Thread by @lex_node

Governance tokens, done right, have a lot of intrinsic value and are a game-changer.

I do worry that 'done right' & intrinsic value also makes them more securities-like utility and MoE tokens but I am also optimistic. Here's why.

People are too quick to apply SEC's utility token guidance to governance tokens and I think this has spawned many misguided regulatory strategies. People need to think more about them in the context of the SEC's DAO Report.

The analogy between network miners or validators and DAO voters to achieve "sufficient decentralization" for regulatory purposes is way too facile.

Governance tokens are share-like; many DAOs rely heavily on delegation or have low participation. This can end up making DAO governance look not radically dissimilar to corporate governance, and for some reason people are in denial about this.

Most DAOs have a high % of relatively passive or relatively uninformed token holders. DAOs tend to end up either: (a) electing & budgeting core teams that are trusted with most details and vision; or (b) having small % of proactive tokenholders that debate & vote most things.

This is bad b/c gov tokens with delegations, governance free-riding, etc. are more likely to be securities (& finally give @angela_walch her day with fiduciary duties). By contrast, general partnership interests (everyone participates actively & equally) are not securities.

Governance token holders are not automatically similar to to miners or validators. Miners and validators are not principally engaged in governance; they are engaged in running a software instance for their individual profit, not designing software for collective profit.

It's true, miners and validators occasionally engage indirectly in something similar to governance-namely, when they decide whether to adopt a new client version. But (Tezos aside) this is not DAOish: the majority decision does not bind the minority; minority can keep old client.

Governance tokens have majority/minority dynamics where the minority is governed by and depends on the majority, and sometimes also have principal/agent dynamics where the majority depend on delegates/fiduciaries or issuers. Very different!

This dissimilarity of governance token holders to miners/validators has led many astray re: "sufficient decentralization". If just distributing voting power meant that the securities laws don't apply, then corporate stock would not be securities either.

At this point I think many would be tempted to say--game over. Look at the DAO report and the discussion of the role of 'curators.' What many DAOs have today--the level of reliance on small groups of devs, etc.--is way more extensive than the curator role in the original DAO.

However, I still think governance tokens can and ultimately should be non-securities, and that this needle can be threaded while still preserving the properties--real rights or powers over funding, etc.--that make gov tokens a superior positive-sum value over utility tokens.

There can be a lot of value in a governance token if it directly or indirectly governs the use of a lot of funds or the changes that are to be made to an important digital commons, and this value can arise outside of Howey test dynamics.

Critically, in certain scenarios, this value doesn't necessarily come from "entrepreneurial efforts of others". It can mainly come from users--i.e., from network effects, because once a smart contract system has sufficient adoption, users gain a vested interest in it.

I have a vested interest in Twitter--not because I expect to profit from Twitter Inc.'s business via a security, but because I run my own business on Twitter, and so what happens with Twitter--upgrades, downgrades, moderation--materially affects that business.

Now let's say there were no Twitter Inc., but there was a Twitter governance token, TWEET. All of Twitter's capital & profits go in a smart contract and I can vote my TWEET to help determine what dev teams or dev bounties get funded, etc.

Assume it was crystal clear that the capital in the smart contract will never be distributed to TWEET holders--there are no dividends to TWEET holders, no TWEET buybacks, etc.

Is TWEET a security? No. In this situation, I am like a miner. I participate in the DAO to help drive decisionmaking that profits my legal business--not to drive decisionmaking that drives Twitter's or TWEET holders' profits. No common enterprise.

Nevertheless, TWEETs will appreciate in value and I can one day sell them at a profit. The reason why matters. It's not because I am relying on the entrepreneurial efforts of others.

Instead, my governance tokens are worth something because the network effects & flywheel of the platform are already so strong, there is inherent value in being able to influence what happens with it--purely from the selfish perspective of any user who relies on that platform.

To illustrate: You can even imagine that if someone were to acquire all the TWEETs, they would effectively 'own' Twitter, even if Twitter is an instance of open-source software. TWEETs are shares of network equity, and the buyer is acquiring the network effects, not software.*

*In this hypo there is probably a sort of poison pill for the buyer, since network effects would likely be reduced if the governance became recentralized in a single entity--people would flee unless they happened to be aligned with that particular entity's interests.

What about passive governance token holders? In the hypo, even they are not securities holders. If network equity valuation increases, it's solely because of users' heterogeneous reasons for valuing influence over the platform, not because of efforts toward a common enterprise.

Many or most DAOs currently do *not* fit this hypo, because the platform also has an independent VC-backed company with a large % of governance token and separate capital; gov token holders are relying substantially on the company's entrepreneurial efforts to increase token value

But what if all these companies dissolved, all funding was community-governed and increasing value was truly an emergent property of individual users' decisions about how the platform works best for them? The securities laws do *not* apply to this, in my opinion.

This leads to an inspiring idea of true DAOs--self-perpetuating, self-regulating, ever-growing pools of capital permanently devoted to governance of digital commons by and for the users of that commons...non-profit, but profitable-- the lodestar we should be navigating toward.

I think it is unrealistic to expect true DAOs to be a high % of tokens voting on everything, with token ownership very widely distributed. Reality is, governance takes a lot of work and so you have to have a really big vested interest to make it worthwhile.

Delegation can work, but it needs to become a more coherent strategy--for example, imagine a lot of artists on an NFT platform had one delegate, collectors had another, core devs had another, etc. Now we're talking--delegation that doesn't result in common enterprise.

I also think it's fine if DAOs end up being dominated by big institutions or groups that are token whales, as long as they have independent reasons for participating than just the token value itself--i.e., they are users, not investors. We need to be realistic.

*more securities-like THAN utility and MoE tokens