Dissecting the Pharos public blockchain's capital game: Is its $950 million valuation propped up by assets like photovoltaics, a shell transaction hidden beneath layers of betting?

Author: Gu Yu, ChainCatcher

After several months, the Layer 1 public chain sector has once again seen a financing round with a valuation of $1 billion. Pharos, which claims to be a high-performance parallel Layer 1 public chain, announced a new round of capital cooperation upgrade with GCL New Energy, a Hong Kong Stock Exchange listed company. GCL New Energy completed its investment subscription in Pharos with a valuation of $950 million, amounting to $24.73 million.

GCL New Energy is a well-known private photovoltaic power generation company in China, mainly engaged in the development, construction, operation and management of solar power plants. This aligns very well with Pharos's RWA's key development direction, and it appears to be a transaction with positive strategic significance for both parties.

However, this deal has also raised many questions in the market. Given the current dismal performance of the secondary market, can Layer 1 and RWA projects really still achieve valuations of around $1 billion in the primary market? And will listed companies readily invest in such high-risk assets?

Interlocking betting transactions

Many details hidden within the complex announcements reveal that this is not a conventional direct financing transaction, but rather a bundled deal involving mutual investment, phased delivery, and a market capitalization-based bet. Furthermore, all core delivery conditions are firmly in the hands of GCL New Energy. If any condition is not met, the transaction will be nothing more than a worthless piece of paper without any real binding force.

Pharos's share subscription in GCL New Energy is a pre-investment, in which it will subscribe for up to 183,480,000 new shares of the company at a price of HK$1.05, worth approximately HK$150 million. This price represents a 15% discount compared to GCL New Energy's current price (HK$1.23).

This deal appears to have benefited Pharos, but GCL New Energy clearly understands the intricacies of financial operations, setting five stringent settlement thresholds for this share subscription transaction. If any settlement condition is not met, all subsequent settlements will be terminated, and the entire agreement is only valid for 18 months. Specifically, this investment was split into five settlements, with all unlocking conditions linked to the performance of the Pharos Token upon its listing:

The first phase of delivery will be 50%, contingent upon Pharos Token successfully obtaining approval for listing on the relevant Web3 exchange and an opening price no lower than the company's agreed investment price (based on a valuation of $950 million). If the listing fails or the opening price falls below the initial offering price, the company reserves the right not to proceed with the delivery.

The second batch of deliveries will be 12.5%, and will only take place if the average daily FDV (fully diluted market capitalization) is no less than $760 million in the three months prior to the listing of Pharos Token.

The unlocking conditions for the subsequent three batches were roughly similar, with the main difference being the period for calculating the average FDV, which was from the fourth to the sixth month, from the seventh to the ninth month, and from the ninth to the twelfth month, respectively.

Once the Pharos Tokens meet the settlement conditions, Pharos's subscription for shares in GCL New Energy will take effect accordingly, and GCL New Energy's subscription for Pharos Tokens will also take effect simultaneously, with the unlocking ratios being the same.

In other words, after Pharos Token's successful listing, Pharos will immediately deliver HK$75 million worth of shares to GCL New Energy, while GCL New Energy will acquire Pharos Tokens worth approximately HK$96.73 million at a valuation of US$950 million.

For GCL New Energy, this is a deal that is almost guaranteed to make a profit. On the one hand, it can obtain HK$75 million in share subscription funds, and on the other hand, it can obtain tokens worth nearly HK$100 million based on the initial opening valuation, given the good performance of Pharos Token. The profit margin is considerable.

The positive news had already been reflected in the stock price. Although GCL New Energy first disclosed its cooperation with Pharos on January 8, its stock price had already risen sharply a week earlier, from HK$0.8 to HK$1.3 on the announcement date, and then rose to a high of HK$1.8 before maintaining a downward trend. In the trading market, this is a typical "insider trading" pattern.

Another potential problem is that Pharos has only publicly disclosed a total funding of US$8 million, equivalent to HK$62.61 million. Even if the preconditions for investment are met, this funding gap may still be a problem for Pharos.

 Source: RootData

How did the $950 million valuation come about?

Another interesting piece of information is that GCL New Energy also disclosed in detail in the agreement why it valued Pharos at $950 million. According to the agreement, the valuation of this investment is mainly based on the total on-chain locked market value. In the Layer 1 track, the average ratio of fully diluted market value to total locked asset value for Ethereum, BSC, Hyperliquid, Tron, and Avalanche is 10, the median is 6, and the ratio for Monad, which has a similar technical approach, is 10.

Therefore, both parties decided to set Pharos's calculation factor at 4.75 times. Pharos's current total locked assets value is $250 million, and with a 20% discount, the initial valuation should be $950 million.

Regarding the types of assets locked on the blockchain, the protocol discloses that currently, 51% of all locked assets in Pharos come from new energy assets of distributed photovoltaic operators and centralized power plant operators, and 49% come from financial assets of fund management companies and credit asset issuers.

In other words, Pharos' total locked value includes physical assets, specifically power plants and photovoltaic assets closely related to the parties involved in this transaction. This calculation method sets a precedent in the Layer 1 industry.

In fact, Pharos' mainnet has not been officially launched yet, and the professional on-chain data statistics platform DeFillama has not included Pharos' locked data. The $250 million figure is also entirely a unilateral disclosure by the project team.

The premature stock price fluctuations, combined with the layers of performance-based conditions and inflated valuations in the agreement, make the true purpose of this transaction clear: for GCL New Energy, this may be a financial maneuver to inflate the stock price and boost the company's market capitalization by leveraging the cryptocurrency concept; for Pharos, it's an attempt to capitalize on the listed company's tangible assets to create a high valuation and build momentum for the subsequent token listing. Both parties get what they want, but leave the market and subsequent investors with the risks.

When a physical industrial company injects its physical assets into a Layer 1 project and then calculates a valuation of $950 million using several times the value of those physical assets, isn't this kind of capital game outrageous? Does the crypto market really need this kind of RWA?