“There are no gods, no nations, no money and no human rights, except in our collective imagination.”

— Yuval Noah Harari

The crypto economy will be built on imaginary ownership

After acquiring Electronic Data Systems (EDS) in 1984, General Motors issued the first-ever “tracking stock” — a class of share designed to track the performance of a company's subsidiary, or a subset of a company’s assets.

In the case of EDS, GM retained full ownership of its acquisition, but holders of the EDS tracking stock would receive dividends as if they were the owners.

Dividends were to be paid based on the performance of EDS, irrespective of how GM did as a whole.

GM issued its second tracking stock just a year later in 1985 when it acquired Hughes Aircraft Company.

These two issues were well enough received by investors that tracking stocks soon became a regular feature on US exchanges, most notably during the dotcom boom when traditional companies like Staples used them to highlight the value of their "e-commerce" activities.  

That one flopped, unfortunately: The Staples.com tracking stock was only issued to company executives and venture capitalists (a planned IPO was cancelled when the dotcom bubble burst) and that eventually led to shareholders suing management for self-dealing (the court ruled partially in their favor).

Others were more successful: John Malone built his sprawling cable and media empire by issuing numerous tracking stocks, each carefully designed to appeal to either growth or value investors. 

"You're either fish or fowl,” Malone said at the time. “That's why God invented tracking stocks."

In other words, tracking stocks enabled corporations to raise funds from both value investors (interested in their low-growth business units) and growth investors (interested in their high-growth business units).

It’s a neat trick because a company that issues a tracking stock doesn’t really give anything away: Holders are promised dividends paid from the cash flow generated by a subsidiary or group of assets, but it’s a pinky promise.

Tracking stocks have no formal claim on cash flows, no claim on any particular assets in a liquidation, and no special voting rights related to the tracked business or assets.

As such, they’re an informal, rights-light type of equity.

Shareholders don’t seem to mind: In their 1990s heyday, tracking stocks typically traded at only small discounts to the valuation you’d have expected them to get if they conveyed full ownership rights.

Nevertheless, you don’t hear much about tracking stocks anymore.

I think that’s because corporations are more focused now, so there’s no need for them to issue pseudo-equity representing make-believe ownership of an ill-fitting subsidiary.

Still, John Malone’s success shows that pseudo-equity can be a useful fiction — a way to attract funding for a business without giving up any equity in that business.

Just like crypto tokens!

In the case of protocols that look like businesses, their associated tokens are perhaps best understood as pseudo-equity that represent an imagined ownership of some open-source computer code. 

Often, those protocols are developed by teams that look a lot like the protocol’s employees and executives.

But protocols can’t be “owned” in the traditional sense (token holders have no legal claim on cash flows or assets) and they don’t employ people in any sense (the teams of developers associated with protocols are fully independent).

Case in point: Last week, Aave Labs proposed launching a new RWA project, Horizon, “as a licensed instance of the Aave Protocol.” 

The proposal was not well received.

Judging from the responses posted on the Aave governance site, no one objected to an Aave-based RWA project (a timely and uncontroversial idea in this new age of regulatory permissiveness).

But token holders did object — often vehemently — to the profit-sharing agreement proposed by Aave Labs. 

The Aave DAO would receive 50% of Horizon’s profits in year one, tapering down to 10% after year three, according to the proposal.

More importantly, if Horizon were to issue a token, only 10% of it would go to the Aave DAO.

One response on the governance site seemed to speak for most commenters by deeming this a “money grab.” 

I can see why — the proposal does feel like a kind of self-dealing not dissimilar to Staples management issuing themselves shares of an unlisted Staples.com tracking stock.

But feelings are not facts.

There’s a general expectation that the developers of a protocol will work in the best interest of the protocol, but that’s all it is: an expectation.

Aave Labs has no fiduciary duty to serve the DAO, the token, or the protocol, but people expect it to act as if it does.

This is observable in token prices, as Felipe Montealegre notes: “A lot of FDV comes from the hope that teams will create additional business lines that benefit the token.”

This might be why God commanded that the tracking stocks He created in 1984 always be distributed to existing shareholders 1:1.

Staples management was reprimanded by shareholders for breaking that commandment by issuing tracking stock to themselves.

Aave Labs was reprimanded by tokenholders for proposing to keep too much of a new token to itself — Aave tokenholders believe they have a primary claim on any new tokens created by the team at Aave Labs.

They don’t: There is no stone tablet commanding that Aave Labs works only in the interest of token holders.

But it’s useful to maintain the fiction that it does — it’s part of what makes the Aave token worth $2.7 billion.

Aave Labs has wisely chosen not to debate the point.

In conceding the proposal’s defeat, Aave co-founder Stani Kulechov concluded that “there would be no wide interest in a token.” 

I disagree. 

Aave holders would be very interested in a new token.

It’s just that they’d want all of it, much like shareholders expect with a new tracking stock.

That is for the best.

It was the fictional beliefs embedded in tracking stocks that built the modern cable industry.

It will be the fictional beliefs embedded in tokens that builds the post-modern crypto industry.

— Byron Gilliam

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