Tokenholder Alignment: In All Chaos There is a Cosmos

“In all chaos there is a cosmos, in all disorder a secret order” - Carl Jung

A variety of token valuation frameworks have spawned an evolutionary cycle procured by trial and error. Fortunately, this cycle has incubated a new positive-sum game that will enable founders to create flywheels which all participants can benefit from. In essence, the ‘revenue meta’ is here to stay and will standardize token design frameworks.

There have been thousands of differentiated attempts to create a token lifecycle that enables users, holders and core contributors to all benefit from alignment; all of which have contributed to incremental token launches that will improve upon these dynamics. Alongside these developments, retail investors have caught on to the gamification of private deals sold OTC before locked tokens enter circulation, and they’re increasingly unwilling to participate.

The newest cohort of founders will have to find a new methodology to create value for themselves and informed market participants going forward. But to understand this new methodology it’s important to touch on how we got here.

Greater fools theory

With tokens that have minimal utility trading at highly irrational multiples, market participants are inclined to manufacture narratives that attract marginal buyers. Incremental buy pressure stems from new swaths of investors that are sold based on the narrative that was created for them to consume. The hierarchy of this pyramid is best described by Mosi here.

There isn’t anything inherently wrong with this structure, but the nascency of crypto market structure creates perverse frameworks within it. A majority of the hype that drives incremental buy-pressure is derived from comparisons to more expensive, over-valued assets. Retail has taken a liking to XRP as they can understand the market-sizing of all financial transactions settling on Ripple and their recent regulatory wins. Through the use of XRP as a proxy, Ripple has effectively raised tens of billions of dollars which they can use to make acquisitions to underwrite a future equity offering and more importantly dump on greater fools. More on this in a future article.

Alternatively, in equity markets a great narrative is underpinned by the prospect for future fundamental (FCF) growth, which shareholders of course have a legal right to. Biotech companies have FDA approvals in their pipeline, Tesla is putting resources into building humanoid robots and hyperscalers are spending billions on compute. These are all narratives based on the future growth of cash flows that drive asset prices alongside memetics and speculative premiums.

The reason there aren’t any growth stories that are comparable in crypto is due to an alignment issue. Founders have been incentivized to create infrastructure that ‘requires’ a utility token which eventually becomes the product itself. This is a playbook that has rewarded marginal infrastructure improvements in the past, but is rapidly turning into a euthanasia roller coaster.

Tokens aren’t products, they’re vehicles that enable founders to share the financial success of protocols with users and early believers.

Protocols generate revenue (a lot of it)

Since the inception of onchain apps the major factor inhibiting scale has been the throughput of settlement layers. Solana bringing local fee markets and parallelization to market enabled protocols to operate like an app on an iphone. And with this came the first iteration of fully onchain capital formation, a use case that has encapsulated a majority of the activity on the Solana network.

This underpinned the narrative that turned SOL into one of the best performing (major) crypto assets over the past couple years. An institution could underwrite an investment in Solana based on 1) user growth 2) fee growth and 3) MEV growth. This is a narrative that was well-understood by capital allocators. The Solana Network is on track to generate $800mm in annualized fees. Of course the multiple it trades at is excessive and valuing blockchains is still a highly-disputed topic.

The newest cohort of high fee-generating protocols mostly consists of products built on top of high-throughput settlement layers Pump.fun was the most direct beneficiary of Solana’s innovations as they’ve generated close to $1bn in revenue since inception after creating the interface for cheap, quick SPL token launches. Other protocols such as Axiom, photon, Jupiter and others have raked in over 9 figures of fees on the back of this growth.

But fee-generating protocols aren’t limited to this use case; Ethena has generated over $500mm since the launch of USDe, Hyperliquid will likely outpace the Nasdaq in free cash flow this year and Aave has an annualized fee generation of ~$1.16bn. These are three independent, category-defining protocols that have created entire markets through brute force.

The dividend meta

The Hyperliquid team’s decision to give tokenholders the rights to the future success of Hypercore not only rewarded early believers (users); it catalyzed a movement where every founder now has to consider how they can replicate the success of HYPE. Assistance fund buybacks were in the documentation long before fees generated through trading activity began to scale. And now that this structural alignment has captured the attention of every market participant, the accountability of founders has risen and will be standardized.

The current gripe with FCF being highly concentrated into buybacks is that early-stage companies should be utilizing a majority of their cash on capex. My argument against this is that the innovations of smart contract technology decrease the capex that is necessary. Some of the most profitable crypto companies operate with up to 99% margins while maintaining lean teams.

Additionally, this is the only mechanism that has successfully created tokenholder alignment at scale. Early adopters of products should be rewarded for their contribution towards the iteration of products and courting risk. This has not been the case with previous token designs as users of protocols have been rewarded with tokens that are effectively worthless in this new paradigm. Tokens should behave similarly to equities.

As noted, Greater Fools Theory is widespread in crypto markets, but when token design prioritizes alignment, it can produce positive-sum outcomes. Value accretion will exist in several tranches with multiple cohorts of backers benefiting from the financial success of protocols.

Capitalizing on inefficiencies

With notable developments including the Clarity Act and the [at] Blockworks Token Transparency Framework in the works, there are still major inefficiencies in the market that can be arbitraged. The most recent being PUMP. Buying at the $4bn ICO price was heavily gamed by large allocators, but price action after TGE enabled aligned tokenholders to add to their position at a discount. With the pump.fun team executing buybacks using close to 100% of cash flows on a daily basis, long-term alignment was justified for investors willing to underwrite the growth outlook. As a caveat, the variance in buybacks from 25% → 100% shows a lack of transparency from the Pump team and could’ve been viewed as a manipulative action by holders.

In addition to under/over valued majors, there’s a growing subset of projects in earlier stages that have designed tokens with alignment at the forefront. Underwriting a liquid token can be akin to an equity investment; long-term alignment is binding and of course the underwriter is willing to provide capital based on their belief that core contributors will execute on their vision and return a portion of the value created to investors. The best example of this is of course HYPE. The team executed on creating value by charging users fees to transact on the exchange, which in turn has directly benefited tokenholders.

This is the democratization of early stage investing that onchain capital formation enables. A majority of equities listed in the US are late-stage companies serving as exit liquidity for early investors and speculation vehicles for retail. Contrastingly, tokens can be launched with minimal underwriting and enable a broader scope of allocators to get exposure. Venture-scale outcomes will be present in crypto markets so long as token frameworks are standardized.

Closing thoughts

There are a plethora of methods for insiders to benefit from artificial growth that isn’t clearly supported by fundamental value creation. But the growth trajectory of companies in the space that build great products is effectively creating new incentives by brute force. If a team doesn’t design a token to create alignment, market participants will have to assume their fiduciary duty to tokenholders is abysmal. Those that do will attract the emerging class of crypto-natives that are willing to use products and speculate on positive sum games.