The two-story house sits on a quiet street in the Fauntleroy neighborhood of West Seattle, a few hundred yards from Puget Sound. Clad in red cedar shingles with a well-kept yard, the five-bedroom, 3,600-square-foot house offers sweeping views of the water.
But no family lives here. The house is owned by RChain, a Seattle-based cooperative that uses the property as its base of operations. RChain is building a decentralized computing platform based on blockchain technology. The founder of RChain and president of its board, software engineer Lucius Gregory Meredith, says that its platform, also called RChain, will handle far more transactions than competitors, with potential applications in industries as varied as music streaming, file storage, and journalism.
The co-op’s purchase of the home is just one of the unusual aspects of its story, which is a microcosm of the boom-and-bust world of cryptocurrency – complete with heated controversies, high-profile defections, and plunging financial valuations that have left the future of RChain in question.
Despite raising $31 million in an initial coin offering at the end of 2017, RChain missed a major release deadline in December and has run into financial difficulties. It’s currently unclear when – or if – the company will release its flagship blockchain product, as well as a music streaming app that the company has spent millions of dollars developing.
While the firm is still in operation and developing its product, the West Seattle house, purchased by RChain in April 2018 for $1.5 million, currently has a sale pending after its list price was reduced to less than $1.3 million. A $1 million loan against the property was taken out in November, which Meredith said was used to fund ongoing operations, which are currently costing $750,000 per month.
Meredith, the public face of RChain and its chief software architect, has come under criticism from members of the co-op, investors and partners over his business decisions and management of the company. After knocking on the door of the West Seattle house, GeekWire met Meredith, who agreed to an interview.
During that interview, Meredith said that RChain has the funds necessary to finish the project. A test version was released in September 2018. But the “mainnet” launch of RChain – code named Mercury because each release is named after a planet in the solar system – was supposed to happen at the end of December, and has been delayed.
However, Meredith said the project is still under development and should be released within months. “With luck, we’ll be out Q2 (second quarter of 2019),” he said, calling that “much more realistic for the main net. Early part of Q2.”
Greg Heuss, the managing partner of Reflective Ventures, a venture firm that has invested in 23 blockchain startups using funds provided by RChain, said of the delivery timeline, “We’re very hopeful. But hope is not a strategy.”
A balance sheet released by Rchain during its annual member meeting in October 2018 showed that its liabilities exceeded its liquid assets by more than $10.5 million. Further, the value of the cryptocurrency, called RHOC, issued to investors by the company during its fundraising, known as an initial coin offering (ICO), has fallen from a high of $2.86 to less than 3 cents at the time of publication. Where it once was ranked around No. 30 on the CoinMarketCap list of cryptocurrencies by market cap, RHOC now stands at No. 232.
This puts financial pressure on RChain, which held a substantial portion of its treasury in RHOC. More than 200 million RHOCs were also given by RChain to Reflective Ventures and another venture firm, Pithia. Both firms signed deals with RChain in 2018, when the value of RHOC was much higher.
Bold promises from blockchain promoters
Meredith chose to found RChain as a cooperative association, a business run for the benefit of its members. The most well-known example of a cooperative business in Washington state is retailer REI. All of the investors in RChain are also members of the co-op, which requires paying a $20 fee and being actively involved in contributing to the development of RChain in some way.
Understanding why Meredith chose to make RChain a cooperative requires understanding a bit about blockchain technology and the ideology behind it.
Meredith, a former senior software architect for Microsoft, told GeekWire that the idea for RChain started when an entrepreneur approached him around 2009 with an idea to build a decentralized social network. The entrepreneur, who uses the email signoff, “Love to all Beings,” was worried about the large amounts of personal data accumulated by tech giants such as Google and Facebook, and thought they could be harmful to society and democracy.
According to Meredith, the social network project fizzled because there was no monetization model without relying on ads and saving user data. But bitcoin, which came into existence in January of 2009, offered a way to add a payment system. Bitcoin is based on blockchain, so Meredith began looking into the emerging technology.
The idea that blockchain can improve privacy is one of the principal arguments promoters of the technology make. Blockchains are essentially shared databases that are secured by cryptography, and all kinds of data can be stored in them. Cryptocurrencies are an application of blockchain technology, and at this point they are the only application that has attracted any meaningful user base.
In selling blockchain and cryptocurrencies to investors and the public, promoters claim they will make the internet more democratic because they remove the intermediaries – whether centralized social networks like Facebook and Twitter or financial institutions like banks – and return power to users. They also say that blockchain has applications in gaming, digital identity, supply chain, file storage, journalism, and other fields. It is a story which, if you believe advocates, doesn’t conflict in any way with creating highly profitable businesses for investors.
And, for a while, the decentralization story was successful in attracting investors to the blockchain space. Bitcoin started 2017 at $1,000 and ended that year at $19,500. But since then, its value has fallen more than 80 percent. Other cryptocurrencies, of which there are more than 2,000, have fallen by even greater percentages. The total market cap of all cryptocurrencies has fallen from over $800 billion in early 2018 to $125 billion today. In the last two years, billions of dollars were raised by blockchain startups in so-called initial coin offerings (ICOs), which are a cryptocurrency-enabled fundraising method.
ICOs are unregulated by most governments and exist in a legal grey area in the United States. The U.S. Securities and Exchange Commission has gone after multiple ICOs for breaking securities laws, including the recent settling of two cases against ICO issuers in November of 2018. ICOs are legal in most European Union countries and many other jurisdictions around the world, though some places, such as China, ban them.
The path to RChain
Around 2015, Meredith joined a company called Synereo as CTO. Synereo was building a decentralized social network and raised $4.7 million in September 2016 via an ICO. Meredith told GeekWire that the conceptual work for RChain began in late 2015 when he realized that blockchains that relied on proof-of-work or a sequential execution model wouldn’t work for the Synereo project. He said that by the spring of 2016 he was discussing it openly with the Synereo team. The CEO of Synereo, Dor Konforty, said that RChain wasn’t discussed within the company until the second half of 2016. In any case, differences between Meredith and Konforty arose in 2016 and Meredith was removed from his position by the shareholders of Synereo in December of that year.
“For the past two years, Greg has not shown that he’s able to deliver any piece of functioning code,” Konforty said at the time. Meredith, for his part, told GeekWire that Synereo attempted to trade on his reputation to raise funds for the project. According to him, when the time came to build the blockchain he was designing and which Synereo had promised their investors, the company’s leadership changed its mind.
When contacted for comment, Konforty said in a statement to GeekWire that he had “nothing further to add to the information that is already out there.”
In 2017 Meredith decided to continue building his technology under the name RChain, though by now his vision had expanded beyond just social networks to create a general purpose blockchain. The RChain Cooperative was founded in the second week of January 2017 by Meredith and several associates. Meredith was chosen to be president of the board.
The RChain team knew that building a blockchain network on its own wouldn’t be enough to attract users. So, in addition to founding the RChain Cooperative, Meredith and others, including Ed Eykholt, a former manager for technology firms such as Alstom and LexisNexis, and Evan Jensen, a Seattle attorney, founded another company called RChain Holdings in early 2017. RChain Holdings was a for-profit venture firm responsible for funding startups that would build applications to run on RChain once it was finished.
The strategy was that the co-op would be responsible for developing the underlying blockchain platform, while RChain Holdings would raise funds and build a community of developers and companies to develop decentralization applications (dApps) on it once it was built. This dual structure is common to blockchain startups, though RChain’s version differed in one key respect. Most of the time, the organization tasked with building the platform is a non-profit entity, often a foundation, while a for-profit company is in charge of developing businesses for the ecosystem. In RChain’s case, both organizations were for-profit entities, though the cooperative is supposed to be managed primarily for the benefit of its members, who can simultaneously also be investors.
Eykholt became CEO of RChain Holdings. He told GeekWire that RChain Cooperative received about $1 million in cryptocurrency in mid April 2017 from its AMP-to-RHOC redemption process. AMP was the cryptocurrency that was used in the Synereo project that Meredith had worked on.
Despite that, things were slow at the beginning for the RChain project. Eykholt said, “Without a demonstrable RChain platform in 2017 (and much of 2018), there wasn’t very active marketing for Holdings nor portfolio investments that made sense for Holdings during 2017.” But RChain was in the right place at the right time: the ICO market heated up significantly over the course of 2017, with more and more blockchain startups launching as the year went on.
With market conditions improving, the RChain leadership decided to launch its ICO, with the goal of raising $15 million for the co-op. RChain chose to do a private sale to accredited investors, offering digital tokens called RHOCs at a price of 20 cents each with a minimum investment of $50,000. Once the blockchain was built, RHOC tokens would allow users to pay for the use the dApps running on top of it. However, from an investor’s perspective, speculating on the value of RHOC was an equally compelling reason for participating.
The ICO, which lasted a month, ended up selling $10 million worth of RHOC. But around the time the sale had closed or was drawing to a close, a new investor stepped up wanting to buy the unsold $5 million. By this time, the cryptocurrency ICO market was really heating up, with bitcoin touching $5,000 in mid-October 2017. Other investors, upon hearing of the new offer, also wanted in. This led RChain to hold another sale in December, where the company raised approximately another $21 million for a total amount raised of around $31 million.
After the money came in, the problems began
Problems started with RChain as soon the money from the ICO came in. According to an investor who put around $1 million into RChain, “In late 2017 Greg Meredith was ‘hacked’ and hundreds of thousands worth of crypto were stolen from a co-op wallet. No serious investigation has been done and the issue has not been mentioned since even though promises were made.”
In an interview with GeekWire, Meredith confirmed that $300,000 of investor funds was lost in the hack. He said one wallet was compromised.
Also in December 2017, another controversy came to embroil RChain. That month, a group of Seattle-area business executives became interested in the project. This group founded a company in late 2017 that was subsequently renamed Reflective Ventures for the purpose of developing for-profit businesses for the RChain ecosystem. Up to that point, this domain had been handled by RChain Holdings, who greeted the newcomers as potential rivals. However, the histories of some of the Reflective Ventures team made some of the co-op members uncomfortable.
One of the founding partners of Reflective Ventures is David M. Otto, a Harvard-educated Seattle attorney who was charged in 2009 by the SEC for his involvement in a penny stock “pump-and-dump” scheme. He eventually settled with the SEC in 2011, paying more than $225,000 in fines and receiving a five-year ban from participating in penny stock offerings. Otto was also the business partner of Steve Bannon, the former advisor to President Donald Trump, in several companies that were involved in legal difficulties in the early 2000s. Otto holds a license to practice law in the state of Washington and is the managing partner of Seattle law firm Martin Davis, PLLC.
Alongside Otto at Reflective Ventures was Steve Careaga, who is associate director at Otto’s investment firm Otto Capital. Careaga was involved in a controversy in the early 2000s when he was chairman of the board of directors for Firefighters National Trust, a Washington state charity set up to help fallen firefighters. Firefighters National Trust raised millions of dollars in the wake of the attacks on Sept. 11, but there were allegations of financial mismanagement by the board, and the charity shut down in 2005. Only 65 percent of the millions that came into Firefighters National Trust went to charitable purposes, according to a report from the Hartford Courant. Careaga has gone on to become chief financial officer of Casper Labs, a blockchain startup that is building off of RChain’s technology.
The third partner of Reflective Ventures is Greg Heuss, a Seattle marketing and product development executive, formerly with Amazon, who is also the co-founder and president of the Washington Blockchain Coalition, a non-profit trade organization which advocates for the adoption of blockchain technology.
When asked about the pasts of his partners at Reflective Ventures, Heuss said, “I hold myself to high standards and especially am conscience of those that I do business with – I have no issues with either Steve or David and their past – I’ve dug into these stories on them more than most and feel 100 percent confident that they both are clear and free of any ‘wrongdoing.’ ”
Deals with Reflective Ventures and Pithia raised eyebrows
Despite opposition from some members, Reflective Venture’s bid was successful, and in January 2018 the firm signed a “strategic partnership agreement” with the RChain Cooperative. According to a publicly available contract, the agreement saw 100 million RHOC tokens, which were valued at 35 cents each, put into an investment fund, called Fund I, managed by Reflective Ventures.
In reality, the market value of RHOC on cryptocurrency exchanges was far above that, increasing from around 60 cents in mid-December 2017 to nearly $3 in the second week of January 2018. This was the all-time high of RHOC’s value, from which it has fallen by over 99 percent. Other cryptocurrencies saw similar volatility in their prices during the same period. An August 2018 study by The Wall Street Journal found that price manipulation of cryptocurrencies is widespread on the unregulated exchanges where they are traded.
Around March 2018, a due diligence report, funded by members of the RChain co-op who were opposed to the Reflective Ventures deal, was prepared by Aces United. In it, lawyers from Pennsylvania law firm Promisloff & Ciarlanto, P.C. analyzed the terms of the deal between RChain and Reflective Ventures, and found that the agreement “highly favors” Reflective Ventures, which at the time the deal was written had not yet been established and was only named as “Ventures.”
Fund I, into which the 100 million RHOC were deposited, was described in the report as “a subsidiary of a subsidiary” of Ventures. Under the deal, 80 percent of the profits generated by the companies backed by Fund I would go to RChain, while the remaining 20 percent would be retained by Reflective Ventures. The report concluded that RChain had no power or votes to influence the affairs of Ventures or Reflective Ventures, though it would have two seats on the Investment Committee Board of Fund I.
Reflective Ventures was to be paid an annual fee of either $2.2 million or 2 percent of the value of the fund by RChain for the next five years, which the report said significantly reduced the downside risk to Ventures and meant it had “less skin in the game” than it otherwise would.
After the deal with Reflective Ventures, RChain Holdings continued operations, though it was renamed Pithia in late 2017. A new CEO, Lawrence Lerner, was also brought on board as CEO around the same time. In February of 2018, Pithia signed a deal with RChain with similar terms as the Reflective Ventures one. This occurred while Meredith was simultaneously on the board of both RChain and Pithia.
The Pithia-RChain contract was subsequently renegotiated in August of 2018 and at that time had a clause where Meredith agreed to step down from the board of Pithia and return the shares he held in the company. RChain agreed to give Pithia 105 million RHOCs to put into an investment fund, 5 million more than it did Reflective. The declining value of RHOC at that point could have played a role, as one RHOC was valued below $1 by the first week of February 2018.
There was another key difference between the Pithia and Reflective Ventures deals, which became important later in 2018. A clause in the contract with Pithia stated that if RChain failed to develop a working version of its blockchain platform by March 31, 2019, then Pithia would be allowed to keep the 105 million RHOC.
An investor who put more than $250,000 in RChain, who spoke with GeekWire on condition of anonymity, is skeptical of the terms of both the Pithia and Reflective Venture deals.
“It was ludicrous how the deal was structured though, for both Reflective and Pithia,” the investor said. “Effectively, research and development goals had to be achieved by the cooperative by certain dates otherwise the RHOC tokens contributed to the funds of both those firms would be kept by the firms. That’s the same as you giving money to your investment manager, and if you don’t do certain things, the manager keeps all your money. No fund on Earth works this way.
“I believe a lot of the deals constructed between the cooperative and entities like Pithia and Reflective had clauses that would never be acceptable in the real business world, but it appears Greg Meredith plays by his own moral compass,” the investor added.
Progress of RV and Pithia
Throughout 2018, both Reflective Ventures and Pithia began funding for startups that would be able to build dApps for RChain. Yet in August 2018, RChain made a decision that embroiled the project in a new controversy. RChain decided to invest, using its own funds, in a music streaming dApp, called RSong.
According to several investors as well as the crypto news site The Block, the deal saw RChain pay $23 million to Immersion Networks, a Redmond, Wash.-based software studio that develops audio technology. Though Meredith won’t confirm the terms of the deal, a balance sheet released at the annual member meeting last October showed a liability of $5.6 million to Immersion. Under the terms of the deal, Immersion developed a software player and gave RChain a multi-year license to use its audio codec. The idea is that RSong, when complete, will run on RChain and allow users to pay for music streaming with RHOC tokens.
Meredith said the plan was to rely on a third party to later buy RSong from RChain.
“We had a portfolio company called Resonate and we were hoping that we would spin that (RSong) out to them. And they would take it and run with it,” Meredith said.
Resonate was profiled by The Guardian in the spring of 2018. According to the newspaper, it was based in Berlin and received a $1 million investment from RChain in March of 2018. The article says that Resonate was also a cooperative that a had “stream-to-own” payment model and was using blockchain technology “to create a more transparent way of tracking and distributing payments as well as more user privacy and power over personal data and interactions on the service.”
But the plan with Resonate didn’t work out in the end.
“In many ways they were doing great work, but the crypto market was in a downward spin,” Meredith said. “And they so kind of have gone belly up as near as I can tell.”
The RSong deal is seen by many involved with the project as a boondoggle. An investor who put $1 million into RChain said the money spent on RSong was “wasted,” and may have jeopardized the future of the project. Another investor told The Block, “I’m not saying it’s not a good piece of tech. But it was a crazy amount for what we had. Let’s say you’re building a house for yourself and it’s $1M. But then you find a nice piece of furniture and you blow half a million on it. And now you don’t have enough to finish the house and you’ve completely destroyed the main project you’re working on.”
Meredith told GeekWire that RSong has benefited RChain by giving it a working dApp to test the network. He said that Immersion’s codec technology is very valuable and that RChain is currently negotiating an “eight-figure” deal to sell RSong to a third party. He also said that there are multiple record labels interested in putting their music catalogs on RSong.
GeekWire was given access to a working version of the RSong app for iOS, which has two audio modes, “stereo” and “immersive.” While the “immersive” mode, which uses Immersive’s codec technology, sounded better, there were only three songs on the app. One was from the English singer-songwriter Imogen Heap, who is starting her own blockchain music service called Mycelia.
Jim Rondinelli, the COO of Immersion Networks, confirmed that the audio technology utilized within the RSong application was provided by Immersion Networks. He wouldn’t confirm the terms of the contract, citing a non-disclosure agreement (NDA).
Some investors found it troubling that a cooperative like RChain, which is supposed to be run for the benefit of its members in a democratic fashion, would make public the price paid to Immersion. “This is yet another topic that suggests the business incompetence or unsavory management behavior conducted by Greg Meredith,” one investor said.
Meredith confirmed via email that there is an NDA on the Immersion deal:
The Cooperative never wants deals under NDA. However, the Cooperative cannot control the business practices of others. For example, several aspects of our business with Pyrofex [a firm that contracted with RChain to provide software development services] were under NDA, but no one complains about this.
In general, businesses may have information that is time sensitive or commercially sensitive for other reasons. Of all the industries, i can think of none more fraught with these sorts of landmines than the Arts & Entertainment industry, and specifically the recording industry.
When open source efforts, like RChain Cooperative, come into contact with these sorts of business there is no contract equivalent of CopyLeft that would force this kind of sensitive information out into the open; nor would people really want this because it would have all kinds of extremely negative consequences for the very people we are endeavoring to serve.
It is also impractical for the Cooperative to restrict itself to doing business only with organizations that do not impose NDAs. That would eliminate engagement with most commercial technology companies, such as IBM, Microsoft, Google, and Amazon, as well as the US Govt, and many other organizations and institutions.
I am sad that people, especially investors, assume the worst rather than coming to the Cooperative and asking for the details. We have provided very detailed information to Cooperative members, under agreements that they honor our agreements with our partners. Those who have taken advantage of this opportunity have come away quite satisfied with the value of our partnerships and agreements with our partners.
Consequences of RChain delay
But it’s not just the business deals that RChain has entered into that are causing it problems. In mid-October, RChain sent a letter to Pithia stating that it would not be able to deliver the live “mainnet” version of RChain until April 1, just one day after the deadline laid out in the August contract. In response, Pithia exercised its termination rights in mid-October, with Pithia CEO Lerner releasing this public statement:
After careful consideration, Pithia has determined it is in the better interest of our portfolio companies and business to terminate the August 13, 2018 Strategic Partnership Agreement with the RChain Cooperative. Several factors went into the decision, including the delay of platform delivery. Under the Agreement, Pithia was to fund a certain number of companies by a certain date, and the Cooperative was to provide a commercially viable platform by end of 2018. The Agreement further provided a March 31, 2019 deadline for the Cooperative to address technical issues in the platform. An email from Cooperative leadership confirmed that the platform would not be ready for launch until April 1, 2019.
Following the Cooperative’s confirmation of the delayed launch date, Pithia sent a letter to the Cooperative leadership and board indicating Pithia’s intent to terminate. The ten-day waiting period for termination provided under the Agreement ended on October 21st, at which time the Agreement terminates.
When questioned about this letter, Meredith told GeekWire, “It was a typo on the part of the letter. Instead of putting 11:59, March 31, someone wrote April 1. There was no intent to delay or anything like that, it was literally just a typo.”
Meredith said that negotiations between RChain and Pithia were underway and that legal action had not been taken off the table. Lerner declined to comment, other than to say, “We remain supporters of the community and look forward to the release of the platform.”
One investor said of the letter, “A typo with incredible financial implications is not appropriate.”
At the start of October, the price of RHOC was trading at around 20 cents each, and has since fallen less than 3 cents. Another investor speculated that RChain purposefully sent the letter to ensure that Pithia would be free and clear to sell its RHOC before the price dropped further.
Reflective Ventures, for its part, is still in operation, but the companies it is funding may end up switching to other blockchain networks if RChain isn’t ready soon. Heuss, the partner at Reflective Ventures, sauid the firm had funded 23 companies after considering more than 600. A typical investment was somewhere between $300,000 and $3 million, with the average deal being $1 million.
“Governance has been a huge issue for RChain,” Heuss said.
As a result, the companies Reflective Ventures funded are keeping their options open as to which blockchain they will use, of which there are many currently under development.
This means that companies which were originally funded by RChain through Fund I may end up not actually using RChain. Heuss said Reflective Ventures’ priority is the success of its portfolio companies, and not RChain’s technology itself. He added that Reflective Ventures is looking for up to $35 million in new funding.
RChain fork Casper Labs reportedly raising $20 million
Reflective Ventures is making back-up plans in case RChain can’t deliver
The startup Casper Labs, where former Reflective partner Steve Careaga is CFO, is in the process of forking RChain’s open source code. The Block reported on Jan. 14 that Casper Labs is also raising its Series A funding round, with verbal commitments of $20 million.
Vlad Zamfir, a member of the RChain board and researcher for the Ethereum Foundation, has been negotiating a contract with Casper Labs, that would see Casper Labs fund Zamfir’s research into his proof-of-stake “Casper” protocol. A former product manager working at Pyrofex, Medha Parlikar, has also joined the firm. A source close to the project said that RHOC tokens would be matched one-to-one for any new Casper Labs token.
Meredith said the existence of forks like Casper Labs aren’t necessarily a bad thing, because they would be compatible with RChain and could operate side by side in order to benefit from network effects. But it remains unclear how Casper Labs or other forks would work with RChain, if it is launched in 2019 as planned.
RChain’s pending sale of the West Seattle home at an apparent loss seems symbolic of the project. All the same, Meredith said that his motivation in creating RChain goes beyond making a profit. In his view, pressures on modern society, such as climate change, mean that new coordination technologies, like blockchain, are necessary to meet the challenges.
In recent weeks, Meredith has been tweeting at politicians such as Washington Gov. Jay Inslee, Vermont Sen. Bernie Sanders, and New York Rep. Alexadria Ocasio-Cortez, offering up RChain and blockchain more generally as a solution to climate change, finance, and regulatory jurisdictions.
In one of the latest twists in the story, Kenny Rowe, who was named RChain Cooperative chief operations officer in 2007, announced his resignation this week from his roles on the RChain Cooperative staff and board, effective Feb. 28. He acknowledged the difficulties faced by RChain but ended his open letter to the community on an optimistic note.
“Though the Cooperative has been under great strain over the last several months, the idea of using a cooperative for blockchain governance is still sound,” he wrote. “I have full confidence that if the board of directors, leadership, and the membership can align and work together, then RChain Cooperative has a bright future.”