Loosely speaking, there are two sorts of cryptocurrency platforms. There are centralized platforms, which are owned by shareholders (founders, employees, venture capitalists, etc.) and managed by managers. The managers set the policies and try to attract deposits (of money and cryptocurrency) from customers and then make decisions about how to invest those deposits. If the investments make money, the customers get paid some agreed-upon yield, and the platform (and its equity investors) keeps any profits that are left over. If the platform becomes popular and successful and widely used, and if its investments work out well, then its shareholders get rich. This is roughly how many traditional finance businesses work too.
Then there are decentralized platforms. These are in some sense owned by their users (customers, depositors, borrowers, etc.), though generally that means that the users get a cryptocurrency token with some economic and governance rights rather than a share of equity. There might be some managers, but the holders of the governance tokens can replace them or change the platform’s policies. There is a Discord channel. If the platform is investing customer money, the customers, as holders of governance tokens, might get to vote on what to invest in, and the profits (or losses) of the investment flow directly to the customers. If the platform becomes popular and successful and widely used, and if its investments work out well, then its users — at least the early users, the ones with a lot of tokens — get rich. This form of organization is at least a somewhat new phenomenon, a genuine innovation of crypto.
Don’t take those last two paragraphs too seriously; I am oversimplifying and abstracting a lot here. But I think that directionally there is something to this: There are manager-run shareholder-owned centralized platforms that interact with users as customers, and there are token-driven decentralized platforms that interact with users as customer-owners.
At a similarly high level of abstraction, one way for a centralized platform to become a decentralized platform is by going bankrupt. Oops! Voyager Digital Ltd. is a New York-based, Toronto-listed cryptocurrency brokerage platform that blew itself up by lending hundreds of millions of dollars of customer money to troubled crypto hedge fund Three Arrows Capital. Last night it filed for Chapter 11 bankruptcy in New York and, while it doesn’t have enough money to pay back its customers, it does have some tokens to give them. From Voyager’s press release this morning:
The proposed Plan of Reorganization (“Plan”) would, upon implementation, resume account access and return value to customers. Under this Plan, which is subject to change given ongoing discussions with other parties, and requires Court approval, customers with crypto in their account(s) will receive in exchange a combination of the crypto in their account(s), proceeds from the 3AC recovery, common shares in the newly reorganized Company, and Voyager tokens. The plan contemplates an opportunity for customers to elect the proportion of common equity and crypto they will receive, subject to certain maximum thresholds.
If you had 10 Bitcoins, or $10,000 of USDC stablecoins, in your Voyager account, you are, uh, you’re not getting those back. Voyager loaned 15,250 Bitcoins and $350 million of USDC to Three Arrows; those are gone. But you’ll get some of your cryptocurrency back. (Last week Voyager released some financial data as of June 30, showing at least $2.3 billion of assets, of which about $650 million is loans to Three Arrows; if everything else is money-good then customers should get back 72 cents on the dollar, though hoo boy is that not investment advice.) And to make it up to you, you will also get:
- Shares of stock in what’s left of Voyager, giving you the upside in its future business.
- “Voyager tokens,” which are “a digital currency issued and administered by the Company” that is “primarily issued in connection with the company’s loyalty and rewards program.” If you own Voyager tokens you can use them to “earn a variety of rewards and incentives, including higher referral bonuses, lower transaction fees, prioritized customer support, higher PIK Interest rates, and access to special events and investment opportunities.” Imagine! Imagine earning that referral bonus. Imagine calling your uncle to be like “hey I have all these loyalty tokens from a crypto exchange that just went bankrupt and lost my Bitcoin, you should sign up.”
- A share of Voyager’s claim against Three Arrows, which is also in bankruptcy; presumably that bankruptcy process will eventually return some number of pennies on the dollar for Voyager’s loan, and you’ll get a share of that.
You thought you were just a customer of Voyager, putting your crypto there to facilitate trading and earn yield. But now you are an owner of Voyager: You’ll get paid more if its investments work out, if it succeeds as a cryptocurrency trading platform, if it earns lots of fees because customers flock to trade on Voyager, etc. You’ve got equity shares, you’ve got loyalty tokens, you have a direct stake in its biggest and riskiest investment. You’re in decentralized finance now, congratulations.
Look. I am being a bit stupid here. This is not, like, how DeFi works. Still I do think it’s funny that bankruptcy will turn Voyager’s customers into owners of its platform and of its biggest loan, and I think it does point to some interesting lessons about crypto. Here are three:
- A lot of people don’t want this. The reason that centralized platforms like Voyager, Celsius, Babel, Vauld, etc. appealed to users is that they offered a simple thing. “We’ll hold your crypto for you and pay you a yield” is a nice proposition, very much like what a bank does with your money. (Banks are more regulated and less reckless though.) It is legible and simple and feels safe, and some people want that. “You’ll deposit your crypto on our platform and then you can vote on how it is invested and get a share of the upside in individual loans while also earning tokens that pay you rewards based on trading fees that we earn” — that is also a thing, and some people want that, but it is a different thing. Even in crypto, the demand for a safe place to put your money and earn a defined yield is separate from, and possibly greater than, the demand for a platform where you can vote on risky investment decisions and share in the upside. Here is a Voyager press release from three weeks ago: “Voyager differentiates itself through a straightforward, low-risk approach to lending and asset management by working with a select group of reputable counterparties, which are all vetted through extensive due diligence by its Risk Committee. The company does not participate in DeFi lending activities, algorithmic stablecoin staking and lending, or derivative assets, such as stETH. One of Voyager’s important objectives is to make crypto as simple and safe as possible for consumer use.” People want trusted intermediaries. They just sometimes trust the wrong ones. Voyager promised people the safe thing and ended up giving them, you know, tokens.
- Tokenomics only work on the way up. “Tokenomics” is sort of a way of saying that, if you make your customers your shareholders, then you can turn any sort of business into a Ponzi scheme. (But in a good way?) People will become customers as a way to get tokens and speculate on the growth of the platform, so the platform will grow, so more people will join to speculate, etc., whether or not the underlying business is good. But it seems harder to do this with a declining business. Here, Voyager has blown up its customers, and to make it up to them it is giving them a share of its future business. There might not be any.
- Actual DeFi platforms (except Terra!) have mostly not blown up the way that Voyager et al. have, and there is a reason for that. Voyager et al. turned out to have been making a lot of unsecured or undersecured loans to crypto hedge funds (largely Three Arrows); DeFi platforms mostly make oversecured loans and, when they don’t get paid back, automatically liquidate the collateral to preserve their capital. This is a sensible division of labor: It is easier to do oversecured lending through smart contracts, on the blockchain, with automatic liquidation, etc.; unsecured lending requires trust and due diligence and works better with some centralized decision-maker who can look the borrower in the eye. The unsecured model is more economically meaningful, but in a downturn, the oversecured model tends to look better.
With this much said, I’m not a believer this CeFi to DeFi transformation. Hopefully voyage will be successfully, otherwise the stakeholders will be holding tons of worthless voyage tokens.