The invention described below has been inspired by the latest hare-brained scheme I have read for a project token. Again, it starts with incantations of Utility. Again, a New Vocabulary is invented, of Actions and Rituals that will be performed with the token, decreasing the dreaded Supply and providing the cherished Demand. You are excused to be confused — by that point to confuse you is the point. A religion which is understood without middlemen is a very primitive one.
What if… we cut the crap?
I am smart enough to understand that I am too stupid to really understand tokens. Tokens… have some magical properties, which are perhaps not even penetrable with reason alone.
And yet, with appropriate humbleness, we can reason about some of the underlying forces and emergent phenomena. And perhaps we can think of better ways to accomplish our goals.
Tokens are used by teams to raise funds for a project. They are sold for a price. This is happening even though the price should be zero because there is no legal obligation for the token issuer to ever share profits with the token investors if the project is successful.
Why is the price not zero? Because the market treats the tokens as pseudo-shares of stock. But unlike with shares, where the bet is on the success of the project, with tokens it’s a twofold bet: both that the project will succeed and that the founders will be honorable enough to share profits even though they don’t have to, legally.
Interestingly, when a project has both token and equity there should be a liquidity premium on the token, but a legal premium on the shares.
To summarize: tokens are, in effect, tokenized honor of the founders.
You raise funds. Your promise is: if we do well, you, our investors will do well too. There has to, eventually, be a hard link between profits and tokens. The cleanest endgame would be to convert the tokens into equity, in a jurisdiction, awarding the holders all the benefits and legal protections that come with shares. That may prove hard, even with good intentions, so other ways of paying back investors are being experimented with, most prominent of which is using profits to buy back tokens and burn them. It’s a rapidly evolving area in which we’ll see more innovation, no doubt.
But for each honorable project that tries to make sure their early investors have profited, there are dozens that have abandoned their token, that don’t care, or that run around in circles trying to prop up the token price artificially using mechanism design and supply/demand manipulation, instead of just calling it a share and letting the market price it as one. How do we solve this?
Two steps:
- We declare project tokens “non/supra-jurisdictional shares of stock”, governed by common-sense understanding of profit sharing and the ancient rules of honor.
- As mentioned, tokens are magical, so we use blockchain magic to enforce this, using Soul Vessel NFTs (ERC-721-SV).
At the beginning of the token offering, the project founders (who can remain anonymous), accept and declare that tokens are shares in the project and that they will fully partake in the fortunes of the project, one way or another. It is recognized that the project may be far from profitability, and far from incorporating and converting to real shares, but it is promised that if there is ever profitability, tokenholders will share in it in the same manner shareholders would. Rules of governance are also established (whether tokenholders can do other things as well).
A special NFT collection is minted. In it, each NFT represents a project founder. The NFT has two states, “locked” and “unlocked”, represented by appropriate graphics (say, a bird in a cage, and a free bird). The birds represent the souls of the founders. They are initially locked, and the only way to set them free is to send an appropriate amount of project token to the NFT smart contract’s release() function.
Effectively, this forces the project founders to buy back (and burn) almost all of the project token in order to set their souls free. To account for things like lost tokens, people who don’t wish to sell, and token price rise, there are two criteria. Either an amount of tokens needs to be burned, or an amount of ETH (USD?) at least equivalent to the amount initially raised needs to be sent to the contract, which will spend them on Uniswap to buy back the token and burn it. A Time Weighted Average Price (TWAP) mechanism is used to prevent manipulation.
What if the project has failed? Well, in that case the token will be cheap and the founders will not have a problem buying back the tokens and freeing themselves. This has an interesting side-effect… by not dumping the token of a rug-pull project, the investors can make it hard for dishonest founders to set their souls free.
The power of this solution is that it uses magic. Typically, you want founders to be doxxed so that their reputations suffer if they behave dishonestly. But we wrote that founders can remain anonymous. The threat of their souls being captured on the blockchain forever unless they behave honestly is a terrifying threat indeed, and a strong incentive for honest behavior.