DESCRIPTION OF BUSINESS
Pricing information for illiquid assets (private companies, pre-IPO companies, etc.) is confined to a limited group of market participants, i.e., brokers and investors. Unlike what tends to happen with liquid assets, the pricing of illiquid ones is infrequently updated. This might make it difficult for existing investors to gauge the current price of the assets they hold. Creating mechanisms to accurately and frequently price illiquid assets can unlock new opportunities, such as entering the growing Decentralized Finance (DeFi) space. One of such mechanisms could be an information market, a market for contracts that yield payments based on the outcome of uncertain events.
Lithium Finance, a new kind of prediction market, aims to solve information asymmetry in private markets by developing an oracle platform to price illiquid assets. The developments in modern peer-prediction theory have helped Lithium conceptualize this novel idea. Lithium uses binary (yes/no, high/low), ternary (higher/lower/neutral), or categorical (< $10, $10-$20, > $20) prediction outcomes, crowdsourcing data to try to determine future performance. It is expected that Lithium would be able to price assets otherwise inaccessible to individuals who are not industry insiders. The Lithium protocol will be developed using Ethereum’s smart contract capabilities. They are planning to launch their Mainnet in December 2021.
Lithium Finance was co-founded by two entrepreneurs who are experienced in successfully running startups. The team is growing with the addition of blockchain and technical skills. It is perceived that Lithium might need to add more resources to complement the team.
An incubated project, Lithium has the strategic and financial backing of a prominent group of Venture Capital and blockchain investment firms.
Their native token, LITH (ERC20), is used to incentivize participants in the protocol. After their recent public fundraising rounds, the LITH token is currently trading at several venues.
The project is at present highly centralized, and the team has not yet decided on its future path to decentralization.
Our researchers gave Lithium Finance a final rating of 48.00%. The breakdown of this rating is available at the end of this report.
PRODUCT & COMPANY DESCRIPTION
Lithium Finance is developing an oracle platform to price illiquid assets. They aim to assign a dollar value to assets that don’t have a market and for which, under current conditions, a unique valuation process is required. Such assets include but are not limited to pre-IPO stocks and private equities. The key hypothetical questions that Lithium addresses are i) how to gather collective pricing intelligence and ii) how to incentivize such collective behavior. The underlying theoretical framework for Lithium originated from modern peer-prediction theory. Lithium Finance’s oracle is built on a Determinant-based Mutual Information mechanism. The protocol will aggregate results using a multi-party computation (MPC) technique to keep data confidential during information submission.
Key Features. Source: Lithium Finance.
Lithium tries to solve an existing problem (illiquid asset pricing) in a fast and inexpensive way. The valuation of illiquid assets is currently done on an as-needed basis by third-party service providers. These valuations are only available to recipients who mandate them.
Current status-quo of pricing illiquid assets. Source: Lithium Finance
Even the most recent blockchain-based attempts to price-discovery center around tokenizing illiquid assets and creating a market for willing buyers and sellers. The crypto-native information markets (prediction markets) have not attempted to value illiquid assets.
However, Lithium aims to crowdsource the pricing function of illiquid assets and such assets to connect to decentralized finance (DeFi). The protocol itself is expected to establish a price for any illiquid asset rather than extracting it from other sources (like other known Oracle providers).
Although there are several different oracle providers, with ChainLink leading the pack, there is no solution that provides price feeds for illiquid assets. Price feeds on illiquid assets could have direct applications in DeFi derivatives scenarios like Linear and Synthetix. Platforms like Convergence are explicitly targeting the private assets markets. This opportunity for real-world, “meatspace” assets in DeFi could be huge. Outside of DeFi applications, Lithium could theoretically become a price provider for private, very illiquid assets like a “brick-and-mortar” shop in a particular locality, or non-housing types of property (e.g. an amusement park or physical art).
However, there are potential hurdles to bringing this kind of product to fruition in the current market context. Regulatory ambiguity is one such area, as real-world assets in DeFi could be facing regulatory headwinds. Any unfavorable developments in this space could hurt Lithium since they have a derived demand from such use cases.
A radical perception change is required for institutional players (e.g., Private Equity firms) to trust crowd-sourced valuations instead of traditional equity valuation methods.
At a micro level, the technical details of the product are currently unavailable. Therefore, it is difficult to make any evaluations on Lithium’s technology. However, the product remains interesting at a conceptual and intuitive level.
The project has published a Litepaper with limited technical details. This Litepaper also provides references to the academic papers that influenced the project’s idea. The team does not have any patents assigned to the project. They discuss their underlying proprietary algorithms/technology around the DMI mechanism.
The project is not open-source. Its GitHub link only hosts the project website. Understandably, due to the proprietary nature of the protocol, all the development work is done in a closed environment. Lithium Finance has not disclosed any plans for decentralizing the platform’s ownership.
Lithium will be a set of smart contracts deployed on the Ethereum blockchain from a high-level technical point of view. That means the smart contracts, once deployed, are immutable. However, the in-house team can change the protocol and the users would have to adapt to such changes. Hence, it is likely that the protocol remains centralized in that sense.
There is no publicly available whitepaper or business plan published by the Project. They have a public Litepaper available on the project’s website. The Litepaper provides references to some of the academic work that helped articulate the project idea.
As per the project’s website: “Lithium Finance uses collective intelligence to price the unpriced.”
Based on available materials, we understand that the project aims to achieve three broader design goals. We could identify them as follows:
- Providing fair and unmanipulated pricing.
- Create an incentive mechanism for Wisdom Nodes; and
- Data privacy.
Lithium project’s success would depend on several factors listed below:
- An incubated, well-funded project, supported by a network of prominent investors.
- Lithium’s unique proposition – the Determinant-based Mutual Information (DMI) mechanism.
- Operations in a niche market in the broader crowd-sourced intelligence market.
MARKET CONDITIONS AND COMPETITION
The overall DeFi market has grown exponentially over the last couple of years. The total value locked (TVL) in DeFi has reached ~$85.63 billion, a 1,127% growth since the summer of 2020. The oracle market has grown in tandem to record a ~$13.91 billion in market value.
In contrast, the information market (or the prediction markets) segment, one of the earliest use cases for DeFi, only stands at ~$1.49 billion. The two most prominent players, Augur and Gnosis, have only reached ~$2.6 million and ~$30.5 million in TVL.
Real assets (public equities and commodities) are very early in the DeFi space. To provide some context, the total all-time synthetic equities trading volume at Synthetix is so far of only ~$20.04 million. Follow this link for updated statistics. Private assets are yet to come to the DeFi arena, being this one of the problems addressed by platforms like Convergence. Non-fungible Token (NFT) valuations may be an upcoming market segment that offers excellent potential to Lithium Finance.
Lithium’s competition is in the broader category of information markets and the oracle sector. Information markets have been around for quite some time in both centralized and decentralized forms. They try to crowd-source wisdom to arrive at an outcome (e.g., an event outcome, a forecast, or any given outcome e.g. an election result). However, the information markets applications are predominantly limited to prediction markets (PMs) for events. Oracles, on the other hand, are bringing public market data points to the blockchain. Lithium is therefore considered a specific niche player in comparison to both the market segments.
Lithium Finance’s competitive positioning. Source: YouTube
Traditionally, PMs operate as centralized firms (e.g., PredictIt, Intrade). Decentralized PMs gained popularity with the early success of Augur and Gnosis. However, Gnosis diversified its offering away to other areas with products like Gnosis Safe. Many of the other competitors, however, have not become formidable challengers to Augur.
ChainLink dominates the Oracle sector. The remaining competitors in the space offer the same service, differentiating in different ways. The clear difference between other oracle providers and Lithium is that the former connect web data to the blockchain while the latter establishes pricing at a protocol level. For example, there is no pre-IPO stock price available on the web for an oracle to connect to a smart contract.
There are emerging players aiming to offer pricing oracle solutions for NFT assets. One such example is NFT Tech. However, they are still at a very early stage and would likely not saturate the market.
What is also critical to be aware of is whether PMs or Oracle Providers can expand their services to pricing illiquid assets. We assume that there may be practical and technical barriers to implementing such an offer.
How is the project different from its competitors?
- The key differentiating factor of Lithium is that they aim to establish pricing mechanisms for illiquid assets (regularly updated) for which there is no current data available at the time of pricing. For instance, when Wisdom Nodes (see Technology Review) price a pre-IPO company, Price Seekers would know the Ground Truth (IPO price) later.
- The other differentiating factor is that Lithium is currently the only platform that tries to price the unpriced. Therefore, anyone else, whether incumbent competition or new entrants, would become followers.
Lithium Finance is developing an oracle platform to price illiquid assets. Their pricing oracle is a collective-intelligence platform powered by cryptocurrency incentives and Ethereum’s global asset rails to deliver reliable information. The two key stakeholders in their protocol are:
Wisdom Nodes (Pricing Providers): They are a segment of experts with knowledge of illiquid assets pricing. For example, brokers, analysts, and investors with private market familiarity. One constraint is that the scope of this segment is narrow. Not anyone could become a Wisdom Node.
Wisdom Querier (Pricing Seeker): Anyone seeking accurate pricing for decision-making purposes.
Lithium Protocol. Source: Lithium Finance
Lithium Finance’s oracle is built on a Determinant-based Mutual Information mechanism. The answers provided by Wisdom Nodes are aggregate and a solution is calculated using the DMI mechanism.
Wisdom Nodes’ Answer Aggregation Matrix. Source: Lithium Finance
At this point, no MVP is available for Lithium’s core product. Understandably, they are presently developing the required smart contracts (since March 2021). It is not easy to gauge the development progress as the code is not open-source.
However, there is a web interface for the pre-staking rewards program. Anyone with a Metamask wallet could connect to this platform to earn staking rewards.
Adrian Lai, the CEO of Liquefy Labs, the incubator of Lithium Finance, has mentioned that “The initial roadmap is to launch the Testnet in Q3 and mainnet by the end of the year.”
Lithium uses the Ethereum blockchain, which happens to be the leader when it comes to decentralized applications. Furthermore, with the interchain or interoperability space developments, they would find it relatively easier to connect to multiple networks.
That said, we flag that they are subject to all the Ethereum negatives. These, of course, involve scalability and high gas fees.
However, on a positive note, Ethereum’s issues are currently being addressed by many different projects, including Ethereum itself. Therefore, any favorable developments could help alleviate potential drawbacks.
For the scope of this project, Ethereum’s scalability should suffice. There is little reason for this project to need extreme scaling, which is beyond the current capacity of the blockchain used.
A vast majority of dApps are using Ethereum as opposed to other smart contract chains. Without real user interaction on the Lithium Finance protocol, it is tricky to opine on any scalability constraints. However, if scalability were to hinder the protocol, Lithium can potentially adopt rollup solutions like Optimism. They should also be able to capitalize on Layer-2 technologies like Polygon, alternatively.
Lithium Finance is not a blockchain in itself. As a result, there is no consensus mechanism associated with it. Being a protocol reliant on the Ethereum blockchain (in their token and smart contracts), they lease out their consensus and protocol security to Ethereum.
The protocol DMI is an algorithm implemented via smart contracts deployed on Ethereum. Therefore, to reach accurate pricing for illiquid assets, Lithium uses a mechanism termed Proof of Wisdom Staking (PoWS).
PoWS is an incentive mechanism that is at the core of Lithium’s potential success. A Wisdom Node has to stake LITH tokens (the stake depends on the confidence level) to price any asset. Over time, they build a reputation by being accurate. Incorrect answers or malicious behavior is punished by slashing. Similarly, the Wisdom Seekers stake LITH to obtain asset pricing.
There is no mention of a third-party smart contract or code audit since the code is under development.
At these early stages, the project is entirely centralized. Therefore, blockchain technology is not essential for the project’s operations. The project also lacks a plan for future decentralization.
That said, as an oracle solution to connect private assets to DeFi, they need to be compatible with blockchain. These functionalities come from the smart contract capabilities of the Ethereum network.
ROADMAP AND TEAM
Lithium Finance has not published a detailed time and action-bound roadmap yet.
However, their tentative plan is to go live on Mainnet in December 2021.
The two co-founders have strong backgrounds in blockchain tech startups that have successfully raised VC funds in the past. Recently announced, the Head of Blockchain has been working as a software developer for over a decade. Steve has his name under several US patents and has also extensively published materials on subjects such as technology and engineering. He has also consulted entities on blockchain strategy. The COO has tech investment experience as a Director of Soul Capital (Soul Capital is an investor in Lithium Finance).
What follows is a brief account about the project’s core management team:
David Lighton (Co-Founder) obtained his qualifications from Johns Hopkins University and MIT. He founded a venture-backed fintech, SendFriend, in the recent past. He has also worked for the World Bank in the past. David is a Fellow at Yale University’s Global Justice Program. He has associated with industry bodies like Global Blockchain Business Council (GBBC) and MIT Digital Currency Initiative (DCI).
Steve Derezinski (Co-Founder) has experience helping incubate startups. He founded LocallyOwned.io (a community currency project), Smallbizplanet.com (non-operational), and Georgia Tech’s VentureLab. Steve also functioned as MD and Consultant at Platform Technology Ventures and as CEO of INFINIUM, Inc. Before co-founding Lithium Finance, Steve consulted many firms on blockchain strategy. He is behind seven US patents. Steve is an alumnus of MIT.
Steven Ciraolo, Head of Blockchain, has been working as a software developer for over a decade.
Vincent Pow (COO) has worked in Operations and sales for over eight years. He obtained his Masters from the University of Leeds.
The project has not appointed any advisors.
General Comments on the Team & Advisors
The project is still adding team members. They just recently announced the tech team. In Telegram discussions, the management has disclosed that they have a Head of Product. Her information is not available on the website.
Based on the publicly available information, our evaluation is that the team lacks resources in the following areas:
- Front and back-end engineers
- Legal and compliance,
- Business development and marketing.
We found no evidence of any nefarious activity that the team or advisors were part of.
During the review period, our Researchers did not find any evidence of publicly known controversial projects that team members have been involved in.
LEGAL AND COMPLIANCE SPECIFICS
The management claims that Lithium is not registered anywhere. In a Telegram conversation, Co-founder David echoed this. However, he talked about a BVI Foundation, details of which are unavailable to the public.
The team is undecided on whether they would become a DAO or not.
There are no publicly available contracts or agreement documents, but Lithium Finance has partnered with a few companies:
- The project conducted its IDO and IEO in partnership with Polkastarter and KuCoin.
- There are formal indications on the project’s website that it has raised funds from Blockchain funds and VCs.
This casts a doubt about the type of agreements the partner entities entered into, since Lithium Finance is not registered anywhere.
Liquefy Labs incubated Lithium. Liquefy’s program includes three features, i) technical advisory, ii) connection to a network of prominent investors, and iii) marketing strategies. Two other projects (Linear and Convergence) incubated by Liquefy are already partners with Lithium. The project has recently announced that they have onboarded their first set of Wisdom Nodes and Wisdom Seekers.
Other partners include:
Injective. Lithium Finance entered a partnership with Injective to launch decentralized pre-IPO stock derivatives. This partnership could showcase a real-world application of Lithium’s protocol. There could be synergies in this partnership, such as experiments with bridging traditional private markets to the DeFi space.
Hashed will provide pricing information of crypto startups. Hashed is an investor in Lithium as well as other crypto startups. This may create a conflict of interest if they were to provide pricing for their portfolio companies.
Beyond Finance will seek pricing for private and illiquid assets to create synthetic products.
Credefi will seek pricing for collateral placed on their lending platform.
Finminity will seek pricing for their investor services platform.
Since these partner firms are very early-stage projects, the demand from their platforms will come after they secure significant market share. The project has some notable Blockchain investors like Pantera Capital, Huobi DeFi Labs and Kenetic, among others.
Lithium Finance has not appointed any legal advisors.
KYC & AML
The project’s website does not carry any GDPR/Privacy statements.
Their token offering was geo-fenced for US investors. The maximum investment per person in the IDO was $250. Such a small amount of investments can practically exclude the project from AML-related risks.
There were two public offerings: The Polkastarter IDO and a KuCoin IEO.
Polkstarter only allowed white-listed addresses to access the token sale. Once the whitelist was done, the applicants were required to go through KYC/AML requirements. KuCoin also allowed whitelisted and KYC-completed participants from non-restricted jurisdictions to take part in the IEO.
The team acts under the idea that the token will be classified as a utility token. (page 7, Litepaper) The two token utilities are, i) to be used in their reward mechanism, and ii) staking for questions and answers on the platform.
Based on the above, we have identified the main areas which present potential legal risks:
- The token could be classified as a security, i.e., unregistered security. Lithium Finance is currently a centralized entity. The token holders are solely reliant on the entity’s managerial efforts. Under prevailing laws, this centralization creates risk if any applicable regime or competent authority viewed and classified the tokens as investment contracts/securities.
- There is uncertainty about the operation of the project without any government licenses. There is a risk if they are viewed/interpreted as an advisory services provider, requiring them to operate under a license.
- Generally, most DeFi projects are operating in a regulatory grey area. This poses a risk to the success of the project and the industry as a whole.
The measures taken by the team during the public sale (e.g., geo-fencing US and restricted jurisdictions, implementing a KYC process, minimum and maximum investment sizes per investor) are expected to mitigate legal risks.
The total maximum supply of LITH tokens is 10 billion. It is calculated that the initial circulating supply would be ~524.4 million tokens (~5.24% of total supply).
A token allocation for the ecosystem of 15% is logical. An additional 10% is available for the community. The project has not discussed in-depth the ways and means of utilizing these allocations.
As found in the Litepaper, an airdrop of tokens is to be conducted to an invited set of brokers to bootstrap the process. (page. 4, Litepaper).
Token allocation. Source: Lithium Finance
The project disclosed that a group of prominent investors invested $7.6 million in the project. Available information confirms two fundraising rounds: i) an initial $5 million and ii) $2.6 million. However, the token allocation shows three funding rounds, namely Seed, Strategic I, and Strategic II. A more transparent approach would be to disclose the amounts against the allocated tokens.
As per D-CORE’s calculations, the early investors have invested in the tokens at an average price of ~$0.0040/token.
Team tokens are locked for six months and then quarterly vested over two years.
The public token allocation of 0.8% seems relatively low. This smaller allocation could leave room for token concentration in the hands of project insiders (including early investors). Any future attempts to attract retail liquidity might be a sensitive subject.
The project has completed private and public fundraising rounds, both of which were successes. Given this, a total public raise of merely $0.5 million may seem illogical. Naturally, one would ask whether this is cost-effective, considering listing costs and other costs involved in the run-up to the offering.
A total of $8.1 million is now available to the team for deployment. The team will have to meet funding shortfalls with tokens in their custody.
Upon completing the Lithium Finance Initial Exchange Offering (IEO), the LITH tokens are now trading on KuCoin.
LITH is also available on UniSwap.
LITH total token supply is finite. However, as discussed below, there will be a continuous token supply released into circulation.
Subject to the maximum supply, there will be tokens released daily and monthly. After six months from listing, the team and advisor allocation will be unlocked. Their tokens will be vested over two years, with releases every quarter.
Currently, there is a pre-staking program underway. This incentive program would go on until the Mainnet launch. The weekly reward constitutes ~0.6% of the initial circulating supply (i.e., 3.150 million LITH tokens). A staking reward pool (30% of total supply) is waiting to come to circulation over the foreseeable future.
As depicted in the table, there are no tokens locked for the long term. The most extended token lock of 6 months is only applicable to team and advisor allocation. Pre-staking rewards will be locked until the Mainnet is launched (planned for December 2021).
Supply and Demand Dynamics
Token Supply: The two key factors affecting the token supply are:
- Vesting: As already discussed, the LITH token has a finite supply, and around 5% of the total supply was available for initial circulation. Nonetheless, starting from the listing date, there will be tokens vested daily. Entry of these tokens to the market should be a price negative.
- Rewards: Supply pressure from the staking rewards could hurt the LITH token trading price. The current weekly staking reward emission rate is 0.6% of the initial circulating supply (3.15 million tokens/week). Assuming this rate continues, ~164 million tokens per year will come to the market over 18 years. Until there is significant demand from Wisdom nodes to stake LITH (generic demand), the current rewards rate might need to remain in place to induce holders and mop up the circulating supply.
Token demand: The two main factors inducing demand for LITH are:
- Staking: The staking pool currently earns an APY of ~92%. The pool size is about 237 million LITH tokens. Follow this link for an updated figure. The number of tokens staked represents about 45% of the initial circulating supply. Demand from this source could continue to be dominant over a short/medium term. The staked percentage is a crucial metric. A higher rate is price positive.
- Pricing Demand: This is the generic demand generated by Wisdom nodes to seek and participate in illiquid asset pricing. This demand is directly proportional to the adoption rate, and hence this source of demand could come in the longer term.
SOCIAL MEDIA AND VIRALITY
Lithium Finance’s Twitter handle has gathered 16.2k followers. There are multiple mentions about the Project by a variety of other Twitter channels with a significant following. This rate of engagement is commendable for a very early project.
Lithium does not have a significant following on LinkedIn. There are only 228 followers at present. The channel is active even though there’s a minimum number of mentions.
Telegram (English) is the main communication channel for questions regarding the project. It is easy to find co-founder David actively participating in conversations with the community. However, there is inadequate response regarding queries on specific technical questions relating to the project.
Both their Telegram channels have a healthy number of followers. Their discussion Telegram channel has 15k+ followers, and the announcements channel has 7.6k subscribers. There are multilingual project Telegram groups, e.g., English, Chinese, Turkish, Portuguese, Spanish, and Hindi.
The Chinese community has a WeChat account.
There is no bounty program as of now.
However, Lithium recently announced a participation campaign to boost their Pre-Staking Program. Participants have to undertake specific tasks in this Reward Program, including participating in their Pre-Staking Program to win LITH tokens. The Program would increase their social media followership, create market demand for LITH tokens, and increase the total staking pool.
Lithium Finance’s YouTube channel doesn’t have any significant following. However, about a dozen YouTube channels are discussing the project. Since these channels have just recently put out the videos, there are few views for these videos. Nevertheless, over time this content should see growing visibility.
Risks to the Project
- Regulatory uncertainties: Traditional assets’ exposure to DeFi has been a prolonged process. This slow adoption may partly be due to cautiousness by participants to avoid regulatory backfire. A continuation of this trend would hurt Lithium Finance since there could be minimal demand for their oracle services.
- Bootstrapping challenges: To successfully bootstrap the project, they need to onboard a larger community of Wisdom Nodes (Pricing Providers). They should ideally be analysts, brokers, and participants with knowledge about private market transactions. The accuracy of Lithium’s results depends on the number of answers per question. If there were not enough answers to questions, the platform might halt sessions. On the other hand, if there were not enough Price Seekers, Pricing Providers may be discouraged. The project team expects their incentive mechanism and game-theoretic approach to help mitigate this challenge.
- Design challenges:
- There is no dispute-solving mechanism in place should the need for it arise. The project could integrate arbitrator services like Kleros to mitigate this risk.
- There may be questions on pricings’ accuracy since the outcome could be directly related to the incentive. If the Wisdom Seekers did not pay a sufficient bounty for the answer, the Wisdom Nodes might not dispense resources to provide a quality answer. Another important feature should be that the DMI should not incorrectly penalize correct pricing provided by a Wisdom Node. For example, a Wisdom Node with perfect information could give a more realistic answer, but his answer may be an outlier. If the DMI punishes him, he will be penalized for being accurate.
Everything you see in this report is the aggregate result of an extensive research process carried out by a distributed team of researchers and crypto enthusiasts around the world. The process consists of 60 questions divided into three phases. Researchers are called to answer these questions about a project, while providing links or screenshots as evidence to support their answers. For every answer, they also provide a rating from zero to ten. The average of their ratings is detailed below.
Our researchers gave Lithium Finance a final rating of 48.00%.
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