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Is one token, one vote a good idea?

When the all-time great salesman Trevor Milton first raised capital for his startup truck company dHybrid Inc., he chose to spend a chunk of his investors’ money on a promotional event that included 8,000 cans of silly string and $10,000 shot from money guns.

The cash raining into a crowd of mostly college students was raised from family, friends and friends of friends.

One friend of a friend maxed out his credit cards to give Milton the $30,000 he said he needed to make zero-emission trucks a reality.

Another invested his entire life savings with Milton — $40,000 — and then moved into a storage unit to make ends meet.

Unsurprisingly, Milton’s early investors saw no return on their investment — the silly string party was not just a poor allocation of capital for a would-be truck manufacturer, but an ethical red flag as well.

When Milton had exhausted his investors’ capital, he declared dHybrid Inc. bankrupt and began raising new money for dHybrid Systems, a copycat company that his amateur investors (much to their confusion) had no claim on when it was later sold at a profit.

That pattern of deceptive fundraising and poor capital allocation would be repeated on a much larger scale when Milton raised hundreds of millions from professional investors for his next startup, Nikola Corporation, whose booming share price made him a paper billionaire before its bust made him a convicted fraudster.

If you're one of my crypto-native friends, you’re probably thinking that decentralization and DAO voting fixes this.

Surely nothing as wasteful as a silly string event could get past a vote of the same investors who’d have to pay for it?

Unfortunately, evidence from both crypto and traditional finance suggests that groups are no better at allocating capital than individuals are — and probably much worse.

We talkin’ about practice

Recent events suggest that in practice, decentralizing capital allocation does not preclude Trevor-Milton-like spending.

The Polkadot DAO recently reported spending $180,000 for six months of branding on a fleet of private jets, $606,000 for two months of mentions on social media with key opinion leaders like “CriptoManiacos” and “Shooterino,” $1.9 million to sponsor the race-car driver Conor Daly and $6.8 million to sponsor an unnamed soccer club.

In total, Polkadot’s onchain Treasury spent $87 million in the first half of 2024 (all admirably detailed here and here). 

That seems like a lot! 

And it doesn’t seem like they have a lot to show for it.

(Note to DOT token holders: Sponsoring this newsletter will be a much better way than any of the above to get the word out about your blockchain, which I’m sure is very excellent.)

More concerningly, this seems like a structural issue — when anyone can put a proposal up for a vote, a lot of things get approved that, counterintuitively, most token holders disapprove of. 

This is not unique to Polkadot, of course. 

I’m not sure, for example, that a majority of arbitrum token holders thought that spending $200 million of ARB tokens to promote Web3 gaming is a good use of the DAO’s assets — but only about 4% of them bothered to vote on the issue, so the proposal passed easily.

Nor is it unique to crypto. 

In politics, the paradox of direct democracy is that giving everyone a vote often makes policy less responsive to the majority will of the people, as is most evident in California with its penchant for referendums.

This is why, in traditional finance, the only voting right that shareholders put much value on is the one they can exercise at any time: the right to sell. 

Vote with your feet

The idea behind “super voting” shares is that all shareholders are better off if one shareholder (the founder, generally) has all of the votes.

Such undemocratic thinking has become more common since a little-known Russian investor bought his way into Facebook by telling Mark Zuckerberg that he didn’t want any voting rights.

This was not a concession he made just to get in on a much-coveted pre-IPO investment ahead of far more prominent investors — he simply did not want the votes.

He wanted to invest in Facebook expressly because Zuckerberg made all the decisions.

That thinking extends beyond the cult of the Silicon Valley founder, as well.

In Europe, preference shares (that do not have voting rights) sometimes trade more expensive than ordinary shares (that do have voting rights) of the same company (usually because investors value liquidity over voting rights).

Further, when shareholders do vote, what they’re voting on is usually trivial — say, a slate of shoo-in board directors and renewing an auditor.

Shareholders are happy with this arrangement because if they didn’t trust management to do the right thing, they wouldn’t be shareholders. 

Mostly, what they’re trusting is that management will allocate their capital wisely — because that’s pretty much all they care about. 

Crypto people like to say that TradFi loves yield, but that’s only true of retail TradFi. 

Professional TradFi loves capital allocation. 

Fetishistically so.

The biggest heroes of investing — Warren Buffett, Henry Singleton, John Malone, Jeff Bezos —  are worshiped by investors for their ability to profitably reinvest shareholders’ profits.

There are no such capital allocators in crypto.

How could there be?

One token, one vote is unlikely to be any more efficient in crypto protocols than one person, one vote is in a direct democracy. 

In both politics and finance, we solve for that by electing individuals to make decisions on our behalf.  

That’s not possible in decentralized crypto (because it’s not crypto if it’s not decentralized).

What, then, are our options?

It seems like we have two: become highly engaged, highly informed voters as we were in Roman times — or start voting with our feet, as we do in traditional finance. 

In the meantime, we should probably value crypto tokens as if they’re being run by Trevor Milton.

— Byron Gilliam

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