🛑 You don’t own the protocol...

Hey there!

Good news: It's Wednesday, which means we're one step closer to the glorious return of Kate Irwin.

The extraordinary Byron Gilliam, from Blockworks' flagship daily newsletter, The Breakdown, is here to distract you from the wait. 

He’s exploring what it really means to hold PUMP. Enjoy!

🤑 Cash, ‘nuked’ tokens and Gordon Gekko

PUMP token holders now find themselves in the odd position of hoping the money they just sent to pump.fun will soon be returned to them.

That’s the mood on Crypto Twitter, at least, where influential accounts keep pointing to pump.fun’s estimated $2 billion cash pile as the bull case for PUMP (see here, here, here and here).

The problem, of course, is that token holders have no claim on that cash — even though they supplied most of it.

In IPOs, stock market investors send their money to a company in return for an owner’s claim on assets that’s roughly equivalent to the money they just sent.

In the PUMP ICO, however, crypto investors sent their money to pump.fun in return for a token with no claim on anything whatsoever.

They knew that. But they also expected to be treated as if they had a claim on the revenue of pump.fun.

So far, they have been. 

Over the past week or so, pump.fun has used roughly 100% of its revenue to buy back the PUMP token.

If you assume it does that forever, the token seems reasonably priced: Annualizing last week’s revenue, PUMP is trading on only about 16x (by market capitalization).

But that’s assuming they also burn all those tokens — and what’s the point of issuing tokens if you’re immediately going to start burning them?

It seems more logical, as people have also been speculating, to do the opposite: either airdropping tokens to users or paying them out as incentives. 

Luca Netz, for example, thinks pump.fun should airdrop 10% of the token’s supply to the community.

This would “nuke the token,” as he puts it, but that’s part of the appeal: “The token nuking is fine, especially because he has so much cash.”

By “he,” Netz means pump.fun’s three co-founders, which is instructive: They own the $2 billion of cash that token holders are hoping to have an informal claim on.

If the co-founders are intending to use that cash to buy the token, as people hope, it would make sense to get the token price down first.

“It’s in his interest to buy as much of the token as possible at the lowest price possible,” Netz explained.

In other words, the incentives between the owners of the protocol and the owners of the token are grievously misaligned.

Charlie Munger would say that’s exactly what PUMP token holders should be thinking about.

Equity investors don’t have to worry much about incentives because management is aligned with shareholders by both law and precedent.

The cult of shareholder value that was popularized by the fictional Gordon Gekko in the 1980s is now so ingrained in equity markets that investors are almost always treated like owners. 

In crypto, by contrast, token holders have neither law nor precedent to rely on, so they do have to think hard about incentives.

Take Grass, for example — a buzzy AI project (“multimodal search”) that’s already earning “millions of dollars a month,” according to its founder.

But that’s the full extent of Grass’s disclosure: That revenue is neither onchain nor otherwise made public. 

So when Dan Shapiro tried to value the DePIN project for Blockworks Research, he could only take a guess at what “millions a month” might really mean.

“Although Grass keeps network revenue data private,” he wrote, “one can make some educated assumptions from publicly available data licensing deals to estimate the value of the network.”

In other words, he had to look at data licensing agreements made by the likes of OpenAI and Reddit to hazard a guess at what kinds of agreements Grass might also be making.

To value the Grass token, he also had to do things like “assume data sales have similar margins to ad sales” — things that an equities analyst would determine by calling the company and asking them.

If all of the assumptions Shapiro was forced to make turned out to be roughly correct, he thought there could be an interesting investment case for GRASS: “In its current state, Grass’ free floating market cap of $585m is justified based on the value of its multimodal data alone.”

But now Grass “appears to have pivoted to data labeling” (i.e., away from multimodal), according to one disillusioned token holder, who adds that “little information has been shared with token holders.”

I couldn’t find any information at all. Which is weird.

Imagine if shareholders had to find out from a random X account that Apple had pivoted from making smartphones to making sneakers.

Grass is earning some amount of revenue, but we don’t know how much; however much it is earning, token holders haven’t seen any of it and don’t know if they ever will; and the business may or may not have gone off in a new direction. 

Such is the state of affairs in crypto “investing.”

It doesn’t have to be that way.

Holders of the MAPLE token, for example, don’t have to guess what portion of the revenue earned by Maple Finance will be returned to them. Instead, they decide that themselves by voting on it. 

As a result, MAPLE investors probably don’t have to think about incentives much more than equity investors typically do. 

“No fees are allocated to the Labs entity,” Shaunda Devens wrote for Blockworks Research, “and the Labs entity is funded exclusively through grants, not through revenue-generating activities.”

That makes MAPLE holders a lot like owners, I think. 

Shareholders have disclosure rules, legal claims, SEC enforcement actions, decades of precedent and the movie Wall Street to substantiate their ownership claims.

Token holders have only smart contracts. 

Have crypto investors properly accounted for this lack of both rights and transparency?

Anecdotally, there doesn’t seem to be any risk premium built into opaque, rights-light tokens. Most of them still seem inexplicably expensive to me.

Nor is there much differentiation between projects with ownership-like tokenomics and those with tokenomics you can only guess at.

I imagine it’s only a matter of time until there is, however. And the sooner the better.

The best thing for crypto investors may be if pump.fun follows Netz’s advice and “nukes the token.”

That might finally get crypto thinking harder about the power of incentives. 

— Byron Gilliam

Institutional DeFi has crossed the chasm from dream to reality and Ethena is leading the charge. $USDe has seen a $3.1B inflow over the last 3 weeks, outpacing all Bitcoin ETFs combined.

Guy Young joins the DAS: London lineup this Oct 13-15 to break down the value proposition of institutional DeFi.

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📅 October 13-15 | London