Meltem Demirors and Patrick Stanley discuss governance and the evolution of investing

So many take aways from Patrick Stanley’s interview of Meltem Demirors. Just a few below…

If people have a large share of stake can you dilute their share of vote?

Many of investors share the same objective as the project they are investing in. It’s important to remember that an investor is a fiduciary, it is their job to manage money and so they all make decisions at the end of the day that are the best for them as a fiduciary.

If you have 10 firms that may control 60% of the economic interest in a protocol, and their ownership about protocol is reinforced over time through this inflationary mechanism, meaning they do not get diluted down over time, and their vote is also proportional to their stake, then you can very quickly see that that becomes a cartel. Now, I am not saying by any means that these firms are trying to do this in a negative way.

There has been discussions of if people have a large share of stake can you dilute their share of vote? This is why the US has a representative democracy and has the House and the Senate. One is the representation of the amount of population that lives in each state and the other is 2 representative per state regardless of the state’s population. It’s a way of balancing power in the governance system.

How are you going to incentivize them to build on top of your protocol?

Once you have the network in place, then you start to see people to build applications. The challenge with applications, is there is a competition among protocols for used cases. Everyone has taken this approach of “built it and they will come”. But if there are not coming, how are you going to incentivize them to build on top of your protocol? So people start giving away tokens, cash in the same way governments might incentivize people to set up shops in their countries using tax incentives.

When you are buying tokens, you’re not waiting for an exit: it changes the social contract.

I do think that venture is in an evolution. Historically as a VC, you would look at different companies, in building and emerging technologies, and purchase equity in these companies. You would help them grow and scale to the point when there would be an acquisition or an IPO where you would make lots of money.

This is fundamentally changing with crypto networks. We’re starting to see many VCs getting involved in crypto networks by buying tokens. When you are buying tokens, you don’t have the same types of obligations, you’re not waiting for an exit, so it fundamentally changes the dynamics of how VCs interact with their portfolio companies. It changes the social contract.

The other fundamental change we’re seeing here is, what you see is reflected with the decision of Andreessen Horowitz to become a registered investment advisor as opposed to being a fund relying on the VC definition from the SEC, and the reason why is because they wanted to have greater flexibility to engage with their companies in different ways.

Crypto networks are ripped for new types of financial engineering

At the end of the day, if I look at the world of finance where I come from, financial engineering has created all of the wealth we see in America. Yes, the backbone is technical innovation, but really what’s been made possible in our markets has been a product of financial engineering. And crypto networks are ripped for new types of financial engineering through the digitization of these investment products using smart contracts, through the existence of this new incentive called the token and through these new representations of value that we’re experimenting with.

Patrick Stanley interviewing Meltem Demirors