JoshTrees... and long-term investing
Inspired by Böhm-Bawerk’s JahresringeThe figure above captivated me while reading The Dao of Capital, a poignant name for a reader in the crypto space (and no, it is not about DAOs). The image is inspired by one shown in the book, which is subsequently devised from the original ideas of Eugen von Böhm-Bawerk, a notable Austrian economist and later Minister of Finance. It is used to illustrate his metaphor of a tree’s growth as representative of an economy. A crosscut analysis of a large tree ...
JoshOn Long-term Debt Cycles and Crypto
Emerging from a deep read of Ray Dalio’s Principles for Dealing with the Changing World Order (specifically Part I), I couldn’t help but draw connections to what might be one of the timeliest combinations of long-term trends: the ending stretch of the long-term U.S. debt cycle and the rise of programmable store of value assets (namely Bitcoin and Ethereum *to date*). The rise of BTC / ETH in the coming years / decades has a strong probability of coinciding with the accelerating devaluation of...
JoshThe Rise of the DEX: let’s add some color to DeFi vs. CeFi
*Migrated from Medium* Original Date - 02/08/21One of the big calls of DeFi is that it stands to eventually topple CeFi, and what place better to start at than with exchanges? The rise of the DEX has been a feat in the making for years, but we only really started to see the logos of DEXes last year, when platforms such as Uniswap, Curve, Balancer, and Sushiswap came to the scene and managed to amass billions in liquidity. Billions is a cool number to throw around, but when compared against ce...
Some very interesting primitives are evolving in DeFi as it pertains to governance. Back in 2020 (or perhaps even earlier given MakerDAO), the concept of governance tokens was unleashed on the crypto ecosystem. This notion that a protocol should be decentralized and run by its community was in many ways revolutionary. When have we seen something like this occur in Web 2.0 -> JP Morgan letting users decide on product fees? Facebook giving users the right to reward key contributors? The basic idea is amazing, and it is the creation of new foundational ideas like these that make the space exhilarating. However, governance hasn’t quite played out that way. The crux of the issue lies in weak involvement. Most governance token holders are not voting on proposals!
Current State of Governance
A run through Tally’s dashboard highlights low engagement across the board. There are two stats to look at while on Tally’s site: the “engagement ratio” and the actual number of votes. The former measures the number of delegated tokens / total tokens. This essentially represents how many tokens have consciously been transferred to some person or entity with the impression that they will be knowledgeable and active in the voting process. The latter is the actual number of votes (1 token = 1 vote). Taking this number and comparing it to the circulating supply (maybe some adjustments needed for certain holders) gives one a rough picture of the level of governance engagement. A couple of examples are highlighted below (note- circulating supply displayed as a range given input from multiple sources like Messari & CoinGecko):
Uniswap (520m — 628m circulating supply) — 19.96% Engagement Ratio
Compound (6m circulating supply) — 40.71% Engagement Ratio
Rari Capital (11.3m circulating supply) — 21.67% Engagement Ratio
Fei Protocol (453m — 455m circulating supply) — 18.36% Engagement Ratio
As one can see across both metrics, voting engagement needs improvement.
What is ISS?
Institutional Shareholder Services Inc. (“ISS”) is a proxy advisory firm. What this means is that institutions (i.e. pension funds, mutual funds, hedge funds, etc.), which own multiple shares of multiple companies, pay ISS to advise and (nearly always) vote on their behalf in shareholder votes. Many times, at an AGM, you will see these whales allocate their voting blocks to the measures being voted on. Proxy advisory firms such as ISS have become very valuable entities over the past decades as the nature of equity ownership and equity governance has changed. Firstly, institutional ownership of equity has increased with time, and these days institutions dominate shareholder voting. Secondly, as the nature of governance has changed, shareholder voting has become very costly, as seen across the categories of time, expertise, and personnel. Massive institutions like BlackRock can insource proxy voting research; however, the long tail-end of large, medium, and small equity holding institutions cannot afford to do this. As a Harvard research paper poignantly put it: “third-party proxy advisory firms satisfy a market demand by centralizing these costs so they do not need to be duplicated across multiple investment firms”. This makes it feasible for a small wealth management firm or medium sized mutual fund to participate in governance. Thirdly, regulation has intensified around investment managers needing to be involved in the proxy voting events of their portfolio holdings as well as acting to the best of their ability to guide governance to the benefit of their clients. Basically, these institutions cannot just ignore or loosely pay attention to governance, they need to be thoughtful and active. This motivation, paired with the costliness, leads to the economic value presented by proxy advisory firms.
In crypto, we have this governance problem, which could be caused by a myriad of things from complexity associated with understanding proposals, low attention bandwidth (i.e. being a holder of so many tokens, each with its own proposals, is tough), and maybe even a lack of knowing that one’s token entitles one to voting power. Paired with this is an overall lack of traditional institutional involvement, no real pressure for funds to participate in governance, and several coordination deficiencies.
This is all going to change. I foresee a future where more institutions accumulate DeFi (and Web 3.0) governance tokens as part of their portfolio strategies. If anything, governance in crypto is even more valuable than governance in equities. As institutions do this, the need to understand not only how the protocols work, but what is going on with all these numerous proposals, will be immense. If the current users now aren’t doing well with participating in governance, how will these TradFi institutions do it? We have a significant opportunity… there needs to be a service that guides them through this process, and this leads me to crypto’s ISS.
There are many ways of tackling this, one of which would be to create a new DAO dedicated to this very mission; however, this would entail a lot of upfront costs — getting smart researchers, being well connected to the DAOs which have active proposals, and building knowledge stock over time. A new DAO is possible, but maybe we can use some of what already exists in the space to get this service going.
Proposal
The initial structure that I envision starts with a team like the one at Llama. This entity produces solid research on several projects that have governance components. While mainly conducting treasury-focused analysis, the team members and community contributors know a lot about these projects through their work and have the ability to retrieve data and information in a very efficient way. It wouldn’t be as much of a startup cost to begin gathering information around key proposals and releasing research. This is actually well aligned with what is going on in the treasury, and the work across both buckets can be symbiotic.
However, research alone won’t be the cure to the aforementioned governance engagement issue. We want voting to be guided by this research. Thus, I propose a partnership between the Llama team and Tally. Llama provides the key ingredients to produce successful governance research and advisory. Tally provides the infrastructure for voting to be delegated to Llama’s proxy advisory services.
Initially, the combined partnership would look like this. For every project that Llama covers, members of the team and community would begin to gather intel on the key governance voting proposals. Setting up a one-pager template, the members would detail the proposal (an overview), list the pros and cons, perhaps a paragraph on parties involved, and then conclude with their advice on what way to vote. This research would be accessible to the public for the time being. Moving on to Tally, the platform would show a special box pertaining to the ‘delegate’ functionality that lists the Llama Advisory group (a very nice addition to this would be a preview of the one-pagers on that project). This box would basically delegate people’s or institution’s vote to the Llama Advisory group, which would direct voting based on its research.
As this service begins to gain traction, and as the space develops to having more institutional involvement over time, Llama can offer this as a product to institutions. The research on voting would become proprietary and would be sold for an annual fee to these firms. The fee could be collected by some form of payment mechanism, or via Tally (i.e. in order to delegate to Llama Advisory, you would let some of your governance tokens be transferred as a tax, a.k.a. the fee — this is similar to how the Graph protocol does delegation). In fact, finding a potential way to monetize the delegation mechanism to the Llama Advisory group could be most successful in charging institutions.
If approached in the right way, this partnership will be a win-win for everyone involved. Llama gets a significant boost in the users / institutions consuming its content. Moreover, it gets to build relationships with key ecosystem players and diversifies its current treasury-focused business model. Needless to say, look at how successful ISS has been as a company in the TradFi world — this is a big revenue opportunity as the space matures. Tally benefits as its platform use increases significantly, given that the proxy vote, and possibly payment, will be realized through it. Projects and the community benefit from increased involvement, more public thoughtfulness on the proposals, and (hopefully) more efficient governance processes.
Now, there are some risks to consider here, but, with the ability to speak with the respective teams / communities, I think we could mitigate them in certain ways:
Llama becomes influenced by a large party to push a vote one way. This has been a certain regulatory concern in the equity world with proxy advisors. We need to ensure that unbiased and objective analyses are run on proposals. Checks and balances / transparency needs to be instituted. The general risk of losing community trust should also motivate the team to behave accordingly. Incentives can be discussed as well
Institutional payment for services could be interpreted as partial. I.e. would Llama contributors be pressured to favorably conclude on investor-introduced proposals if that investor paid for their services? Would just the potential of this happening reduce trust? This is a tough one to tackle, and we would need to devise a very strict proposal for customers, outlining impartiality
Insider trading can interfere with research and voting. Assuming this partnership were to really scale, Llama’s team / core contributors could take token positions in protocols before releasing its research / voting. We would need to find incentive mechanisms to prohibit this (perhaps some form of auditing?)
The Future
The basic details mentioned above are just the start… in the not too distant future, the ownership of governance tokens will be spread out across more and more institutions. Wealth managers, pension funds, endowments, the very same entities that use ISS, will need a similar service for DeFi (and DAOs overall) governance. It makes complete sense for them to use the same model with their crypto exposure. In fact, it makes even more sense just given that crypto is very complex and harder to understand for the traditional manager. Given this knowledge gap, these firms would pay for the research and voting advisory, especially with pressure from clients on understanding the developments of their holdings and influencing them to participate in a way that benefits the long-term success of the clients. Token advisory services is very much a part of the future — and it’s time for us to get a head start on building it now.
Conclusion
This idea is in its early innings, however, its potential to tackle a deep problem within crypto is very exciting. A lot of it is still malleable, and I am very open to feedback from the community at large as well as to in-depth discussions with projects and especially involved parties (i.e. Llama and Tally). I look forward to presenting an updated proposal upon further research and significant input from others.
Disclosure:* This blog series is strictly personal/ educational and is not investment advice nor a solicitation to buy or sell any assets. It does not represent any views from where the author is working — all views, opinions, and arguments are the author’s. Please always do your own research.*
Some very interesting primitives are evolving in DeFi as it pertains to governance. Back in 2020 (or perhaps even earlier given MakerDAO), the concept of governance tokens was unleashed on the crypto ecosystem. This notion that a protocol should be decentralized and run by its community was in many ways revolutionary. When have we seen something like this occur in Web 2.0 -> JP Morgan letting users decide on product fees? Facebook giving users the right to reward key contributors? The basic idea is amazing, and it is the creation of new foundational ideas like these that make the space exhilarating. However, governance hasn’t quite played out that way. The crux of the issue lies in weak involvement. Most governance token holders are not voting on proposals!
Current State of Governance
A run through Tally’s dashboard highlights low engagement across the board. There are two stats to look at while on Tally’s site: the “engagement ratio” and the actual number of votes. The former measures the number of delegated tokens / total tokens. This essentially represents how many tokens have consciously been transferred to some person or entity with the impression that they will be knowledgeable and active in the voting process. The latter is the actual number of votes (1 token = 1 vote). Taking this number and comparing it to the circulating supply (maybe some adjustments needed for certain holders) gives one a rough picture of the level of governance engagement. A couple of examples are highlighted below (note- circulating supply displayed as a range given input from multiple sources like Messari & CoinGecko):
Uniswap (520m — 628m circulating supply) — 19.96% Engagement Ratio
Compound (6m circulating supply) — 40.71% Engagement Ratio
Rari Capital (11.3m circulating supply) — 21.67% Engagement Ratio
Fei Protocol (453m — 455m circulating supply) — 18.36% Engagement Ratio
As one can see across both metrics, voting engagement needs improvement.
What is ISS?
Institutional Shareholder Services Inc. (“ISS”) is a proxy advisory firm. What this means is that institutions (i.e. pension funds, mutual funds, hedge funds, etc.), which own multiple shares of multiple companies, pay ISS to advise and (nearly always) vote on their behalf in shareholder votes. Many times, at an AGM, you will see these whales allocate their voting blocks to the measures being voted on. Proxy advisory firms such as ISS have become very valuable entities over the past decades as the nature of equity ownership and equity governance has changed. Firstly, institutional ownership of equity has increased with time, and these days institutions dominate shareholder voting. Secondly, as the nature of governance has changed, shareholder voting has become very costly, as seen across the categories of time, expertise, and personnel. Massive institutions like BlackRock can insource proxy voting research; however, the long tail-end of large, medium, and small equity holding institutions cannot afford to do this. As a Harvard research paper poignantly put it: “third-party proxy advisory firms satisfy a market demand by centralizing these costs so they do not need to be duplicated across multiple investment firms”. This makes it feasible for a small wealth management firm or medium sized mutual fund to participate in governance. Thirdly, regulation has intensified around investment managers needing to be involved in the proxy voting events of their portfolio holdings as well as acting to the best of their ability to guide governance to the benefit of their clients. Basically, these institutions cannot just ignore or loosely pay attention to governance, they need to be thoughtful and active. This motivation, paired with the costliness, leads to the economic value presented by proxy advisory firms.
In crypto, we have this governance problem, which could be caused by a myriad of things from complexity associated with understanding proposals, low attention bandwidth (i.e. being a holder of so many tokens, each with its own proposals, is tough), and maybe even a lack of knowing that one’s token entitles one to voting power. Paired with this is an overall lack of traditional institutional involvement, no real pressure for funds to participate in governance, and several coordination deficiencies.
This is all going to change. I foresee a future where more institutions accumulate DeFi (and Web 3.0) governance tokens as part of their portfolio strategies. If anything, governance in crypto is even more valuable than governance in equities. As institutions do this, the need to understand not only how the protocols work, but what is going on with all these numerous proposals, will be immense. If the current users now aren’t doing well with participating in governance, how will these TradFi institutions do it? We have a significant opportunity… there needs to be a service that guides them through this process, and this leads me to crypto’s ISS.
There are many ways of tackling this, one of which would be to create a new DAO dedicated to this very mission; however, this would entail a lot of upfront costs — getting smart researchers, being well connected to the DAOs which have active proposals, and building knowledge stock over time. A new DAO is possible, but maybe we can use some of what already exists in the space to get this service going.
Proposal
The initial structure that I envision starts with a team like the one at Llama. This entity produces solid research on several projects that have governance components. While mainly conducting treasury-focused analysis, the team members and community contributors know a lot about these projects through their work and have the ability to retrieve data and information in a very efficient way. It wouldn’t be as much of a startup cost to begin gathering information around key proposals and releasing research. This is actually well aligned with what is going on in the treasury, and the work across both buckets can be symbiotic.
However, research alone won’t be the cure to the aforementioned governance engagement issue. We want voting to be guided by this research. Thus, I propose a partnership between the Llama team and Tally. Llama provides the key ingredients to produce successful governance research and advisory. Tally provides the infrastructure for voting to be delegated to Llama’s proxy advisory services.
Initially, the combined partnership would look like this. For every project that Llama covers, members of the team and community would begin to gather intel on the key governance voting proposals. Setting up a one-pager template, the members would detail the proposal (an overview), list the pros and cons, perhaps a paragraph on parties involved, and then conclude with their advice on what way to vote. This research would be accessible to the public for the time being. Moving on to Tally, the platform would show a special box pertaining to the ‘delegate’ functionality that lists the Llama Advisory group (a very nice addition to this would be a preview of the one-pagers on that project). This box would basically delegate people’s or institution’s vote to the Llama Advisory group, which would direct voting based on its research.
As this service begins to gain traction, and as the space develops to having more institutional involvement over time, Llama can offer this as a product to institutions. The research on voting would become proprietary and would be sold for an annual fee to these firms. The fee could be collected by some form of payment mechanism, or via Tally (i.e. in order to delegate to Llama Advisory, you would let some of your governance tokens be transferred as a tax, a.k.a. the fee — this is similar to how the Graph protocol does delegation). In fact, finding a potential way to monetize the delegation mechanism to the Llama Advisory group could be most successful in charging institutions.
If approached in the right way, this partnership will be a win-win for everyone involved. Llama gets a significant boost in the users / institutions consuming its content. Moreover, it gets to build relationships with key ecosystem players and diversifies its current treasury-focused business model. Needless to say, look at how successful ISS has been as a company in the TradFi world — this is a big revenue opportunity as the space matures. Tally benefits as its platform use increases significantly, given that the proxy vote, and possibly payment, will be realized through it. Projects and the community benefit from increased involvement, more public thoughtfulness on the proposals, and (hopefully) more efficient governance processes.
Now, there are some risks to consider here, but, with the ability to speak with the respective teams / communities, I think we could mitigate them in certain ways:
Llama becomes influenced by a large party to push a vote one way. This has been a certain regulatory concern in the equity world with proxy advisors. We need to ensure that unbiased and objective analyses are run on proposals. Checks and balances / transparency needs to be instituted. The general risk of losing community trust should also motivate the team to behave accordingly. Incentives can be discussed as well
Institutional payment for services could be interpreted as partial. I.e. would Llama contributors be pressured to favorably conclude on investor-introduced proposals if that investor paid for their services? Would just the potential of this happening reduce trust? This is a tough one to tackle, and we would need to devise a very strict proposal for customers, outlining impartiality
Insider trading can interfere with research and voting. Assuming this partnership were to really scale, Llama’s team / core contributors could take token positions in protocols before releasing its research / voting. We would need to find incentive mechanisms to prohibit this (perhaps some form of auditing?)
The Future
The basic details mentioned above are just the start… in the not too distant future, the ownership of governance tokens will be spread out across more and more institutions. Wealth managers, pension funds, endowments, the very same entities that use ISS, will need a similar service for DeFi (and DAOs overall) governance. It makes complete sense for them to use the same model with their crypto exposure. In fact, it makes even more sense just given that crypto is very complex and harder to understand for the traditional manager. Given this knowledge gap, these firms would pay for the research and voting advisory, especially with pressure from clients on understanding the developments of their holdings and influencing them to participate in a way that benefits the long-term success of the clients. Token advisory services is very much a part of the future — and it’s time for us to get a head start on building it now.
Conclusion
This idea is in its early innings, however, its potential to tackle a deep problem within crypto is very exciting. A lot of it is still malleable, and I am very open to feedback from the community at large as well as to in-depth discussions with projects and especially involved parties (i.e. Llama and Tally). I look forward to presenting an updated proposal upon further research and significant input from others.
Disclosure:* This blog series is strictly personal/ educational and is not investment advice nor a solicitation to buy or sell any assets. It does not represent any views from where the author is working — all views, opinions, and arguments are the author’s. Please always do your own research.*
JoshTrees... and long-term investing
Inspired by Böhm-Bawerk’s JahresringeThe figure above captivated me while reading The Dao of Capital, a poignant name for a reader in the crypto space (and no, it is not about DAOs). The image is inspired by one shown in the book, which is subsequently devised from the original ideas of Eugen von Böhm-Bawerk, a notable Austrian economist and later Minister of Finance. It is used to illustrate his metaphor of a tree’s growth as representative of an economy. A crosscut analysis of a large tree ...
JoshOn Long-term Debt Cycles and Crypto
Emerging from a deep read of Ray Dalio’s Principles for Dealing with the Changing World Order (specifically Part I), I couldn’t help but draw connections to what might be one of the timeliest combinations of long-term trends: the ending stretch of the long-term U.S. debt cycle and the rise of programmable store of value assets (namely Bitcoin and Ethereum *to date*). The rise of BTC / ETH in the coming years / decades has a strong probability of coinciding with the accelerating devaluation of...
JoshThe Rise of the DEX: let’s add some color to DeFi vs. CeFi
*Migrated from Medium* Original Date - 02/08/21One of the big calls of DeFi is that it stands to eventually topple CeFi, and what place better to start at than with exchanges? The rise of the DEX has been a feat in the making for years, but we only really started to see the logos of DEXes last year, when platforms such as Uniswap, Curve, Balancer, and Sushiswap came to the scene and managed to amass billions in liquidity. Billions is a cool number to throw around, but when compared against ce...
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