Tony Sheng, the product lead at the Decentraland Foundation, an Ethereum-based virtual reality (VR) platform, recently published a blog post in which he clarified that cryptocurrency-based tokens are not a form of equity.

Sheng, who previously worked as product manager at Google, wrote that equity holders actually have an ownership stake in the stocks of the company that they invest in. Specifically, Shen explained that owning equities is equivalent to “a pro-rata claim on the enterprise value of a company.”

“Governance Rights”

Importantly, owning equity may give the holders control or “governance rights” over the issuing company’s business-related decisions, Sheng noted. Also, both investor ownership and governance control are “legally enforced”, so “the average holder of equity need not worry about unexpected changes to their ownership or control.”

The English and Neuroscience graduate from Amherst College added that most cryptographic assets give their holders “a pro-rata claim on the aggregate value of the current supply” of the digital asset.

“An Informal Promise”

Control or the ability to participate in a cryptocurrency project’s decision-making process (or roadmap) is usually given to its token/coin holders as “an informal promise”, Sheng wrote. A crypto’s developers may say that people who buy their tokens “will be informed and consulted in governance decisions”, however, it’s usually not legally binding.

Therefore, the “equity-like expectations” cannot be “legally enforced”, Sheng noted. He added that some terms and conditions can be considered enforced such as the monetary supply (maximum number of tokens) of a cryptocurrency protocol – which is normally set at its base layer.

Additionally, smart contracts may be issued that require a crypto’s developers to commit to allowing its token holders to have some control over its “on-chain governance system”, Sheng explained.

Commenting on how control and ownership is “promised” to crypto token investors, Sheng wrote: 

By and large, ownership and control are provided in ‘good faith’ by those with power in these networks (if at all). The powerful meet the expectations of the network’s stakeholders in self-interest. If they were to fail expectations, the value of the network would decrease.

Tony Sheng

Andreessen Horowitz’s Investment In MakerDAO (MKR)

Notably, Sheng has made some pertinent points and he also addressed the recent controversy around Andreessen Horowitz’s a16z crypto fund investing $15 million in MakerDAO (MKR). The venture capital firm’s investment allowed it to acquire 6% of MKR tokens at a substantial 45 percent discount

Meltem Demirors, the chief strategy officer at CoinShares, a crypto treasury management firm, criticized Andreessen Horowitz’s multi-million dollar investment in the MKR stablecoin. Demirors alleged that by not informing MakerDAO’s other investors, the platform’s developers simply made a “clever move for a fund” to engage in “opportunistic capital.”

However, Sheng made it clear in his blog post that “the MakerDAO team did not violate any explicitly stated or implied rules” with the exception of referring to itself as a decentralized autonomous organization as its actions may indicate otherwise.

Moreover, MakerDAO’s “explicitly defined governance mechanisms only cover risk management”, and many people still don’t understand that “tokens are not equity, but people expect tokens to behave like equity”, Sheng noted.