Index Protocols, Meta-Governance, and the Battle for Capital

“People treat [tokens] like stocks, in defi, tokens are a coordination mechanism. If you have tokens, it is because you want to be a contributor, not a bystander.” - Andre Cronje

Passive investing in the world of traditional finance is, well… passive. It's not just the fact that passive indices provide investors broad access to stocks without any need to do any work on the index composition. It’s also that fundamentally, stock holding is a passive game.

Holding a stock entitles the investor to economic and governance rights to a company, but there’s no performance obligations for you as a shareholder. It is completely fine to just hold a stock into perpetuity, collecting dividends and enjoying capital appreciation over time by virtue of holding shares in a company.

Even if a shareholder were to exercise their governance rights there are limits to what they can do. Sure shareholders can do things like vote in new board members, adjust management compensation, and approve or reject significant financial transactions like mergers and acquisitions. But shareholders don’t directly manage companies. Apple shareholders don’t set prices for Apple’s latest iPhones nor do Amazon shareholders determine what new markets Amazon should enter next. Most of the time, barring activist situations, shareholders are very hands off when it comes to the operations of a company. And the same can be said for index funds which although own significant portions of most publicly traded companies don’t really flex their power.

But crypto is a different story.

Token holding is an active game. In many cases token holders directly govern protocols and assume the protocols’ risks. In Synthetix, token holders actively mint synthetic assets and manage the protocols’ debt. In Aave, token holders actively set the risk parameters of its lending markets and insure the protocol in the case of insolvency events. In Nexus Mutual, token holders govern the mutual and determine which claims are paid out. For performing these activities active token holders receive protocol rewards in the form of fees and inflation, while passive holders often receive nothing and face dilution.