WAX — An Exchange Platform under Construction

04.06.2018

TL;DR. Ecology:3. Technology:3. Decentralization:2. Valuation:3. Rating:3/10

Introduction

(Update 2018-12-04: Please see the semi-annual ratings review of WAX here.)

WAX, short for Worldwide Asset eXchange, was first announced on bitcointalk.org on the 5th of October by user tkbx, informing about a token sale that was to start on the 27th of October.The project aims to build a decentralized marketplace platform for digital goods like virtual gun designs (skins) or other digital collectibles, and it is lead by the founders of OPSkins, a large, successful marketplace for in-game items. By utilizing a blockchain-based token, the project hopes to mitigate costly back office functions that must process a myriad of national currencies, and instead introduce border-less, friction-less trading of the virtual items in question. So in a way, WAX tries to disintermediate its old centralized business model while opening up for new ways of making profits.

The WAX token, so far of the ERC20 standard, is planned to be used as the medium of exchange on the WAX based trading platforms. In that regard, WAX can be seen as a utility token on top of the Ethereum network, yet there are plans to later base WAX on a completely new blockchain which makes it eligible for a BD Ratings grade. That blockchain has a planned launch of Q4 2018. The old ERC20 tokens will coexist with the new tokens that are to be issued on a old/new token ratio of 1:1.

The consensus model picked for this new blockchain is the EOS DPoS (delegated Proof-of-Stake) model, where WAX holders delegate verification responsibilities to what is called guilds. It seems that these validating guild nodes receive only transaction fees as there are no block rewards.

Just before the issuance and distribution of the ERC20 tokens to crowdsale participants, an announcement was made about a ten-fold increase of total supply. 1 ETH contributed in the main sale gave 1 500 WAX instead of 150 WAX. The stated reason for this change was to make micro transactions more calculable. Total WAX supply in existence is thus 1 850 000 000. The distribution process finished after some troubles on the 2nd of January 2018 and resulted in a total of 35% of all tokens being issued to crowdsale participants. 20% of the tokens were claimed by the WAX team, 15% went to early contributors and advisors, and 30% were reserved for what is called "Market development" which seems to include new developers.

In December 2017, WAX tokens went live on OPSkins, meaning users could trade skins with WAX. Soon thereafter ERC721 tokens like CryptoKitties were tradable on OPSkins as well.

Ecology

Focusing on the money-like properties of WAX and not its utility in siloed environments like OPSkins, BD Ratings conclude that a high economic activity is essential for long term trust that value can be stored on this ledger. Having lead developers with background in the successful OPSkins venture then is something positive for the Ecology rating. They likely understand what was lacking in the old model and can try to mitigate those pain points for the new model, resulting in economic activity on top of the chain.

Looking at the number of transactions per day for the ERC20 token, we can see that there are between 100-200 transactions per day, so not very many.

The tenfold supply increase just before WAX ERC20 tokens became tradable turned out to cause confusion on the market. As WAX was listed on Huobi, traders seem to not have picked up on the supply increase as they initially traded WAX as high as USD 16. The price quickly went town to USD 0.5. A 16 USD token price resulted in an insane valuation of over 20B USD, for some ERC20 tokens. The WAX team drew criticism because of this miscommunication, and BD Ratings can't imagine how they thought a tenfold supply increase just before an important exchange listing possibly could have been a good idea.

WAX seems to have changed Medium account after conducting the crowdsale. The bitcointalk.org announcement thread continuously refers to another Medium account which now is inactivated. This obfuscate the whole crowdsale period of the project a little bit as that information was mainly on the old account. The old sub-reddit was moved as well. Luckily, the whitepaper brings up these details properly. At the time of this minor re-brand, it seems a mandatory KYC process was introduced as well. It might have been referred to in the whitepaper but it it obvious many investors missed that part, and it is the first time BD Ratings see KYC activities after funds have already been sent to the contribution address. A cynical guess would be that the WAX team realized they may have been too close in breaking security laws, and hedged with said rebrand and KYC-process.

Grade: 3

Reasons: Mainnet not yet launched. Small token use-case when comparing to the generalized blockchains.

Technology

Two of the founders of WAX, William Quigley and Jonathan Yantis, cofounded Tether, the popular USD token used by many exchanges. So they do have engineering experience. The WAX GitHub repository is not active however and there is no trace of them building on the new codebase yet.

WAX has chosen to develop what they call the protocol token on an EOS code base (not on top of the EOS chain). They may have their reasons for this - probably an emphasis on high transaction throughput - but the code is not tested in the wild yet. This is a gamble from their side, and BD Ratings wonder if the engineering team has considered future second layer solutions that are being developed on Ethereum, where capacity for ERC20 transactions would increase as well. On top of the extra insecurity of deciding to copy an untested codebase, there is also the huge task in actually launching and maintaining the new chain in a safe manner; it is quite different from building regular applications as the open source attract attackers. The WAX team has not really addressed this task. Serious EOS mainnet bugs were discovered recently, which point to the high difficulty in getting everything correct at the first try.

Since the WAX team chose a zero inflation policy for the protocol, guilds will be incentivized to create blocks and include transactions only if there are transaction fees. BD Ratings understands the need for low or no inflation in a cryptocurrency protocol, but it is a bit ironic that WAX discarded the idea of using ERC20 tokens because of this very issue; the ETH network is so popular that the transaction fees some times are uncomfortably high. If WAX wants stable guild participation without having to put trust in their willingness to maintain the network, there better be enough payouts in the form of transaction fees later to incentivize them.

Grade: 3

Reasons: Mainnet not yet launched and code not yet public. Untested EOS-based blockchain.

Decentralization

BD Ratings see an issue with the fact that only 35% of all existing tokens were issued to the public during the crowdsale. As WAX will introduce a new EOS-based blockchain with DPoS as consensus algorithm, it is important that tokens are distributed broadly. If any entity manages to obtain a large piece of total supply, that entity may be able to control the ledger by delegating power to itself.

Another centralization aspect of the whole venture is that it is lead by a company with an already established business model and revenue stream. Regulatory pressure could certainly result in WAX/the OPSkins team cancelling the project. This threat comes from both AML laws and Securities laws.

Grade: 2

Reasons: Token concentration. Project lead by company.

Valuation

Grade: 3

Reasons: ERC20 WAX tokens worth over USD 300M, counting the total supply as is appropriate in this case, seems way too high. WAX is a utility token; it does not have security-like aspects where the owner is entitled to future revenues. It is also not yet a protocol token/coin like BTC and ETH, and so has a very hard time obtaining any meaningful money properties, and certainly not store of value properties. This low Valuation rating might change to the better once WAX manages to launch its protocol token and prove the network is secure and decentralized, but until then BD Ratings is highly skeptical of the valuation and can just sigh when seeing the extreme valuations present during the cryptocurrency peak of Dec 2017 - Jan 2018.