Decentralized Science - BowTiedBioTech & BowTiedShrike

Level 2 - Value Investor

Welcome Avatar! We haven’t had a crypto niche post update on the space in a while so we’re doing that here for free. Usually, Wednesday is for paid posts but it doesn’t make much sense to do one now when CPI is coming out tomorrow.

Friday will represent the paid post and we’ll be back to normal schedule on Sunday. Would be meaningless to post something that is dated in 12 hours again especially after the constant news barrage out in the Middle East. With that here is a long-form update on DeSci with BowTiedBiotech!

Emphasis this is a guest post and we’re not involved with DeSci at this time.

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Is intellectual property the next crypto target?

An update on Decentralized Science

Welcome Avatar! Biotech and Shrike are back! For those of you not familiar with us, nice to meet you! We operate in our own corner of the Jungle with a deep focus on biology, translational medicine, and finance. We are not talking about the supplement market, but real, FDA-approved medicines. Like many in the Jungle, we see the utility of the blockchain to enable novel business models that aren’t just “speculative shitcoin trading platforms”. You are all aware of the applicability of this technology to finance (DeFi) and “art” NFTs. Another industry ripe for innovation is the world of science. Everything from the way academics publish their research, to the way those discoveries are moved out of academia into the biotech world, financed, and ultimately translated into medicines for patients. This is all happening today on Ethereum via Decentralized Science. We are about to bring you up to speed on the latest!

Blockchain Evolution: Beyond DeFi And NFTs

Many people believe “crypto” is dead, and have moved on to the current investment fads of AI and LLM. However, some people remain, and Ethereum remains an active chain. The current top uses for Ethereum are:

1. DEX - Decentralized Exchanges, swapping tokens

2. Unknown

3. MEV Bots – Bots monitoring the network to scalp fees off transactions

4. Layer 2 – processing transactions that help scale the network via Arbitrum and others

5. Bridges - moving tokens between different blockchains

6. Contract Creation – building new apps / support

These activities can be characterized as infrastructure that support Decentralized Finance (DeFi). We suggest that crypto is moving into the 3rd generation of application building on Ethereum:

Generation 1 (pre-2020): Infrastructure (e.g., DEX, bridges)

Generation 2 (2020-2022): Decentralized Finance (DeFi) and Art NFTs

Generation 3 (2022+): Beyond DeFi & Art NFTs

Ethereum was founded in 2013. For the first 7 years, the most significant development was infrastructure to support large scale transactional use. This enabled the first applications with real world utility. As one can imagine based on the popularity of Bitcoin for financial transactions, it was only natural that the programmability functionality offered on Ethereum would promote further innovation in the financial sector - thus the birth of Decentralized Finance (DeFi). We saw this happen in 2020-22, an EXPLOSION of blockchain enabled financial innovation. The first apps replicated many bank functions without the bank as a middleman. In theory, this reduced the middleman cost of the traditional banking system and offered superior products.

Of course, this came with all the growing pains of a new industry on a novel technology platform. The digital scammers and hustlers came out in full force and set the industry back a good decade. Security failure after security failure obliterated trust and drew the attention of regulatory agencies and law enforcement. Without going into too much detail, a similar situation evolved in the “art” NFT marketplace.

We are now moving to Generation 3 (beyond finance and “art” NFTs) and seeing projects emerge which utilize blockchain technologies to run their underlying models. These are projects with utility beyond financial derivatives. These are not scam coins that trade off pump-amentals, but enterprises that use the blockchain functionality to differentiate and draw competitive advantage vs traditional business models. About a year ago we previewed a Gen3 utility which is in its infancy - Decentralized Science or DeSci. One year later the industry has continued to grow and we are back to update you on everything that has been happening and why the future of science is bright.

Decentralized Science

This brings us to the topic of Decentralized Science (DeSci), which in our view is one of the handful of legit business models with utility evolving on Ethereum.

We have written about DeSci extensively in 2022, and why Pharma made a bet on it. However, a lot has happened in the last year and this field is starting to mature into something interesting.

If you are not familiar with DeSci, decentralization in science represents a new way of doing science. Broadly it represents new ways of funding, collaboration, material transfer, publishing, and intellectual property.

Source

The autists may have noticed the source of that table is the Ethereum foundation. Ethereum founder Vitalik Buterin recognizes DeSci as a main use case on Ethereum.

DeSci is growing at an impressive clip. UltraRareBio maintains a chart on DeSci progress. Compare the current chart (below), with their chart we shared with BowtiedBull readers last year

Of these many DeSci initiatives, we focus again on VitaDAO because it is the most mature DeSci DAO, and continues to innovate with new web3 primitives.

VitaDAO overview

VitaDAO is a DAO centered around promoting longevity and increasing lifespan. Their approach is to catalyze longevity research through a mix of investments in the “Valley of Death” between academic and corporate research, development of new tools to facilitate investing in research, and other initiatives to apply the benefits of web3 to science. We gave an earlier overview of VitaDAO for BowtiedBull readers. This is an update on some of their recent advances.

Recent initiatives include several DeSci infrastructure advances, including the successful fractionalization of an IP-NFT, development of on-chain legal primitives for governing IP, an overlay journal called The Longevist to highlight upcoming longevity research, new ways of peer review, and funding 17 longevity projects to a total of over $4M.

$VITA is the governance token for VitaDAO. Token holders do not receive revenue from any successful exits from the funded projects. Instead, those funds go back into the treasury to fund new research. However, in exchange for funding projects, VitaDAO may receive intellectual property (IP) rights that are developed during the project, or shares of companies in which it invests. Thus, the governance token gives the ability to allocate funding to new projects, contribute to governing the IP, and providing input into project exits without expectation of profit.

Autist Note: the potential to distribute profit is not non-existent, but due to evolving regulatory law in this space it is important to separate rights to returns vs decision-making. A clear link to financial return would risk the $VITA token falling under securities law. However, it is possible at some point in the future that token holders propose to distribute profits/treasury. At this point the DAO would need to dissolve or comply with security law. Until then, all token holders understand they are buying a governance token with no expectation of profit. Disclosure: this is our understanding as outsiders from reading their materials. We encourage you to check directly with VitaDAO for the official legal implementation.

Fractionalization of IP-NFT

While many people still consider the apex of NFTs to be drooling ape pictures (also pitched as “art”), VitaDAO has used NFTs to innovate new legal primitives. VitaDAO previously introduced “IP-NFTs”, where intellectual property is represented on-chain via an NFT. One advantage of moving IP on-chain is that it can be fractionalized. This was done with an IP-NFT issued for work in the Korolchuk lab to develop new autophagy-activator drugs.

To fractionalize the IP-NFT, the Vita-FAST token was created. This token represents membership in an IP pool governing the IP-NFT. Members (i.e. token holders) have governance rights in the IP-NFT, access to the underlying confidential data, and a duty of care for terms and conditions, the underlying FAM agreement (google docs link), and confidentiality (necessary to preserve IP!). Signing a confidentiality agreement is necessary to access the data, but not to hold the token. There is not a way to sign anon yet, because this poses high risk to the IP.

These rights, terms and conditions use an adhesion contract for Vita-FAST to attach the IP rights to a token. Other projects that use adhesion contracts include CryptoPunks and the Viral Public License for Miladys. This contract adheres at point of purchase, when voting in governance, when accessing non-public data, and when claiming proceeds from any licensing or sale of the IP-NFT, IP, etc. Notably, on legal advice, purchase of Vita-FAST by US persons is prohibited by Vita-FAST terms, and US persons are restricted from governance until permitted by law.

VITA-Fast tokens were distributed to seed a liquidity pool and to stakeholders, including the researchers, the university, the VitaDAO Deal-flow working group, with 69% reserved to VitaDAO. The university, working group and researcher tokens are vested. 10% of Vita-FAST was sold to the public in a “fair auction” with a total target raise of $31,271. The round was oversubscribed, with $620k bid. Bidders received an amount of Vita-FAST in proportion to the amount they bid, with the amount in excess of the target returned to bidders.

Vita-FAST tokenholders are now setting up the mechanisms by which they want to govern the IP-NFT. Notably, this mechanism includes VitaDAO agreeing to not vote with more than 50% of the tokens available to others. This allows VitaDAO to retain a voice in the IP-NFT, while enabling other stakeholders’ to have meaningful input into governance. Note that no revenue accrues to the token automatically, though token-holders could vote where to direct proceeds that come from licensing, selling or otherwise commercializing their IP.

It is worth noting that access to IP, and developing IP, lacks precedent for being classified as a security. Governance over IP is neither a company nor shares in a company. The fractionalization of the IP thus represents a legal primitive to enable IP commoning: it gives cross-licenses among token-holders for the specific purposes of joint development and experimental use of emergent IP. For a non-token analogy, consider 4 inventors on a patent making decisions about the patent, or assigning patent rights to a university. The patent is never a security. US persons were prohibited out of an abundance of caution due to the erratic behavior of the US Securities and Exchange Commission.

However, one future opportunity IP fractionalization makes possible is the ability to securitize IP. A fund could be created in the future that aims to hold specific types of IP rights, or a broad basket of IP rights instead of investing in the company itself. This would allow more granular focus by investors on specific inventions.

Other catalysts

In addition to the IP-NFTs, VitaDAO is developing collaborative approaches for evaluating science. VitaDAO performs scientific assessments for other organizations. VitaDAO aims to expand this program to accredited investors.

VitaDAO plans to launch a token-gated “sidecar fund” for accredited investors who want access to early stage projects, but lack the expertise to choose projects. VitaDAO performs due diligence on the project by providing an assessment of the project’s merits. The accredited investor then uses the assessment to decide if they want to support the project or not.

In other investment cases (real estate), the usual way this set up works is that the assessor saves the best projects for themself, and passes the lower quality projects on, while collecting a fee for those projects. The assessor may also shill their investments when they need exit liquidity.

Two differences from the real estate model are scale and unpredictability. One difference at play is scale. VitaDAO has deployed ~$4M in funding in its two years of existence. In the same time period, the National Institutes of Health deployed ~$76,000M in funding. And the NIH rejects 75-85% of biomedical research projects. Of these rejected projects, one third of them are ‘great’, but not ‘excellent’. So there are more good projects out there than funding available.

Related to this issue is that of unpredictability. Do ‘excellent’ projects lead to patentable drugs more often than ‘great’ projects? Hard to say. In biotech, rock solid ideas proposed by outstanding teams often fail even after they’ve made it to the clinic. The projects VitaDAO is assessing and funding have not yet made it to the clinic, so projects that sound good to experts can still fail. After filtering for baseline competency, choosing winners and losers at this stage is more luck than anything else. This is evidenced by the hit rate for the professionals: ~1% of their of preclinical investments go on to become approved revenue generating products. Contrast that with real estate, where winning deals can be accurately identified by many people.

If biotech is a roll of the dice, why bother with an assessment? One major benefit is filtering out low quality ideas and plans that have zero chance of success. This is not easy for a non-expert. The other benefit is that it gives the investors and the team another perspective, which can help them anticipate and avoid problems later on. The benefit to VitaDAO is that it expands the amount of longevity research being done.

VitaDAO is exploring two initiatives to change peer review: The Longevist and The Longevity Decentralized Review (TLDR). The Longevist is an overlay journal, meaning they select pre-prints that can be published in other journals. The purpose of The Longevist is to highlight outstanding, upcoming longevity research. This helps solve the problems of getting buried in sifting through the thousands of pre-prints, and provides an expert opinion on the research. For non-scientists, The Longevist is another way beyond X for finding exciting and new research before it gets published in traditional journals.

Closely related to The Longevist is TLDR. This is a new approach to scientific peer review. Normally, peer review is done for free by academics. In contrast TLDR aims to compensate reviewers for providing peer reviews of new research in the field of longevity. The reviews stand independent of the scientific journals, and are publicly available, so both authors and the public can see the strengths and weaknesses of the research. Decentralization comes from the ability of anyone with the credentials to provide peer reviews in this mechanism. The tl;dr for TLDR is that VitaDAO is trying to improve the scientific infrastructure, with a focus on longevity work.

Other funded VitaDAO projects

VitaDAO has funded 17 research projects related to longevity, which places VitaDAO third for number of longevity-related deals made since 2018. Most awards are $50k-$300k. In academia, those amounts represent typical funding for a pilot study on the low end, and a 2 year high-risk, high-reward project backed by some preliminary data on the high end. Seven of the funded projects use the IP-NFT mechanism, while 10 projects have equity deals. VitaDAO is also exploring funding projects proposed from within the community, using contract research organizations to perform the experimental work.

Organization/Decentralization

As may be surmised from the legal aspects of intellectual property and equity deals, VitaDAO needs to balance legal risks with decentralization and life on-chain. Many DAOs get treated as general partnerships, which exposes governance token holders to liability. VitaDAO uses a Canadian company to coordinate its real-world assets, and its deals with non-web3 entities.

The Canadian corporation representing VitaDAO is VitaDAO Global Services, Inc. This entity is used for the operations of the DAO’s Coordination Working Group (eg legal, governance, finance functions). VitaDAO Global Services also manages Service Provider relationships.

The primary Service Provider is Molecule AG, which is one of the single-largest holders of $VITA. Strategic contributors from the January fundraise include Pfizer and Balaji. Strategic contributors also contribute to DAO activities (e.g. sourcing new deals, vetting deals). VitaDAO reports on the token distribution, team unlocks, etc.

From the VitaDAO link above

On-chain assets are held by the DAO, and can be seen at vitadao.eth

VitaDAO uses an agent-centric model to fund corporations, and when it cannot act on-chain. In general, this is securing loans to 3rd party agents to fund companies. The loans are secured against the company equity or convertible debt.

Overall, VitaDAO is using web3 technology and ideas to reimagine funding early stage biotech, but it is treating web3 as a tool instead of ideology. Solving problems at the intersection of web3 and biotech funding is prioritized over decentralization for the sake of decentralization. However, decentralization remains a long-term goal.

VitaDAO itself has moved to “seasonal governance”. Governance proposals are solicited all together in a series of blocks. This enables proposals to be considered side-by-side. It also allows time for passed proposals to be implemented. In addition to science projects that are submitted for funding and consideration, VitaDAO has other infrastructure needs that it funds. Since attention is the name of the game, if you are able to drive attention to VitaDAO, you can submit a proposal to do this in a concrete way during seasonal governance and get compensated for it.

Challenges

VitaDAO remains in virgin territory when it comes to the infrastructure and initiatives it is building out. It is not clear how much adoption will be seen, or how it improves DeSci infrastructure. However, this is a risk endemic to all of DeSci. VitaDAO is one of the most lindy players in this arena.

The risk profile in this part of biotech is high. While most projects will advance knowledge, turning that knowledge into IP that can be commercialized is hard, and requires luck. VitaDAO’s projects are too early for any commercial successes yet, but they may not be successful in the future. Since the projects typically produce publications and advance knowledge, yeeting your ecom gains into biotech will provide a greater benefit to humanity than yeeting them into dog coins, even if your $$ goes to zero in both cases. But with academic stage projects, you could also donate the money to a university to be specifically used by a specific lab for a defined project, get a tax write-off for the donation, and maybe some IP access.

The risk profile on the fractionalized IP-NFTs is even higher. On one hand, the Vita-FAST auction price was $0.32, it hit $3.81, and it trades ~$1.28 as of 9/25/23. On the other hand, the underlying IP is in its infancy. That means there are many places where it can fail, sometimes through no fault of the scientific team. If it fails, the IP value can drop to zero. This can happen at each hurdle. On the flip side, each hurdle the science clears increases the value of the underlying IP. But you are concentrating all your risk on one project succeeding. In contrast, VitaDAO needs one of its 17 projects to win.

$VITA-FAST token chart

The liquidity on $Vita is low, which can lead to slippage and arb bot feasts when purchasing or selling the governance token. This was seen recently in a transaction by a whale who bought ~3M $Vita in the first public offering. This whale dumped 1M $Vita (>$1.7M at the time) and lost >$600k to MEV. This sale cut the token price by ~50%.

Autist Note: Discussion in the VitaDAO discord noted the positive aspects of the whale sale event. It reduced the largest $VITA holder from the genesis auction, who had been recently inactive. This reduces the ability of a single stakeholder to manipulate price and influence governance. But the whale still holds 2M $VITA. Those who felt priced out by the 3x gain over the last year now have a buying opportunity.

Token disclosure

BowTiedShrike – I have a small stake, which has come from contributing to the DAO. I enjoy thinking and talking about the proposed science, and I hope VitaDAO succeeds. With the introduction of delegated voting, I may apply to be a delegate for token voting on Snapshot. The team and DAO have continued to innovate and develop new infrastructure and primitives that have many applications outside of science, and appear to be planning for the long-term. From a financial standpoint, this remains a degen version of biotech, and biotech was the investing casino prior to crypto. Some of the science needs to pay off at some point for this to be a success, but science is a long term game. Many of the projects they support will fail, but the ones that win can win big.

BowTiedBiotech - We currently do not own any tokens. This project comes with high risk and we view the current community/token holders as those truly involved for the governance token in the short term. Drug development is a long process (10+ years) so VITA coin holders should not expect a quick flip. Although important to note, significant value could be realized in a 1-2 year time period as value is unlocked from IP advancement at many different stage gates ahead of an actual product approval. For example, if the DAO is successful with one of its academic investments and the new IP is licensed to a pharma company for a significant upfront payment that would represent likely millions of dollars coming back to the DAO. VitaDAO also invests in standard venture capital equity financings. If one of their equity investments was to exit within the next 1-2 years again, that could represent multiple millions of dollars coming back to the DAO. Also important to note, the current setup is NOT to distribute these proceeds to token holders, but to use the financial gains evergreen to finance additional science. However, one would expect the value of the token to rise alongside the value of the underlying treasury and IP portfolio.

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BowTiedBull Note

Emphasis this is a guest post and we’re not involved with DeSci at this time.

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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We’re an advisor for Synapse Protocol 2022-2024E.

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