Web3 Ownership & Governance: What You Own, and What You Don’t
Web3 is all about ownership. But hypermarketing has led many non-technical users to believe they actually have more rights than they do. Let’s set the record straight.
Watch a live discussion on this topic between Dan Patterson, Partner at Sfermion, and Sam Peurifoy, CEO of Playground Labs, here.
Your “governance” tokens probably aren’t that useful, since they’re likely just a Facebook “thumbs-up” button instead of any real ownership mechanism. And that NFT you bought? Probably just as good as you owning a random image Apple issued you on your iPhone. Most terrifying of all, the “decentralized” crypto tokens you hold in your low-fee exchange account are almost certainly not yours, and won’t be the “digital gold” that help you survive the fiat apocalypse the doomsayers are fond of predicting.
But it’s not all doom & gloom — crypto has incredible potential, you just have to stay ahead of the marketers enough to know what’s fact and what’s fiction.
“Governance” Tokens
A true governance token enables holders to place on-chain votes using smart contracts to enact snippets of code without any humans in the loop. This means that a true governance token would allow a majority of tokenholders to, say, entirely deplete a DAO’s treasury in the case that the tokenholders are dissatisfied with the core team’s performance. This also implies that such governance tokens are implicitly backed by the value of the treasury or protocol that they control.¹
A “governance” token in the more modern implementation favored by marketers, on the other hand, is one that promises holders the ability to “govern the community by way of voting on key decisions in the ecosystem.” This is a nice-sounding way for the marketing teams to say “you can use your tokens as upvotes or downvotes on forum posts about what color our new Discord banner will be.” It should be painfully obvious that this is simply not the same as a true governance token as defined above. These tokens are not governing any on-chain smart contract interactions, and thus do not have any implied economic value derived from the holdings of a governed treasury, despite what the core team may be bleating.
This is dangerous for market participants, because the two words are being used interchangeably despite their very obvious differences with respect to real economic value. The first case, a true governance token, should just be called a governance token. The second case, my air-quoted “governance” token, should instead be called a social token. These already exist and are even well-defined in the groups that use them.² It’s irresponsible for projects raising funds from public (or private) participants to repeatedly imply that their tokens will grant any amount of real ownership over their protocol, when the code simply does not.
NFTs, Non-Fungible… Wait, Where’d It Go?
Non-fungible tokens (NFTs) were the buzzword of the year in 2021, and that’s with good reason. Provable ownership of digital unique assets in a purely electronic capacity is an impressive feat. The value of an NFT lies in the understanding that the asset itself will never change (it is immutable),³ that its ownership and provenance are verifiable, and that it is never mutually equivalent to another asset (i.e. it is non-fungible).
Unfortunately, the first criteria in particular (immutability) is often ignored. To understand the implications, it’s important to recognize that an NFT is a smart contract that contains some rules alongside some URL-like digital address pointer that tells your computer where to retrieve an image or other file. If that image or file in question is residing on, say, my computer in C:/Sam/Downloads/cat.jpg, then, if I were to sneakily swap out your NFT’s image of a cat for one of a hairless dog, you’d be completely powerless to stop me, just the same as you’re powerless to stop Apple employees from deleting your photo cloud on accident. Criteria 1: immutability, failed.
In reality, what this looks like is that when you buy your new favorite monkey or cat-related NFT JPG, the image itself is hosted on someone’s Amazon Web Services cloud account. If, say, the “startup” (or individual) that issued the NFTs from such a cloud account were to be unable to pay their bills and allow their AWS account to lapse, it’s likely that your NFT would go poof. You’d still hold the token in your wallet, technically, sure. But it’d be pointing to empty space. OpenSea wouldn’t render an image when you look at your wallet, and your verified Twitter picture with a neat NFT hexagon would probably just be blank. Does that sound like truly immutable digital ownership to you?
Exchanges: Not Your Keys, Not Your Crypto
Bitcoin is “digital gold” as the saying goes. You can own it forever, and Uncle Sam can’t come after you and rip it out of your bank account, right? But what if you leave it not in one of Uncle Sam’s nice FDIC-insured bank accounts, but instead in a massive, trusted crypto exchange? It’s still Bitcoin, right? And you still own it?
Yes and no. As an example, LUNA and UST, like BTC, are (were?) cryptocurrencies freely traded between participants in decentralized markets. But they’re also traded on centralized exchanges, and there’s a serious technical difference between holding your crypto in a personal on-chain wallet, and holding your crypto on a centralized exchange.
After LUNA’s violent implosion in May of 2022, Binance suspended trading of LUNA and UST across its exchanges for all participants. Despite the “decentralized” nature of the tokens that participants were ostensibly holding, some users (probably mostly speculators who bought at $0.0001) found themselves sitting on massive LUNA & UST positions without the ability to buy, sell, or migrate off platform.
It was a stark reminder that just because you’re trading or holding the world’s most novel decentralized electronic bearer asset, as soon as you deposit it into a centralized entity, you’re back to being on the ol’ credit accounting books, and you may as well be holding fiat.
Defend Yourself & Your Neighbors
As a community, we need to do better about holding projects accountable to their code and educating participants around us on their actual rights, not their perceived “roadmap rights.” Code is law, or, at least, in most blockchain contexts on the market now, it should be. Read the smart contracts you’re buying by using the “Read Contract” UI function at the bottom of Etherscan token contracts.⁴ Chase the object URLs in your NFTs to determine if they’re hosted on a truly immutable framework, or if they’re just on some anon’s old AWS server. And be wary of tokens you leave in centralized exchanges — you’re exposed to price risk on the tokens themselves, but default risk on behalf of the exchange. Stay safe, frens.
¹This assumes that malevolent core contributors would be unable to withdraw assets from the treasury prior-to or during a governance vote by the distributed tokenholders. If the core contributors are able to directly withdraw from the treasury, then this “backing” is invalid to the extent that the community believes the core team will act to preserve their own best interests, i.e. withdraw the treasury before the community can.
²These are popular in art / creative communities, less so in financialized crypto sectors.
³Ignoring NFTs that level up or otherwise intentionally mutate over time, which are very neat, and such attributes are usually communicated to the community ahead of time (though I’m waiting for some Banksy-level switcheroo detonations someday).
⁴Image here of what you’re looking for to read smart contracts, broadly:
This post is accompanied by a companion podcast episode of Web3 Wednesdays, a Kapital DAO production.
Watch on Youtube: https://youtu.be/pwhaHWcqMIw
Listen on Buzzsprout: https://www.buzzsprout.com/2006743/10819678The views expressed here are those of the individuals quoted and are not the views of the authors’ employers or affiliates. Certain information contained in here may have been obtained from third-party sources, including from portfolio companies of funds managed by the authors’ employers or affiliates. While taken from sources believed to be reliable, the authors have not independently verified such information and make no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; the authors have not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by the authors or their affiliates. Partner & Head of Interactive at Hivemind Capital, a crypto-focused multi-strategy fund. Follow him on Twitter at @SamPeurifoy.
The views expressed here are those of the individuals quoted and are not the views of the authors’ employers or affiliates. Certain information contained in here may have been obtained from third-party sources, including from portfolio companies of funds managed by the authors’ employers or affiliates. While taken from sources believed to be reliable, the authors have not independently verified such information and make no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; the authors have not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by the authors or their affiliates.
