Audius x Prime Trust: Shades of Alameda Research
Dissecting the latest crypto-custodian calamity, making sense of $AUDIO, and an updated look at HSEP.
Crypto has yet another centralized custodian that has been having issues in recent weeks. Don’t worry, no stadium naming rights agreements are in jeopardy this time around. That said, there are some unfortunate similarities between what is currently going down at Prime Trust and what was happening at FTX/Alameda Research last November. The biggest of which involves diabolical overexposure to a highly illiquid, probably unnecessary shitcoin altcoin token.
Brief Rundown
Earlier this month, BitGo started kicking the tires on an acquisition of Nevada-based Prime Trust.
A couple weeks after the announced buyout, BitGo backed out of the deal.
Then a few days ago we learned Nevada has officially filed for receivership of Prime Trust.
If that sounds familiar, it’s sort of similar to how Binance almost acquired FTX and then backed out days later after a closer look at the books. Of course, it isn’t a perfect analog as I don’t suspect BitGo’s founder and CEO took measures to ensure that Prime Trust needed a bailout in the way Binance Don CZ whacked FTX last November. And unlike Prime Trust, FTX/Alameda didn’t lose access to on-chain crypto wallets. But there are still some similarities that are just as disturbing.
Prime Trust apparently has $85 million in fiat-based liabilities but just $3 million in cash. Since the degens in this industry just can’t seem to help themselves from using assets that don’t belong to them, Prime Trust reportedly started using customer assets to fulfil withdrawal requests even when they didn’t belong to the people requesting the withdrawals.
That’s bad, but the biggest WTF similarity between Prime Trust and FTX/Alameda is the absolutely abhorrent overexposure to illiquid altcoins on the balance sheet. According to data from Arkham Intelligence, Prime Trust’s crypto holdings are valued at $65.7 million - of which, roughly 88% is tied up in the governance token of the Web3 music streaming platform Audius ($AUDIO):
Prime Trust’s $AUDIO position is so big, it’s actually holding 31% of the token’s circulating supply:
Total Token Supply: 1.18 billion
Circulating Supply: 1.05 billion (89%)
Token Price: $0.173
Market capitalization: $181 million
Market Cap Rank: 140
I’ve actually heard of $AUDIO before all this and have dug in on the coin’s token economics in the past. It was originally launched on Ethereum ($ETH) but has since bridged over to Solana ($SOL) for faster transactions. The coin was launched in conjunction with the Audius music streaming platform. The primary utility of the token is for governance over platform decisions but the coin can also be used within the Audius platform for tipping artists.
The Idea Isn’t All That Crazy
If you’ve followed my worth over the last couple years, it’s probably not a surprise I believe the creator economy is going to benefit from what blockchain enables. This is one of the reasons why I'm so intrigued by things like Brave Browser, music NFTs, and some of the attempts at decentralized social media networks. I believe what we understand as "likes" today will be replaced by micropayment “tips” years from now; and we’re already starting to see this sort of thing on networks like Nostr as well.
One of the creator industries that I think will see serious disruption from both public blockchains and tokenization is the music industry. Applications like Audius that use public blockchains to connect the listener and the creator more directly can allow for the musician to unlock more value. This ends up being a dramatic shift from the current model because “Web2” companies likely don't benefit financially from shifting to “Web3” even if the platforms start integrating micro-tipping and things of that nature.
The tokenization model is a little bit different from the traditional equity model because the users are the “stakeholders” in the token model. The Web2 comparison would be like if all Spotify SPOT 0.00%↑ users were granted stock simply for using the platform; this obviously doesn't happen.
While the numbers are admittedly small compared to more recognizable streaming platforms, Audius has been experiencing platform growth in 2023. Plays came in at 12.1 million in May - up from 11.2 million in April. Also in May, unique users surpassed 5 million. Like many other tokens in the crypto market, governance as a legitimate utility is, at best, questionable. The last Audius proposal was in April and it passed with just 3 voters actually participating.
From where I sit, there’s nothing wrong with liking Audius or $AUDIO - there’s probably a lot wrong with buying a third of the coins in circulation, however. Not to go all Bitcoin Maxi here, but why can’t $BTC just be the tipping coin in an application like this? Does a platform really need an inflationary governance token when nobody is ultimately using it to vote on proposals?
Then again… Nasty Nas was involved in the last funding round and that guy can’t miss. The bigger concern I have is for current $AUDIO holders not named Prime Trust - those Prime Trust $AUDIO coins have to go somewhere in a liquidation process. Is there enough demand? I’m not so sure.
While Prime Trust may have a hard time liquidating its portfolio, the Heretic Speculator Equity Portfolio is chugging along and hasn’t had any problem selling shares...
Keep reading with a 7-day free trial
Subscribe to Heretic Speculator to keep reading this post and get 7 days of free access to the full post archives.