Pugilist Ventures. pu.gi.list. fighter; especially a professional one

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1 Pugilist Ventures pu.gi.list fighter; especially a professional one Pugilist Ventures is a FinTech and Blockchain research and investment firm that provides actionable insight to investors and traders. Please reach out by . Co-Founders Christopher Brookins, chris@pugilistvc.com O Brian Hunter, obrian@pugilistvc.com

2 Ripple Analysis Content Overview... 2 xcurrent... 2 xrapid (Powered by Native Token XRP)... 3 Business Model and Strategy... 4 Revenue Model... 5 Ripple Financial Projections... 6 Team... 7 Industry and Market... 8 Overview... 8 Total Addressable Market (TAM)... 8 Competition... 9 Risks Mitigants Technology and Intellectual Property Quantitative Model Rating* Conclusion Pugilist s Investment Rating* Appendix Disclaimer Pugilist Ventures research and recommendations are meant for educational purposes only and the opinions expressed do not constitute investment advice. Independent advice should be sought where appropriate. The information in this report are provided "as is" and "as available". All information and opinions expressed herein are current as of publication (December 14, 2017) and are subject to change without notice. Pugilist Ventures does not warrant the accuracy of the materials provided herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or fitness for a particular purpose. 1

3 Overview Ripple is a decentralized global payments network for banks, payment providers, corporates, and exchanges. Ripple utilizes their protocol software xcurrent and digital asset XRP to provide a frictionless and scalable global payment solution. Ripple touts over 100 banks and 75 customers commercially deploying their solution. xcurrent has several compelling points of differentiation which include: cost reductions and revenue increases interoperability with existing systems real-time global payment settlement Additionally, Ripple s digital asset, XRP, aims to provides additional cost savings to end users by providing on-demand liquidity for cross-border payments with increased settlement speeds, scalability and stability. 1 xcurrent 2 xcurrent offers the ability for banks to provide cross-border payments services while lowering their total cost of settlement. xcurrent is designed to meet the needs of banks by integrating with existing risk, compliance and information security frameworks. Additionally, Ripple s software is installed within the bank s infrastructure and is built to interface with the bank s legacy systems, thus minimizing integration time and effort. They key xcurrent components are: Messenger: API-based messaging module that enables bidirectional communication between banks on RippleNet. FX Ticker: Facilitates the exchange between ledgers by enabling liquidity providers to post FX rates. Validator: Cryptographically confirms the success or failure of a payment. ILP Ledger: A subledger of each transacting bank s general ledger that enables transacting parties to have an entire transaction settled (or rejected) instantly

4 3 xrapid (Powered by Native Token XRP) 4 XRP is Ripple s digital asset for settling global payments without the need for nostro/vostro accounts (accounts with FX held in each other s banks) or liquidity provider. XRP is a fungible and liquid digital currency that can be held on a bank s balance sheet and used to settle cross border transactions. Thus, respondent banks apply liquidity efficiently across the same volume of global payments. xrapid will also expose additional revenue opportunities through less standard FX accounts (exotic) and minimize FX risk or hedging costs. Ripple s CEO recently stated, our goal is to lower the marginal cost of international payments to the point where money can move as easily as information does today. 5 The expectation is the goodness factor and cost savings Ripple provides will raise the profile and value of XRP as the network grows and utilization increases

5 6 7 Business Model and Strategy Ripple aims to deliver a better, faster and cheaper global payment network. Ripple is solving a real problem and has existing technology and pilot customers that are willing to spend money to address this significant problem. The centralized (currently) software system, xcurrent, provides unique long-term network effects for banks to utilize Ripple s digital asset XRP for their nostro/vostro account clearing practices which would increase bank savings

6 Ripple s target customers and ability to integrate with existing bank systems present an intriguing element for faster adoption while creating a barrier for competitors simultaneously -- banks will be less likely to switch to competitor blockchains such as Hyperledger or R3 Corda after spending $10M upfront and having Ripple s software interwoven into their legacy IT systems. As a caveat, the slow-moving nature of banks, large initial price tag and outdated legacy IT systems could adversely impact Ripple s adoption speed which would inhibit long term growth and barrier building to stave off increasing and formidable competition. Additionally, Ripple is taking the following initiatives to drive growth and adoption: Decentralized Strategy: XRP has their network and incentives properly aligned to attract and retain users on the platform. Despite being quite centralized, Ripple is taking the appropriate steps to move away from the initial centralization strategy which helped bootstrap and protect the network to a more decentralized network. Accelerator Strategy: Ripple is using push mechanisms at their disposal by offering discounts and rebates to financial institution that demonstrate commercial use of RippleNet. The goal is to deliver network effects like the early days of PayPal. Escrow Strategy: 55B of XRP is held in escrow and the aim is to shore up predictability in XRP supply by introducing new tokens to the market in a thoughtful cadence. Revenue Model Ripple s revenue model has two components 8 : There may be other revenue sources, but Ripple is a private company and we do not have access to financial reports. Ripple s CEO also asserts that they are cash flow positive which is plausible given the low overhead of blockchain-based businesses plus the accretive nature of SaaS businesses after a few business cycles

7 Ripple Financial Projections $10M upfront installation fee for Ripple xcurrent with a forecasted payback period between months. The xcurrent licensing fee per year has been approximated as hundreds of thousands of dollars per Ripple s Head of Cryptography. Pugilist is unsure what that means in particular, but assumes an approximate licensing fee range between $100,000 to $500,000; depending on size and scope of bank engagement. We use a conservative metric, $200,000, for our financial projections below. XRP Network Utility Value Projections There are three approaches to approximating the present and future network value of XRP: 1. Present Value of Future Expected Value: the percentage of the network s future utility captured by Ripple; discounted back to the present value. Triangulated Value (TV) over five range assumptions. 2. Revenue Multiplier: a revenue multiplier on the forecasted total revenue of Ripple from 2018 to XRP value given current supply outstanding (NOT including XRP held by Ripple) 6

8 XRP value given current supply outstanding INCLUDING XRP held by Ripple 3. Present Value of Network Multiplier: a multiplier on the percentage of the network s future utility captured by Ripple; discounted back to the triangulated present value. Team Ripple was established off the backs of founders recognized in the FinTech space. As critical as the underlying technology for Ripple may be, the most significant need for strong leadership lies within Sales, Business Development and Compliance. These positions are pivotal in establishing and recruiting members to the network as well as building trust in the underlying process and technology. Pugilist s current view of these critical roles are: Chief Compliance Officer: Antoinette O'Gorman has solid experience in the world of Anti-Money Laundering at the regional bank level. As Ripple grows and the water gets murky in terms of fraud and risk, the question is whether Ms. O Gorman and her team can scale to meet Ripple s needs as their business becomes more global and complex. SVP Global Sales: John Mitchell s background in SaaS and treasury management systems will be invaluable to Ripple conveying their value proposition to potential customers. Another key is John finding the right people 7

9 geographically to support Ripples growth. At the time of writing this analysis, Ripple has job posts for Sales Directors in Europe, APAC and Brazil. SVP Business Development: Patrick Griffin has an interesting background in equity trading and some experience at notable startups. Unfortunately, none of this screams SVP of business development which is pivotal for Ripple to build the right partnerships where fast moving upstarts are moving in. Again, not ignoring the importance of Ripple s crypto technology and engineering, but we believe that in a market where customers are averse to embracing new business models or technology, these key roles play a major factor in the ultimate success or failure of Ripple. Industry and Market Overview The banking and payment provider industries are regulated, quasi-monopolies which make them typically unagile and slower moving, but with deep pockets. Given the buzz and fear surrounding blockchain technology s ability to disrupt financial services, many banks and payment providers are showing a vested interest in moving quickly to adopt or partner with blockchain technology providers. Cross border payments have always been a blight on the global payment system. It is riddled with inefficiencies and complicated rules. Correspondent banks thrived in this environment with a network of complex relationships and the expansion of B2B transactions. Fortunately, businesses and customers are demanding for a more robust and effective solution that marginally reduces the cost of being an active member of the global economy. Total Addressable Market (TAM) The total market size for global cross-border transactions is approximately $1.6 Trillion dollars per year. 9 Ripple s entire, potential value proposition is 60% cost reduction, which equates to $960B Ripple analysis across: World Trade Organization, International Trade Statistics 2014; Institute of International Finance, Aggregate Capital Flows 2014; Federal Reserve Financial Services, Cross-Border Payments

10 Standard revenue or value splits between client/business have a range from 60/40 to 80/20. Using this information, Pugilist calculates Ripple s TAM between ~$192B and ~$384B. *See appendix for methodology. Competition SWIFT Society for Worldwide Interbank Financial Telecommunication (SWIFT) is an international payment network that helps facilitate the secure delivery and messaging of financial data to corresponding institutions. SWIFT is the clear incumbent in the space with an established network of banks built over decades. SWIFT maintains significant relationships that cannot be discounted in a market that revolves around familiarity and stability in the solutions and partnerships. Many would argue that they lack the technical expertise to deliver on the market efficiencies businesses would like to see in cross border payments. However, this will not stop SWIFT from leveraging their large network and experimenting with new initiatives like SWIFT gpi (global payment innovation). Permissioned Blockchains Solutions by Hyperledger (IBM/Linux), JPMorgan, R3 Corda and the like are perhaps the most severe threat. Permissioned Blockchains move away from native digital assets, thereby removing the dependency on a specific asset or token to execute transactions. This essentially allows participants to dip their toe into the crypto waters without the unforgiving volatility that can sometimes be associated with native assets like Bitcoin. Although Ripple is a first mover in the space, banks and payment providers are keenly aware of alternatives that may arise. The one knock against permissioned blockchains may be the fact that they do not remove the need for nostro/vostro accounts which still presents FX cost pressure. Stellar Lumens and Raiden Network Their respective technology, business model and use cases are not a direct apples to apples comparison to Ripple, but one can see the ultimate convergence and future competition both companies can present. Ripple s business model, team, and traction are much more developed, but from a coin value perspective, the competitors may present a more compelling investment opportunity given sentiment and coin supply outstanding is more conducive for investors and speculators alike. Also, given that both are decentralized and open source, if either protocol demonstrates a superior technology or value proposition, banks or corporations could just build their own 9

11 service(s) atop these open source protocols. Thus, Stellar or RDN could use the disruptor model to eventually overcome Ripple and XRP in the long run. Risks Centralization and the Decentralization Transition Part of what has driven adoption and trust in Ripple is the controlled nature in which they managed the validator node ecosystem. Validators are an essential part of the Ripple consensus mechanism that verifies the authenticity of a transaction like Bitcoin miners. Ripple has a heavy hand in the administration of the validator ecosystem which some suggest makes it more centralized and susceptible to a single point of failure. Ripple s goal is to remove itself from the administration process and have a wider network of validators policing themselves. We venture to guess this network will look like the Certificate Authority Networks policing the internet. As Ripple tries to grow validators and customer base in parallel, the growing pains will be inevitable. To have a trusted system and process of self-policing takes time which may adversely impact transactions of XRP. Amount of XRP in Circulation and Escrow Currently, there is approximately 37B XRP tokens outstanding. Additionally, Ripple holds 55B XRP in escrow. Ripple by far has the most digital assets outstanding. The total amount outstanding and held in escrow reserve could inhibit the price appreciation of XRP for two reasons. First, the supply of XRP outstrips the current demand for it, thus causing downward price pressure. Second, investor expectations are that Ripple will use escrow to continually put subtle downward pressure or overt pressure on XRP to ensure that the price and volatility is low enough so that it is palatable to banks. Regulatory and Compliance Much has been made about XRP being the cure-all for banks and payment providers liquidity woes. However, little has been said in the way of regulatory requirements, specifically Basel III which mandates liquidity levels for financial institutions. This begs the question, will regulators view XRP as a liquid instrument that satisfies very stringent rules? Until that day, XRP being the digital asset of choice for cross border transactions is on hold. Unfortunately, Basel III is not the only issue. The regulatory landscape is vastly different by country and this level of complexity and unpredictable rule changes can place excessive operational burden on Ripple. 10

12 Mitigants Amount of XRP in Circulation and Escrow The argument Ripple wants to maintain a low price to entice banks does not hold because digital assets are divisible. Regardless of how high XRP rises, banks can still buy the same fiat currency amount of XRP to hold on their balance sheets for payment clearing. Ripple does not want to control price, but rather volatility. Ripple has a vested interest in minimizing XRP s volatility to attract banks and payment providers onto xrapid. For example, if Bank A bought $100M of XRP on Day 1 to hold on their balance sheet for payment clearing, they would want to make sure that Day 2 said XRP amount was not worth only $80M, and Day 3 the XRP amount was not worth $120M. Wild price swings like that would require banks to significantly hedge their XRP exposure with derivatives, thus weakening xrapid s cost saving value proposition. Pugilist views the large number of outstanding XRP tokens and their 55B amount held in escrow as a positive attribute for long term Ripple and XRP success and ultimate price appreciation. XRP has a longer term goal to become a global reserve currency or component of it and having a sufficiently large amount of XRP is paramount to helping accomplish this. Regulatory and Compliance Ripple has made notable steps towards bolstering this aspect of their business which includes a Chief Compliance Officer. More importantly, they established a special advisor role for Karen Gifford to address regulatory issues at the global level. This is an obvious step in the right direction and we believe Ripple is aware of the importance of establishing influential voices in countries that are crucial to Ripple being adopted around the world. Technology and Intellectual Property Open source and intellectual property (IP) tend to be oxymoronic when paired together, but not in the case of Ripple. The critical blend of SaaS and digital asset XRP make for a powerful combination. Ripple is leveraging the potent power of the developer community to build out consensus nodes and internally building solutions for often wary enterprise customers. The long term synergies of this approach can create a powerful network effect. Also, Ripples meteoric rise and years of building trust in the finance and 11

13 payment community must be factored into the existing IP. We believe this strong brand image along with xcurrent network effects and XRP is the real IP. Without each, the long term viability of Ripple and especially XRP as an investment token is very minimal. Quantitative Model Rating* Pugilist s proprietary machine learning model generates a probability of viability that is subject to early stage investment return standards. However, given the early stage nature of these investments, the model should be viewed as directionally accurate versus a crystal ball. Pugilist s probability of viability is 77.35% that Ripple WILL be a viable company. Pugilist s probability of viability is 6.02% that XRP WILL be a viable digital asset. *See appendix for rating methodology. Conclusion The xcurrent software protocol offers a strong value proposition to the banking and payments landscape. Ripple is also equipped with solid management, technical team and investors. Per Ripple s management, they are already cash flow positive which will likely only increase as they onboard more financial institutions and payment providers. Unfortunately, the investment token, XRP, has a multitude of business hurdles and risks to overcome with viable competitors at their doorstep and potential hurdles from central banks, financial institutions and governments. If Ripple can move quickly and interweave the protocol + token into the global banking systems payment operations, their network effects should be strong enough to beat out competition from permissioned blockchains and rival protocol/native assets. Overall, we believe the underlying fundamentals of Ripple the company has tremendous upside in addressing a critical pain point. 12

14 Pugilist s Investment Rating* Ripple (the company) GOOD investment potential with below average risk and high reward. XRP (the digital asset) SPECULATIVE investment potential with high risk and reward. *See appendix for rating methodology. 13

15 Appendix Pugilist Investment Rating Overview Calculated weighting scheme which incorporates our research and quantitative model. Our scoring and weighting schemes are not subjective, but rather based upon data science of the highest predictors of a viability. Investment Rating Rubric Rating Investment Potential Risk Potential Reward VERY WEAK Very High Low SPECULATIVE High High DECENT Average Medium GOOD Below Average High STRONG Well below Average Very High Quantitative Model Methodology Overview Pugilist s proprietary machine learning model is trained off publicly available, historical data and validated by our advisors at Carnegie Mellon University. The model cuts through heuristic flaws in human decision-making and finds the independent variables with the highest predictive power. Our model has good degrees of accuracy, precision, and recall. *Subject to change as we continually update our model with new data Probability of viability Pugilist s model produces a binary outcome variable, i.e. YES or NO, along with a commensurate probability of said outcome variable. Viability is determined as the expected future enterprise value; subject to investment return standards indicative of early stage investing. 14

16 Ripple: Scored Probabilities: {YES} XRP: Scored Probabilities: {YES} Company Binary Outcome Variable Probability of Viability Ripple YES Ripple XRP YES xcurrent 15

17 xrapid Current Value Proposition Future Value Proposition 16

18 Total Addressable Market (TAM) Methodology 17