Crypto Debate: Should Projects Pay 100% Revenue to Token Holders?

In the early days of the Dutch East India Company (VOC), shareholders expected their capital to be returned after a set period, along with additional yield. However, the company's high investment needs in building forts and projecting naval power abroad led to a decision to retain investors' money rather than return it. This move was met with protests, particularly from Isaac Le Maire, a former director of the VOC, who campaigned against the company's management and petitioned the government for liquidation. To placate investors, the VOC offered dividends, initially paid in spices like mace and nutmeg due to chronic cash shortages. Shareholders were skeptical, as spices were hard to sell and impossible to sell at the company's stated value. Despite the initial skepticism, the VOC's dividends, which averaged 18% of paid-in capital over 200 years, eventually convinced investors that shares could have value even if the paid-in capital was never intended to be paid back.

In the crypto world, the debate over what percentage of revenue, if any, crypto projects should pay out to token holders is ongoing. Tom Towbridge, co-founder of Fluence, argues that a team that pays out 100% of revenue is perfectly aligned and trustworthy with token holders. He suggests that when a team pays only a small percentage of revenue to token holders, there is a significant misalignment of trust and interests. This is evident in the case of pump.fun and its new token, PUMP, where investors value the token at $4 billion despite the owners retaining 75% of the platform's revenue. While it is possible that the retained revenue will be invested in a manner that benefits token holders, there is no guarantee. Therefore, it is best to value the PUMP token as a multiple of its current cash return, similar to how the VOC's pioneering investors valued their shares.

Historically, from the VOC in 1602 until about US Steel in 1901, investors tended to value stocks only by the dividends they received, assigning no value to a company's retained earnings. This made sense because investors had no idea what companies were doing with their retained earnings. Today, token investors are not much better informed, so it similarly makes sense to value many tokens by the rate of their current buybacks and nothing else. However, PUMP is trading at 40x its annualized buyback, equating to a 2.5% yield at the current token price, which seems to price in something more than the current rate of cash return. In contrast, VOC's early shareholders demanded all of the company's cash flow, as they were rightly suspicious of what management was using it for. Until it is established in crypto that token holders have a claim on earnings, token holders should probably demand bigger buybacks.