March 04, 2025 | Read Online

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"A stock is worth the present value of all the dividends ever to be paid upon it, no more, no less."

— John Burr Williams (1938)

Protocols should show investors the money

In 1919, the Ford Motor Company was sued for not paying sufficient dividends.

The Dodge brothers (both shareholders and competitors) argued they were entitled to a larger portion of the Ford Motor Company's earnings than Henry Ford chose to distribute — and that Ford was harming shareholders by selling his cars at unreasonably low prices.

The court agreed, in part, ruling that shareholders were entitled to a one-time special dividend, but only because Henry Ford was found to have prioritized his personal interests (philanthropy) over the interests of shareholders.

But the court was reluctant to second-guess a company's business judgments: It would not tell Henry Ford how to price Model Ts.

Dodge v. Ford Motor Co thereby established that the purpose of the corporation is to make money for the shareholders.

But it set the somewhat confusing precedent that while shareholders were entitled to share in a company's profits, they couldn't force management to pay them out in dividends.

Investors were still trying their luck in 1947 when minority shareholders of the Gottfried Corporation filed suit to force the company to pay dividends in "a fair and adequate amount."

The court ruled against them, establishing the precedent that a company cannot be compelled to pay dividends unless its directors are found to have been withholding them in bad faith.

Acting in bad faith is a difficult thing to prove, so in practice, companies cannot be forced to share earnings with shareholders.

But we shareholders have nonetheless retained the general idea that we have a claim on them.

That might be why Berkshire Hathaway paid its one and only dividend in 1967.

Warren Buffett says he can't recall why he chose to distribute $0.10 per Berkshire share — a decision he later declared a "terrible mistake."

(Oh, how that $101,755 could have compounded with Berkshire!)

My guess is that in a moment of weakness, Buffett gave into the expectation that a profitable company would pay a portion of its profits out to shareholders.

Because if a profitable company doesn't pay profits out to shareholders, why should we think its stock is worth anything?

Buffett has since demonstrated why: Berkshire shares are up approximately 3,750,000% since 1967, despite never paying another dividend.

Show. Me. THE MONEY.

The intrinsic value of any stock remains the net present value of its future dividends — but shareholders have come to understand that those dividends don't ever have to be paid for a stock to have real value.

Instead, a company can create value by using profits to buy its own stock or reinvest in the business — or store value on behalf of shareholders by just sitting on cash indefinitely.

Whatever management chooses, shareholders can rest easy knowing that the purpose of corporations is to make money for them.

The purpose of crypto protocols, however, is not so clear.

When I started writing this newsletter in 2021, the idea that protocols should make money was controversial and the idea that they should return that money to tokenholders was even more so.

Crypto purists believed that protocols were software platforms, not pseudo-corporations.

The purists have mostly lost out: Protocols are now generally expected to make money and token holders generally expect that they will someday see some of it.

There was no mention of crypto in Dodge v. Ford, however, so token holders do not have a legal claim on those profits.

Nor is there any Berkshire-like precedent to establish that tokens of money-making protocols can have value whether or not that money is paid out to tokenholders.

So, the idea that tokens have real value has to be set by example — which is why I think it's valuable for protocols to be returning revenue to tokenholders now.

Crypto natives understandably question this.

Most protocols are early-stage ventures and investors typically want their early-stage ventures to reinvest revenue, not pay it out to shareholders — so why should crypto be any different?

Crypto protocols that return revenue to tokenholders, they argue, are bringing a value mindset to a growth game.

But at this stage of the crypto investing game, I think we still have to demonstrate why tokens have any value at all.

Specifically, we have to demonstrate that tokens have a social claim on earnings.

The crypto investor Felipe Montealegre believes they do, and applies a "backyard test" to measure it.

When considering a new protocol for investment, he asks himself a question: If the team developing the protocol found $1 billion in their backyard, who would they give it to?

"Sometimes the answer is themselves and we can't invest in that," he explains. "Sometimes the answer is, given the incentives, we're pretty sure they'd give it to the token."

In short, Montealegre looks at things like a token's ownership structure and a team's reputation to determine whether tokenholders will have a social claim on the protocol's earnings.

This is not unique to crypto.

Shareholders in Fannie Mae and Freddie Mac, for example, have no legal claim on the companies' profits (all of which go to the US Treasury).

But shares in both have skyrocketed this year on expectations that activist investors will successfully convince the government to voluntarily redirect profits to shareholders.

Crypto-native investors have a similar belief that they will someday share in the profits of protocols that are not legally required to share them.

To foster that belief, I think there's a lot of signaling value in DePIN-style tokenomics where most or potentially all revenue is returned to tokenholders via token buybacks — even if a protocol is simultaneously issuing a larger number of new tokens (to incentivize supply).

It's not the TradFi playbook — an equity investor would never want to see a company selling new shares at the same time it's buying back existing ones.

But tokenholders don't have the Dodge v. Ford ruling to rely on.

Nor do they have decades of evidence that a legal claim on dividends creates value, whether or not the dividends are ever paid.

Until we do, crypto investors should be asking protocols to show them the money.

— Byron Gilliam

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glassnode @glassnode

From a realized loss perspective, the initial $BTC drop triggered the largest flush of the cycle, with investors locking in $818M in losses. This shows the intensity of the move and the difficult conditions as liquidity thinned below key support levels: glassno.de/3F3ga97