World Liberty Financial is perfecting TradFi

Property rights are not sacrosanct in traditional finance.

Even in the US stock market — where shareholder rights are treated with near-religious reverence — a company’s management can sometimes forcibly divest an unwanted shareholder of their shares.

In 2009, for example, the struggling software firm Selectica used a poison pill defense to cut a single shareholder’s stake in half.

When the pill was triggered, all shareholders other than Versata, a hedge fund, received rights that effectively doubled the number of shares they owned.

In effect, this redistributed half of Versata’s share in the company to the company’s other shareholders.

Versata sued, but a Delaware judge sided with the company — proving that, under some circumstances, a board can seize a shareholder’s property much like a government invoking eminent domain.

Unlike eminent domain, however, the company doesn’t have to compensate the dispossessed owner.

It’s not done lightly. 

Selectica had to prove in court that its action was a “proportionate” response to a threat posed by a hostile shareholder.

But the fact that it’s possible is part of what inspired crypto and decentralized finance: a new kind of financial system where property rights are enforced by code, not the whims of a Delaware judge.

On Friday, however, World Liberty Financial — a DeFi protocol that’s “governed by a distributed community of WLFI tokenholders” — effectively dispossessed a large token holder of their tokens. 

Justin Sun’s substantial holding of WLFI was frozen (perhaps temporarily) when his tokens were added to a blacklist that prevents them from being moved.

In total, World Liberty blacklisted 272 accounts this weekend, mostly in an effort to stop phishing attacks — which is laudable, but not exactly in the spirit of not-your-keys-not-your-coins permissionless crypto.

Sun’s tokens, however, were frozen amid reports that he shorted WLFI tokens borrowed from an exchange he controls.

Someone at World Liberty took exception to this and froze Sun’s property in response — something they can do without consulting the “distributed community” of token holders that ostensibly governs the protocol.

TradFi executives don’t appreciate short selling either, of course.

Companies that feel attacked by short sellers will sometimes issue special dividends to complicate short positions, contrive to have large holders recall the shares they’ve lent out, or even lobby the government to ban the practice (as banks successfully did in 2008).

But crypto makes this so much easier: Smart contracts can give protocols the ability to stop their tokens from moving. 

Few protocols grant themselves this ability, presumably because it’s counter to the spirit of a decentralized, permissionless financial system.

Blacklists are usually only found in centralized stablecoins, where issuers need the ability to freeze criminals’ funds at the request of law enforcement. 

But a blacklist for tokens?

World Liberty might be unique in granting itself the ability to extinguish property rights with just a function call to blacklist(address).

This seems to contradict the spirit of its founding mission.

As World Liberty co-founder and CEO Zach Witkoff tells it, the project was inspired by a conversation he had with the Trump brothers, Eric and Donald Jr., shortly after their accounts were “terminated” by two of the largest US banks. 

“So, we started discussing solutions, and the conclusion was that we needed a more democratized system," he explained. “The origin of World Liberty was to truly return financial control to the users.”

But not, evidently, to users of the World Liberty token.

The project’s Gold Paper states “WLF believes that the ability to transact privately and without intermediaries is a core American value.”

But World Liberty itself is an intermediary — and an unusually powerful one.

They did warn us. 

Further down in the gold paper it cautions that in a “Material Adverse Event or Security Risk,” governance power can be “completely vested in the multisigs.”

This makes dispossessing an unwanted token holder much easier compared to executing a complex poison pill defense that a shareholder can appeal in a Delaware court of law.

Justin Sun, by contrast, can appeal the seizure of his property only to the court of social opinion: “My tokens were unreasonably frozen,” he posted on X after denying accusations of short selling. 

That’s not how this alternative financial system was meant to work.

Just the opposite: World Liberty’s multisig appears to give its founders a level of control that TradFi founders can only dream of.

Traditional founders sometimes maintain control of their company with special voting rights, but how much easier is it when that control is baked into a smart contract?

World Liberty’s control appears to be absolute.

Their token, WLFI, is strictly for governance —  “the sole utility of holding WLFI is governance of the WLF Protocol” — but World Liberty can ignore the decisions token holders make.

Late last year, WLFI holders voted to grant the Aave DAO “approximately 7% of the total supply of $WLFI tokens” (because World Liberty was originally conceived as a fork of Aave).

Eight billion tokens voted in favor of the proposal, vs. just 187,000 against. 

Despite that overwhelming consensus, World Liberty appears to be reneging on the deal, reportedly calling it “fake news.”

This, too, is a TradFi founder's dream.

Crypto founders already have the magical ability to raise capital without surrendering a share of their future profits (by issuing governance tokens). 

And in this case, the founders didn’t have to surrender any governance rights, either.

Could anything be a better deal than that?

To be fair, selling a token that people think of as equity but is actually more like a collectible is hardly unique to World Liberty — there are many such cases.

If anything, World Liberty deserves credit for being upfront about it: Just the fact that it employs a CEO tells you that, whatever idealistic language used in its gold paper, it’s more of a company than a protocol. 

But blacklisting shareholders is a level of centralization that outdoes even TradFi.

“Tokens are sacred and inviolable,”  Justin Sun wrote on X, ”this should be the most basic value of any blockchain.”

Sun is not generally known as a champion of decentralization, but he makes the case for it concisely. 

“It’s also what makes us stronger and more fair than traditional finance,” he added.

World Liberty’s founders would presumably agree: The first line of their gold paper says World Liberty is “pioneering a new era of Decentralized Finance.”

So far, though, they’re making it look a lot like the old era.

But better.

— Byron Gilliam

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