Unboxing BendDAO #01: Why do we need financial statements in Web3?
Welcome to UnboxingDAO. Here, we “unbox” the financial status of different Web3 organizations by breaking down on-chain data and creating financial reportings. If you can relate to any one of the situations below, you’ve found the right place:
wanted to invest in a DeFi protocol/DAO but couldn’t understand 100% how the system works,
ever wondered where the contribution rewards are coming from, or where your investments are going to,
tried to track down a DAO’s financial activity but felt lost,
or wished there were financial statements for Web3 organizations.
When making investment decisions in Web2, we can always access financial statements, or written records that show the business activities and financial performance of a company. Companies are obligated to report Balance Sheets (B/S), Income Statements (I/S), and Cash Flow Statements (SCF) to their investors. If you find reading them challenging, you can always rely on business analysts instead to sort out insightful information from the reporting.
Meanwhile, decentralized organizations in Web3 are free of such obligations. If you are lucky, you might find a well-organized Dune analytics or a treasury page. But at most times, we are left with a few treasury wallet addresses in our hands — a bunch of raw data that no one dares to break down or interpret. When financial transactions are openly available on-chain but cannot be interpreted by anyone in the group, can we say that this is truly “transparent?”
Being able to actually interpret on-chain data is a completely different issue. That is, with easily interpretable and digestible financial information, DAOs can be even more transparent and decentralized. At the end of the day, this will help investors and DAO members make informed decisions, preventing another series of Terra-Luna crash or FTX collapse.
With trusted financial experts (CFA, CPAs) and highly experienced data engineers, our team aims to help investors make informed decisions by unboxing these black boxes. Our first step is to provide you with a financial statement of different Web3 organizations and DAOs, starting with BendDAO.
Have a quick look at how we’ve unpacked the entire operation of BendDAO. With this visualization, you can actually understand the different functionalities and consume it in a financial context. 😉
Unboxing Series 1: BendDAO
BendDAO is the first decentralized P2Pool based NFT loan protocol. NFT holders can borrow ETH through the lending pool using NFTs as a collateral, while depositors can stake their ETH or BEND to earn interest. Since there are various stakeholders (borrowers, depositors, DAO contributors, etc.) and financial activities (borrowing, staking ETH, staking BEND, NFT down payment, etc.), understanding BendDAO’s on-chain transactions is extremely complex and challenging.
While there’s a great Dune analytics to BendDAO transactions, we are here to create a financial statement for BendDAO to compare on-chain transactions with their docs, show BendDAO’s actual revenue stream, and whether debit/credit balances out. If you are familiar with BendDAO, hold BEND tokens, or ever staked your BEND tokens to earn veBEND tokens, this will help you gain a better understanding of the underlying value and financial performance of the protocol. Now, let’s deep-dive into BendDAO.
[Part 1] Sneak-peek of the financial statement of BendDAO
Financial statements, such as the balance sheet (BS) and income statement (IS), are crucial tools for understanding a company's financial health and performance. These statements provide important information about a company's assets, liabilities, and overall financial stability. What’s more, the common language of accounting builds trust within people in and out of the organization.
In Week 0, we start with the basics of B/S and I/S.
Balance Sheet
The balance sheet of BendDAO will include key account items listed below:
Each of these accounts will fit into the journal entry (JE) in the following format. The left side of the JE indicates “debit,” and the right side “credit.”
Cash and Cash Equivalents
ETH, WETH, BEND, and any other kind of tokens in the pool
Reserve cash coming from capital raising and deposits
Loan Receivable
Principal loans and interests that the borrowers must pay
Withholding deposit
ETH BendDAO should return to the depositors who staked their tokens to the pool
NFT (escrowed)
NFTs collateralized by borrowers
NFT (deposited)
NFTs that have to be returned to borrowers
NFT (transferred)
Liquidated NFTs that have been transferred into BendDAO asset
Retained Earnings
Cumulative net earnings
Capital
Capital initially used to create the DAO
Income Statement
The income statement will include key account items listed below:
Revenue
Interest Revenue: Interest received from borrowers
Marketplace Fee: Collected when an NFT is sold through BendDAO’s auction
Down Payment Fee: Collected when NFT Down Payment takes place on BendDAO’s platform
Expense
Interest Expense: Interest paid to the depositors
Loss on Disposal: Missing payment of borrowed asset due to liquidation
Compensation Expense: Incentives (i.e., BEND token) provided to depositors and borrowers for using BendDAO services
Airdrop Expense: BEND airdrops for promotion at the launch of the service
Bonus Expense: Compensation provided to the BendDAO dev team
SG&A Expense: General and administrative cost of operating the DAO
[Part 2] The ultimate guide to understanding the BendDAO protocol
In order to create such financial statements, we first needed to understand the operating structure of BendDAO perfectly, starting from its origin. The UnboxingDAO team has deep-dived into the BendDAO protocol like no one else, and we captured the full picture of BendDAO’s data on-chain to help you follow the flow.
Understanding B/S (Establishment of BendDAO)
First, let’s analyze the initial founding process of BendDAO to better understand the Balance Sheet. Throughout March and April 2022, BendDAO successfully raised 3000 ETH through the Initial Fair-launch Offering (IFO). In this process, BendDAO used 1 billion out of the initial 10 billion BEND tokens. Other uses of BEND tokens include Airdrop Expense, Compensation Expense, and Bonus Expense (The full list of IS Expense accounts is mentioned above).
How did BendDAO use this 3000 ETH? 66% was allocated to protocol operation (recognized as Operation Cost), and the remaining 34% was allocated to team operations (recognized as SG&A Cost). Upon tracking the use of funds allocated for team operations, we found out that 550 ETH were transferred to unknown personal wallets—expected to be the team members of BendDAO. We see that this 550 ETH were used for one of the following four purposes:
keeping in the wallet,
purchasing NFTs,
staking to BendDAO pools,
and purchasing APE tokens for staking.
Now, let’s take a look at the 1 billion BEND tokens distributed to the public. This is important to understand because the success of the BendDAO protocol and the demand for BENDs (i.e. their price) are closely linked; increasing demand for the BEND token (which provides utility) prevents the price of BEND tokens from dropping, creating a positive chain reaction that keeps BendDAO sustainable. Therefore, it is essential to understand the utility of BENDs in order to analyze the financial state of the BendDAO. Currently, there are three major utilities of BEND:
staking BENDs to receive veBENDs,
staking LPs earned from Uniswap’s BEND/ETH pool,
and trading BENDs on CEX and DEX.
Understanding I/S (Revenue Structure)
In order to create an accurate Income Statement for BendDAO, it is essential to understand the complex revenue structure of the organization. The UnboxingDAO team, consisting of highly skilled engineers and professional financial experts with CPA/CFA credentials, have delved into the code and thoroughly analyzed the entire process of how the BendDAO protocol operates. While we are not able to publicly share the details at this time, we have been able to gain a bird's eye view of BendDAO's revenue stream.
So far, we shared with you a part of what we’ve uncovered while analyzing BendDAO. We believe that the financial statements created through this process will be informative and valuable. At unboxingDAO, our goal is to "unbox" the financial statements of Web3 DAOs—starting with BendDAO—in order to bring a new paradigm to the Web3 investing ecosystem.
In our next newsletter, we will be providing an in-depth analysis of the Income Statement with actual numbers keyed in. Subscribe and stay tuned for further updates! If you have any questions or feedback, feel free to email us at unboxinglabs23@gmail.com.