies — many that have been unsuccessful in obtaining credit or funds from banks and/or other investors. As a general rule, most vulture capitalists will buy companies at a very low price so they do not end up losing out of pocket before they attempt to turn the firm around.
In early 2018, Steem and SBD were still riding high at the crest of the crypto currency craze realizing their highest dollar valuations to date. Since this time, the crypto currency market has been in steep decline and Steem has suffered a 90% drawdown.
By November 2018, the crypto winter was settling in with Steem inc. in serious financial distress forcing the company to implement a series of painful cost cutting measures.
As a result, Steem inc. was left with no choice but to layoff 70% of its staff. Ned Scott stepped back from day-to-day operations selecting Eli Powell to fill the role as managing director of the company.
The struggling company also attempted to stop the bleeding by reversing their stance on maintaining an advertisement-free platform allowing the first ads to appear on Steemit.com in 2019.
With many crypto-projects folding during the extended bear market, Steem inc. struggled to stay afloat.
Eli Powell has retro-actively described the situation as being stuck in a "holding pattern". It's this type of predicament that attracts predatory outfits seeking to make a quick return on investment.
Vulture Capitalists slowly descend.
The Tron smart contract network, with a mission to "decentralized the internet", has been marketed as a competitor to Ethereum.
Beginning as an ERC-20 token on the Ethereum blockchain, Tron's transition to their mainnet and official launch occurred on May 31st 2018.
Tron has been dogged by criticism since its inception, with Ethereum founder Vitalik Buterin openly accusing Tron of plagiarizing Ether's whitepaper along with several others, including Filecoin.
BitTorrent Acquisition and Lawsuit
A major boost to Tron's portfolio occurred when it acquired the Peer-2-Peer file sharing networking company BitTorrent in June 2018. Tron hailed their purchase as a landmark achievement while highlighting the on-boarding of BitTorrent's over 100 million user base.
More recently, BitTorrent former developers Richard Hall and Lukasz Juraszek filed a $15 million dollar lawsuit against Tron for alleged workplace violence and harassment.
Hall says he was bullied into fast-tracking BitTorrent software releases to meet Tron roadmap targets and provided what he alleged are chat app messages from Li and Sun as evidence.
The details of the allegations surrounding the abuse are summarized in a 2019 article from cryptonews.
The No-Shop Clause
An interesting aspects of Tron's acquisition of BitTorrent is that during negotiations Tron tabled a No-Shop clause into the talks. BitTorrent representatives entered into an agreement designed to prevent the company from entertaining offers from other prospective buyers.
Typically, companies agree to no-shop as a sign of trust. In addition, companies who are in financial difficulties may also agree to the clause as not to lose a potential buyer.
No-shop clauses give a potential buyer leverage, preventing the seller from looking for another, more competitive offer. Once signed, the buyer can take the time necessary to weigh out its options about the deal before agreeing to it or walking away. They also prevent potential sellers from being targeted by unsolicited offers which may present a better opportunity. No-shop clauses are commonly found in mergers and acquisitions (M&A).
Before the acquisition was finalized, Tron actually sued BitTorrent for breaching the No-shop clause. The exact details of the lawsuit remain undisclosed but Tron dropped the suit and a short time later the acquisition of BitTorrent was complete.
According to BitTorrent's creator, Bram Cohen, the final portion of the purchase - was not paid on time.
BitTorrent founder Bram Cohen publicly accused Justin Sun of not making the final payment on the TRON Foundation’s $140 million acquisition of BitTorrent, Inc.
Tron/Steemit inc. No-Shop Clause?
So far, the details of Tron's agreement to purchase Steem inc. and Steemit.com remain undefined as the deal was made in secret between Ned Scott and Justin Sun's representatives.
Since the details of the agreement remain shrouded in secrecy, it is only speculation that it's possible Ned Scott entered into a No-Shop clause agreement with the Tron Foundation.
If evidence existed to support this notion, it might be found in reports by community insiders that Tron purchased the Steem inc "ninja mined" stake, an estimated 73 million tokens or 20% of the total supply in circulation, at below market value.
This would be consistent with how No-Shop clauses are used while the buyer takes time to consider the purchase. Furthermore, it buys time for Tron to allow the bear market to drive down the price of Steem even further before making a low-ball offer while also preventing Steem inc. from soliciting alternative buyers.
Quick Turnaround | Quick Profits
Vulture capitalists look for areas in which they can cut costs in order to make the most profit. Once they make their acquisitions, they may do things like cutting staff, reducing benefits or even both.
It's no secret that soon after Sun and Tron took the reigns of Steem inc. and executed the hostile takeover of Steem governance, almost all of the Steem inc. core blockchain development team resigned from the company. Although the team left the company on their own accord, it's highly likely that the work environment inside the company became toxic leading to the mass exodus. Remember former employees of BitTorrent have filed a lawsuit for harassment, bullying and workplace violence.
The Ninja Stake | Community Development Fund
At the heart of the current deadlock between Tron/Steem inc. and the elected witnesses of the Steem blockchain, are the tokens mined by Steem inc. in the earliest days of the platform.
The 'ninja-mined' stake has long been a contentious issue in the Steem community. There exists numerous statements from Steem inc. representatives and former CEO Ned Scott that the tokens would be used for community development and growing the Steem ecosystem.
The 'ninja mined' stake under Steem inc's control was never recognized as the sole possession of Steem inc, or communicated as such.
Here's a screen shot from Bitsharestalk.org on April 1st, 2016, communicating the intention of the pre-mined Steem inc. stake (at the time believed to consist of 80% of all Steem tokens in existence).
Steem inc. CTO, Dan Larimer aka Bytemaster:
We have secured ~ 80% of the initial STEEM via mining. Our plan is to keep 20%, sell 20% to raise money, and give away 40% to attract users / referrers.
Eyeing the Community Development Fund
Since very little official information surrounding the deal has been disclosed to the community, there's much speculation as to the exact amount Justin Sun and the Tron Foundation paid in the deal to acquire Steem inc.
Although Sun himself has claimed (in at least one townhall Discord chat) that he paid market value for each token, others estimate that, instead, Justin paid somewhere in the area of $0.05 to $0.10 USD per Steem token.
In the days leading up to February 14th, when the official announcement of the Steem acquisition was made, the token was trading between approximately $0.20 and $0.22 USD. Following the announcement, Steem then temporarily climbed to $0.30 USD as news a deal had been finalized circulated through the space.
Without knowing the exact details, it's difficult to determine if Sun received a favorable deal or not. Moreover, it's possible the exact number may remain undisclosed for quite some time since there has been multiple mentions of NDAs (Non-Disclosure Agreements).
Though this is a matter of speculation it is possible, that Sun and his team viewed the large amount of stake held by Steem inc. as an opportunity to profit immediately from the bargain.
All Tron had to do was to plead ignorance to the community's claim on the stake, transfer the 'ninja mined' tokens to the exchanges and dump the stake.
At below market value prices, Tron would stand to make a handsome profit, instantly doubling or tripling their gains. There would be no need for marketing and promotion of Steem - simply turn around and sell the 73 million tokens.
Again, this is only speculation yet it would go a long way in explaining Justin Sun's hostile takeover of the Steem blockchain and almost myopic obsession of a quick power-down period to come to the rescue of the exchanges he convinced misallocate and powerup user tokens.
It would also suggest that acting swiftly to overthrow Steem's governance with centralized proxies and eliminating opposition would allow Tron/Steem inc. to easily reallocated funds earmarked for development. Once the tokens were transferred offchain and 'safely' on exchanges, the Steem community would be left powerless and with little to no recourse.
Furthermore, it would seem to be confirmed by Justin Sun himself when he stated that he "would like to get out" and "sell his tokens" on the market and make a quick exit.
(see: @ausbitbank Witness Meeting video at the end of this post)
Originally, Sun professed that his goal was to grow Steem, give it proper marketing and have the token listed on more exchanges to increase its value. When pressed on a time frame, Justin refused to give any details about how long he intended to be involved with Steem.
If this is truly a Venture Capitalist investment, as Sun claims, then he might commit more time to his investment and guide Steem to a brighter future.
On the other hand, as pointed out there are indications we are glimpsing the Vulture Capitalist formula.
Preying on distressed companies
Highly aggressive behavior
Taking control of decision making and management
Aim to make a quick turnaround and profit
If we subscribe to the notion we're observing the workings of Vulture Capitalists, as Tron's behavior alludes to, we can be sure they intend to dump the promised community funds to market and earn a significant profit for himself and any potential secret backers.
It is this author's opinion that viewing Tron's contradictory, hypocritical and erratic behavior through the lens of Vulture Capitalism sheds light on the Tron takeover and occupation of the Steem blockchain. It is my hope that this article may provide some insight into the methods behind the madness.
The Vultures have landed and are picking away at Steem piece by piece