Value Accrual in Web3
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May 19th, 2022

Just because a protocol is good, doesn’t mean the native token will go up in price. 

Unlike companies who have publicly traded stocks, tokens don’t actually grant holders ownership in the company, or a claim to future profits. 

I think there was an early dream in the DeFi world, that the token would be the only form of “equity” and all value would accrue to the token. The protocol would release a governance token that would entitle the holders to voting power in the platform. 

The thinking went that when the platform became profitable the token holders could vote a share of the profits to people who staked the governance tokens in the protocol. We saw projects like Sushi Swap implement this kind of staking and pay out a 0.05% of all swap volume to the stakers. 

The common criticism was that these protocols were early stage tech startups and shouldn’t be paying a dividend to stakes. The protocols haven’t found product market fit, and should be reinvesting any proceeds. 

The second criticism, or issue, with this type of staking to pay out rewards is that companies were also raising external capital through entities that were unrelated to their tokens. For example, Uniswap has the $UNI governance token, but they also have a corporate entity through which they’ve raised external capital. 

So if people can own equity in Uniswap, but also own $UNI token, it begs the question of which is more important. Again, when DeFi started, I think there was a hope that the governance token would be THE only form of equity. And for some DAO-first protocols like BarnBridge, this remains the case. But for many, they have tokens, and traditional equity. So for the retail investor, you only have access to the token, but as the myth of the governance token wanes, nearly all DeFi tokens have bled out 80% over the past year. 

At a basic level, if there are two claims to ownership of the company, then the total value is equal to the sum of them. If the protocol is valued at $2 billion and the market believes there is one token, the token market cap will be $2 billion. When the market starts to price in a second token, the market cap of each will be split, say $1 billion and $1 billion. The split not be even, but you get the idea. 

Now let’s carry this logic into the NFT world. This is why NFT projects often drop in floor price after an airdrop. The market now prices in two tokens and the market cap gets split between the two. 

The exception to this trend has been Yuga labs, who has continuously released airdrops like Bored Ape Kennel Club, Mutant Ape Yacht Club, $APE coin, and Otherdeeds. Each time that market has done pretty well at absorbing these airdrops and growing the market capitalization of the project as a whole. 

Some will say that lower price entries to a project can grow the pie if there is sufficient demand to enter the ecosystem.  Others may attribute this to the high execution quality of each new offering (with the exception of otherdeeds, perhaps). The quality execution sends a signal to the market that the team is highly capable, and the total market cap may grow. 

The other complicating factor here is that Yuga labs has also raised venture capital for a corporate entity. The equity in this company is separate from Apes, Mutants, Dogs, Otherdeeds and $APE coin. Thus, you would roughly say the market cap of Yuga combines ALL of these tokens and equity. 

And now we’re back to the question of value accrual. With six different “assets” where does value accrue in the ecosystem? 

Otherdeeds buyers hope that a successful metaverse world means value accrues to their land. $ape holders hope that it’s the currency of the meta verse and thus it accrues value. Bored Ape holders are the top tier, and get the highest level of clout and future benefits. Mutants are second on the list. Dogs help boost your perks a little bit sometimes. But at the end of the day, if Yuga labs gets acquired, meaning their corporate entity is bought, what does that mean for all of these assets in the ecosystem? It certainly means that people who own equity in Yuga labs get their exit liquidity and probably make a huge return. But there is a question of what happens to the other assets. 

There is a world in which Yuga gets acquired and it doesn’t lead to a return for the NFT holders, or the $ape holders. The only asset that actually has claim to the upside is the equity of the company. The rest is simply trust. Trust that BAYC will be prioritized the most. Trust that Mutants will come second. And you would like to think Yuga will continue to operate like that. They likely will. And they may never get acquired. But we’re in uncharted territory, and anything could happen. 

Just like we assumed that value would accrue to governance tokens as protocols grew, we’re also assuming that value will accrue to NFTs as their ecosystems grow. It’s probably a safe assumption to make for now, but it’s worth understanding that it’s just that, an assumption.  

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