Will Tokens Replace Equity?
every.to
every.to
IxO tokens are totally different. By providing liquidity on day one (before you have anything) and opening it up to anyone of any level of sophistication is an abject disaster. These tokens aren't linked to equity, they aren't linked to business value, they don't provide voting rights. They're just fun little tokens.
Once you do this the token is the product.
The founders, employees, investors all get their liquidity on day one (and even with vesting schedules on tokens, VCs have been selling their interest in their un-vested stakes). There's no incentive to build a business. The only incentive that exists is to pump the token at all costs. Your only incentive is to build a "community" and "enthusiasm" and spend your entire budget on marketing. Anything you spend building a business is a complete waste and sets you at a disadvantage relative to your peers.
It's been almost 14 years and to date not a single business built around tokens has actually become successful. Not a single one in 14 years even though if you ask any crypto advocate, they've got a list as long as your arm of industries ripe for disruption.
I posit this is because the incentive structure doesn't exist.
There's nothing new here, either. These are simply the blue sky securities that were outlawed when the SEC came into existence following the Great Depression. [1]
Makes me think of Star Citizen. I will admit I don't follow it very closely, but the cynical view seems to be they've found a very successful business model of hyping up new features and crowdfunding by selling in-game ships while the game is eternally in development, rather than building and selling a finished game.
I have no idea how you define successful but I'd consider e.g. Chainlink or SNX or Uniswap to be as or more successful and more widely used by users than a lot of startups funded in the same years by YC.
There are some original vested-escrow models currently being pushed in the DeFi token space. It's still unproven, but the term "ve(3, 3)" [0] (referring to a game theoretic outcome of mutual gain) is a meme right now.
And outside of the "scalable startup" target there's plenty going on too. All of GitHub is now subjected to an airdrop through Kivach, which escrows a cascading donation system. [1]
A generally correct lens of DeFi tech is to decenter "ownership" and look instead for network value incentives that incidentally involve individuals to generate activity. This leverages the distributed ledger properly towards social value. Taking this perspective overlaps with existing securities law in some instances, but not others.
[0] https://andrecronje.medium.com/ve-3-3-44466eaa088b
[1] https://blog.obyte.org/kivach-cascading-donations-for-github...
This isn't true though, many of these have locked liquidity that's distributed over some vesting period.
It's true that the vesting periods are typically much shorter in crypto than in traditional non-crypto businesses (6 months to a year are common vesting periods), but there are businesses which have done periods as long as 4 years to full vesting. I'll dig up some examples and edit this
edit with examples:
- Uniswap (which basically invented the AMM) has a 4 year vesting period: https://uniswap.org/blog/uni
- Beethoven X (which forks and improves on a different AMM protocol that provides multi-asset portfolio style liquidity pools) vests 95% of the team allocation linearly over a 4 year period: https://docs.beethovenx.io/beets/tokenomics
Even if tokens had all the rights of equity, this is like IPOing your company on day 1.
Is there value in that, or like you offer, is it just openings for scams?
So let's just take that as a premise, "every company IPOs on Day 1."
There seems like some fundamental opportunity there. More liquidity, perhaps paired with better milestones.
Is the extant VC model fundamentally defined by business growth or is it legal friction or something else?
Thinking about the paperwork and legal that goes into each round. There's a lot of friction. You can see SAFEs changing that already.
> They're just fun little tokens.
How can they possibly be securities if they don't hold any interest in the business nor are they a financial asset, but rather just a token? You're contradicting yourself here.
Maybe I like tokens. I put in my labor to get my cash fair and square, I'd rather not have some regulatory chump tell me I can't buy a token that I know may be worthless. People buy beany babies too, and some enjoy it.
This is an astute observation. I meant that they are the spiritual successor, framed specifically to avoid regulation.
> I put in my labor to get my cash fair and square, I'd rather not have some regulatory chump tell me I can't buy a token that I know may be worthless.
Regulators tell you what you can and cannot buy every single day. They're the reason the rivers aren't on fire, there's not lead in your food and there isn't asbestos in your walls. However, these things are so normal now that folks lose sight of the value of regulations, which is likely why we're so intent on recapitulating every single disaster that brought us the modern financial regulatory environment.
This particular one ended due to its contribution to the Great Depression.
Your argument didn't hold water in 2010 once we realized how sub-prime mortgages worked and I strongly suspect it won't hold water in a few more years. Your freedom to buy whatever toxic garbage you want ends where it compromises the stability of financial markets. It's a question of scale.
A story in three parts:
1. "You can't tell me what to buy, regulatory chump!"
2. goes broke (:shocked-pikachu:)
3. "Whelp, off to the publicly funded poor-house. Where were the regulators?!"
This is a very distorted view of the great depression. I'd argue the great depression's biggest factors were overextension on debt and poor management of fiat and the banking system. Buying tokens with free and clear cash is really is a bet a tangential comparison to contributions of the depression.
>Your argument didn't hold water in 2010 once we realized how sub-prime mortgages worked and I strongly suspect it won't hold water in a few more years. Your freedom to buy whatever toxic garbage you want ends where it compromises the stability of financial markets. It's a question of scale.
Much of the subprime-mortgage disaster was a result of poor understanding of investors of risk. I agree investors should be made more aware of risk. Markets can tolerate risk, after all startups are funded all the time and somehow they don't tank the economy. Many of these startups are funded completely by unaccredited 'investors' too -- ex: like a husband/wife team pouring their savings into a restaurant.
>"You can't tell me what to buy, regulatory chump!" goes broke "Whelp, off to the publicly funded poor-house."
People can spend all their money on beany babies, the claw arcade game, gambling, whatever. Let's not pretend everybody is off betting the farm on these tokens.
>sub-prime mortgages
Are people offering 100k+ variable interest loans to unemployed persons to buy these tokens?
>"Whelp, off to the publicly funded poor-house."
Whether you believe in welfare is a separate issue. People don't become slave of government just because if they mis-act they may end up on welfare.
I actually disagree. I represent that the social safety net is the state's interest in avoiding the bankruptcy of it's citizens.
In an economic model that advocates for free risk taking and falls back on a welfare system, you're privatizing gains and socializing risks. Tempering risk taking while providing a social safety net seems like a reasonable balance to me.
However, I appreciate your perspective!
Personally I would happily opt-out of the social safety nets and sign my own death warrant if it meant I could spend my money more freely. Sadly only a few groups can opt out of social security in US (I have looked into it, but it would require me to join a few select religions which have existed since at least the 1960s).
>However, I appreciate your perspective!
Likewise.
Seems like it's a scam. Bunch of the participants are considering a class action suit.
The article basically boils down to "people believe in the scam so founders should embrace it because it'll make them rich".
Which is hardly a new phenomena but... come on. Let's at least pretend to care about ethics, eh?
The important difference is that equity provides actual legal rights. Tokens do not.
Before making an investment, always ask basic questions like "who are these people I'm giving my money to", "what jurisdiction are they in", and "what recourse do I have if they've lied to me"?
That said, I'm interested in developments that do follow local laws, or explorations to what extent this is possible. Either that they're succeeding completely not as securities (pure utility somehow), or that they are clearly securities (ie trading stocks on the blockchain).
Is the idea you all are subscribers or are we all just commenting on the beginning? The first few paragraphs were just lead in.