"Valueless" Governance Tokens - The Daily Gwei #178

Don't be fooled by the memes.


There’s a popular meme in the DeFi space around “governance tokens” where people like to call them “valueless”. This meme spawned from when Andre Cronje launched YFI because he called it “valueless” and then it went on to gain 4500x in a couple of months (if you take $10 as YFI’s starting price). The funny thing is that these tokens aren’t actually valueless at all even if all they can do at the start of their life is participate in governance.

What some people fail to see when it comes to governance tokens is that they have value because they hold governance rights over a protocol. What this means is that just because a protocol doesn’t pay out cash-flows to token holders on day 1, doesn’t mean it will be like that forever. This is because token holders can one day vote in some sort of value accrual mechanism as well as other parameters that bring value to the token when they feel it is the right time to do so. On top of this, token holders govern the platform itself and are responsible for making sure it operates smoothly.

I think the clearest example of a token that went from being worth nothing to being worth everything is AAVE. This token started its life as LEND back in 2017 after it was sold as part of an ICO. Then, during the 2018/19 bear market, its market cap stayed around $5 million to $15 million until slowly starting to move up in late 2019. Fast forward a year and a bit later and the now migrated LEND token (called AAVE) has a market cap of $6.5 billion. So, what happened? Well, the Aave team kept building all throughout the bear market and finally launched their product in January of 2020. During the bear market they had built up a loyal token holder base who weren’t begging for cash-flows or yield on their tokens - they were just happy to be part of a growing community. Then in late 2020 the AAVE token was completely revamped with a bunch of new features including cash-flow generation for token holders (paid out of protocol fees).

Even after this amazing story there’s still a lot of short-termism in the DeFi space where people expect protocols to be cash-flow generating from day 1. This is really bizarre to me as I believe any revenue generated by a protocol in its early days (say 1-2 years) should be reinvested straight back into the development of the project. Why pay out what is essentially dividends to token holders who aren’t adding much value? If these token holders actually cared about the project and wanted to help it grow and succeed then they would stick around regardless. I believe teams that optimize for creating as much value for the protocol as possible before paying out dividends will do very well in DeFi.

There’s plenty of overvalued coins and tokens across the entire crypto ecosystem but there are many undervalued ones too. Typically, I like to look for projects that people consider to be “dead” or “moving too slow” and then buy up those tokens - especially if those tokens don’t have any cash-flows yet. Of course this isn’t investment advice but given the rampant short-termism in this space I believe that it’s an opportunity that us long-term orientated folk can take advantage of.

Have a great day everyone,
Anthony Sassano


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All information presented above is for educational purposes only and should not be taken as investment advice.