Why are governance tokens interesting and important? A short thread below 👇
There is often no IP protection with many blockchain-based protocols and assets move fast on a blockchain. Teams are using governance tokens to build a community, which ideally helps generate integrations with other blockchain-based projects.
These two strategies (community/integrations) appear to be the cornerstone of the blockchain-based network effect.
One way to think about governance tokens is this: these tokens serve as a shelling point in the coordination game that a smart contract-based protocol is trying to solve.
They channel a community to organize its activity, and if the community becomes large enough, it protects the protocol from competitors who can copy the underlying smart contract code (e.g., what we're seeing with Uniswap and Sushi), thus solving for low IP protection.
However, governance tokens may serve other functions too (overtime, especially if the market for these assets mature). Some governance tokens trade freely and a few now have a high implied total market caps.
Many projects are exploring this direction and we'll likely see a whole class of these assets being launched over the next several years, including protocols that serve the same basic function (stablecoins, marketplaces, lending, options, etc.).
Some of these competitors will be direct forks and others will be novel implementations to provide similar functionalities.
Over time, the value of a governance token should serve an important signal for consumers and users exploring competing smart contract-based protocols. In other words, the value of governance tokens is a rough proxy for the trustworthiness of the underlying smart contracts.
Think about it, how can users know whether a smart contract-based protocol is reliable, safe, and trustworthy, especially if they aren't technical? The market cap of these governance tokens is not a bad (albiet imperfect) proxy.
I'd argue that a high price would tend to signal that there is a community backing / using the project.

Are market prices a perfect signal? Of course not. Markets are notoriously inefficient. And the current value of governance tokens may be inflated.
But, with blockchain tech operating with a high degree of transparency, and with delegated voting, etc., we should get decent directional pricing over time (especially if we see opportunities to short these assets).
Governance tokens are also interesting because they often enable the community to upgrade the smart contract protocol. This is really important too.
As many know, smart contracts are difficult to change once deployed and sometimes this software can operate autonomously. What happens if there is a bug, error, change of parameter in the smart contract that is needed to reflect moving market conditions?
Interested members of the community can weigh in and hopefully solve the problem or change the relevant parameter.
Now that may be scary to some: a random group of people supporting an important financial product? Run.

But as we've seen with other large user-run ecosystems, this hive approach can work well, if the ecosystem is well-governed and entry is open and permissionless
(A good example here is Wikipedia and how it has largely avoided the fake news problem, through community-run curation, and beat out more traditional encyclopedias in scope and accuracy)
In addition, if the protocol becomes large enough--and important enough--it gives the community the ability to address regulatory concerns (if they should arise). That's a win for projects aiming to impact the real world and not just the crypto world.
I'm not fully pulling the above out of the air. The above benefits have been recognized by legal scholars.
Smart contract-based protocols are provided on a "take it or leave it basis." There is no room for negotiation if you want to use a smart contract-based protocol, which often performs a financial and quasi-legal function.
You either deploy your capital into them, execute a transaction with them, or you don't.
Scholars like Frank Easterbrook and Daniel Fischel have argued that the market can price corporate governance (for traditional organizations) in these types of "take it or leave it" scenarios in the legacy world.
We now have a way to test some of these theories and that's pretty cool. I think many folks are dismissing governance tokens, but I think the above characteristics make them worthy of careful consideration.
I hope that regulators don't jump the gun and just assume that there is no value to these tokens, simply because several of them are trading for a comparatively high valuation.

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Aaron Wright

Aaron Wright Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @awrigh01

8 Sep
The use of NFTs to tokenize creative works is growing. Artists are attempting to tokenize their IP and these tokens are trading on dexes and other marketplaces. Some NFTs are selling for $50k+ and we're seeing robust NFT marketplace emerge:

A short thread 👇
There are some interesting concepts being explored with NFTs, including:

- using smart contracts to program ongoing payment to authors on secondary transactions.
- fractionalizing all or parts of the NFT so it can be owned by a group of people.
- cryptographically creating sub-tokens that can approximate licensing rights.

However, there are some things for folks exploring NFTs to consider:
Read 6 tweets
14 May
1/There's been quite a bit of discussion around personal tokens over the past couple of days. I thought I'd weigh in here.

Buckle up (jking -- but it's prob worth a read if you're a crypto dork)👇
For those that don't know, personal tokens are being created by a variety of folks for a variety of different reasons: lawyers in exchange for services and entrepreneurs in exchange for nothing in particular.
3/All of these build on the work of OG's like "Tatiana Coin" and "GavCoin"--created by @gavofyork in the early days of Ethereum.
Read 32 tweets
25 Oct 19
1/ Blockchain is becoming a larger geopolitical issue and the US should help lead here. Blockchains embody fundamental values that align with US politics:

1) a framework for digital property rights (smart contracts)

2) first amendment protections (censor resistant data)
2/

3) participatory and democratic voting mechanisms (think about DAOs)

4) open and global marketplaces (think DEXs)

For the US to lead, it’s imperative that the US government support the technology’s maturation through sensible policy and government applications.
/3

As I noted in Congressional testimony last year, the US should explore developing a national policy around blockchain like it did for the internet.

It should also clarify certain legal frameworks around tokens and the digitization of financial agreements.
Read 7 tweets
16 Nov 18
SEC just entered into settlements with two projects (Airfox and Paragon) for failing to register tokens as securities. Lots of additional detail on how the SEC is viewing the sale of tokens to “investors.” Thread below:

sec.gov/news/press-rel…
Paragon was an online entity that was purportedly established to implement blockchain technology in the cannabis industry.
They engaged in what can be viewed as a standard token sale for 2017 — selling ERC 20 tokens to investors (at a discount) to fund the development of the service.
Read 22 tweets
3 Oct 18
1/ Blockchains will support not only cryptoeconomic and financial primitives, but also legal primitives. Legal primitives streamline existing commercial transactions and will power new emergent forms of commercial activity and arrangements over the upcoming decades.
2/ At a high level, primitives are well established, generic building blocks designed to do one very specific task in a highly reliable fashion.
3/ For example, cryptoecomomic primatives are blockchain-based incentives systems uniquely enabled by tokens. Systems like token curated registries (TCRs) and curved bonding are early crypto-economic primatives, which help create scarcity or align incentives.
Read 20 tweets
18 Jun 18
Late last week Bill Hinman from the SEC gave a speech that outlined a handful factors that lawyers and projects should use “in assessing whether a digital asset is offered as an investment contract and is thus a security.”

sec.gov/news/speech/sp… (towards the end)
These factors indicate that many of the tokens sold via an “ICO” run the risk of being deemed a security.
They also shed some light on previous statements from the SEC and highlight risks that I and others at @TheBKP_Official previously flagged. A more detailed analysis follows below.
Read 48 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!