Shares, Stake and control
Thoughts on holding shares and staking in crypto
Sunday — Funday; probably thinks no sane person ever. Either you're nursing a hangover or dreading Monday.
Not me. I instead listened to a Money Week podcast on Shareholder democracy, which made me think and see parallels to how things work in crypto.
Do you own shares?
According to a survey by finder, 33% of Brits own shares. 67% of the population say that they plan to buy stocks and shares in the future, and 2.2 million Brits (just 3%) have subscribed to a stocks and shares ISA in 2019.
A stock and shares ISA is a savings account that is only taxed beyond 20k, so usually, a good idea to have one.
But the finder survey might have forgotten one crucial thing: many people own stocks and shares unknowingly.
Are you enrolled in a pension scheme?
In the UK, there is a thing called pension auto-enrolment. It's based on ideas from the Nudge theory that we humans like to stick with the default. So instead of making employees actively enroll in a pension scheme, it's now done by default. Of course, the amount of people currently enrolled in pensions is a lot higher than before.
And well, if you wanted to opt-out and missed the deadline like me, that's on you. All you can do is pause and wait until you're past 50 to get the money back. (This is not financial advice)
Where do pension funds put their money?
So for better or worse, many employees in this country have money in pension funds. With current inflation rates, these funds have the difficult task of continuing to make sure your money remains worth something — even if you only get to cash out in 50 years.
No risk, no fun… or the more risk, the higher the return, but also the chance that you incur losses. One way to hedge is diversification, so pension funds end up investing your (our all) money into various assets. Guess what, they don't do it through Robinhood, but they will often rely on other asset management firms like BlackRock.
If you want or not, you are probably in some form invested in them. This, in a sense, makes Larry Fink the most powerful shareholder of them all. If you wonder who Larry Fink is…
It's not this guy, but you'd be forgiven to think he is.
That is Ken Griffeth, who we all love to hate regardless of whether you're a crypto enthusiast or a retail trader. He would be the perfect bad guy, the one shorting GameStop (how dare he), and then he upset all of us, crypto people, by winning the auction against the ConstitutionDAO.
Larry Fink, on the other hand, is one of the founders of BlackRock, the world's largest asset manager that manages over $10 trillion in assets.
What were shares supposed to be?
Let's take a step back and think about why this matters in the context of shares. Shares were the idea that people could participate in the growth of companies (gain financially) but also had a say in their direction.
Shares were a way for the company to raise funds and then use these funds so that shareholders could approve of and benefit from them in the long run.
Isn't it weird then that companies' shareholder meetings don't involve many ordinary people despite shares being so much more readily available?
You might say that's just the way of capitalism, so we should try communism. And while there is this great meme for it, I don't think that's the solution. (still a good meme, though).
What I’m getting to is that, even if you actively own shares, you probably have not exercised your voting rights. I haven’t despite owning shares in various companies. I must admit. Which made me start digging into it.
I do remember that last year, Gamestop investors would actually turn up to the shareholder meeting. But could they actually vote?
Robinhood was the platform of choice for GameStop investors. But despite buying shares, they couldn’t vote directly — only through Proxy. As stated on the Robinhood support page: Voting by proxy allows you to cast your vote prior to the shareholder meeting without attending the meeting in person.
If you want to vote, you’d have to watch out for an email from Robinhood prior to votes, register accordingly, and then rely on a third-party platform called Mediant to deliver your vote. So chances are that if you bought shares on Robinhood and didn’t do anything prior to a shareholder meeting — even if you are there in person, your vote doesn’t count.
Redditors have been confused by the “how do I actually get to vote” question, maybe more than anyone else who holds their shares unknowingly in a pension scheme. They also mastered the attention-grabbing headline.
The answer to that post was that you definitely need a Proxy Card and can only vote by Proxy.
Power in the Hands of Larry
This brings us back to Larry, and yes, this time, I will put an actual image of him. Here he is, probably thinking about how he can invest more of our pension money into high-yield opportunities that also fulfill ESG criteria.
The thing is if your money is in BlackRock, then well… that’s about all you get. The financial return whenever you cash out. But there is no such thing as Proxy Voting. So in practice, Larry is a huge shareholder in lots of companies, and his vote (not our vote, but our money) counts. Funny, isn’t it. We’ve managed to distribute shares far and wide, but yet we’ve got this individual who holds the power to turn decisions in shareholder meetings around. 🤷
Even I, it turns out, has some stake in BlackRock, because my ISA invested in some of their funds…That means, even if they start offering ProxyVoting, it would go through two intermediaries?!
Anyway, there might be a glimmer of hope at least for those institutional clients invested in BlackRock, because the firm has announced it’ll launch an initiative to enable them to vote by proxy. Maybe then, even us who we’re invested in through other platforms might get a chance to vote in companies we’re invested in.
Bitcoin fixes this
Not sure how many times I’ve heard that, it’s somewhat a meme by now because most of the time when used, it doesn’t fix the problem.
However, technically blockchain (note not Bitcoin) has the ability to give more people direct access to vote for things — as we’ve seen with the rise of DAOs. It’s a more direct way between capital, company, and shareholder. You invest, you receive governance tokens, and in return, you can easily vote on every decision that has to be made.
In practice, DAOs in the initial stages are managed by a few individuals that control the treasury’s multi-sig (a fun example to look at would be wonderland). They resemble more traditional corporates with a powerful board. But others have managed to allocate tokens and control in the hands of the community, such as MakerDAO.
DAOs are usually built on top of baselayers like Ethereum. So decisions that are made on those matter as well — for the entire stack that’s built on top. Now, if you’re following the crypto-verse, you’re aware that Ethereum will soon move to Proof-of-Stake. Don’t call it Eth2, though, they’re phasing that term out because — why not make things confusing.
There are other PoS networks already like Cardano, Solana, Tezos, etc. I came to the conclusion that staking is very similar to holding shares. Here’s how.
You buy, you own a piece of it
If you buy a share, you own a tiny part of a company. If you buy a token, it’s similar you own a piece of the ecosystem.
You own, you have a thing to say
If you have shares, you also have a say in shareholder meetings. In PoS networks, we could see basic validation as a similar activity. You got tokens, you validate depending on if you think a transaction is valid or not.
Similarly, when governance decisions have to be made, you will move your tokens accordingly to represent your vote. Now, governance decisions happen rarely, but staking happens 24/7.
This brings us to where things get problematic. As in traditional shares, the power to make decisions isn’t necessarily with the people who provide the capital.
A lot of the staking across blockchains happens on centralized exchanges. And sure enough, as an individual, they are the most convenient option — all you need to do is deposit money, and look at numbers go up.
But what you’re giving up is control. I always thought blockchain was about putting power into the hands of the people — ironically, we’re now all willing to give it right to the next intermediary (CEX sells); at the promise of a 12% return on our ADA, DOT, or whatever. Kraken is one of the top validators on Solana, and if you check out who ultimately validates on Cosmos, you will recognize many of the names. DYOR, and you’ll see that pattern repeated across most Proof-of-Stake networks.
So what, you might think. I earn my return, and that’s all I want. But maybe you’re forgetting something. You might not be in it for the paradigm shift, but you might want to consider what happens when a network is controlled by a few. (HINT: rich get richer and often more powerful, little people not)
At this point, of course, it’s good for CEX to continue validating transactions on all these PoS networks. So far, the rewards make it worth it, and there is no reason for them to stop. But this just re-creates the very same financial system we’re all familiar with. You might not think of it, but validators have censorship power: they can simply not add your transactions to blocks. Doesn’t look like the consensus rules weren’t followed, but for you, that can have quite an impact.
And why would you assume that potentially, if CEXs have such a big voting power, they’ll always vote in your best interest? If history taught us anything about the workings of capitalism, then it’s that businesses will be acting in their own best interest, and to beat the competition. When you gave them your funds, they didn’t have to promise to respect your wishes. It’s a purely transactional relationship. So eventually, they might well vote in a way that you don’t agree with.
If it pays them more than your meager stake is worth, it seems an economically rational bet.
I don’t stake in any network because to me it feels like there’s little point in encouraging the recreation of a system that benefits the few. Similar to how we made shares available to all, we have forgotten that there is control with them. It’s about more than just the financial gain, we should use our power to hold companies, and protocols accountable. Until BlackRock provides retail investors with a way to vote, there’s little hope for the shares in my ISA. But there seems to be some movement in the right direction.
With blockchain, we’ve got all the tools at our hands already. Let’s make sure we use them.
We don’t do that by providing yet another platform with all our voting power. No matter how many sports arenas they put their name on. Democratizing Finance should not just be about the distribution of money, it should come with the distribution of power.