On the Points Guard post

The thrust of the Arthur Hayes post on Points is that Points work, Points are here to stay, Points are a more mature evolution of ICOs or Airdrops/yield farming, and (this is implied) Points don’t violate Howey in the US.

Some quotes:

 Points combine the best aspects of ICOs and yield farming.
 Are points a contract between the project and the user for a tangible reward in the future? No.
 Is there any form of money, fiat, crypto, or otherwise that is exchanged between the user and the project for points or tokens? No.
 Whether you like it or not, every successful project, and by success I mean, token number go up, will enact a points program before their TGE.
 If points create better alignment between users and the protocols, LFG.

I would say, referring back to my prior post, that Points technically are more useful from the protocol’s perspective than a mere frontloaded ICO, or the more sophisticated single-shot airdrop. They provide more flexibility, they give the ability to not issue if regulatory trends are perceived to be adverse, and they give developers the chance to continually tune the offering, deprive certain users/sybil farmers, etc. Technically, they are better.

However, you know that meme “I consent; I consent; is there someone you forgot to ask”? There’s more than two stakeholder groups here. There’s the team; there’s the VCs; there’s the retail punters; and most importantly there’s the regulators.

For VCs, points are useful, since they provide a cheap way for protocols to “buy” usage early on (and solve the cold start problem associated with protocols that need liquidity) without giving up either tokens or equity. Tokens solved this initially, but points are even better, since they’re just a vague promise of a token.

For the regulators however, Points don’t help. They are super arbitrary, and encode massive information asymmetries by definition. Aidrops are generally fairer, since the team (generally but not always) lays out the rules, rewards the community, and then that’s it. Points are more of an ongoing thing and the rules can be constantly changing. If we review Howey, Points don’t look great.

1. Expectation of profit – clearly present, otherwise no one would be farming
2. Investment of money – arguably present. Points farmers are stumping up capital for a time in the protocol. Capital has an (opportunity) cost, so this is an investment.
3. Efforts of third parties – especially for points programs that are drawn out, this is clearly present, as the retail farmers are depending on the team to build something
4. Common enterprise – yes.

So I would say points are no better than airdrops, and arguably worse, since info asymmetries are worse in my view. Here’s where I disagree with Arthur. Just because the promise of a future reward is vague, doesn’t mean it’s not a promise. It’s still compelling retail to do something. And in fact, from the securities regs perspective, if you’re making a promise which induces grandma to put her life savings in your defi thing, and then you DON’T release a token after, you’ve basically tricked her – arguably, this is fraud. So any team that is going to release points and wink and nod to the community in the hope that they commit their own capital and effort to make the protocol valuable, and then they don’t get tokens in the end – that’s probably the worst thing you could do. That’s an easy way to get sued. An implied contract that isn’t an explicit contract is still a contract, in the US.

Why do Arthur and me disagree? We have the same set of facts at our disposal. However, Arthur doesn’t live in the US, so he doesn’t necessarily have to care as much about the letter of securities laws. It's possible other jurisdictions (whose laws I’m not as familiar with) will take a more benign view of points. Assuredly, many airdrops and new listings will continue to use points, and I’m sure it will “work” much of the time. But in the US, using points doesn’t save you from securities laws considerations.

On Lex Node’s comments

He has a few comments on points. I’m not sure which ones specifically you want me to address. I’ll paste a few here.

 Points are probably the stupidest detour crypto has taken in my time here. Also borderline scammy.
 I just have zero faith that most of these points programs will turn into a token. Likely result: "Our lawyers advised us tokens are illegal. Enjoy your consumer utility attached to our closed-loop points system; you've earned it." Plan accordingly.
 overall, while there COULD be a good use of points as a more transparent, fair, consistent yield-farming structure as described in Hayes' article, it seems that's more theory than practice at this point--in practice, they represent a reversion to web2 and a new opportunity for team/VC abuses and info asymmetries

The key problem with points isn’t a points problem, it’s an alignment problem. Fundamentally, VCs have the advantage because they buy BOTH tokens and equity (sometimes in different ratios, so you have 1:1 ratios or 1:3 ratios, i.e. the FDV is 3x the post money of the equity deal, and VCs get a smaller share of the token supply), and they can be indifferent in terms of value accrual. The community that is ONLY buying tokens does not have that privilege. So if it turns out the equity accrues value (which should happen most of the time, because the equity is senior to the tokens (remember, the equity determines who runs what at the company, and only the shareholders can fire the core team, not the tokenholders)), as happened with Uniswap, for instance, the tokenholders lose. The team and the VCs are incentivzed to get a free token option by implying the token will be worth something, selling their own tokens, and then actually redirecting the cash flows from the protocol/business into the equity. It’s a BAD system. The only way to solve it is by having a single unified cap table where everyone has even to tokens and equity (as in, the equity cap table is mirrored by the token cap table). But this doesn’t happen, because the point of tokens is broad buyin, whereas equity cap tables are very small.

Points don’t solve this, as lex node says, they just introduce a third, most junior level of pseudo-equity. So you have a capital stack that looks like: preferred equity, common stock, tokens, points. Preferred equity gives the VCs the ability to set the board and fire the CEO etc, and it has preference in liquidation or a sale. There’s a lot of explicit rights that come with it. Common stock has fewer rights but still lots of codified legal protections. Tokens give you a firm right to whatever the token gives you. Points give you maybe a claim on future tokens. So you see how at each stage of the stack the rights get more diffuse and weaker.

The point of securities laws is to set retail investors on an even footing with the most sophisticated firms. This is why securiites laws are alllll about disclosure. If you go public, you have to reveal everything material about the company, and do it on a cadence and not insider trade on that info. Points are the opposite of this. They give you virtually no information, but youre still meant to buy in to the project anyway. So on the spectrum of Arthur Hayes to Lex Node I’m much more sympathetic to Lex. Although, I do think Points will remain the meta for a long time, at least until courts catch up with them.