This essay contributed materially to the realizations behind Salutary. It was originally published on Twitter here and then Substack here.

DeFi needs more awareness of our TradFi parallels. Namely how our problems, discoveries, life cycles, etc. are not new. If we’re “speedrunning financial history” there’s much to be learned by actually observing history; the details change, but the patterns of human behaviors endure. Many of crypto’s problems have already been litigated with clear answers. Sometimes the future is visible by simply looking to the past. 

DeFi is not reinventing human behavior or financial axioms; we are creating superior environments for them to take place.

There is such a thing as financial physics, economic natural law: immutable principles governing how value flows, concentrates, and compounds. Distributed ledgers don’t void these laws. Salutary does not deny this reality because a crypto asset resides on a blockchain. Crypto is finance; the rules of finance still apply, no matter what database you stick the asset on. 

Your Equity Is Not What It's Made Out to Be

Stock "equity" isn't exactly what it's presented as anymore. In many respects, it’s quite similar to DeFi governance tokens. This essay is a functional breakdown that decomposes these two assets.

There’s a hyperfocus on DeFi projects’ revenue distribution, often found in the phrase “stake for yield” or “fee switch”. This means you receive a dividend when you own the project’s token (it’s the exact same thing as a dividend). I don’t know why DeFi felt compelled to rebrand the term "dividend", maybe because it feels more community inclusive.

Is this dividend necessary for the token to accrue value? Does it give it “utility”? What do we even mean when we say that?

I’ve taken CFA tests, have worked in finance, and understand the official DCF theories. What I’m interested in is situational reality; what do you actually get at the end of the day with stock ownership? When does the claim on cashflows happen? What does equity even mean anymore?

Last I saw figures on it, about 70% of S&P 500 stocks pay a dividend, and the most richly valued ones (tech and high-growth stocks) rarely do. No startup pays a dividend, and only 50% of the Nasdaq does. No cash will ever be returned to you from many of these stocks, no claim can be exerted on their resources from the average holder. So why do they track the underlying business?

It's odd how we describe dividends as "utility" in DeFi, but no one says a tech stock has/doesn't have utility based on if it pays dividends.

A Claim on Cashflows…?

You can’t claim any cashflows from Cloudflare with your NET or Nvidia with your NVDA. Go ahead and contact their investor relations and request "one cashflow please" or try to exchange it for company resources, see what they say. No claims can be made, and no dividend will be paid. 

What about situational claims on company resources? Like say, bankruptcy?

Still, not really. Especially if they're tech companies. Most tech assets are intangibles. Intangibles are things like IP, goodwill, the spoils from research and development, etc.. They're the brand and service they've built via investing through the income statement, not the balance sheet. They're not hard assets like property, plant, and equipment.

Here’s an infographic on how tangible assets for US companies has been declining, broken down in 10-year chunks. This trend won't reverse anytime soon.

The investments tech companies make are often in things that seem periphery like customer support and advertising, but are critical capital assets of the tech world. These squishy assets are very valuable to the company, but they have little salvage value in liquidation.

Common stock is a junior claim on assets if the company is being liquidated: debt holders get first claim, then preferred stock, then if there’s anything left common stock gets something. There are little of any leftovers for shareholders when the company has no tangible book value. There are no hard (tangible) assets for them to sell, like a factory, to try and make all members of the capital stack whole. Your stock exerts no claim in good times, and no claim in bad times either.

And on an aside: you sure aren't investing hoping you get scraps in bankruptcy; it means the company failed and the share price was decimated. What I'm doing here is trying to conjure up any scenario where this "equity" you hold actually forcefully exerts any claim/control over company resources.

What are you getting when you buy a tech stock?

• No cashflows

• Nothing in bankruptcy

• Voting rights!

When you buy NVDA, CFLT, NET, or basically anything in the WCLD index, etc. all you get is to vote in shareholder meetings. Neat! Wait, what's a governance token do again?

These stocks still track revenues, margins, etc. even though you will never touch the cash these companies generate. You can't exercise a claim on the company’s assets. So what exactly is your “equity” giving you equity in?

Stocks Can't Rug As Easily?

I’ve heard some say legal protections make stocks safer, and from a “rugging the business” standpoint, that’s true. However this is value-accrual analysis, not a legal-protections one. Why does the treasury of Cloudflare make NET more valuable when you’ll never touch one penny of it by holding NET? Yes the CEO can’t steal the corporate bank account, whereas in crypto he can more easily. But that doesn’t change how you'll never get anything valuable returned to you from owning NET.

On Share Buybacks

Some important points on share buybacks vs dividends: they're technically the same thing if you're taking a CFA test. I understand the accounting logic and the tax-advantaged approach. But it doesn't address the central point being asked here.

Reducing the quantity of something doesn’t in and of itself make it more valuable. The question being asked here is “why was this thing valuable to begin with?”. Buybacks don’t tell me why the stock is intrinsically worth anything, it just tells me there’s less of it now; “less of something” is not a value-accrual argument.

• Reducing share count does not create value; it concentrates value that already exists.

• Buybacks are not by themselves a form of value accrual. A worthless asset is still worthless even if you shrink its supply.

  • This is effectively what DeFi token buybacks do: they borrow stock abstractions for assets with no stock characteristics and no intrinsic worth… “Here are 100 units of vapor, we’ll now reduce the supply to 70 units, returning value to vapor holders. It works for the stock people, so it must work for the token people?”. Unfortunately, the token is not a stock.

  • Reducing quantity alone cannot manufacture intrinsic value; it merely redistributes whatever value already exists. Something must already have innate value for a scarcity-inducing action to increase its worth.

You're still not getting any income stream with buybacks, and you still have no functional claim on company assets. How do you acquire dollars out of your stock, post buyback? You still receive nothing by virtue of owning them besides… voting rights.

This artificial-scarcity act pleases the DCF gods that say your stock price should go up now by virtue of there being less of them. But for almost everyone, you still just own a governance token. A share that only lets you vote, has no profits returned to you, and has no real claim on any resources.

There is one exception to this: your equity is not equity, unless you own enough of it. Stocks have evolved substantially over centuries into an entirely different asset class, and no one has updated their priors. Please read The Salutary Whitepaper to learn more.