The Token is Not a Stock

If it works for the stock people, it must work for the token people?

If you ask a crypto guy “is the token a stock?” his words will tell you “no”. He then will demonstrate almost zero understanding of what he just said by speaking of "market cap", "P/E ratio", "buybacks" and other concepts specific to stocks.

Rather than reflect on what these terms actually mean, DeFi takes a vibes-based approach and says "close enough" when it's not even in the same ballpark. Led by VCs and crypto founders making unwitting stock abstractions that implicitly assume the token is kinda sorta like equity; many bad decisions flow out of this.

The analysis and thought put into a lot of DeFi beliefs can be summed up as: "If it works for the stock people, then it must work for the token people."

I will cover token buybacks and their misapplication to crypto in another essay (if you follow me on Twitter, you’ve probably seen parts of this). This essay will focus on another crypto misnomer: market capitalization.

And to clarify: when I say “DeFi” it means decentralized finance, which is the open infrastructure that the tokens trade on. When you’re anonymously transacting on a blockchain in a P2P fashion using permissionless applications, that’s DeFi. I will use crypto and DeFi interchangeably.

Multiplying Two Numbers Together

Market cap is explained simply as stock price X share count; however this does not communicate what that math meaningfully represents. Why does multiplying these two numbers inform anything useful for the stock people? Does it mean the same for the token people?

Here is a literal, specific definition of market cap:

Market capitalization (“market cap”) is the total market value of a company, calculated as share price multiplied by the number of shares outstanding.

Market cap measures a corporation’s total equity value. This math produces a concretely meaningful number, because the stock facilitates legal claims and enforceable control over the company’s underlying assets, operations, and cash flows. The stock is valuable proportionate to the degree the business is valuable, because the stock effects claim and control of the business.

DeFi guys take the finance bro’s construct and superficially apply it to their coins. Extending the term “market cap” to non-equity assets is a shorthand for “price × supply in circulation”; it does not signify any ownership interest or the value of a business. It doesn’t tell you much beyond “here’s what two numbers multiplied together are”. Examples:

• A “market cap” for commodities such as oil or feed hogs is not applicable and carries no practical information. For gold sometimes a “total market value” (price per ounce × total ounces) is cited, but all it does is provide an estimated global value based on a rough quantity (all the gold ever mined) and current prices.

• For crypto that serves as a commodity like Bitcoin or Ethereum, “market cap” is the same sort of shorthand someone might use for gold.

  • These assets are commodities because they accrue value like commodities. Bitcoin is valuable for gold-like reasons, and ETH is worth something similar to why oil is (it’s the “gas” of Ethereum). Their utility stems from their integral role in powering networks or functioning as a medium of exchange and store of value. They provide no equity-like claim to a business or profits.

• That brings us to governance tokens, which share the same “token” moniker as ETH and BTC, but unlike them lack any utility or mechanism to be worth something. Thinking all crypto tokens are the same because of the common nomenclature is like believing all financial assets are the same, because they’re called “assets”.

  • Governance tokens confer zero ownership or enforceable control over the issuing DeFi company. They are not commodities because they have no intrinsic use, they are not comparable to stocks because they exert no claim on resources. Then what are they? Nothing. They aren’t anything. They are memecoins wearing fancy suits.

Thus “market cap” for non-equities denotes only a notional aggregate value, rather than the worth of a valuable enterprise. The term is inapplicable for assets without ownership claims.

A stock’s market cap communicates the mark-to-market value of the business that issues it, because the stock has enforceable claims and control over that business (just ask a private equity firm or Carl Icahn). That’s why market cap is a germane, informative figure for stocks, and why it’s vacuous hot air for DeFi assets.

A DeFi governance token exists in financial purgatory. It defies classification because it lacks purpose beyond speculation. It’s a feather floating in the wind pretending it’s flying.

“Investing” in DeFi

The value of a business is the sum total of all cashflows it will ever generate, discounted back to today. Projecting this is much closer to art than science, and why short-term stock prices are so volatile and capricious, and why investing is so difficult.

It's also why long-term stock valuations mirror the company’s financials and growth.

"In the short term, the market is a voting machine. In the long term, it's a weighing machine."

Trading (trends, sentiment, herding) is metaphorically expressed as votes; this is reflected in short-time-horizon pricing and can be disconnected from underlying economic worth. It’s high-time-preference asset allocation.

Investing (cashflows, margins, balance sheets) is metaphorically expressed as weight; this is reflected in medium-to-long-term valuation. It's low-time-preference asset allocation.

Eventually, every asset gets put on the scale.

“Price is what you pay, value is what you get.”

The following is analysis of DeFi governance tokens. Gas coins or genuine utility tokens are assets that accrue value like commodities and have a reason to be worth something; this criticism does not apply to them.

The Token is Not a Stock

Optically, it may look the same when a VC invests in a SaaS company’s Series A at a $100M valuation and a DeFi company at a $100M.

It’s not even close to the same thing.

The asset the VC receives is completely different.

The time preference is completely different.

The market structure is completely different.

The incentives are completely different.

When regular tech VCs make an investment, they’re typically making a 7-10+ year commitment and projection of what that company's success and cashflows will be over that time.

Why are they looking so far out into the future?

Because their liquidity event (an IPO) is often 7-10 years away, thus they're forced to invest based off long-term estimations of revenue the company generates. It’s an approximation, it’s imperfect, but at least we know what they’re aiming to predict and promote: a genuine business, because that’s what the incentives encourage.

Due to this delayed liquidity event and VC emphasis on authentic value creation, the founder is incentivized to build a serious enterprise. Everyone in this situation is calibrated to Build For Weight (fundamentals/cashflows) because everyone gets the heftiest financial reward (stock price) that way. This is healthy. This is not trading, this is investing.

“Show me the incentives and I’ll show you the outcomes.”

However, crypto VCs do not think this way. Because they can’t, as there is no legitimate way to invest in anything in DeFi; because the token is a nonsense instrument that does nothing and does not track the issuing company.

So what’s the strategy? How does one even make money buying such a silly asset?

Well, you remember that 7-10 year liquidity event? That’s gone now. A DeFi benefit that serves as a poetic double-edged sword is the immediate liquidity. The digital asset can be traded out of far more quickly, often within months. This is a positive thing on paper, but manifests in some pernicious externalities.

The combination of near-immediate liquidity and tokens that carry no legitimate claims on the issuing company produces a dynamic that isn't investment, but pure speculation. There is little focus on fundamentals, because fundamentals aren’t rewarded, because the asset itself is not designed to reward fundamentals!

DeFi is an industry that builds for votes, not weight. It’s not a flaw of its participants, but a terminal defect in its tokens. Actions follow incentives. The down-only charts of many of these things should not be confusing.

These critical differences reveal themselves in every aspect of VC and founder decision making, resulting in funding round “valuations” and "market caps" that basically boil down to this: “Can I sell this coin for 50-200% more than what I paid for it within the next 6-18 months? I don’t care about the income statement, how do we pump this thing?”

A traditional VC contemplates a company’s worth ten years down the line, because that’s what his stock will represent when it gets liquid. A crypto VC ponders what the token can moon to over the next several months based off Twitter hype and pumpanomics shilling 🚀🚀🚀, because that’s all that magic internet bean will be worth in its current state.

These two parties are the same because they’re both venture capitalists the same way cocaine and sugar are the same, because they’re both white powders.

Crypto VCs are receiving an asset with no characteristics of a stock tying it to the foundations of the company. They know this.

Gone is their emphasis on cashflows, gross margins, and Rule-of-40 metrics; typical tech VCs really care about this, because they're actually investing, because the stock they receive is investable.

This is why crypto VCs aren’t investing: they have no mechanism to do so. It’s a failing of the token, not the investor. You dance to the music that’s playing, and right now the music in DeFi is something you’d hear at a kid’s birthday party.

The immediate liquidity of DeFi has destroyed a critical Chesterton’s Fence of VC delayed gratification, and the absence of any value accrual to the token has exacerbated a parasitic hot-potato mindset and zero-sum thinking. Show incentives = show outcomes.

Your DeFi app is not worth $100M because the token price X quantity equals that number, as we discussed that’s not what market cap means! Multiplying two numbers means something for the stock people because they’re playing a serious game, whereas DeFi is playing Hungry Hungry Hippos on the blockchain. The token is devoid of control and claim over the business; it’s vapor with a ticker symbol. There is no such thing as “market cap” in DeFi.

When the token is understood on grown-up terms and not crypto-kiddie vibe ones, you see it's not possible for VCs to be making a serious investment in your company, because the token is not a serious investment. What do you do with an unserious asset? You trade it.

Hot Cheetos Philosophers

This is why the decisions in DeFi are oriented around building for votes, not weight; rather than guided by long-term fundamentals, it’s what the other guy might be willing to pay for it in a couple months. It’s thinking on a relative basis, not an absolute one. This is how a trader sees the world.

Traders look at momentum data, RSI, “narratives”, “sentiment”, musical-chairs trends, and other short-term indicators that are unrelated to the sustained viability of the company. Everything in DeFi is informed by this voting mentality, it’s pervasive. A corrupt asset has resulted in corrupt incentives, and unsurprisingly… corrupt behaviors.

Crypto magical thinking that implicitly views a stock and token as essentially the same has bred a corrosive strain of financial nihilism. Many in this industry don’t come from finance; crypto is their first real encounter with the plumbing of money. And even those that do know some proper finance tend to forget basic things and get infected with “WAGMI fren 🚀” brain.

Since their governance tokens are nothing more than digital pillowcases filled with pudding, they presume every asset must be like this, so what’s the point? It’s all just numbers bouncing around bro!

Rather than say “Damn, our tokens are bullshit, we should fix that” the conclusion is often “Wow, everything is bullshit, value is a meme!”; this is financial nihilism in a nutshell. When your industry is mostly vapor being passed around in a circle, it tragically degrades the morale and motivation of those trying to sincerely build.

These juvenile behaviors are all downstream of the same culprit: the tokens. If you fix them such that he who creates the most value gets the greatest reward, much of this Hot Cheetos pseudo-philosophy and myopic parasitism would evaporate. If you made the most money by building the best business… I think you’d be surprised how quickly this industry would clean itself up.

What do I mean by Hot Cheetos philosophers?

A Horse and Dog: Basically the Same

We have two abstractions that *look* similar to their TradFi (traditional finance) counterparts while being nothing like them:

• VC investment in DeFi applications: it’s not an investment, it’s a trade

• DeFi market caps: it’s not a market cap because the token is devoid of any fundamental value accrual and control of the company

DeFi founders: This is why your “market cap” is meaningless insofar as your true company value. You did not create a $200M company because your token price X circulating supply multiplies to this. You can’t just copy the stock people and then issue definitely-nothing-like-a-stock and then pretend like you’re doing a real finance.

I know, I know, you’re acutely aware the token is not a stock, however your actions continue to expose that you do not understand what those words mean…

A governance token is more aptly described as a suggestion token; that’s what “governance” means in DeFi, you suggest things with no legitimate enforcement. Suggestions are not a form of value accrual.

Believing market cap and other equity metrics apply to this gibberish token is like thinking a horse and a dog are the same animal, since they both walk on four legs. Assuming token buybacks work because they do for stocks is like saying what’s true for the pizza must be true for the Oreo, since they’re both round.

Currently, governance tokens are nothing more than onchain "I Voted" stickers: a hollow, symbolic badge that provides a sense of involvement the same way a participation trophy does. They don’t come with a seat at the corporate table or enforceable claims on valuable assets. They’re speculation vehicles for people to dance around with. Unalloyed voting machines. There is no weight there.

What’s the right market cap for a bunch of onchain “I Voted” stickers? I have no idea, what’s the right number of unicorns and candy canes in the world? Just make it up. Just as a feather can be described as flying based on whatever gust of wind takes it up.

Concluding

A DeFi token is not an investment vehicle for the issuing company, as it has categorically no reason to track the company’s fundamentals. It is a completely separate product that must be managed and treated entirely distinctly.

DeFi value creation and onchain integrity will be ascendent once it has tokens that represent genuine investment vehicles that reward positive-sum, value-creating behaviors.

If you don't make the most money by creating the most value, then parasites thrive. Fix the tokens, fix the toxic nihilism and mercenary musical chairs behaviors.

Fix incentives = fix outcomes

Footnote:

These issues are what Salutary is addressing in a concrete, direct way. We are creating institutionally investable assets that happen to trade on a blockchain as opposed to a corporate ledger. Hybridizing the benefits of crypto with the realities of the real world and the meaning of “enforcement”. With a Salutary token, market cap becomes a relevant concept; they aim to be the kind of asset a private equity firm would own. The Deloitte of DeFi and the Carl Icahn of the coins.

Salutary extends beyond DeFi businesses. One of our partners is an LA film and music studio, tokenizing enforceable control over IRL media assets. Imagine providing a valuable, liquid instrument for small and medium-size businesses that would never see the light of day on a stock exchange… car dealerships? Shopify stores? This is an authentically useful manifestation of crypto for regular people.

With a strong technical understanding of DeFi and no magical thinking, disruptive things are possible.