7 ms·

Will Tokens Replace Equity?

19 points by enigmatic02 5y ago

arcticbull 5y ago
The biggest issue for me is that while there are plenty of problems with the extant VC model, it breaks fundraising into a number of discrete checkpoints. At each checkpoint, you must justify your valuation to a progressively more informed and sophisticated investor who has to put their money where their mouth is. This process is repeated until your business is able to list publicly and provide liquidity for the founders and employees. The incentive structure is for you to build a business and grow that business over time - and hence the intrinsic value of the equity. 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] [1] https://en.wikipedia.org/wiki/Blue_sky_law https://en.wikipedia.org/wiki/Blue_sky_law
- tsujp 5y ago
  Would you consider MakerDAO to not be successful?
  - deleted 5y ago
    [deleted]
  - deleted 5y ago
    [deleted]
  - ShamelessC 5y ago
    https://forum.makerdao.com/t/vault-compensation-plan-v2/3584/102 https://forum.makerdao.com/t/vault-compensation-plan-v2/3584... Seems like it's a scam. Bunch of the participants are considering a class action suit.
- Tenoke 5y ago
  >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 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.
  - quickthrowman 5y ago
    All of the things you listed just allow for further speculation on tokens (or create synthetic versions of actual tradable markets that already exist), they don’t solve an actual real world problem that non-cryptocurrency owners have. Please try again, and list a successful product that uses blockchain/cryptocurrency in a way that solves a problem in the real non-cryptocurrency world.
    - InvertedRhodium 5y ago
      Would darknet markets count? I understand that it's an illicit product, so traditional VC funding is obviously not going to happen, but it seems to me that cryptocurrency is essential in enabling those platforms.
- syntheweave 5y ago
  I already got exactly what I wanted out of BAT: a token with a good incentive structure that has supported a business(Brave) with a hockey-sticking userbase. Brave got its initial financing through VC rounds, but the token represents one of the most successful outcomes of the ICO mania. 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 https://andrecronje.medium.com/ve-3-3-44466eaa088b [1] https://blog.obyte.org/kivach-cascading-donations-for-github-repositories-2b175bdbff77 https://blog.obyte.org/kivach-cascading-donations-for-github...
- magicjosh 5y ago
  I'm curious about this too. 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.
- alex_c 5y ago
  >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. 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.
  - magicjosh 5y ago
    Star Citizen certainly does seem like that! The question is, is this fundamentally because of the liquidity of these mechanisms? Or is there an opportunity to build working funding systems that work better than the VC process? Is VC simply the ultimate evolution of funding impactful businesses?
  - pjc50 5y ago
    In retrospect, they were extremely ahead of the game, and they didn't even have to waste staggering amounts of energy to sell people virtual items.
- notch656a 5y ago
  >. These are simply the blue sky securities > 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.
  - arcticbull 5y ago
    > How can they possibly be securities if they don't hold any interest in the business nor are they a financial asset. 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?!"
    - notch656a 5y ago
      >This particular one ended due to its contribution to the Great Depression. 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.
- pcthrowaway 5y ago
  > 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. 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 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 https://docs.beethovenx.io/beets/tokenomics
M2Ys4U 5y ago
No. And they shouldn't. 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?
pjc50 5y ago
(mostly paywalled?) 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"?
- magicjosh 5y ago
  Is there any work on making tokens provide actual legal rights, actually being securities?
  - pjc50 5y ago
    But they specifically want to avoid that! If they're securities, there are laws you have to follow.
    - magicjosh 5y ago
      I hear ya. The stuff under "regulatory arbitrage" or "legal gray area" seems less interesting to me because of this. I don't have the expertise to tell if there's fundamental value or just breaking the rules. 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).
magicjosh 5y ago
What a paywall! Article really gets going and then cuts off paragraphs in. Had me hooked. Is the idea you all are subscribers or are we all just commenting on the beginning? The first few paragraphs were just lead in.
thunkshift1 5y ago
Whats the difference between the two? Other tokens being completely unregulated

19 points by enigmatic02 5y ago

The biggest issue for me is that while there are plenty of problems with the extant VC model, it breaks fundraising into a number of discrete checkpoints. At each checkpoint, you must justify your valuation to a progressively more informed and sophisticated investor who has to put their money where their mouth is. This process is repeated until your business is able to list publicly and provide liquidity for the founders and employees. The incentive structure is for you to build a business and grow that business over time - and hence the intrinsic value of the equity. 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] [1] https://en.wikipedia.org/wiki/Blue_sky_law https://en.wikipedia.org/wiki/Blue_sky_law

tsujp 5y ago
Would you consider MakerDAO to not be successful?
- deleted 5y ago
  [deleted]
- deleted 5y ago
  [deleted]
- ShamelessC 5y ago
  https://forum.makerdao.com/t/vault-compensation-plan-v2/3584/102 https://forum.makerdao.com/t/vault-compensation-plan-v2/3584... Seems like it's a scam. Bunch of the participants are considering a class action suit.
Tenoke 5y ago
>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 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.
- quickthrowman 5y ago
  All of the things you listed just allow for further speculation on tokens (or create synthetic versions of actual tradable markets that already exist), they don’t solve an actual real world problem that non-cryptocurrency owners have. Please try again, and list a successful product that uses blockchain/cryptocurrency in a way that solves a problem in the real non-cryptocurrency world.
  - InvertedRhodium 5y ago
    Would darknet markets count? I understand that it's an illicit product, so traditional VC funding is obviously not going to happen, but it seems to me that cryptocurrency is essential in enabling those platforms.
syntheweave 5y ago
I already got exactly what I wanted out of BAT: a token with a good incentive structure that has supported a business(Brave) with a hockey-sticking userbase. Brave got its initial financing through VC rounds, but the token represents one of the most successful outcomes of the ICO mania. 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 https://andrecronje.medium.com/ve-3-3-44466eaa088b [1] https://blog.obyte.org/kivach-cascading-donations-for-github-repositories-2b175bdbff77 https://blog.obyte.org/kivach-cascading-donations-for-github...
magicjosh 5y ago
I'm curious about this too. 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.
alex_c 5y ago
>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. 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.
- magicjosh 5y ago
  Star Citizen certainly does seem like that! The question is, is this fundamentally because of the liquidity of these mechanisms? Or is there an opportunity to build working funding systems that work better than the VC process? Is VC simply the ultimate evolution of funding impactful businesses?
- pjc50 5y ago
  In retrospect, they were extremely ahead of the game, and they didn't even have to waste staggering amounts of energy to sell people virtual items.
notch656a 5y ago
>. These are simply the blue sky securities > 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.
- arcticbull 5y ago
  > How can they possibly be securities if they don't hold any interest in the business nor are they a financial asset. 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?!"
  - notch656a 5y ago
    >This particular one ended due to its contribution to the Great Depression. 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.
pcthrowaway 5y ago
> 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. 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 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 https://docs.beethovenx.io/beets/tokenomics

M2Ys4U 5y ago

No. And they shouldn't. 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?

pjc50 5y ago

(mostly paywalled?) 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"?

magicjosh 5y ago
Is there any work on making tokens provide actual legal rights, actually being securities?
- pjc50 5y ago
  But they specifically want to avoid that! If they're securities, there are laws you have to follow.
  - magicjosh 5y ago
    I hear ya. The stuff under "regulatory arbitrage" or "legal gray area" seems less interesting to me because of this. I don't have the expertise to tell if there's fundamental value or just breaking the rules. 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).

magicjosh 5y ago

What a paywall! Article really gets going and then cuts off paragraphs in. Had me hooked. Is the idea you all are subscribers or are we all just commenting on the beginning? The first few paragraphs were just lead in.

thunkshift1 5y ago

Whats the difference between the two? Other tokens being completely unregulated