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đȘ Investing in crypto is investing in incentives
Nuke the token!


Investing in crypto is investing in incentives
PUMP token holders now find themselves in the odd position of hoping the money they just sent to Pump.fun will soon be returned to them.
Thatâs the mood on Crypto Twitter, at least, where influential accounts keep pointing to Pump.funâs estimated $2 billion cash pile as the bull case for PUMP (see here, here, here and here).
The problem, of course, is that token holders have no claim on that cash â even though they supplied most of it.
In IPOs, stock market investors send their money to a company in return for an ownerâs claim on assets thatâs roughly equivalent to the money they just sent.
In the PUMP ICO, however, crypto investors sent their money to Pump.fun in return for a token with no claim on anything whatsoever.
They knew that. But they also expected to be treated as if they had a claim on the revenue of Pump.fun.
So far, they have been.
Over the past week or so, Pump.fun has used roughly 100% of its revenue to buy back the PUMP token.
If you assume it does that forever, the token seems reasonably priced: Annualizing last weekâs revenue, PUMP is trading on only about 16x (by market capitalization).
But thatâs assuming they also burn all those tokens â and whatâs the point of issuing tokens if youâre immediately going to start burning them?
It seems more logical, as people have also been speculating, to do the opposite: either airdropping tokens to users or paying them out as incentives.
Luca Netz, for example, thinks Pump.fun should airdrop 10% of the tokenâs supply to the community.
This would ânuke the token,â as he puts it, but thatâs part of the appeal: âThe token nuking is fine, especially because he has so much cash.â
By âhe,â Netz means Pump.funâs three co-founders, which is instructive: They own the $2 billion of cash that token holders are hoping to have an informal claim on.
If the co-founders are intending to use that cash to buy the token, as people hope, it would make sense to get the token price down first.
âItâs in his interest to buy as much of the token as possible at the lowest price possible,â Netz explained.
In other words, the incentives between the owners of the protocol and the owners of the token are grievously misaligned.
Charlie Munger would say thatâs exactly what PUMP token holders should be thinking about.
Equity investors donât have to worry much about incentives because management is aligned with shareholders by both law and precedent.
The cult of shareholder value that was popularized by the fictional Gordon Gekko in the 1980s is now so ingrained in equity markets that investors are almost always treated like owners.
In crypto, by contrast, token holders have neither law nor precedent to rely on, so they do have to think hard about incentives.
Take Grass, for example â a buzzy AI project (âmultimodal searchâ) thatâs already earning âmillions of dollars a month,â according to its founder.
But thatâs the full extent of Grassâs disclosure: That revenue is neither onchain nor otherwise made public.
So when Dan Shapiro tried to value the DePIN project for Blockworks Research, he could only take a guess at what âmillions a monthâ might really mean.
âAlthough Grass keeps network revenue data private,â he wrote, âone can make some educated assumptions from publicly available data licensing deals to estimate the value of the network.â
In other words, he had to look at data licensing agreements made by the likes of OpenAI and Reddit to hazard a guess at what kinds of agreements Grass might also be making.
To value the Grass token, he also had to do things like âassume data sales have similar margins to ad salesâ â things that an equities analyst would determine by calling the company and asking them.
If all of the assumptions Shapiro was forced to make turned out to be roughly correct, he thought there could be an interesting investment case for GRASS: âIn its current state, Grassâ free floating market cap of $585m is justified based on the value of its multimodal data alone.â
But now Grass âappears to have pivoted to data labelingâ (i.e, away from multimodal), according to one disillusioned token holder, who adds that âlittle information has been shared with token holders.â
I couldnât find any information at all. Which is weird.
Imagine if shareholders had to find out from a random X account that Apple had pivoted from making smartphones to making sneakers.
Grass is earning some amount of revenue, but we donât know how much; however much it is earning, token holders havenât seen any of it and donât know if they ever will; and the business may or may not have gone off in a new direction.
Such is the state of affairs in crypto âinvesting.â
It doesnât have to be that way.
Holders of the MAPLE token, for example, donât have to guess what portion of the revenue earned by Maple Finance will be returned to them. Instead, they decide that themselves by voting on it.
As a result, MAPLE investors probably donât have to think about incentives much more than equity investors typically do.
âNo fees are allocated to the Labs entity,â Shaunda Devens wrote for Blockworks Research, âand the Labs entity is funded exclusively through grants, not through revenue-generating activities.â
That makes MAPLE holders a lot like owners, I think.
Shareholders have disclosure rules, legal claims, SEC enforcement actions, decades of precedent and the movie Wall Street to substantiate their ownership claims.
Token holders have only smart contracts.
Have crypto investors properly accounted for this lack of both rights and transparency?
Anecdotally, there doesnât seem to be any risk premium built into opaque, rights-light tokens. Most of them still seem inexplicably expensive to me.
Nor is there much differentiation between projects with ownership-like tokenomics and those with tokenomics you can only guess at.
I imagine itâs only a matter of time until there is, however. And the sooner the better.
The best thing for crypto investors may be if Pump.fun follows Netzâs advice and ânukes the token.â
That might finally get crypto thinking harder about the power of incentives.
â Byron Gilliam

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