Friday, December 18, 2020

What Quadriga Initiative Is Not

What we are doing with Quadriga Initiative hasn't been done before.

Many people have expressed confusion over how the initiative works, or tried to compare it to fundamentally flawed ideas. Below are some of the most common misconceptions. Enjoy!

Part of The Bankruptcy

The initiative operates completely separately from the bankruptcy and affected users need to complete a separate free signup to participate. Signup does not affect any bankruptcy claim. We will, however, utilize bankruptcy information to validate losses (ensure that losses are legitimate) with a special claim process in our partner exchange. Our goal is to create a full recovery targeted to legitimate losses from Quadriga.

A Relaunch of Quadriga

Very early on, ideas were posted surrounding a relaunch of the Quadriga platform. The key advantages of this approach were that it could have been run under the CCAA, saving creditors the $2m bankruptcy cost, and that it likely would have provided faster access for affected users to withdraw what remained of their funds. In addition, a CCAA structure may have provided greater flexibility such as allowing creditors to hold more funds in bitcoin during the process. Ongoing profits from the new platform would be used to pay a recovery of the remaining losses. Such a model was successfully demonstrated in the Bitfinex hacking case (among a few others).

However, it should be noted that this model suffered extreme legal challenges if losses (a clear debt) were to be tokenized as these could be considered a security. While Bitfinex was able to complete this recovery, they did so in a different legal jurisdiction. Canadian securities law would likely not allow such tokens to be publicly tradable. In addition, case studies such as Cryptopia or Bitgrail show that relaunch attempts generally fail where the credibility or integrity of the platform is implicated, and even a renamed platform still suffers reputation damage as a result of Gerald Cotten’s fraudulent actions. This would place a relaunched platform at a significant disadvantage. When Bitfinex was hacked, people still trusted them. Quadriga committed massive fraud, and embezzled funds from thousands of Canadians. The platform had nothing more than a reputation that was completely destroyed.

The recovery token is being launched as a goodwill promotional gesture within a completely separate exchange (our partner exchange) with the key selling point being one of radical transparency being the first in Canada with a full cryptographic Proof of Reserve and regular public third party reporting to prove asset backing, a stark contrast to the deception implicit in Quadriga. Tokens represent losses from Quadriga, and the goal is to recover each and every loss token to products, services, or cash at the full discretion of affected users. All aspects of the recovery are best-effort and not covered by any sort of obligation or guarantee. The recovery will be structured such that all participants benefit from their participation and are incentivized to complete the recovery successfully.

An Initial Coin Offering (ICO)

2017 was a big year for Initial Coin Offerings, and we may see a repeat again very soon. However, the general data shows that participating in ICOs very rarely worked out for the investor. In cases where it did, it was often the case that the same coins or tokens could be purchased just months after the ICO for significantly less than investors in the ICO would have paid. A lot of people lost a lot of money.

While TxQuick may need some capital to launch, this is expected to be gained from accredited investors. Quadriga Initiative does not need your funds to start or participate. Participation for affected users consists of a 100% free claim process on the partner exchange. Participation for outsiders is primarily motivated by a desire to save money on products and services, effectively exploiting arbitrage when making purchases.

While the market value may be dynamic, all tokens have a fixed final value of $1. Either our mission is successful, in which case all losses of Quadriga represented in the tokens will be recovered, or our mission fails, in which case the free tokens will cease to have any utility. Over the process of recovery, tokens are generally exchanged for $1 discounts at the full discretion of token holders or to $1 CAD donated through a best-effort redemption. All discounts and redemptions come through partner businesses that participate as a sponsor in the recovery.

A Ponzi Scheme

The characteristic features of a ponzi scheme are an upfront investment of capital, no clear value proposition, and unrealistic returns (an impossible promise). By contrast, affected users nor any other participant in Quadriga Initiative are required to provide any capital whatsoever. There is no “investment” necessary. Participation is completely free for affected users, and others who wish to participate primarily buy tokens on an “as-needed” basis.

There is a compelling value proposition for each participant. Primarily, tokens can be exchanged for $1 worth of product or service from the participating businesses. For example, by keeping tokens in your account, you receive a $1 discount from each token as you trade. Other businesses will accept generally a percentage or portion of the purchase/payment price in tokens at face value. Token holders have free choice of using any of the businesses (or none of them), and only exclusive deals count towards the recovery. We have a set of rules for what counts and doesn’t, overseen by affected users.

Recovery is not in any way guaranteed and is being pursued on a best-effort basis. A successful initiative enables an affected user to recover the entirety of their loss, and enables the full recovery of the total loss amount. We’ve found that such is not just possible, but actually realistic on a multi-year time-scale, and for substantially less time and effort than the equivalent market salary. (An average labour market value of 5,000-9,000 man years.)

"GoFundMe" for Affected Users

The standard model of charity is such that advertisements or events which consist primarily to evoke pity, empathy, guilt, etc… are used to convince the public to make donations. A portion of each donation is then taken to fund the administration of the organization, including running the sometimes expensive advertisements that generated the donations in the first place, and some remainder (sometimes surprisingly little) reaches the actual cause the donor intended. This model can work effectively when there is a massive disparity in the utility which can be gained from the funds. For example, a starving child in a third world country will benefit significantly more from a $10 donation than will a rich millionaire in North America (even if the donor paid $100). While some affected users have been placed in absolutely horrible situations as a result of what happened, because affected users are generally living in Canada (a first world country), such a disparity does not commonly exist among affected users.

In addition, a great deal of empathy and sympathy are required for the model to work. While our market research found that there is demonstrable empathy among a portion (one fifth to one third) of the cryptocurrency community towards Quadriga victims, there appears to be substantially less than would be necessary to fund the massive shortfall caused through Gerald Cotten’s fraudulent actions. Some money was raised for one affected user from a fundraiser “Tong Zhou Recovery GoFundMe”, however many express the strong opinion that affected users should instead take full responsibility for their losses, including many affected users themselves. Even if enough members of the cryptocurrency community feel that a recovery is a worthwhile cause, they have to weigh this against other causes competing for their donation dollars globally. While the idea of righting a wrong is compelling, there are a great many wrongs in the world to be righted. For these reasons we have assessed that a pure donation model would not recover funds at a scale necessary to create a meaningful recovery.

In addition, there is a moral counter-argument. From a purely financial standpoint, such a fundraising model does nothing more than move money around from donors to recipients (and it does so highly inefficiently). By contrast, Quadriga Initiative utilizes businesses in the economy who actively create new value when they produce products and services. The utility of what they produce is higher than the utility of the raw materials/inputs taken to produce it, which is what creates profit. Quadriga Initiative works to capture part of this created value. When token holders make purchases, it creates new economic activity. A comparable charitable model would only serve to transfer losses from affected users to generous members of the community, and do so highly inefficiently.

To help illustrate the difference, we could first consider a model where each affected user would donate $100 to another affected user in a series of large circles. Even though we could have exchanged the full value of the entire loss from a series of such transfers, the reality is that nothing has actually changed. In fact, if there is any cost at all to those transfers, such a model will inevitably only serve to increase the size of the loss. While a charitable model means that the source of those funds is not always affected users, this only means losses move instead to unrelated “generous” donors. While it certainly feels good to know that others care, and it definitely feels better to give money generously than to have it stolen from you, the end financial result is still just an equivalent or larger “hole” than that which originally existed. Anyone who donated money has that much less money, plus the cost of the transaction, and didn’t receive fair value for what they gave.

By contrast, a small business could take that same $100, and use their skills, technology, and processes to produce $140 worth of economic value. Many businesses regularly operate on margins this large (and need to in order to cover fixed costs which apply regardless of sales volume). A generous business can donate the $40 discount, and reinvest the original $100 in a further loop, thus creating a perpetual cycle which ends with the same capital as it started. Or they could donate a $30 discount, and the size of the contribution in each cycle would perpetually increase. (ie. the business can contribute to the recovery and still profit by doing so.) Hopefully, you can see that this model is fundamentally different because each transaction is resulting in a value creation. The losses of Quadriga are recovered by the creation of this new value in a competitive free market.

In addition to being free for businesses to participate in (they can do so with merely providing any sort of exclusive promotional discount), Quadriga Initiative aims to provide a useful service to the participating businesses in the form of increased engagement, an effective price segment, a tool to attract and upsell prospects, etc… Consumers benefit from participation by saving money and businesses benefit by expanding their market share. Every participant has a strong incentive to participate and benefits significantly by doing so.

Hopefully this helps to illustrate better how the initiative works and maybe it solved some misconceptions you might have had. Please feel free to share your thoughts or post any questions!


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