Research

Should you participate in the ChronoBank crowdsale?

ChronoBank aims to disrupt the employment services industry through the implementation of stable crypto-tokens whose value is pegged to the national average hourly wage in Australia. The vision of ChronoBank (CBE) is to launch a stable cryptocurrency, Labor Hour Tokens (LHT) backed by an agreement to redeem tokens for one hours worth of labor at the Australian national average wage. Initial plans target labor hire companies, which help other companies with temporary needs for skilled labor, such as construction workers, technicians, and administrative support. Long-term plans include creating a decentralized labor market, launching a debit card for LHT, and supporting LHT as mainstream currency.

ChronoBank is launching an ICO on December 15th, 2016.

Smith + Crown looked at ChronoBank’s model carefully, similar to how we analyzed Golem, ICONOMI, and BitGirls. In particular, we developed scenarios for the success of ChronoBank based on reasonable assumptions and estimated what the benefits would be for crowdsale participants investors.

Executive Summary

What is the model? In practice, ChronoBank (CBE) will effectively function like a bank that lends both fiat and Labor Hour Tokens (LHT). In CBE’s first stage, labor hire companies can borrow money from CBE to pay their workers instead of borrowing from a bank–thereby avoiding costs and fees. CBE will then either give labor hire companies LHT to pay their workers (less likely) or loan them fiat to pay their workers and float LHT on cryptocurrency markets.

This crowdsale involves TIME tokens, which entitle holders to a portion of fees involved in issuing LHT and transacting with them.

What is the market? There are two minimum markets in this model that need to co-exist. First, labor-hire companies need to see enough value in using ChronoBank as a lending entity to get LH or fiat instead of going to a bank for a loan. Second, cryptocurrency traders would need to purchase LH tokens and use them as a store of value.

Can the team deliver? The founders own a company that would be the first user of Chronobank and appear well connected within the labor-hire industry. Delivering a decentralized labor market platform seems unlikely with this round of funding: both Handy and Upwork needed close to $100 million in funding over several years.

Overall commentary: Labor Hour Tokens (LHT) could be an attractive stable store of value in otherwise volatile cryptocurrency markets if the contracts that guarantee their value hold. We need to trust ChronoBank’s ability to choose reliable partners. However, getting LHT out into broad circulation as a means of payment realistically seems years away. In addition, it seems unlikely anyone would actually purchase labor-hire services using LHT rather than just using fiat, meaning CBE remains an intermediary and hopefully doesn’t get regulated as a bank.

That said, our scenarios suggest TIME tokens are valued in line with other banking entities, assuming Price/Earning Ratios from banks is a reasonable benchmark for ICO price/earning ratios. P/E ratios are one way to quantifying the perceived value (and risk) of holding a share in an entity: high P/E ratios mean the market is willing to pay a lot to have one dollar of that entity’s earnings, usually because they either expect growth in the future or at least see it as a stable source of value. Lower P/E ratios could be a company is undervalued. This approach opens access to benchmark data from the stockmarket today. The two concepts aren’t exactly the same, because future earnings for ICO tokens are forecasts rather than facts, but it can help the reader mentally size the perceived risk.

Our scenarios are fairly conservative in terms of ChronoBank’s broader ambitions (no LaborX market and no traction as a means of everyday payment). It’s worth noting that one of the founders is also using ChronoBank to solve a very real problem in his own industry–he’s a guaranteed first customer.

However, these must be weighed against the risks if ChronoBank fails. If ChronoBank can’t sell enough LHT on crypto-markets, it could run out of non-LHT funds to loan to labor hire companies. If ChronoBank can’t recruit enough labor hire companies, it won’t be able to issue more LHT–and no one would use them. If ChronoBank can’t serve effectively as an intermediary between companies, clients, and traders, the system could become too complex for users. If ChronoBank can’t protect against speculation attacks, it could spook either LHT holders or labor hire companies. If ChronoBank gets regulated like a bank, who knows?

As a side note, one of the most interesting findings from our research is that the market for stable tokens is likely to be a major factor in ChronoBank’s success: a secondary market needs to buy LHT in order to provide ChronoBank with enough capital to lend. Our initial scenarios assumed high volumes of LH transactions driven from trading of LHT, but when we revisited assumptions about the total size of the stable tokens market, we adjusted that parameter downwards. If the interested reader has suggestions on other ways to size the market for stable tokens, we are happy to revisit our analysis.

Ultimately, this is more of an investment in ChronoBank than an investment in a distributed protocol. ChronoBank should remain at the center of the model and the long-term success of these financial services will depend on whether the entity can deliver the services effectively, avoid getting regulated as a bank, and successfully sell LHT as a stable token on cryptocurrency markets.

If you are interested in developing your own scenarios, you can find our spreadsheet here. If you come up with other scenarios (and provide reasonable, data-backed assumptions), we’ll post yours too.

Product: Labor Hours and TIME

How ChronoBank works

The mechanics of the system are centered around the Chronobank Entity (CBE), which facilitates the issuance, redemption and destruction of Labor Hour Tokens (LHT) through a complex set of interactions with stakeholders.

Issuance

Minting, the process of issuing LHT, is conducted by the CBE when entering into a legally binding contract to provide financing for a Labor Offering Company (LOC). Like a traditional bank, the CBE will provide a fiat loan, whilst minted LHT will represent the LOC’s liability to settle the loan. However, loans provided will be interest free, giving LOCs an economic incentive to use the system. In the first market, Australia, demand for such financing is enhanced by potential cash-flow issues that may arise due to the nature of the industry; employees must be paid either weekly or bi-weekly by law, whilst LOCs credit terms with clients are usually 1-3 months. As the CBE’s settlement schedule is monthly, this provides LOCs with some breathing space in regards to the amount of capital required to take on bigger contracts.

A fee for the service will be charged in the form of LHT retained by the CBE in the minting process. The rate will be negotiated on a case-by-case basis, portions of which will be distributed across the Liquidity Reserve (LR), Security Guarantee Fund (SGF) and TIME Rewards Contract.

Redemption & Destruction

Once minted, the LHT will be available for the public to exchange for fiat via the Chronobank wallet and eventually external exchanges. Holders may choose to redeem their LHT in the form of labor using the request form linked to the in-wallet redemption contract. Parameters from the form will be used by the CBE to match the request to an appropriate LOC and subsequently destroy the LHT once labor has been delivered.

Alternatively, people may choose to instead hold LHT as an inflation-resistant store-of-value, something particularly attractive in jurisdictions with low or negative interest rate

Further Decentralization

As the project matures, Chronobank will also look to develop LH tokens on programmable blockchains other than Ethereum to guard against the risk of any single blockchain failing in the long run. Primary candidates for this expansion are WAVES and NEM.

Given the crowdsale reaches a funding milestone of 10k BTC (approximately $7.5 million), Chronobank will commit to building LaborX, a decentralized exchange which enables peer-to-peer exchange of labour-hours for LHT, supplemented by an Upwork-like reputation system. The idea behind this is to reduce the system’s dependency on LOC’s through decreased redemption rates. 

However, for purposes of this analysis, we have omitted consideration of LaborX. As points of comparison, launching what is Upwork today took $74 million over five rounds and 10 years of financing. Handy, a decentralized marketplace for house cleaning, took over $100 million over seven rounds and three years of financing. Handy has had outlier growth and started focusing on just one market. ChronoBank would also have to be operating in a world in which workers are comfortable getting paid in LH, which is likely years away. We’re not saying ChronoBank can’t do it, just that it would likely require multiple rounds of fundraising and more tech investment.

How are LHT valued?

LHT are pegged to average national hourly wages published by the region’s official statistics bureau. To ensure a smooth movement of price between data releases, LHT will be calculated as the linear interpolation between the average wage in year t-1 and t-2. For purposes of our analysis, we have assumed AU$25 per hour, roughly $18.61 USD.

What is the role of the LR and SFG?

These offline funds are designed to prevent the value of LHT wavering from the average national wages. The LR will be used to combat fluctuations in supply and demand, whilst the SFG will primarily serve to burn LHT to maintain the 1 to 1 parity with the amount of outstanding labor hours in the case of LOCs defaulting on their commitments.

What is TIME?

TIME is the Ethereum ERC-20 token being used in crowdfunding the project. It will entitle holders to a share of the networks profits from LH issuance and transactions. Transaction fees will be a constant 0.15%, whilst issuance fees will begin at 3% and decrease linearly to 1% over 3 years. Payout intervals of these rewards will vary, but are expected to last a few months. The token also represents voting rights in polls conducted by the CBE.

Who is initially signed up to issue LH?

As a co-founder of the project, Edway Group’s Labor Hire arm is the first LOC officially signed up to the system. The company has supplied over 10 million labor hours since 2007, with clients including the Australian Government, GlaxoSmithKline and Target. Edway Labor Hire claims to deliver 1 million labor-hours per year; at an average of $25/hour, this represents $25 million in contract labor annually.

The Market

Broadly, TIME derives its value from adoption of ChronoBank and LH tokens. Whenever a company creates new LH tokens to pay workers, TIME tokenholders get a small percentage of the LH. In addition, TIME token holders get a portion of transaction fees whenever LH tokens are sent or redeemed over Ethereum or other blockchains that support both smart contracts and LH.

What drives the value of TIME?

As the value of TIME is driven by expected reward payouts from LH issuance and transaction fees, it will initially be dependent on the acquisition of new LOC clients and market adoption of LHT as a stable token. Expansion beyond Australia, development of the decentralized LaborX marketplace, and adoption of LHT as a currency would increase transaction fees, but for purposes of this analysis, we have not seriously considered these.

That said, our approach suggests that LH tokens are valued in line with other banks.

How much could a TIME token return at different adoption scenarios?

As with all tokens that provide a stream of payments, we develop three scenarios based on reasonable assumptions drawn from third-party sources. The goal is to provide the reader with a range of plausible returns. We have also performed all calculations in USD. For reference, 1 USD is currently 1.34 AUS. For details about the scenarios, see the Appendix.

  • Low Scenario: The crowdsale raises only $1 million, and only Edway participates in ChronoBank in the first five years. LHT aren’t traded: only bought and redeemed.
  • Medium Scenario: The crowdsale raises half of its goal and ChronoBank recruits at least eight similarly-sized labor-hire companies by 2021. LHT are only moderately traded but all are bought and redeemed.
  • High Scenario: The crowdsale raises its target amount and ChronoBank grows enough encompass 5% of the entire labor hire market in Australia by 2021. LHT dominate the stable token market.

It’s worth noting that TIME tokens need to be locked into a contract in order to be eligible for rewards. The above assumes everyone locks their TIME during all payouts to maximize their earnings, but it is possible users will forget, leaving other TIME holders with even more earnings.

As stated above, we did not assume ChronoBank builds LaborX. Similarly, we have not considered the scenario in which LH tokens take off as a medium of exchange. There currently aren’t many debit cards that deal with Ethereum or its metatokens. Uquid does, but its fees are in line with major credit and debit cards, offering no relative advantage to using cryptocurrency, particularly given that acquiring cryptocurrency generally involves much higher fees than simply using fiat. Cryptocurrency as a means of payment has seen slow growth, and it seems unlikely it would take off, fees would drop to make it competitive to the non-enthusiast, and LHT would come to dominate the market. We see it more likely that LHT would become a traded stable token. This makes our calculations conservative.

If you are interested in developing your own scenarios, you can find our spreadsheet here. If you come up with other scenarios (and provide reasonable, data-backed assumptions), we’ll post yours too.

What is the demand for a stable coin?

One premise of ChronoBank is that providing a token backed by labor hours will make for a more stable–and more usable–cryptocurrency. The commitments from the LOCs will help guarantee LHT are redeemable and stable. ChronoBank wants the market to buy its tokens so it is not holding onto LHT–preferably it will have currencies it can directly exchange for fiat to lend the LOCs.

So the question is, will the market purchase LHTs?

There are two stablecoins we looked at, and we are aware of three more that will emerge.

  • Tether: redeemable for fiat and backed one-for-one by fiat deposits.
  • Steem Dollars: redeemable for $1 worth of Steem, not backed by fiat or assets.
  • DGX (Digix’s gold-backed token), DAI (MakerDAO’s stable coin), and Royal Mint (backed by gold) are all close to launch and should provide more stablecoins on the market.

Tether and Steem Dollars are the best indicator of demand for a stable coin. Both also have constraints on issuance: Tether are only created when fiat are deposited into the system, and Steem Dollars only as new Steem are created. Due to the nature of LHT issuance, CBE can supply the market with stablecoins faster than either Tether or Steem can, but it’s not clear there is enough demand. (see Appendix for more discussion)

 

It’s also not clear that LHT has a market outside of existing cryptocurrency traders. As an alternative to fiat, it seems a poor choice even with no interest rates: new technology few understand, an issuing bank-like entity that isn’t a bank, and backed by labor hire companies that few people have heard of. In addition, risk-hungry people fleeing low-interest rate bank deposits for cryptocurrencies might just invest in bitcoin instead. In order to want to hold LHT, one would need to be familiar with cryptocurrency and trust it.

Authors: Andreas Weiler, Matt Chwierut

Appendix

In it’s simplest form, TIME rewards (R) per token over a given period (P) may be represented by the following equation.

RP = [(0.0015*VT) + (0.02*VI)] / TN   

Where:

VT  = Volume of LH transactions over time P.

VI  = Volume of LH issues over time P.

TN = Number of TIME tokens in the rewards contract at the snapshot.

Using this equation we conducted some back-of-the-envelope calculations to estimate rewards at 3 levels of adoption. P and TN  are taken as constants of 1 year and 2 million respectively. VT  is estimated to be 2*VI  under the assumption that each LHT issued is either bought and sold or bought and redeemed once over P. A VT  of 2 assumes no secondary trading. The issuance fee decreases over time, while adoption should increase over time. Finally, LH price is fixed at AU$25 or $18.6 USD.

Low adoption scenario:

  • 25% of Edway’s business is financed by LHT. According to their website, 1 million labour hours are supplied per year, giving us a VI  of 250,000.
  • Growth is tepid [5%] but Edway continues its commitment for five years.
  • Only approximately $1 million was raised in the crowdsale and 156,250 TIME tokens were created. We assumed an average bonus of 10%, plus more TIME tokens will be created to compensate founders.
  • We assume only 2 transactions per LHT: one to sell, one to redeem. In other words, people buy them as a store of value.
  • VT  = 500,000.
  • RP = 0.002875 LH = AU$ 0.071875.

Medium adoption scenario:

  • In the first year, Edway and its three partners all contribute 25% of their business. The three partners are assumed to be equal in size to Edway.
  • Growth is aggressive [50%] such that by 2021, CBE has captured .5% of the entire temporary staff services market in Australia. This would be equivalent to recruiting approximately 20 LOCs of Edway’s size. For reference, According to IBIS World, the temporary staff services market in Australia has AU$20 billion in annual revenue. If recent annual growth continue (2.2%), this will equal AU$22 billion by 2021–or US$16.5 billion.
  • We assume six transactions per LHT: one to sell, one to redeem, two to send to/from an exchange, and two during trading activity.
  • The crowdsale raises $7.5 million, in line with recent high-profile ICOs. 1.25 million TIME are created. We assumed an average bonus of 10%, plus more TIME tokens will be created to compensate founders.

High adoption scenario:

  • Chronobank starts with four times the annual issuance of LHT in the medium scenario: Edway recruits twelve additional LOCs–or convinces a smaller number to expose more of their business to ChronoBank. For reference, this fast start does not account for a significant portion of earnings: most come during 2020 and 2021.
  • Growth is very aggressive such that by 2021, Chronobank captures 5% of the entire Australian labor-hire market.
  • The crowdsale raises $15 million: roughly the desired goal of CBE (20 thousand BTC valued at $750/BTC)
  • Transaction volume is high as multiple parties purchase and trade LHT.  This is actually a critical assumption: 70% of the earnings from TIME come from transaction fees, mostly in 2020/2012.

Given a BTC price of ~AU$1,100 and the crowdsale rate of 100 TIME to 1 BTC, we arrive at a purchase price of AU$ 11 per TIME, suggesting that it may be a fruitful long-term dividend-paying investment, so long as the medium adoption scenario or better is achieved.

Assumptions for Analysis of Stable Coins

Estimating the demand for stablecoins is not straightforward. Is it a function of stablecoin supply, which currently isn’t much and whose growth is limited? Is it a function of market volatility, which is difficult to forecast? Is it a function of total cryptocurrency market size–a given portion of entire market wants to be tied up into something stable?

Likely all three, and it is beyond the scope of this exercise to explore this in depth.

Instead, we have provided one estimate for the growth in trade volume for stablecoins using Tether’s trade volume growth in 2016 as a benchmark.

Then, we create reasonable assumptions for the number of transactions per LHT under different scenarios.

Trade volume should be correlated with number of transactions, because each move to/from an exchange requires an on-chain transaction, and a certain portion of trades on exchanges requires on-chain settlement. This means each LHT issued will include:

  • 2 transactions: one for buy, one for redeem
  • Trade volume x Settlement Ratio (how much exchange trading is supported by on on-chain settlement)
  • Trade volume x Activity Ratio (how often a holder will send to/from exchanges for purposes of trading)

Together, this would yield a ratio of blockchain transactions (which generate fees for TIME holders) to observed 24-hour trade volumes.

We estimated this in two ways. First, we recorded either hours of Tether blockchain activity here, estimated 24-hour blockchain transaction volume, and compared it to observed 24-hour trade volume to yield a ratio of .063: every dollar traded generates .063 blockchain transactions. We then developed another estimate using reasonable assumptions of trade size, frequency, and moving in/out of exchanges, and got ratio of .05. See sheet for further details.

This meant that for every $1 of value that traveled over the LHT network (generating fees), an estimated $20 would need to be traded.

We then compared this to a baseline forecast of trade volume for stablecoins using Tether’s trade volume and growth as an example. This yielded an estimated $728,195,562 in 2021.

We used this as a reasonable assumption of trade volume for stable coins like LHT. We then tested how much trade volume would be implied by LHT transaction volume–assuming supply, a transaction per LHT ratio, and the transaction/trade ratio of .05. We compared this to our baseline–just to see how far off the trade volume would be.

  • Low: This wasn’t an issue because we assumed no trade volume. We did assume 5% of users would transfer between wallets, generating moderate transaction fees.
  • Medium: This yielded a .44 ratio, implying Labor-hour Tokens would capture 44% of the trading market.
  • High: This yielded a ratio of 8.8, implying CBE would issue more stable tokens than the market might want by an order of magnitude. We kept this under this scenario to respect the possibility of radical growth in the stablecoin market and immense popularity for Labor-hour tokens. In addition, frequent redemptions would pull the implied trade number down, since presumably many LOC’s wouldn’t want to be carrying immense liability on their books. Nonetheless, when we kept the transaction ratio so low, it meant the amount of money TIME holders receive from transactions is quite low relative to the issuance fee, so keeping the transactions per LHT low should yield a conservative estimate. Nonetheless, it does show that there may not be market demand to absorb LHT under high-growth scenarios–would people want to hold a stablecoin backed by contracts by labor-hire companies in Australia?

1 Comment

February 22, 2017 at 6:16 am, Nathan Tipping said:

Interesting way to circumvent PAYG withholding tax on labour hire.

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