Edit: Thank you for all the comments and chat messages! I'm trying to go through each one. Writing thoughtful comments in the midst of having a full-time job is HARD WORK. I think I've missed a few questions, drop me a message if you're interested in continuing a discussion, I'm open to listening! There has been a lot of good comments, a few with great perspectives, and now I have a whole lot of things to read up on.submitted by cherenkov_blue to singapore [link] [comments]
Now that the 2020 General Election is firmly in our rear-view mirror, there is something that I have been meaning to write about: institutionalized racism affecting the minorities, especially the Malays, in Singapore. If you are groaning at this thinking you have been misled by this post’s title, I assure you that by the end of this post you will understand the caveat behind the above-mentioned title. I plead for a little of your time and patience.
We have seen many discussions online about majority privilege and systemic racism impacting the minorities. Many of you may have even participated in some of these discussions. I will not try to explain those terms for they have already been repeatedly debated to death. What this post aims to achieve is to bring to light Singapore’s history and government policies that have either benefited the majority race or kneecapped the minority race. Or both.
Why am I doing this?
It is frustrating to see some Singaporeans fully buying into the narrative that Singapore is a truly meritocratic society; that the government’s policies do not discriminate against minorities, or if a Singaporean worked hard enough he or she will succeed (whatever the definition of success is), or that we have anti-discriminatory laws that protect the minorities. Some even claim that the Malays enjoy special privileges due to Section 152 of the Constitution describing the special position of Malays, and that the Malays are blessed with free education in Singapore.
Section 152, “Special Position”, free education for all Malays?
Minorities and special position of MalaysThe oft-mentioned Section 152 of the Constitution was an administrative continuation of previously existing colonial policy towards the Malays [Col: 126]. Regardless of the “special position” of the Malays, the only form of assistance rendered to the Malays was the policy of free education for all Malay students. This minimal approach of the government did little to improve the educational and socio-economic standing of the Malays as revealed by the 1980 national census. The free tertiary education policy was ultimately removed in 1990, despite opposition from Malays who questioned the constitutionality of its removal [col: 126].
With free education for all Malays, why haven’t their socio-economic and educational standings improved?
There are many factors to look at, and the issue goes way back to the colonial era so that’s where we shall start. The colonial administrators of Singapore, in their pursuit of capitalistic gains, had little use for the native inhabitants. The natives who were already living off their own land had no desire to work for the British as labourers. The British saw this unwillingness to work for them as indolence, and ascribed many other negative cultural stereotypes to the locals [pdf]. Nailing home the capitalistic intent of colonial presence in Singapore, the British Director of Education R. O. Winstedt explained their policy for education for the natives in 1920 [pg. 2]:
"The aim of the government is not to turn out a few well-educated youths, nor a number of less well-educated boys; rather it is to improve the bulk of the people, and to make the son of a fisherman or a peasant a more intelligent fisherman or peasant than his father had been, and a man whose education will enable him to understand how his lot in life fits in with the scheme of life around him".And in 1915, a British resident revealed the colonial attitude towards education [pg. 3]:
"The great object of education is to train a man to make a living.... you can teach Malays so that they do not lose their skill and craft in fishing and jungle work. Teach them the dignity of manual labour, so that they do not all become krannies (clerks) and I am sure you will not have the trouble which has arisen in India through over education"The type and quality of education that the British set up for the native inhabitants show that they had no intentions to empower the locals with skills for a new economy. The education provided, while free, was to make sure the locals were kept out of trouble for the British, and remain subservient to the colonial causes. Further impeding the socio-economic status of Malays, the British actively discouraged Malays in switching from agricultural production to more lucrative cash crops, preventing the building of wealth among the Malay communities (Shahruddin Ma’arof, 1988: 51). In contrast to the British suppression of the buildup of Malay wealth and provision of vernacular education, Chinese businessmen, clan associations and Christian missionaries established Chinese schools where students were taught skills like letter-writing and the use of the abacus. By the turn of the 20th century, the curriculum in these Chinese-language schools expanded to include arithmetic, science, history and geography while Malay-language schools under Winstedt’s educational policies focused on vernacular subjects such as basket-weaving.
So, when Singapore attained self-governance, did things get better?
Discontent with the education system and social inequalities was already a big issue in the mid 1950s that the parties that contested for the Legislative Assembly championed for reforms to social issues like better education systems, housing subsidies and workers rights.
The People’s Action Party (PAP) won the 1959 Legislative Assembly general elections by running on a rather progressive platform of low-cost housing, improvement of employment opportunities for locals and a stronger education. They also campaigned for abolishing the inequality of wealth in their election manifesto (Petir, 1958: 2), with PAP chairman Dr Toh Chin Chye expressing his disgust at seeing “so many of our people reduced to living like animals because under the present social and economic system, the good things of life are for the ruthless few, those who believe that the poor and the humble are despicable failures.”
With the PAP in power, assurances were made to Singaporeans that no community would be left behind. In 1965, Prime Minister Lee Kuan Yew promised aid specifically to help raise the economic and education levels of the Malays. In 1967 during a mass rally at Geylang Serai, PM Lee again promised that “the Government with the support of the non-Malays are prepared to concentrate more than the average share of our resources on our Malay citizens [pdf].” He emphasized the importance of lifting all sections of the community to an even footing, reasoning that “if one section of the community were to lag behind it would harm the unity and integrity of the nation” (Bedlington, 1974: 289).
Despite these promises to help the minorities narrow the inequality gap, very little was done to realize it. Instead, the government took a ruthless approach towards economic growth, sparing no expense. Deputy Prime Minister Goh Keng Swee explained the government’s main concern was “to generate fast economic growth by any and every possible means. . . . If unequal distribution of income induced greater savings and investment . . . then this must be accepted as the price of fighting unemployment.” (Goh, 1972: 275)
By the late 1970s, a strong shift in parents’ preference towards an English-medium education for their children had resulted in a rapid decline in the number of vernacular schools.
Throughout the 1960s and 1970s, there was a shift of parents’ preference towards educating their child in the English stream. This shift, together with a period of minimal intervention in terms of educational policy and assistance to the minorities by the government, caused the number of enrolments in vernacular schools to rapidly decline. The socio-economic gap also widened between the Malays and Chinese, as the Chinese community enjoyed greater occupational mobility relative to the minorities. This can be seen in the shift in the lower manual occupation category, from a relatively equal proportion in 1957 to a 10 percent difference in 1980 [Table A]. In 1980, the average Malay household income was only 73.8 percent of the average Chinese household income. The income gap widened considerably by 1990, where the average Malay household income dropped to 69.8 percent of the average Chinese household income [Table B] (Rahim, 1998: 19-22). Decades after the lofty promises were made by the government, the Malay community’s slide into marginality continued.
Wait, the gap got bigger? Did the government do anything?
In 1979, Education Minister Dr Goh Keng Swee with the Education Study Team released a report on the Ministry of Education, more widely known as the Goh Report. The team was made up of 13 members, most of them systems analysts and economists, and none of whom ‘possess much knowledge or expertise on education’ (Goh Report, 1979: 1). The all-Chinese team excluded social scientists and educationalists, as the Education Minister had little regard for their expertise (Rahim, 1998: 121). The Goh Report made recommendations for radical changes to the educational system, recommendations which then became the basis of the New Education System (NES).
During a time when Tamil, Malay and Chinese schools were getting closed down due to declining enrolment numbers due to the popularity of English medium ones, the Special Assistance Plan (SAP) was introduced in 1978 to preserve and develop nine Chinese schools into bilingual (Mandarin and English) schools while retaining the values and traditions of a Chinese school. As part of the NES, these schools were to be the only ones to offer the Special course which the top 10 percent scorers of the PSLE are eligible to opt for. With these schools getting more resources, better facilities and the best teachers, the SAP contradicts the multi-racial principle of giving equal treatment to the non-English language streams. This exclusivity and the elite status of SAP schools affords its students better opportunities and advantages that are virtually out of reach for many minorities in Singapore. Effectively, the SAP is an institutionalized form of ethnic/cultural favouritism (Rahim, 1998: 130)
The NES also introduced early streaming for students which further exacerbated existing inequalities. Despite primary school education being free for all Singaporeans, families with better financial means have a huge advantage in preparing their child for streaming through additional tuition and better preschool choices#. (Barr & Low, 2005: 177) As we have seen from the disparity in household incomes between the Chinese and Malays, early streaming served to widen the gap between the haves and have-nots. The have-nots, more often than not, find themselves in the lower streams, trapped with very limited options providing upward social mobility. They will have to face an insurmountable task to lift themselves and their future generations out of their current predicament.
In 1982, the PAP slogan “a more just and equal society” was quietly dropped from the party’s constitution. This signaled an end to the socialist ideals that the party built its identity upon.
Why? It can’t be that the government favours one race over another...can it?
Examining the PAP leadership’s attitude towards the different cultures and ethnicities is key to understanding what the government values and how these values shaped its policies. Prime Minister Lee Kuan Yew, as quoted in the Goh Report, extolled the values of East Asian philosophies: "The greatest value in the teaching and learning of Chinese is in the transmission of the norms of social or moral behaviour. This means principally Confucianist beliefs and ideas, of man [sic], society and the state" (Goh, 1979: v). The government’s championing of SAP schools and ‘Chinese values’ is also complemented by the launch of ‘Speak Mandarin Campaign’ in 1979.
In 1991, Prime Minister Goh Chok Tong espoused similar values as his predecessor, praising the virtues of ‘Confucian dynamism’ and claiming that Singapore would not be able to thrive and prosper without the Confucian core values of thrift, hard work and group cohesion. The fear of erosion of the Chinese cultural identity was never matched with a similar concern for the erosion of minority cultural identities, where the minorities were “expected to submit to a form of partial or incomplete assimilation into a Chinese-generated, Chinese-dominated society.#” (Barr & Low, 2005: 167)
On top of favouring Chinese cultural values and identities, the PAP leadership associated the cultures of the minorities with negative connotations. Speaking about a Malay who did well in business, Senior Minister Lee Kuan Yew described the man as “acting just like a Chinese. You know, he’s bouncing around, running around, to-ing and fro-ing. In the old culture, he would not be doing that” (Han, et al., 1998: 184). In a Straits Times article on 26 June 1992, SM Lee also implied that the Chinese are inherently better at Maths, and that "If you pretend that the problem does not exist, and that in fact (the Malays) can score as well as the Chinese in Maths, then you have created yourself an enormous myth which you will be stuck with.+"
These attitudes from the ruling elite translated into more policies that preserved the advantage of the majority. When faced with the “pressing national problem”* of a declining birth-rate of the Chinese, the government took steps to ensure Chinese numerical dominance in Singapore. The Singapore government encouraged the immigration of skilled workers from countries like Hong Kong, Korea, and Macau, countries which were accorded the status of ‘traditional sources’ of foreign labour (Rahim, 1998: 72). Meanwhile, showing the government’s preference and/or dislike for specific groups of people, Malaysian Malays faced great difficulty in getting work permits. (“‘Harder’ for bumiputras to get S’pore work permits.+”, The Straits Times, 7 Mar 1991)
Another policy which worked to preserve the advantage of the majority was the urban resettlement programmes of the 1960s and 1970s. This resulted in the dissolution of the Malay electoral strongholds in the east, undermining the organic growth of Malay political grassroots. When it became apparent in the 1980s that the Malays were moving back to the traditional Malay residential areas, an ethnic residential quota, labelled the Ethnic Integration Policy, was implemented. The rationale behind the quota was to ensure a balanced racial mix, purportedly for racial harmony. However, this rationale does not stand up to scrutiny in the face of numerous academic studies on interethnic urban attitudes and relations**. Another consequence of the policy is the reinforcement of racial segregation when taking into account the income disparity between the races. Underlining the weakness of the government’s reasoning, constituencies like Hougang were allowed to remain Chinese residential enclaves despite its population being approximately 80 percent Chinese. (Rahim, 1998: 73-77)
Perhaps the most controversial policy introduced was the Graduate Mothers Scheme. It was introduced in 1983 to reverse the trend of falling fertility rates of graduate women versus the rising birth-rate of non-graduate women***. In a push to encourage graduate mothers to get married and have children, Deputy Prime Minister Dr Goh Keng Swee unveiled a suite of incentives; all-expenses paid love-boat cruises for eligible graduate singles in the civil service, a computer dating service, fiscal incentives, and special admissions to National University of Singapore (NUS) to even out the male-female student ratio#. At the other end of the spectrum, lesser-educated women were encouraged to have smaller families in a scheme called the Small Family Incentive Scheme. This was achieved by paying out a housing grant worth S$10,000 to women who were able to meet the following set of conditions: be below 30 years of age, have two or less children, educational level not beyond secondary school, have a household income totalling not more than S$1,500 and willing to be sterilized#.
Based on the average household income statistics, a simple deduction could be made that those eligible for the sterilization programme were disproportionately from the minority communities.
Isn’t that eugenics?
Yes. Singapore had a government-established Eugenics Board.
The graduate mothers and sterilization programmes were greatly unpopular and were ultimately abandoned or modified after the PAP’s mandate took a 12.9 percent hit in the 1984 general election. However that did not mean that eugenics stopped being an influence in policy-making.
In his 1983 National Day address, PM Lee stated that when it comes to intelligence, “80 per cent is nature, or inherited, and 20 per cent the differences from different environments and upbringing.” This is telling of the role that eugenics, biological determinist and cultural deficit theories played in the formation of PAP policies.
To further safeguard Singapore from “genetic pollution” (Rahim, 1998: 55, Tremewan, 1994: 113), the Ministry of Labour in 1984 issued a marriage restriction between work permit holders and Singaporeans. The work permit holder would have his work permit cancelled, be deported and be permanently barred from re-entering Singapore if he were to marry a Singaporean or permanent resident without obtaining prior approval. Approval from the Commissioner for Employment would only be given if the work permit holder possesses skills and qualifications of value to Singapore.
Doesn’t sound to me like the government targets any particular race with its policies.
Deputy Prime Minister Lee Hsien Loong in 1987 rationalized that certain posts in the Singapore Armed Forces had been closed to Malays for "national security" reasons. He claimed that this policy was implemented to avoid placing Malays in an awkward position when loyalty to nation and religion came into conflict. PM Lee also added that the Malays behaved more as Malay Muslims than as loyal Singaporeans. PM Lee and DPM Lee’s statements finally made explicit what many suspected to have been an implicit rule. It could be observed that, despite being overrepresented in the civil service, Malays tend to stay in the lower-to-middle rungs of organizations like the SAF. It is also noteworthy that, to date, no Malay has held important Cabinet portfolios such as Minister of Defence, Minister of Home Affairs, Minister of Foreign Affairs, and Minister of Trade and Industry.
The conflation of loyalty to the country with approval of the ruling party proved to be patently flawed, as studies by the Institute of Policy Studies (ST, 30 Sept 1990: 22; IPS, 2010) indicate that Singaporean Malays showed a stronger sense of national pride and identification compared to the other major ethnic groups. The study also found that Citizen-Nation Psychological Ties (CNP) scores, that is, national loyalty, weakens with: higher socio-economic status, Chinese, youth, and political alienation. Even when the Malays have been historically disenfranchised, they were found to be proud to be Singaporeans, loyal to Singapore and more willing to sacrifice for the nation than the other ethnic groups.
Additionally, Minister of Defence and Deputy Prime Minister Goh Chok Tong threatened to withhold aid to the Malay self-help organization Mendaki in 1988. The threat was issued over an incident during election night where several Malays in a crowd of Workers Party supporters had jeered at PM Goh at a vote counting centre. It became apparent from this incident that any aid offered by the government was tied to loyalty to the PAP instead of it being the duty of the government to serve Singaporeans regardless of party affiliation^^.
There have always been Malay PAP Members of Parliament (MP), did they not help fight for these issues?
The Malay PAP MPs are in the unique position of having to represent not only people of their constituents but also the rest of the Malay Singaporeans while toeing the party line. With many of the government policies being unhelpful towards the Malays, it is near impossible to fulfill this role satisfactorily. PAP MPs Ahmad Haleem (Telok Blangah) and Sha’ari Tadin (Kampong Chai Chee, Bedok) were both made to enjoy early retirements from their political careers for bringing up “sensitive” issues of the Malay community^^^. This set the tone for future PAP Malay MPs to remain unquestioningly in step with the leadership, regardless of their personal agreement, in order to have a long career within the party. Today, Malay PAP MPs have continued with the trend of parroting PAP policies that ran against the interests of the Malay/Muslim community (e.g. Environment and Water Resources Minister Masagos Zulkifli and Minister-in-charge of Muslim Affairs Yaacob Ibrahim with regards to the tudung issue).
What about the Mendaki and the Tertiary Tuition Fee Subsidy (TTFS)?
The policy providing free education for all Malays was ended in 1990 despite opposition from the Malays and the opposition party[Col: 126]. In its place, Mendaki introduced TTFS in 1991 to subsidise the cost of tertiary education in local institutions for those living in low household income. Due to the long history of marginalization and the widening of the inequality gap, the number of Malays who were able to make it to tertiary education institutions, especially in local universities, have been disproportionately low compared to the other ethnic groups. As such, the number of students able to benefit from this subsidy is even lower.
It was only recently, 20 years after the introduction of the subsidy, that the criteria for eligibility underwent revision. The revision takes into account the size of the family of the applicant, allowing for more Malay students to benefit from it. However, this subsidy is only one measure in an attempt to ensure that Malays students who were able to qualify for tertiary education are able to do so. Short of totally ditching streaming, more care, thought and resources are needed to lift the quality and accessibility of education for the Malays, especially in the early years of a child’s education.
So what needs to happen now?
Singaporeans, especially politicians, need to move on from making assertions similar to what PM Lee had made in 1987, that the "problem is psychological . . . if they try hard enough and long enough, then the education gap between them and the Chinese, or them and the Indians, would close. . . . Progress or achievement depends on ability and effort." It is important for Singaporeans to recognize the nearly Sisyphean task faced by marginalized communities in improving their socio-economic standing. Handicapped right from the start, their perceived failures in our “meritocratic” society should not be judged as an indictment of their efforts, but influenced in no small measure by the failings of the state in dragging their feet to take action. As a community, Singaporeans need to actively combat negative stereotyping, and move away from policies that were rooted in eugenics. Government intervention into ensuring unbiased, fair hiring practices would also help in raising the standing of the marginalized minorities. It would be impossible for Singapore to live up to its multiracial, meritocratic ideals without making fundamental changes to the above mentioned policies.
# Academic journal behind a paywall. Most tertiary institutions should have partnerships with these journals, so you are likely able view them if you have a student email address.
+ Online scan of the article is unavailable
\* The declining birth-rate of the Chinese was one of three pressing national problems, according to PM Lee in a National Day rally speech in 1988; the others being education and the growing number of unmarried graduates [at approx 29 mins].
\* From Lily Zubaidah Rahim’s* The Singapore Dilemma (1998: 76-77): Rabushka’s (Rabushka, Alvin (1971), ‘Integration in Urban Malaya: Ethnic Attitudes Among Malays and Chinese’, 91-107) study found that it was common for people living in ethnically homogeneous areas to adopt favourable attitudes towards other ethnic groups. People who resided in ethnically mixed areas but did not mix with other ethnic groups were also found to hold negative attitudes towards others. He postulated that physical proximity coupled with superficial interaction across ethnic lines may in fact lead to heightened contempt for other ethnic groups. Urban studies (Fischer, Claude (1976), The Urban Experiment*) have similarly found that close physical distance of different ethnic groups does not necessarily result in narrowing the social distance between the communities. Indeed, physical ethnic proximity in large cities may well engender mutual revulsion and a heightening of ethnocentrism. These research findings have been corroborated by several Singaporean studies (Hassan, Riaz (1977),* ‘Families in Flats: A Study of Low Income Families in Public Housing’; Lai, Ah Eng (1995), ‘Meanings of Multiethnicity: A Case Study of Ethnicity and Ethnic Relations in Singapore’) which have found interethnic relations in the ethnically integrated public housing flats to be relatively superficial.
\** In the same article, PM Lee drew a straight line connecting the Malays with lower educational levels in this line of rhetoric questioning: “Why is the birth rate between the Malays, and the Chinese and Indians so different? Because the educational levels achieved are also different.”*
^ The stronger representation of Malays in civil service and Western multinational corporations was likely due to the difficulty in seeking employment in local firms. Prevalence of negative stereotyping of Malays meant that a Malay job applicant has to be much better qualified to be considered for a job in a local firm (Rahim, 1998: 25). A recent study into this phenomenon can be found here#.
^^ The PAP’s quid pro quo policy was put under the spotlight again in 2011, when PM Lee made it clear that the government’s neighbourhood upgrading programmes prioritised PAP wards over opposition wards.
^^^ PAP MP Ahmad Haleem raised the “sensitive” issue of the government’s exclusionary policy towards Malays in National Service, which adversely affected socio-economic standing of the Malay community [Col: 144]. PAP MP Sha’ari Tadin was actively involved in Malay community organizations and helped to organize a 1971 seminar on Malay participation in national development (Rahim, 1998: 90).
The Myth of the Lazy Native: A study of the image of the Malays, Filipinos and Javanese from the 16th to the 20th century and its function in the ideology of colonial capitalism [pdf].
The Singapore Dilemma: The Political and Educational Marginality of the Malay Community.
Eugenics on the rise: A report from Singapore#.
Assimilation as multiracialism: The case of Singapore’s Malay#.
Racism and the Pinkerton syndrome in Singapore: effects of race on hiring decisions#.
Bedlington, Stanley (1974), The Singapore Malay Community: The Politics of State Integration, Ph.D. thesis, Cornell University.
Chew, Peter K.H. (2008), Racism in Singapore: A Review and Recommendations for Future Research, James Cook University, Singapore.
Fook Kwang Han, Warren Fernandez, Sumiko Tan (1998) Lee Kuan Yew, the Man and His Ideas, Singapore Press Holding.
Goh, Keng Swee (1972), The Economics of Modernization and Other Essays, Singapore: Asia Pacific Press.
Michael D. Barr & Jevon Low (2005) Assimilation as multiracialism: The case of Singapore's Malays, Asian Ethnicity, 6:3, 161-182, DOI: 10.1080/14631360500226606
Rahim, Lily Z. (1998), The Singapore Dilemma: The political and educational marginality of the Malay community, Kuala Lumpur, Oxford University Press.
Shaharuddin Ma’aruf (1988), Malay Ideas on Development: From Feudal Lord to Capitalist, Times Book International, Singapore.
Tremewan, Christopher (1994), The Political Economy of Social Control in Singapore, London, Macmillan.
Thanks to Tesla the EV market has been getting a lot of attention in the past few months. Many retail investors are pilling into EV scams (NKLA) or overpriced SPACS like (SPAQ, HCAC, etc...). These companies don't have working vehicles, they depend on press releases to pump the stock and investors are constantly diluted for no reason.submitted by bearsgotoalaskanstfu to wallstreetbets [link] [comments]
Meanwhile, many institutional investors are securing positions in different companies that have a high chance in becoming big players in the EV revolution. Solid companies with defined plans, realistic goals, working products and real factories.
July 09, 2020: (BUSINESS WIRE) Arcimoto, Inc.®, (NASDAQ: FUV) today announced the entry into agreements with institutional investors relating to the sale of 1,370,000 shares of its common stock at an above market offering price, pursuant to NASDAQ rules, of $7.30 per share.
VARIETY OF PREMIUM VEHICLES
FULL Q1 CALL
Hi,submitted by Dr_Sargunz to CanadianInvestor [link] [comments]
This is my first attempt at writing a DD report. I hope it makes sense.
Just a few cautionary words:
IntroductionToromont Industries Ltd. (TSE:TIH) provides specialized equipment in Canada and the United States. The Company operates two business segments: The Equipment Group and CIMCO. The Equipment Group supplies specialized mobile equipment and industrial engines for Caterpillar Inc. (NYSE:CAT). Customers for this business segment vary from infrastructure contractors, residential and commercial contractors, mining companies, forestry companies, pulp and paper producers, general contractors, utilities, municipalities, marine companies, waste handling companies, and agricultural enterprises. CIMCO offers design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.
The Company was founded in 1961 and operates out of Concord, Ontario. As at December 31, 2019, Toromont employed over 6,500 people in more than 150 locations across central/eastern Canada and the upper eastern United States.
The primary objective of the Company is to build shareholder value through sustainable and profitable growth, supported by a strong financial foundation.
Description of the 2 Main Business Segments
ManagementCEO, Scott J. Medhurst has been with the company since 1988. He was appointed President of Toromont CAT in 2004 and he came into his current position as President and CEO in 2012. He is a graduate of Toromont’s Management Trainee Program.
CFO, Mike McMillan joined the executive team in March of 2020. His predecessor, Paul Jewer is retiring this year and has been working with McMillan during the transition period.
VP and COO, Michael Chuddy has been with Toromont since 1995.
On average, leaders have 29 years of business experience and have served at Toromont for 19 years. Seeing long tenures, good stock performance, excellent business planning and execution is usually a sign of strong leadership. In addition, insiders hold more than 3% (~$175 million) of the company’s outstanding shares. Medhurst owns more than 170 thousand shares, Chuddy owns just under 100 thousand shares and the former CEO and current Independent Chairman of Board of Directors, Robert Ogilvie owns more than 2 million shares, making him the 4th largest stockholder. High insider ownership typically signals confidence in a company's prospects. Compare this to Toromont’s main Canadian competitor, Finning, where insiders own less than 0.4% ($12 million) of the company (this number varies depending on where you look, I just took the highest one I found).
Recently insiders have been selling stock (Figure 1). I cannot speak to the reasons why insiders are selling but the remaining position owned by the insider is sizable and demonstrates that the executive still has confidence in the company. Some of the reasons insiders sell are: they don't believe in the company’s future, they need money for personal use, they are rebalancing their portfolio, among others.
Figure 1: Buy and selling activity of insiders (the data is from MarketBeat, so take that for what it's worth).
On a somewhat unrelated but still related note, 50% of Toromont employees are also shareholders.
Growth StrategiesToromont has five growth strategies (expand markets, strengthen product support, broaden product offerings, invest in resources, and maintain a strong financial position). I chose to focus on the following two strategies, as they seemed most prevalent.
Growth Through AcquisitionRapid growth in this industry is generally driven through acquisitions. Toromont has gone through multiple acquisitions since the 90’s:
This acquisition allowed Toromont to make headway into the Quebec, Western Labrador, and Maritime markets, as Hewitt was the authorized Caterpillar dealer of these regions. Hewitt was also the Caterpillar lift truck dealer of Quebec and most of Ontario and the MaK marine engine dealer for Québec, the Maritimes, and the Eastern seaboard of the United States (from Maine to Virginia).
Toromont had total assets of $1.51 billion before the acquisition, the acquisition added $1.024 billion in assets, nearly doubling the balance sheet (look at Figure 2 for more details about the acquisition).
Figure 2: (all numbers are in thousands) The final allocation of the purchase price was as of Dec 31, 2018, Note 25 of 2018 Annual Report. $1.024 billion was added to the Toromont’s B/S
Large acquisitions like this one can be the downfall of a company. Here are some of the risks highlighted by management at the time of the acquisition:
The result of the acquisition and Hewitt’s integration with Toromont’s existing business produced a 39% increase in EPS in 2018 and 14% increase in 2019.
DividendToromont pays a quarterly dividend and has historically targeted a dividend rate that approximates 30 - 40% of trailing earnings from continuing operations.
In February 2020 the Board of Directors increased the quarterly dividend by 14.8% to $0.31 per share. This marked the 31st consecutive year of increasing dividends and 52nd consecutive year of making a dividend payment. The five-year dividend-growth rate is 12.09%.
Table 1: Information about the last eight dividends
Risks/Threats and MitigationDependency on Caterpillar Inc.
It goes without saying that Toromont’s future is heavily dependent on Caterpillar Inc. (NYSE:CAT). For those who don't know, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It has a market cap in excess of $68 billion. All purchases made by Toromont must be made from Caterpillar. This agreement has been standing since 1993 and can be terminated by either side with 90 days notice.
Given that the vast majority of Toromont’s inventory is Caterpillar products, Caterpillar’s brand strength and market acceptance are essential factors for Toromont’s continued success. I would say that the probability of either of these being damaged to an unrecoverable point are low, but at the beginning of this year, I would have said the probability of the world coming to a complete stop was very low too and look at what happened. Anything is possible. The reason this is a major consideration is because it's a going concern issue. Going conference is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If there was irrevocable damage to Caterpillar’s brand, Toromont is no longer a going concern, meaning the company would most likely be going bankrupt or liquidating assets. The whole Company might not go under because the CIMCO, SITECH, and AgWest business units would survive but, essentially ~80% of the business would be liquidated.
In addition to the morbid scenario I laid out above, Toromont is also dependent on Caterpillar for timely supply of equipment and parts. There is no assurance that Caterpillar will continue to supply its products in the quantities and time frames required by Toromont’s customers. So if there is supply chain shock, like the one we just saw, there is the chance that Toromont will not have access to sufficient inventory to meet demand. Which in turn would lead to the loss of revenue or even to the permanent loss of customers.
Again, both of these threats have low a probability of occurring but either could single handedly cripple Toromont’s business. As of now, Caterpillar continues to dominate a large market share (~38% as per Gurufocus) in the industry against large competitors like John Deere, CNH Industrial, Cummins, and others.
Caterpillar's stock has been on a slow decline for a couple years but that is due to reasons beyond the ones that directly concern Toromont’s day-to-day operations. I would say if you don't believe in Caterpillar’s continued market share dominance, investing in Toromont is probably not for you.
Shortage of Skilled Workers
Shortage of skilled tradesmen represents a pinch point for industry growth. Demographic trends are reducing the number of individuals entering the trades, thus making access to skilled individuals more difficult. Additionally, the company has several remote locations which makes attracting and retaining skilled individuals more difficult. The lack of such workers in Canada has caused Toromont to become more assertive and thoughtful in their recruitment efforts.
To combat this threat, Toromont has/is:
Cyclical Business Cycle
Toromont’s business is cyclical due to its customers' businesses being cyclical. This affects factors such as exchange rates, commodity/precious metal pricing, interest rates, and most importantly, inventory management. To mitigate this issue, management has put more focus on increasing revenues from product support activities as they are more profitable than the equipment supply business and less volatile.
Environmental Regulations Affecting Customers
Toromont’s customers are subject to significant and ever-increasing environmental legislation and regulation. This leads to 2 impacts:
Impact of COVID19
While the company had been declared as an essential service in all jurisdictions that it operates in, Q1 2019 results were lower as a function of COVID19 reducing activity in many sectors that Toromont services. Decline in mining and construction projects lead to a decrease in demand for Toromont products in the latter part of the quarter. Revenues were trending for 5-7% growth for the quarter before the effects of COVID19 were felt.
Management cannot provide any guidance on how to evaluate the impact of COVID19 on future financial results. They are focusing on ensuring the continued safety of employees and working with customers and the jurisdiction they operate in to evaluate appropriate activity levels on a daily/weekly basis. Lastly, management is keeping a close eye on how this crisis has led to an increase in A/R delinquencies and financial hardship for customers.
The Executive Team and the Board of Directors have taken a voluntary compensation reduction. Wage increase freezes and temporary layoffs have been implanted on a selective basis. Management believes that expanding product offerings and services, strong financial position, and disciplined operating culture positions the Company well for continued growth in the long term.
Toromont competes with a large number of international, national, regional, and local suppliers. Although price competition can be strong, there are a number of factors that have enhanced Toromont’s ability to compete:
Main Competitor in Canada: Finning International Inc.Finning International Inc. (TSE:FTT) is the world's largest Caterpillar dealer that sells, rents and provides parts and service for equipment and engines to customers across diverse industries, including mining, construction, petroleum, forestry and a wide range of power systems applications. Finning was founded in 1933 and is headquartered in Vancouver, Canada.
I am sure there are some people looking at this table and thinking Finning looks rather promising based on the metrics shown, especially in comparison to Toromont. Finning’s dividend yield, P/E, and price/book look more attractive. Their top line is 2x. Not to mention it operates worldwide and is the only distributor in the UK, while Toromont only operates in half of Canada.>! Before you go off thinking “I need to use my HELOC to buy some Finning,” as some people on this subreddit are prone to do, ask yourself: do you see any cause for concern in the metrics listed above? !<
One glaring question I have is: why is Finning trading at half of Toromont’s market cap given that it operates internationally and has twice the number of employees and revenues of Toromont?
Q1 2020 Financial Results
Figure 3: Q1 2020 Income Statement
Overall operating income, net earnings, and EPS all decreased even though Toromont saw an increase in revenue for the quarter compared to Q1 of 2019.
Assuming the world does return to “normal,” many of Toromont’s customers (especially in mining and construction) may try to catch up for lost time with increases to their operational activity, leading to an increase in Toromont’s sales for the remainder of the year. Of course this is a major assumption but it’s a possibility.
Below is a comparison of the last eight quarters. You can see the clear cyclical nature of their business.
Figure 4: Last eight quarters of earnings
Sources of LiquidityCredit
Financial AnalysisAnalysis of Debt
Historically, Toromont has had very low debt levels. The spike in late 2017 was due to the acquisition of Hewitt. Management paid off the debt aggressively in 2018. At the end of December 2019 Toromont had $650 million of debt maturing between 2025 and 2027. As a result of COVID19 the company has taken on more debt. This additional access to debt accounts of the slight uptick in historical debt in 2020 (Figure 5).
Figure 5: Toromont’s historical debt, equity, and cash
The long-term debt to capitalization ratio is a variation of the traditional debt-to-equity ratio. The long-total debt to capitalization ratio is a solvency measure that shows the proportion of debt a company uses to finance its assets, relative to the amount of equity used for the same purpose. A higher ratio means that a company is highly leveraged, which generally carries a higher risk of insolvency with it.
The debt-to-equity ratio is at 47% and debt-to-capitalization ratio is 32%, Toromont has $388 million in cash that could be used to pay down debt by nearly 50% and bring the net debt-to-equity to 23% and net debt-to-capitalization to 18%. As mentioned before, management is holding on to cash to insure sufficient liquidity during these times.
The implication of these ratios is that Toromont does not take on large amounts of debt to finance growth. Instead the Company leverages shareholders equity to drive growth.
For comparison, Finning has a debt-to-equity ratio of ~100% (it differs between WSJ, 99%, and Yahoo Finance, 101%). The nominal amount of their total debt is ~$2.2 billion, which gives them a long-term debt to capitalization ratio 62%. Finning carries $260 million in cash.
Figure 6: Toromont’s debt-to-capitalization and debt-to-equity ratios
Return on equity (also known as return on net assets) measures how effectively management is using a company’s assets to create profits.
Toromont’s return on equity is generally around 20%. Go to Figure 6 to look at the ROE for the last 4 years. In comparison, Finning has had a ROE of ~11% for the last three years, about 3% in 2016 and a negative ROE in 2015 (as per Morningstar).
Return on capital employed (ROCE) tries to find the return relative to the total capital employed in the business (both debt & equity less short-term liabilities). Toromont’s ROCE (ttm) for March 31 2020 was 22%. This means for every dollar employed in the business 22 cents were earned in EBIT (earnings before interest and tax). Finning had a ROCE of 11% as of December 2019.
Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for. In the last ten years, Toromont’s working capital has fluctuated between 1.6 at its lowest (2018) to 2.8 at its highest (2016). At the end of 2019 it was at 1.8. Meaning current liabilities equate to 60% of current assets.
Interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. Toromont has an interest coverage ratio 15x (as per WSJ). Finning on the other hand is at 4x. At this point I feel like I'm just beating up on Finning.
For those of you who made it this far, I have to admit something to you. This whole post is just a facade to ask you a question that has never been asked on this subreddit before: Should I buy BPY.UN? It keeps going down and I'm worried if I buy it, it will keep going down and I'll lose money. I don't want to lose money. Although if you go through my post history, you'll see I've been looking at/buying penny stocks.
Key Performance MeasuresBelow is a chart with key financial measures for the last four years. A few things I want to highlight:
Price Chart ComparisonsI don't do technical analysis. To those who do, good luck to you because let's be real, you'll need it. This section is just to get an idea of past performance and evaluate the opportunity cost of investing in Toromont compared to a competitor or a board based index fund.
I thought it would be easier to look at pictures as opposed to reading a bunch of numbers off a table.
For the sake of not creating a picture album of screenshots, I just looked at charts for the last 5 years. If you're interested in looking at different time intervals you can do so on google finance.
These are the only two Caterpillar distributors on the TSX, making them direct comparisons. If I was looking for exposure to this industry, I would be choosing between these two companies (on the TSX anyways). There isn't really much to evaluate here. It's like they saying: “A picture is a thousand words,” or in this case, it's 128%. If you have time, go look at the graph from August 1996 to now. I can safely say it hasn't been much of a competition. Toromont has outperformed by ~2500% in stock price appreciation alone. If you're a glass half full kind of person, I guess you could look at this disparity as Finning having enormous upside. LOL
If I'm not buying individual stocks, I’m buying the S&P 500 and to a lesser extent a Nasdaq index fund. This gives me a second look at the opportunity cost of my money. The story is not as bad as the Finning comparison. If you had bought $100 dollars of Toromont stock 5 years ago, it would have turned into $207 today, whereas the same $100 dollars in VFV would have became $157.
Just a quick aside, you can see the volatility in Toromont’s stock is much higher compared to the VFV. VFV has a relatively smooth trend upwards while Toromont trends upwards in a jagged path. This is the risk of single stocks, they move up and down more erratically, leading inventors who don't have a grasp of the business or conviction in their pick to panic sell or post countless times on Reddit asking why their stocks keep going down. “I bought the stock last week and it's done 3% already, do you guys think it’s going bankrupt? I thought stonks only go up???”
The S&P/TSX Capped Industrials Index isn't my favourite comparison for Toromont because its constituents cover many industries ranging from waste management (WCN), to railways (CNCP), to Airlines (AC, lol, had to mention it. I miss the days when there were double digits posts about AC. I wonder where those people have gone, because I can tell you where AC stock has gone... absolutely nowhere). Regardless, I used TTIN because I deemed it a better comparison to Toromont than the entire TSX. The story is on par with the other two comparisons. Toromont’s out performance is significant.
I just threw this bonus chart in here because when I saw it, I was like BRUHHH (insert John Wall meme)… It's completely unsustainable but that's impressive given the vast differences between the two.
Now, of course, past performance does not dictate future results and all that good stuff, but it really gets you thinking about how the rewards disproportionately favours winners compared to the overall market. People are generally happy getting market returns (i.e. the just buy VGRO people) but being able to pick even a few winners really pays. This reminds me of the Warren Buffet quote: “diversification is protection against ignorance.” The context of the quote is that if you are able to study a few industries in great depth and acquire a wealth of knowledge, you can see returns astronomically higher than those who diversify across the board market. The problem then becomes you put yourself at risk of having all your eggs in one basket. Look at what's happening with Wirecard in Europe right now. This is why the real skill in investing is managing risk.
Analyst Price Targets and EstimatesThe prince targets set for by analysts range from $63-$81. The average price target is ~$72, with the majority of targets within the 70-$71 range. Given the current price of $65.66, there is a ~10% upside. These price targets haven't changed much due to COVID19 even though revenues and EPS forecasts have been downgraded for 2020. The consensus estimate on 2020 revenues is $3.36 billion, down from the actual revenues of $3.69 billion in 2019 and the consensus EPS for 2020 is $3.01 down from actual EPS of $3.52 for 2019 and $3.10 for 2018. The fact that revenues and EPS forecasts have been downgraded, yet price targets remain untouched, for the most part, indicates that the effects of COVID19 are expected to be short-lived.
Figure 12: Earnings and estimate ranges for Toromont. Note: EPS numbers in this graphic are diluted EPS numbers.
Assuming P/E ratio stays the same as it has been for the last 12 months (~19x) and EPS goes down to ~$3.00 (as per analyst consensus), the implied price would be $57.
Using the last 12 months of revenues, the EV-to-Revenues ratio is at 1.56x. Assuming that ratio stays the same and with revenues estimated to be ~$3.36 billion, enterprise value (EV) comes out to $5.2416 billion. Using Q1 2020 figures for shares outstanding (82.015 million), cash ($388.182 million), and debt ($745.703 million), the implied price for a share is $58.94*.
\Note: Enterprise Value is equal to market cap plus total debt minus cash.)
Dividend Discount Model
The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value.
The average dividend growth rate is 12% for the last 5 years is 12%. There is no way Toromont can increase the dividend at this pace in the long term, thus, I chose a long term dividend growth rate of 5%. This is the assumed rate in perpetuity. The required rate of return will equal WACC, 6.85% (averaged from 2019 Annual Report). The dividend over the last year is $1.16 (two payments of $0.27 in 2019 and two payments of $0.31 for 2020).
The fair value equals $65.84.
Figure 13: DDM calculation.
Closing ThoughtsThere is no doubt that Toromont trades at a large premium. The current P/E is 19x and the CAPE ratio (Shiller P/E) is 26x. The fair value of the Company as per Morningstar research is in the mid $60 range.
Based on all valuations I did and analyst price targets, I would start buying in the high $50 range or maybe the very low $60 range, but my belief in the company has to do with long term thematic trends and how the Company operates, rather than today's price. Although I have to admit, the price does look more attractive now than it did in the beginning of June when the stock hit new all time highs. It seems like the only companies hitting new all time highs these days are tech companies, so it's refreshing to find a non-tech company achieving the same feat.
Toromont is not going to double next year or the year after that. It is a relatively low margin business, with slow growth and a cyclical business cycle. I like that the Company has strong financials, low debt, and good management. They don't take shortcuts or unwarranted risk. Future growth will mostly be driven through acquisition, but management is cautious with acquisitions and don't overextend themselves. One of the biggest problems Finning has been facing for the last couple years is political and social turmoil in South American countries which is affecting their mining clients and thus affecting revenues/margins.
The Q2 earnings are reported on July 22 202. We should have a clearer picture on the prospects of the Company from management. Hopefully we have a better idea of the COVID19 situation by then too. Regardless, I think the company is in a position where its services will always be in demand so short term fluctuations are not something that shake my confidence in this pick.
Limitations and Further Areas of ResearchBy no means is this an exhaustive due diligence report. This is enough for me to feel confident in the business and its trajectory. Limitations/further areas of the research include:
>! I know I took a few shots at people in this post. It's all in good jest. If you're offended well.... maybe you should be. I don't know, you have to figure that out on your own or you could make a post on Reddit asking random people on the internet whether you should be offended or not. !<
Remember I'm not an expert, I'm just a random guy on the internet.
DisclosureI am long Toromont. This information is not financial advice. Please do your own research and/or talk to a financial advisor. All data provided is current prior to the market opening on June 29, 2020. Inconsistencies in data can be due to many reasons, the foremost being that data was spruced from multiple different websites.
|2021/22||14% if Preliminary HRR for 2020/21 exceeds $3.3B. 18% if it is below $1.8B. Pro-rata rate in between.|
|July 1||2020/21 season begins (for contract signing purposes)|
|July 13||Training camps open|
|July 26||Travel to Hub Cities|
|July 28-30||Exhibition Games|
|August 1||Stanley Cup Qualifiers Begin|
|August 11||First Round Begins|
|August 25||Second Round Begins|
|September 8||Conference Finals Begin|
|September 22||Stanley Cup Finals Begin|
|Later of September 26 or Beginning of SCF||First Buy-Out Period Begins|
|October 4||Last Possible Day of Final|
|Later of October 4 and 2 days following the last game in the final Playoff round the team plays||Deadline for First Club-Elected Arbitration Notification (5pm ET)|
|October 9-10||2020 NHL Draft|
|Later of October 6 and 4 days following the last game in the final Playoff round the team plays||Deadline for Qualifying Offers (5pm ET), which are not open for acceptance prior to the “Qualifying Offers Open for Acceptance (12pm ET)” date"|
|Later of October 8 or SCF + 6 days||First Buy-Out Period Ends|
|Later of October 9 or SCF + 7 days||Qualifying Offers Open for Acceptance (12pm ET); RFA/UFA Signing Period Begins (12pm ET)|
|Later of October 10 and 8 days following the last game in the final Playoff round the team plays||Deadline for Player-Elected Salary Arbitration Notification (5pm ET); Deadline for RFA Offer Sheets for Players for whom Clubs have elected Salary Arbitration pursuant to First Club-Elected Salary Arbitration (5pm ET); Commencement of Second Club-Elected Salary Arbitration Notification (5:01pm ET)|
|Later of October 11 and 8 days following the last game in the final Playoff round the team plays||Deadline for Second Club-Elected Salary Arbitration Notification (5pm ET)|
|October 12||Scheduling of Salary Arbitration Hearings|
|Later of October 18 or SCF + 16 days||Qualifying Offers Expire Automatically (5pm ET)|
|October 20||First Day of Salary Arbitration Hearings|
|November 8||Last Day of Salary Arbitration Hearings|
|November 17||Training Camps Open|
|December 1||2020/21 Regular Season Begins|
https://preview.redd.it/b80c05tnb9e51.jpg?width=2550&format=pjpg&auto=webp&s=850282c1a3962466ed44f73886dae1c8872d0f31submitted by hkalodner to ethereum [link] [comments]
Submitted for consideration to The Great Reddit Scaling Bake-Off
Baked by the pastry chefs at Offchain Labs
Please send questions or comments to [[email protected] ](mailto:[email protected])
We're excited to submit Arbitrum Rollup for consideration to The Great Reddit Scaling Bake-Off. Arbitrum Rollup is the only Ethereum scaling solution that supports arbitrary smart contracts without compromising on Ethereum's security or adding points of centralization. For Reddit, this means that Arbitrum can not only scale the minting and transfer of Community Points, but it can foster a creative ecosystem built around Reddit Community Points enabling points to be used in a wide variety of third party applications. That's right -- you can have your cake and eat it too!
Arbitrum Rollup isn't just Ethereum-style. Its Layer 2 transactions are byte-for-byte identical to Ethereum, which means Ethereum users can continue to use their existing addresses and wallets, and Ethereum developers can continue to use their favorite toolchains and development environments out-of-the-box with Arbitrum. Coupling Arbitrum’s tooling-compatibility with its trustless asset interoperability, Reddit not only can scale but can onboard the entire Ethereum community at no cost by giving them the same experience they already know and love (well, certainly know).
To benchmark how Arbitrum can scale Reddit Community Points, we launched the Reddit contracts on an Arbitrum Rollup chain. Since Arbitrum provides full Solidity support, we didn't have to rewrite the Reddit contracts or try to mimic their functionality using an unfamiliar paradigm. Nope, none of that. We launched the Reddit contracts unmodified on Arbitrum Rollup complete with support for minting and distributing points. Like every Arbitrum Rollup chain, the chain included a bridge interface in which users can transfer Community Points or any other asset between the L1 and L2 chains. Arbitrum Rollup chains also support dynamic contract loading, which would allow third-party developers to launch custom ecosystem apps that integrate with Community Points on the very same chain that runs the Reddit contracts.
1.1 Why Ethereum
Perhaps the most exciting benefit of distributing Community Points using a blockchain is the ability to seamlessly port points to other applications and use them in a wide variety of contexts. Applications may include simple transfers such as a restaurant that allows Redditors to spend points on drinks. Or it may include complex smart contracts -- such as placing Community Points as a wager for a multiparty game or as collateral in a financial contract.
The common denominator between all of the fun uses of Reddit points is that it needs a thriving ecosystem of both users and developers, and the Ethereum blockchain is perhaps the only smart contract platform with significant adoption today. While many Layer 1 blockchains boast lower cost or higher throughput than the Ethereum blockchain, more often than not, these attributes mask the reality of little usage, weaker security, or both.
Perhaps another platform with significant usage will rise in the future. But today, Ethereum captures the mindshare of the blockchain community, and for Community Points to provide the most utility, the Ethereum blockchain is the natural choice.
1.2 Why Arbitrum
While Ethereum's ecosystem is unmatched, the reality is that fees are high and capacity is too low to support the scale of Reddit Community Points. Enter Arbitrum. Arbitrum Rollup provides all of the ecosystem benefits of Ethereum, but with orders of magnitude more capacity and at a fraction of the cost of native Ethereum smart contracts. And most of all, we don't change the experience from users. They continue to use the same wallets, addresses, languages, and tools.
Arbitrum Rollup is not the only solution that can scale payments, but it is the only developed solution that can scale both payments and arbitrary smart contracts trustlessly, which means that third party users can build highly scalable add-on apps that can be used without withdrawing money from the Rollup chain. If you believe that Reddit users will want to use their Community Points in smart contracts--and we believe they will--then it makes the most sense to choose a single scaling solution that can support the entire ecosystem, eliminating friction for users.
We view being able to run smart contracts in the same scaling solution as fundamentally critical since if there's significant demand in running smart contracts from Reddit's ecosystem, this would be a load on Ethereum and would itself require a scaling solution. Moreover, having different scaling solutions for the minting/distribution/spending of points and for third party apps would be burdensome for users as they'd have to constantly shuffle their Points back and forth.
2. Arbitrum at a glance
Arbitrum Rollup has a unique value proposition as it offers a combination of features that no other scaling solution achieves. Here we highlight its core attributes.
Decentralized. Arbitrum Rollup is as decentralized as Ethereum. Unlike some other Layer 2 scaling projects, Arbitrum Rollup doesn't have any centralized components or centralized operators who can censor users or delay transactions. Even in non-custodial systems, centralized components provide a risk as the operators are generally incentivized to increase their profit by extracting rent from users often in ways that severely degrade user experience. Even if centralized operators are altruistic, centralized components are subject to hacking, coercion, and potential liability.
Massive Scaling. Arbitrum achieves order of magnitude scaling over Ethereum's L1 smart contracts. Our software currently supports 453 transactions-per-second for basic transactions (at 1616 Ethereum gas per tx). We have a lot of room left to optimize (e.g. aggregating signatures), and over the next several months capacity will increase significantly. As described in detail below, Arbitrum can easily support and surpass Reddit's anticipated initial load, and its capacity will continue to improve as Reddit's capacity needs grow.
Low cost. The cost of running Arbitrum Rollup is quite low compared to L1 Ethereum and other scaling solutions such as those based on zero-knowledge proofs. Layer 2 fees are low, fixed, and predictable and should not be overly burdensome for Reddit to cover. Nobody needs to use special equipment or high-end machines. Arbitrum requires validators, which is a permissionless role that can be run on any reasonable on-line machine. Although anybody can act as a validator, in order to protect against a “tragedy of the commons” and make sure reputable validators are participating, we support a notion of “invited validators” that are compensated for their costs. In general, users pay (low) fees to cover the invited validators’ costs, but we imagine that Reddit may cover this cost for its users. See more on the costs and validator options below.
Ethereum Developer Experience. Not only does Arbitrum support EVM smart contracts, but the developer experience is identical to that of L1 Ethereum contracts and fully compatible with Ethereum tooling. Developers can port existing Solidity apps or write new ones using their favorite and familiar toolchains (e.g. Truffle, Buidler). There are no new languages or coding paradigms to learn.
Ethereum wallet compatibility. Just as in Ethereum, Arbitrum users need only hold keys, but do not have to store any coin history or additional data to protect or access their funds. Since Arbitrum transactions are semantically identical to Ethereum L1 transactions, existing Ethereum users can use their existing Ethereum keys with their existing wallet software such as Metamask.
Token interoperability. Users can easily transfer their ETH, ERC-20 and ERC-721 tokens between Ethereum and the Arbitrum Rollup chain. As we explain in detail below, it is possible to mint tokens in L2 that can subsequently be withdrawn and recognized by the L1 token contract.
Fast finality. Transactions complete with the same finality time as Ethereum L1 (and it's possible to get faster finality guarantees by trading away trust assumptions; see the Arbitrum Rollup whitepaper for details).
Non-custodial. Arbitrum Rollup is a non-custodial scaling solution, so users control their funds/points and neither Reddit nor anyone else can ever access or revoke points held by users.
Censorship Resistant. Since it's completely decentralized, and the Arbitrum protocol guarantees progress trustlessly, Arbitrum Rollup is just as censorship-proof as Ethereum.
Block explorer. The Arbitrum Rollup block explorer allows users to view and analyze transactions on the Rollup chain.
Although this is a bake-off, we're not going to sugar coat anything. Arbitrum Rollup, like any Optimistic Rollup protocol, does have one limitation, and that's the delay on withdrawals.
As for the concrete length of the delay, we've done a good deal of internal modeling and have blogged about this as well. Our current modeling suggests a 3-hour delay is sufficient (but as discussed in the linked post there is a tradeoff space between the length of the challenge period and the size of the validators’ deposit).
Note that this doesn't mean that the chain is delayed for three hours. Arbitrum Rollup supports pipelining of execution, which means that validators can keep building new states even while previous ones are “in the pipeline” for confirmation. As the challenge delays expire for each update, a new state will be confirmed (read more about this here).
So activity and progress on the chain are not delayed by the challenge period. The only thing that's delayed is the consummation of withdrawals. Recall though that any single honest validator knows immediately (at the speed of L1 finality) which state updates are correct and can guarantee that they will eventually be confirmed, so once a valid withdrawal has been requested on-chain, every honest party knows that the withdrawal will definitely happen. There's a natural place here for a liquidity market in which a validator (or someone who trusts a validator) can provide withdrawal loans for a small interest fee. This is a no-risk business for them as they know which withdrawals will be confirmed (and can force their confirmation trustlessly no matter what anyone else does) but are just waiting for on-chain finality.
3. The recipe: How Arbitrum Rollup works
For a description of the technical components of Arbitrum Rollup and how they interact to create a highly scalable protocol with a developer experience that is identical to Ethereum, please refer to the following documents:
Arbitrum Rollup Whitepaper
Arbitrum academic paper (describes a previous version of Arbitrum)
4. Developer docs and APIs
For full details about how to set up and interact with an Arbitrum Rollup chain or validator, please refer to our developer docs, which can be found at https://developer.offchainlabs.com/.
Note that the Arbitrum version described on that site is older and will soon be replaced by the version we are entering in Reddit Bake-Off, which is still undergoing internal testing before public release.
5. Who are the validators?
As with any Layer 2 protocol, advancing the protocol correctly requires at least one validator (sometimes called block producers) that is honest and available. A natural question is: who are the validators?
Recall that the validator set for an Arbitrum chain is open and permissionless; anyone can start or stop validating at will. (A useful analogy is to full nodes on an L1 chain.) But we understand that even though anyone can participate, Reddit may want to guarantee that highly reputable nodes are validating their chain. Reddit may choose to validate the chain themselves and/or hire third-party validators.To this end, we have begun building a marketplace for validator-for-hire services so that dapp developers can outsource validation services to reputable nodes with high up-time. We've announced a partnership in which Chainlink nodes will provide Arbitrum validation services, and we expect to announce more partnerships shortly with other blockchain infrastructure providers.
Although there is no requirement that validators are paid, Arbitrum’s economic model tracks validators’ costs (e.g. amount of computation and storage) and can charge small fees on user transactions, using a gas-type system, to cover those costs. Alternatively, a single party such as Reddit can agree to cover the costs of invited validators.
6. Reddit Contract Support
Since Arbitrum contracts and transactions are byte-for-byte compatible with Ethereum, supporting the Reddit contracts is as simple as launching them on an Arbitrum chain.
Minting. Arbitrum Rollup supports hybrid L1/L2 tokens which can be minted in L2 and then withdrawn onto the L1. An L1 contract at address A can make a special call to the EthBridge which deploys a "buddy contract" to the same address A on an Arbitrum chain. Since it's deployed at the same address, users can know that the L2 contract is the authorized "buddy" of the L1 contract on the Arbitrum chain.
For minting, the L1 contract is a standard ERC-20 contract which mints and burns tokens when requested by the L2 contract. It is paired with an ERC-20 contract in L2 which mints tokens based on whatever programmer provided minting facility is desired and burns tokens when they are withdrawn from the rollup chain. Given this base infrastructure, Arbitrum can support any smart contract based method for minting tokens in L2, and indeed we directly support Reddit's signature/claim based minting in L2.
Batch minting. What's better than a mint cookie? A whole batch! In addition to supporting Reddit’s current minting/claiming scheme, we built a second minting design, which we believe outperforms the signature/claim system in many scenarios.
In the current system, Reddit periodically issues signed statements to users, who then take those statements to the blockchain to claim their tokens. An alternative approach would have Reddit directly submit the list of users/amounts to the blockchain and distribute the tokens to the users without the signature/claim process.
To optimize the cost efficiency of this approach, we designed an application-specific compression scheme to minimize the size of the batch distribution list. We analyzed the data from Reddit's previous distributions and found that the data is highly compressible since token amounts are small and repeated, and addresses appear multiple times. Our function groups transactions by size, and replaces previously-seen addresses with a shorter index value. We wrote client code to compress the data, wrote a Solidity decompressing function, and integrated that function into Reddit’s contract running on Arbitrum.
When we ran the compression function on the previous Reddit distribution data, we found that we could compress batched minting data down to to 11.8 bytes per minting event (averaged over a 6-month trace of Reddit’s historical token grants)compared with roughly 174 bytes of on-chain data needed for the signature claim approach to minting (roughly 43 for an RLP-encoded null transaction + 65 for Reddit's signature + 65 for the user's signature + roughly 8 for the number of Points) .
The relative benefit of the two approaches with respect to on-chain call data cost depends on the percentage of users that will actually claim their tokens on chain. With the above figures, batch minting will be cheaper if roughly 5% of users redeem their claims. We stress that our compression scheme is not Arbitrum-specific and would be beneficial in any general-purpose smart contract platform.
8. Benchmarks and costs
In this section, we give the full costs of operating the Reddit contracts on an Arbitrum Rollup chain including the L1 gas costs for the Rollup chain, the costs of computation and storage for the L2 validators as well as the capital lockup requirements for staking.
Arbitrum Rollup is still on testnet, so we did not run mainnet benchmarks. Instead, we measured the L1 gas cost and L2 workload for Reddit operations on Arbitrum and calculated the total cost assuming current Ethereum gas prices. As noted below in detail, our measurements do not assume that Arbitrum is consuming the entire capacity of Ethereum. We will present the details of our model now, but for full transparency you can also play around with it yourself and adjust the parameters, by copying the spreadsheet found here.
Our cost model is based on measurements of Reddit’s contracts, running unmodified (except for the addition of a batch minting function) on Arbitrum Rollup on top of Ethereum.
On the distribution of transactions and frequency of assertions. Reddit's instructions specify the following minimum parameters that submissions should support:
Over a 5 day period, your scaling PoC should be able to handle:
We note that assuming that there are only 300,000 transactions that arrive uniformly over the 5 day period will make our benchmark numbers lower, but we believe that this will reflect the true cost of running the system. To see why, say that batches are submitted every five minutes (20 L1 blocks) and there's a fixed overhead of c bytes of calldata per batch, the cost of which will get amortized over all transactions executed in that batch. Assume that each individual transaction adds a marginal cost of t. Lastly assume the capacity of the scaling system is high enough that it can support all of Reddit's 300,000 transactions within a single 20-block batch (i.e. that there is more than c + 300,000*t byes of calldata available in 20 blocks).
Consider what happens if c, the per-batch overhead, is large (which it is in some systems, but not in Arbitrum). In the scenario that transactions actually arrive at the system's capacity and each batch is full, then c gets amortized over 300,000 transactions. But if we assume that the system is not running at capacity--and only receives 300,000 transactions arriving uniformly over 5 days-- then each 20-block assertion will contain about 200 transactions, and thus each transaction will pay a nontrivial cost due to c.
We are aware that other proposals presented scaling numbers assuming that 300,000 transactions arrived at maximum capacity and was executed in a single mega-transaction, but according to our estimates, for at least one such report, this led to a reported gas price that was 2-3 orders of magnitude lower than it would have been assuming uniform arrival. We make more realistic batching assumptions, and we believe Arbitrum compares well when batch sizes are realistic.
Our model. Our cost model includes several sources of cost:
Our model also shows that Arbitrum can scale to workloads much larger than Reddit’s nominal workload, without exhausting L1 or L2 resources. The scaling bottleneck will ultimately be calldata on the L1 chain. We believe that cost could be reduced substantially if necessary by clever encoding of data. (In our design any compression / decompression of L2 transaction calldata would be done by client software and L2 programs, never by an L1 contract.)
9. Status of Arbitrum Rollup
Arbitrum Rollup is live on Ethereum testnet. All of the code written to date including everything included in the Reddit demo is open source and permissively licensed under the Apache V2 license. The first testnet version of Arbitrum Rollup was released on testnet in February. Our current internal version, which we used to benchmark the Reddit contracts, will be released soon and will be a major upgrade.
Both the Arbitrum design as well as the implementation are heavily audited by independent third parties. The Arbitrum academic paper was published at USENIX Security, a top-tier peer-reviewed academic venue. For the Arbitrum software, we have engaged Trail of Bits for a security audit, which is currently ongoing, and we are committed to have a clean report before launching on Ethereum mainnet.
10. Reddit Universe Arbitrum Rollup Chain
The benchmarks described in this document were all measured using the latest internal build of our software. When we release the new software upgrade publicly we will launch a Reddit Universe Arbitrum Rollup chain as a public demo, which will contain the Reddit contracts as well as a Uniswap instance and a Connext Hub, demonstrating how Community Points can be integrated into third party apps. We will also allow members of the public to dynamically launch ecosystem contracts. We at Offchain Labs will cover the validating costs for the Reddit Universe public demo.
If the folks at Reddit would like to evaluate our software prior to our public demo, please email us at [email protected] and we'd be more than happy to provide early access.
11. Even more scaling: Arbitrum Sidechains
Rollups are an excellent approach to scaling, and we are excited about Arbitrum Rollup which far surpasses Reddit's scaling needs. But looking forward to Reddit's eventual goal of supporting hundreds of millions of users, there will likely come a time when Reddit needs more scaling than any Rollup protocol can provide.
While Rollups greatly reduce costs, they don't break the linear barrier. That is, all transactions have an on-chain footprint (because all calldata must be posted on-chain), albeit a far smaller one than on native Ethereum, and the L1 limitations end up being the bottleneck for capacity and cost. Since Ethereum has limited capacity, this linear use of on-chain resources means that costs will eventually increase superlinearly with traffic.
The good news is that we at Offchain Labs have a solution in our roadmap that can satisfy this extreme-scaling setting as well: Arbitrum AnyTrust Sidechains. Arbitrum Sidechains are similar to Arbitrum Rollup, but deviate in that they name a permissioned set of validators. When a chain’s validators agree off-chain, they can greatly reduce the on-chain footprint of the protocol and require almost no data to be put on-chain. When validators can't reach unanimous agreement off-chain, the protocol reverts to Arbitrum Rollup. Technically, Arbitrum Sidechains can be viewed as a hybrid between state channels and Rollup, switching back and forth as necessary, and combining the performance and cost that state channels can achieve in the optimistic case, with the robustness of Rollup in other cases. The core technical challenge is how to switch seamlessly between modes and how to guarantee that security is maintained throughout.
Arbitrum Sidechains break through this linear barrier, while still maintaining a high level of security and decentralization. Arbitrum Sidechains provide the AnyTrust guarantee, which says that as long as any one validator is honest and available (even if you don't know which one will be), the L2 chain is guaranteed to execute correctly according to its code and guaranteed to make progress. Unlike in a state channel, offchain progress does not require unanimous consent, and liveness is preserved as long as there is a single honest validator.
Note that the trust model for Arbitrum Sidechains is much stronger than for typical BFT-style chains which introduce a consensus "voting" protocols among a small permissioned group of validators. BFT-based protocols require a supermajority (more than 2/3) of validators to agree. In Arbitrum Sidechains, by contrast, all you need is a single honest validator to achieve guaranteed correctness and progress. Notice that in Arbitrum adding validators strictly increases security since the AnyTrust guarantee provides correctness as long as any one validator is honest and available. By contrast, in BFT-style protocols, adding nodes can be dangerous as a coalition of dishonest nodes can break the protocol.
Like Arbitrum Rollup, the developer and user experiences for Arbitrum Sidechains will be identical to that of Ethereum. Reddit would be able to choose a large and diverse set of validators, and all that they would need to guarantee to break through the scaling barrier is that a single one of them will remain honest.
We hope to have Arbitrum Sidechains in production in early 2021, and thus when Reddit reaches the scale that surpasses the capacity of Rollups, Arbitrum Sidechains will be waiting and ready to help.
While the idea to switch between channels and Rollup to get the best of both worlds is conceptually simple, getting the details right and making sure that the switch does not introduce any attack vectors is highly non-trivial and has been the subject of years of our research (indeed, we were working on this design for years before the term Rollup was even coined).
12. How Arbitrum compares
We include a comparison to several other categories as well as specific projects when appropriate. and explain why we believe that Arbitrum is best suited for Reddit's purposes. We focus our attention on other Ethereum projects.
Payment only Rollups. Compared to Arbitrum Rollup, ZK-Rollups and other Rollups that only support token transfers have several disadvantages:
While it's ultimately up to the judges’ palate, we believe that Arbitrum Rollup is the bakeoff choice that Reddit kneads. We far surpass Reddit's specified workload requirement at present, have much room to optimize Arbitrum Rollup in the near term, and have a clear path to get Reddit to hundreds of millions of users. Furthermore, we are the only project that gives developers and users the identical interface as the Ethereum blockchain and is fully interoperable and tooling-compatible, and we do this all without any new trust assumptions or centralized components.
But no matter how the cookie crumbles, we're glad to have participated in this bake-off and we thank you for your consideration.
About Offchain Labs
Offchain Labs, Inc. is a venture-funded New York company that spun out of Princeton University research, and is building the Arbitrum platform to usher in the next generation of scalable, interoperable, and compatible smart contracts. Offchain Labs is backed by Pantera Capital, Compound VC, Coinbase Ventures, and others.
Ed Felten is Co-founder and Chief Scientist at Offchain Labs. He is on leave from Princeton University, where he is the Robert E. Kahn Professor of Computer Science and Public Affairs. From 2015 to 2017 he served at the White House as Deputy United States Chief Technology Officer and senior advisor to the President. He is an ACM Fellow and member of the National Academy of Engineering. Outside of work, he is an avid runner, cook, and L.A. Dodgers fan.
Steven Goldfeder is Co-founder and Chief Executive Officer at Offchain Labs. He holds a PhD from Princeton University, where he worked at the intersection of cryptography and cryptocurrencies including threshold cryptography, zero-knowledge proof systems, and post-quantum signatures. He is a co-author of Bitcoin and Cryptocurrency Technologies, the leading textbook on cryptocurrencies, and he has previously worked at Google and Microsoft Research, where he co-invented the Picnic signature algorithm. When not working, you can find Steven spending time with his family, taking a nature walk, or twisting balloons.
Harry Kalodner is Co-founder and Chief Technology Officer at Offchain Labs where he leads the engineering team. Before the company he attended Princeton as a Ph.D candidate where his research explored economics, anonymity, and incentive compatibility of cryptocurrencies, and he also has worked at Apple. When not up at 3:00am writing code, Harry occasionally sleeps.
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