Governance Tokens, Tech Stocks, Dividends, and "Utility"
Governance tokens… not as valueless as we’ve been led to believe. Let's be very literal about what your "equity" represents.
DeFi needs more awareness of our TradFi parallels. Namely how our problems, discoveries, life cycles, etc. are not new. The point of this series is to predict the future and clarify the present, by looking to the past. We are not reinventing human behavior or financial axioms. We are creating superior environments for them to take place.
Your Equity Is not Equity
Governance tokens… perhaps not as valueless as we’ve been led to believe. And stock "equity" isn't exactly what it's sold as, either. Let’s observe how TradFi views them, functionally and literally.
There’s hyperfocus on DeFi projects’ revenue distribution, which means you receive fee share when you own the project’s token; it’s tantamount to a dividend (idk why DeFi rebranded the term "dividend" to "rev share", maybe because it feels more community inclusive). Is this necessary for the token to accrue value? Does it give it “utility”? What do we even mean when we say that?
When you break down the “equity” platitudes and get down to concrete situations, you’re being hypocritical if you deride governance tokens but would own Nvidia, Google, TSLA, Cloudflare, or any tech stock with no dividend. What does your “equity” mean here?
I’ve taken CFA tests, I know the official theory. What I’m interested in is situational reality; what do you actually get at the end of the day with these tech stocks? Because when I break it all down, it isn't a claim on cashflows or company assets. So what is this “equity” you speak of?
Last I saw figures on it, about 70% of stocks pay a dividend, and the most richly valued ones (tech and high-growth stocks) rarely do. Only half of the Nasdaq stocks pays dividends. No cash will ever be returned to you from many of these. So why own them? Where is their “fee switch”? Because that’s how something accrues value right? Well, tech stocks do not do that. And yet, they’re very valuable.
It's odd how we describe dividends as "utility" in DeFi, but no one says a tech stock has/doesn't have utility based on if it pays dividends.
The value for the stock must come from the equity claim on company assets then...?
Nope! Especially if they're tech companies. Most tech company assets are intangibles. What are intangibles: things like IP, goodwill, the spoils from research and development, etc.. They're the brand and service they've built via investing through the income statement, not the balance sheet.
Here’s an infographic on how tangible assets for US companies has been declining, broken down in 10-year chunks. As you can see, it's mostly intangibles now.
This means there's no factory for you to lay claim to in bankruptcy (a factory or equipment would be examples of tangible assets). No hard assets to be sold off to make you whole. You have no “equity” in anything concrete here. The investments these tech companies make are often in things that seem periphery like customer support and advertising, but are critical capital assets of the tech world.
These squishy tech assets are very valuable... to the company. But they have little salvage value in liquidation. What is MongoDB going to do, sell its advertising investment and goodwill in bankruptcy? Common stock is a junior claim on assets if the company fails. You get the leftovers after bond holders and preferred shareholders are repaid. And you sure as hell aren't investing in a tech company, or any company, hoping you get scraps in bankruptcy. That means the company failed and the share price was decimated.
And you're not going to get anything anyways, because the tech company has little salvage value for its assets because they're all intangibles. What is your "equity" equity in??
So what are you getting when you buy NET?
no cashflows
nothing in bankruptcy
voting rights!
When you buy NVDA, TSLA, NET, etc. all you get is to vote in shareholder meetings. Neat! Wait, what's a governance token again?
No cash is returned to you from tech stocks. And you don’t buy them hoping for that anyways, you want 100x, not a 5% yield. You can't have both at the same time. Life doesn't work that way, that's called having your cake and eating it too.
You buy these things for huge capital gains, not a bond yield. Companies who start paying dividends only do so because they can't reinvest all the profits back into the business. Paying a dividend means your growth is slowing.
The financial laws of physics dictate the valuation of equities follows some DCF iron rule that says they go up in price as revenues, cashflows, margins, etc. increases. For many stocks, you will never touch that revenue. You will never exercise any claim on the company’s assets. What, exactly, is your “equity” giving you equity in?
If that tech company fails, the stock is a zero. And there are no assets to be sold off to make you whole. In essence, you own a governance token with no cashflows, and by the grace of god its valuation is tied to company performance. Tech stocks and governance tokens, mostly a distinction without a difference.
Stocks Can't Rug As Easily?
I’ve heard some say legal protections make stocks safer, and from a “rugging the business” standpoint, that’s true. However this is value-accrual analysis, not a legal-protections one. Why does the treasury of Cloudflare make NET more valuable when you will never touch one penny of it? Ok so the CEO can’t just steal the corporate bank account because of laws, yes. But that does not refute how you'll never get anything valuable returned to you from owning NET.
On Share Buybacks
Some important points on share buybacks vs dividends: they're technically the same thing if you're taking a CFA test. I understand the accounting logic and the tax-advantaged approach. But it doesn't change the central point being made here.
You're still not getting any income stream with buybacks, and you still have no functional claim on company assets. How do you acquire actual dollars out of your stock, post buyback? You have to sell those shares to get anything. You receive absolutely nothing by virtue of owning them besides… voting rights. But there are less of them now because of the buyback, so just less of something makes it magically more valuable? Why was it valuable to begin with though?
This artificial-scarcity act pleases the DCF gods that say your stock price should go up now by virtue of there being less of them. But you still have a governance token. A share that only lets you vote on things, has no profits returned to you, and has no real claim on any resources.
Buyback or no buyback, you can still just vote with your stock and hope number goes up as the company does well. And as the company grows and its margins improve, that’s exactly what happens! Empirically, this is the case whether or not cash is ever returned to you. Fee switch or no fee switch. Dividend or no dividend. Why? I don't know. But it just does.
To be clear I’m not smearing tech stocks, I’m using them as demonstrable evidence that governance tokens are in fact valuable. I own them myself (long NET and NVDA, in fact). Be aware of what you own, and don't be hypocritical bashing one thing but not the other when they're functionally the same.
Please share if you found useful. It’s a candid dissection that more people in DeFi should understand.
Footnote: I’m aware NVDA pays like a 0.03% dividend, which is useless. As a shareholder I'd rather the money be in Jensen's hands than mine, where it's far more valuable. Nobody owns Nvidia for the dividend.
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