Tulips, Constitutions, and HIRPies

Novel treasury and fundraising mechanisms shaping the future of finance

The FT token blurs the lines between tokens, equity, and a stablecoin. It’s like a stablecoin because the value is backed 1:1 by a real asset that can be claimed at any time. It’s like a token or equity investment because it could be 5x or 10x for you.

The purpose of an endowment is to provide a sustainable and perpetual source of operating capital by preserving (and growing) principal capital in the long run. Universities and foundations have done this for years. They use interest and investment proceeds to fund operations and avoid ever touching the principal capital. Flying Tulps is planning on running entirely on interest income, meaning that the only “risk” that users take is that they’re not generating yield with their assets for themselves. 

There are so many bad crypto projects out there. Most of them leave financial contributors extremely exposed and allow creators to easily extract value. That's not good. I like that Andre has set this up so that the team has no tokens up front. They have to earn their success. They must perform and deliver a positive outcome to be rewarded. This is the way.

A lot of people have asked me, “Why did ConstitutionDAO get so big?” It was in large part, because of the treasury design. From the onset, it was designed to be 100% refundable, thanks to Juicebox. The structure was simple: contribute one ETH and get one million tokens. The same ratio held for any contribution amount. People contributed over 12,000 ETH (worth over $40 million) in just a few days after I launched the project. As you know, we tried to buy an original copy of the Constitution at a Sotheby's auction and lost to Ken Griffin. After the auction, they were able to get a 100% refund by returning their tokens. This whole return process happens programmatically, no interventions. In fact, if you still want to return your contribution receipts, you can.*  

The structure had the effect of a free call option. If you put in $100, you were promised to be able to take back $100. We had a Redeemable Treasury. But an odd thing happened: a lot of people decided that they wanted to hold on to their contribution receipts. It was a part of history. In fact, a lot of people who didn’t have a chance to contribute originally also wanted to hold a part of history, so they bought $PEOPLE tokens from contributors. A person's receipt for their $100 contribution quickly turned into $1,500. A lot of people made a lot of money. And weirdest of all, there was zero risk.

So a mythical 10x is possible with zero principal risk? Genuinely, yes. And Andre’s model just took it to the next level.

Andre’s structure takes the great parts of ConstitutionDAO’s Redeemable Treasury and supercharges it. It has two key improvements: (1) capital is programmatically put to work to generate interest and (2) redemption is a continuous option rather than a discrete thing that is turned on or off.  These are critical improvements to evolve the model and focus on a long-term sustainable organization that has meaningful funding for operations. 

To a degree, this is a High Interest Rate Phenomenon. Flying Tulip’s Redeemable Treasury model is very interest rate dependent. It wouldn’t work as well in a low-interest rate world since it would slash his operating budget. This is the opposite side of the coin from zero interest rate phenomenon (ZIRP) that introduced novel models suitable for uniquely low interest rate environments. In a high-interest world with new mechanisms, we’re going to see more HIRPies: High Interest Rate Phenomena (yes, I’m going to coin that). 

I point to the dependency on interest rates as a point of caution, not criticism. I think we’re likely in a structurally higher interest rate environment in the foreseeable future. That means that there’s a massive window that innovators should absolutely build things with. However, it is critical that founders, operators, and investors understand this relationship because it introduces different risks and challenges. 

If the macro environment moves us to even higher interest rates in the years ahead, you can expect to see even more innovations built for these conditions. The higher the interest rates, the more HIRPies will spread. 

I love Andre’s treasury design. I think this (in addition to many of his other inventions) will cement him as an all-time great mechanism architect. But I also think that treasury design space will evolve even further. 

Right after ConstitutionDAO, I expected there to be much more innovation around treasury architecture. A programmable treasury was very obvious to me. At the time, I was working on a variety of investment structures: REITS, LBOs, Credit Facilities, SPACs, sovereign bonds, and more. Most of these had unique capital structures, incentive mechanisms, and governance. I got intimately familiar with a lot of bylaws and capital structures. There are still much more ways to borrow well-tested mechanisms from TradFi and use them programmatically with smart contracts in even more interesting ways. At some point, I will need to share more about my previous work on “Regenerative Treasuries." The space was far too immature for this model in 2022, but the market may be mature enough for it now.

Another example of a next-era treasury design is Jango’s creation of RevNets. I'm also hopeful about Gabe Shapiro's work on BORGs, which are working to emulate traditional capital structures onchain, but have the potential for further innovations. It is a model that programmatically defines the relationship between revenue and ownership with crystal clear rules.

People have not yet wrapped their heads around the consequence of innovating on capital structures. New ways of aligning interests and rewarding financial contributions will reshape the fundraising and startup landscape.