Should Crypto Companies Issue Shares?
Walmart is now the second largest eCommerce retailer in the United States, with eCommerce making up around 13% of Walmart’s sales. Wallmart is in many ways the OG bricks & mortar company, has huge stores positioned in low land cost areas outside towns, massive distribution networks, and low prices driven by economies of scale. Walmart’s adoption of internet technologies reinforces the narrative that every company is now an internet company.
It’s our opinion Web3 will follow a similar trajectory: in 20 years, every company will be a crypto company.
But just as traditional, pre-internet companies didn’t rush to adopt web technology, post-internet companies won’t rush to adopt crypto either. Rather, they’ll take a more selective, methodical approach.
An example— let’s look at your local taxi company vs. Uber. Uber was internet native from the start — bookings are made via apps, trips guided by sat nav, and payments are taken automatically via PayPal. Uber went full ham on the benefits the internet could offer from the start.
Your local taxi company though, most likely adopted the internet in a more iterative manner. Perhaps the first step on the ladder was the accepting of payments via card as well as cash, then they started giving their drivers sat nav devices. Finally they rolled out Whitelabel ride-hailing apps that allowed customers to book without calling the booking office.
The transition of traditional cab companies adopting these technologies was inevitable. It was inevitable because these technologies provide a real economic advantage, either through reducing cost or improving user experience (and therefore revenue).
Not Just a Tech Innovation
The internet was primarily a technological innovation. It’s ability to network nodes unlocked, when combined with intelligent code, huge advances in orchestration, logisitcs and automation—by reducing the need for human interaction in many jobs, while delivering a much improved user experience.
Crypto, though, is not merely a technological innovation. At it’s core, it is a legal one. Legal innovations are rarer, but they happen. The invention of the limited company in the 1800’s is the foundation of all modern business. It allows risk to be spread further than just the founders of the company, making entrepenurship 100x more attractive.
Crypto is a similar 0 to 1 leap. A complete rewriting of how we view ownership, authority and how we fundamentally decide what is true and what is false.
Because of this, the potentially most far-reaching consequence of crypto will be the extent to which traditional companies will alter their ownership structure through the issuing of tokens.
I believe we will see two major types of companies emerge in the Web3 revolution.
- The token-enhanced centralised organisation (TECO)
- The decentralised autonomous organisation (DAO)
Before discussing these two types of companies, let’s clarify the difference (and similarities) between tokens and shares.
Tokens versus Shares
I’ve discussed at length the benefits of tokenisation in previous articles, but as a summary tokenisation unlocks:
- Limitlessly flexible incentive design
- Completely liquid, trustless LP pools, that never sleeps
- Global reach
Shares on the other hand have much stricter limits
- Limited incentive design, you basically have dividends and buy-backs
- LP pools with 3rd party gatekeepers (see the RobinHood gamestop case study) of how easy it is for centralised entities to control trading of shares
- Reach bound by the regulating body of the shares, i.e SEC in the US
It would be unfair to say there aren’t positives of a traditional share vs tokens, in fact some of the factors that appear as disadvantages on the surface turn out to be features rather than bugs.
- The fact that private companies issue illiquid shares rather than tokens means valuations are more likely to be based on long-term fundamentals, rather than short-term speculation. This ensures investors are aligned with the long-term success of a project.
- The tight link of shares to nation-states can also be favourable when looking to interact with a nation-state. For example investing in certain companies can offer attractive tax breaks.
It’s my belief that most companies will try and utilise the benefits of both a traditional centralised, nation-state share structure, along with the benefits of a trustless, more decentralised token offering. Let’s take a look at how this could play out.
The movement of centralised organisations → TECOs
I think it would be naive to assume that crypto native companies will completely replace centralised organisations. If we look back to internet adoption, many ‘incumbents’ such as Wallmart, Johnson & Johnson, and Mastercard utilised the internet to further grow. Internet-first companies such as Facebook, Google, and SpaceX were often 0 to 1 industries that, rather than competing with any incumbent, created completely new markets.
I think we’ll see a similar process play out with crypto adoption as we did with the internet, with companies strategically selecting how to utilise crypto to add as much value to their customers, and therefore their company.
Let’s take a look at how this could play out with a company such as Amazon (with their current recruitment drive of blockchain developers, this future could be closer than we think).
Amazon currently has only one mechanism of ownership, shares in Amazon Inc, traded on the NASDAQ. The share price (in an efficient market) is a reflection of all the money that Amazon is forecasted to create in the future, valued using discounted cash flow (DCF). Shares, then, allow me to speculate on the future success of Amazon. I can however, only access these shares through one method — parting with my hard-earned cash. Proponents of tokenisation would say this isn’t particularly fair, as nodes bring different value to a system, that is not always financial.
If I am an Amazon customer who leaves detailed reviews for every product I buy, who refers all my friends to their new service, who tries out all their new offerings and gets involved in beta-testing whenever asked — maybe I’ve even sold some items on the Amazon marketplace, shouldn’t I get to own some of this business I am such an advocate for?
Introducing the Amazon token. Imagine we now have an Amazon token ($AMZNT), which could be earned through a number of different ways. For example, everytime a review you left is marked as helpful, you’ll recieve 1 $AMZNT. Lets say you refer a friend to start selling on the Amazon marketplace, that’s 1000 $AMZNT. I could then use Amazon tokens within the Amazon ecosystem, perhaps to pay for services, to receive exclusive access to certain product or services, or maybe even get invited to special Amazon events. The possibilities are endless. And of course, if I wanted, I could just trade $AMZNT on an exchange for any other token of my choice.
From Amazons point of view, rewards for token holders could be paid out of the Amazon Inc. Any given year, Amazon spends billions on marketing— investing some of this into its token-community could be an incredibly efficient use of funds.
The Impact of Tokenisation on Tradtional Share Marketcap
One question is how a tokenisation strategy for a nation-state incorporated company would effect its core offering — shares. Fundamentally, the value of a token-enhacned centralised organisation would come from the sum of both its token marketcap and its share marketcap. The natural reaction to this would be to assume that there is a fixed amount of cash available for the Amazon ecosystem. If Amazon launched a token and $1bn of value was locked in the token, $1bn of value therefore must be removed from the share.
But if there’s one thing that the history of economics has taught us, it’s that economies are rarely ever a zero-sum game. Value can be created out of ‘nothing’. The invention of the printing presses, electricity, and the internet unlocked value that previously didn’t exist. Why should the tokenisation of companies be any different? Tokens provide a completely new utility to customers, along with incentive structures that can only be dreamed of with traditional share issuing.
I’d argue that the most likely view is tokens and shares working in harmony, mutually benefiting each other. The traditional entity funds the initial capital required to kickstart the token, and the token incentives users through ownership to carry out work that is favourable to the company. As a result, the valuation of the company increases, as does that of the token.
The reverse — token-backed assets issuing shares
Just as traditional financial assets will make use of tokensisation, the same will be true of crypto-native assets. There is a pervasive view in crypto that TradFi is inherently broken beyond repair. The only solution are completely decentralised, token-owned and token-governed assets that are completely independent of the nation-state system.
While it is difficult to disagree with the premise that TradFi is broken, it’s also a bit naive to assume that the world is headed to a token-based future anytime soon. Nation states will continue to play a huge role in regulation, governance and capital allocation this century, and traditional share structures will still provide many of the benefits they provide today.
It would seem logical then, that many crypto companies will start issuing shares, if they haven’t done so already. Captilising on many of the benefits that share issuing offers—from tax breaks, to attracting different kinds of investors to regulatory benefits.
The Sliding Spectrum
Companies will fall on a spectrum of completely crypto native DAOs to traditional share nation-state limited companies. Most companies will fall somewhere on this spectrum. Where they fall will depend on how they allocate utility among shareholders and token holders.
A big part of how this utility is allocated will be based on how revenue is split between the token and the centralised organisation. In some cases it might be that revenue is 100% allocated to the limited company, with the token simply offering loyalty benefits or non-financial perks. In other cases the token may receive 100% of revenue, with this revenue being allocated to rewards pools that are accessible to staked holders, and the limited comany existing only to hold IP.
It’s the middle ground that is most interesting. Just as traditional companies split revenue streams into different sub-companies, whether for tax reasons (Apple) or by order of regulators (Amazon and AWS), you may find that companies choose to split revenues between the token and share entity. Take for example a crypto-enabled freelancer platform. The limited company may take the revenue from the first iteraction between a client and freelancer, which would help pay for development costs. Subsequent interaction may allocate revenue further and further into the token rewards pool, encouraging freelancers to remain on platform, and discourage disintermediation, as token holders they see an upside of clients doing frequent business with them.
It’s going to be interesting to see how this plays out, in 10 years will most companies be fully share-backed, fully token-backed, or some combination of both?
Let the best approach win.