Jake Chervinsky

Most projects should have equity or tokens, not both. It's not that equity and tokens *can't* work. In theory, both can accrue value in the same system provided each conveys real ownership over valuable property. But in practice, equity and tokens usually *don't* work, for a number of reasons that make single asset models better in most cases: (1) Misaligned incentives. Companies with shareholders have a fiduciary duty to drive value to equity, not tokens. Holding tokens on a balance sheet doesn't solve this problem on its own, because there will always be some difference between the best interests of shareholders versus tokenholders. For example, a profit-generating business will nearly always return more value to shareholders by retaining that profit rather than socializing it across all tokenholders. There may be ways to wiggle out of the legal obligation here, but no way to avoid the misalignment itself. Over time, its impact typically grows rather than shrinks. (2) Ambiguous value accrual. Companies with dual assets have to figure out what value should accrue to each one. Historically, most companies have struggled to design tokens that capture real value onchain, instead relying on theory (e.g., demand for utility tokens) or hand-waving to assert an investment thesis that rarely plays out well. Meanwhile, companies that generate value *offchain* have largely been blocked by legal from returning it to tokenholders, and so instead they return it to shareholders. The solution is to build fully onchain products where tokenholders have true ownership over infrastructure and revenue, but few projects have achieved that goal so far. (3) Legal and governance issues. Beyond their affect on value, misalignment and ambiguity impose high operational costs. They are a potent combination for destroying any project, let alone one trying to build in an environment of regulatory uncertainty like we still face in crypto. Even if a well-designed dual asset model can work, the distraction and inefficiency required by the balancing act tend to make it *worse* than a single asset model, all else being equal. So, can equity and tokens work together? Yes, if it's absolutely clear that offchain value accrues to equity, onchain value accrues to tokens, there's enough value to make both assets attractive, and neither one siphons or undermines the value of the other. There's a place for this, such as when a company's offchain business is positive sum (e.g., increasing token value by driving more activity to a protocol), or where the token performs a necessary function (e.g., incentivizing permissionless coordination). Those cases are few and far between. Real enough to take seriously, but rare enough to treat with skepticism. Tl;dr, for almost everyone: tokens or equity, pick one.