Will Tokens Replace Equity?

The Weird Future Ahead

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Dermot O'Riordan over 3 years ago

I love Napkin math, but this article fell short in a few areas due to a lack of depth.

Tokens are analogous to equity in terms of an instrument of value. However, there are a few key differentiating factors with equity. And also some relevant some similarities:

1. While I agree that having instant liquidity for an early-stage, highly volatile startup is nonsensical. Almost all high-quality Web3 projects sell tokens initially privately first to value-add angels and VCs, with tokens only launched at the Token Generation Event ("TGE) when the platform is fully built and operational. In other words, when the token has utility. Of course, there are exceptions to this, but that's the general rule. And the time from the first token sale to TGE is usually at least six months, if not 1-2 years+.

2. For tokens to have fundamental value, they must align with the core values of Web3 - shared ownership and participation, in particular.

Ownership of tokens tends to be less concentrated and more distributed than equity cap tables, with considerable portions - typically over 50% of the supply / cap table - reserved for the "community" of stakeholders, ie supply-side participants, demand-side users, casual contributors to the code base, early supporters, referrers etc etc.

And the token has value from coordinating and incentivising participation in the platform itself, typically as a supply-side coordination mechanism, with supply-side participants "staking" in the network to signal that they are willing to do work and enabling the protocol to send them work and reward them for work done, and conversely, burn some of that stake for actions not in line with the protocol's SLA so-to-speak. Check out the decentralised SLA for Pocket network, for example - https://docs.pokt.network/v1/specs/utility#4.2-castaway, and it's economics - https://docs.pokt.network/home/v0/economics

3. Regarding the total anonymity point, we're early in developing best practices for token offerings. My firm belief is that better conflicts of interests rules, disclosure and transparency will solve 99% of the problems with token issuances. I think Cryptography and smart contracts combined with higher levels of accountability and scrutiny for "insiders" - team members and early investors - can solve a lot of this.

4. Lastly re regulation, hopefully I've made it clear that startup financing is predominantly not about regulatory arbitrage. Saying that, good laws are helpful to ward off the bad actors. And decentralisation is an important frame for a lot of this. All token projects should only benefit from protection from global securities laws if they become "sufficiently decentralised" within a period - of say 12 to 24 months - from the date of their token sale.