The Stock Warrant instrument explained

Tuesday, 05 November, Year 5 d.Tr. | Author: Mircea Popescu

Motto : {asciilifeform} can't argue with a working civilization-building machine...

MPEx has been using SSWs extensively, starting with the S.MG IPO this summer. So far they have been sparsely explained in the definition section of MPEx listing agreeements, as follows :

Special Stock Warrants (abbreviated SSW) are numbered and GPG signed instruments which create the right for a beneficiary specified by GPG fingerprint to purchase a specified number of S.MG shares directly from MiniGame for a specified price, no earlier than a specified date. To be valid a SSW must be published by MiniGame at the time of its issuance.

This is factually correct and actually complete, but let's go a little into detail on the matter. The classic use case of stock warrants is the fabled story of the fisherman. It goes like this : One day a spiffy young fellow wants to start fishing. Generally to catch fish, which is valuable, you need a fisherman to do the work, and a boat and tools to work with. If an investor puts in 100 BTC to buy the tools while the fisherman promises to use said tools to fish, then the guy that put in the 100 BTC gets 100 shares, and the fisherman gets warrants for 100 shares at 1 BTC each. After the fishing, when they have a grand total of 200 btc worth of fish, they can now split it up. The fisherman brings 100 btc in cash, taking the total value of their venture to 300 BTC. This total is divided to 200 sharesi, yielding 150 BTC to each of the two participants. The original investor has realised a 50 profit over his risked 100 BTC, and the fisherman returns the borrowed 100 BTC he just used and pockets the extra 50. Even split, all is well.

Should the fishing not have been successful, in the sense that there was a storm and the boat was sunk, tough for the investor. The fisherman walks away to a different boat and that's the end of this sad story. If on the other hand the boat is not sunk, but the fisherman simply toils in the sun for no fish, tough for the fisherman (as the boat will be sold, recouping most of the investor's investment, or so the theory goes).

Because it correctly translates into contract the factual relationship between risk, work and rewardii this is the correct financial instrumentiii to handle the split of benefits whenever the prevailing situation is an interaction between the provider of fixed capital and the laborer employing that fixed capital to a useful purpose. It is improper to give both of these shares, as shares represent a participation in equity, which the laborer has not in fact made. It is further improper, and indeed piling impropriety upon impropriety, to try and force the matter.

One such avenue through which the matter has been forced by those with pretensions to structuring financial deals but bereft of the intellectual ability to do so (or indeed even grasp how utterly unqualified they are in the field) is to insist the labourer be an investor. This does not work in practice - not only because should the labourer also be an investor he'd be telling you and under no conceivable circumstances would you need to be telling him - but also because even should he manage to somehow bring capital from home the simple merging of two wholly distinct categories in the same physical person has not resolved anything (indeed, it has made matters more difficult).

Another such avenue goes exactly the other direction, forcing fundamentally non-equity contributions into being accepted as equity.iv The case of "locked shares", such as allegedly implemented by the Labcoin scamv, the various implicit "owner's shares" as implemented all through the blessfully short existence of the Global Scam Exchange are all in practice an invitation to disorder. Or finance as a subset of business is exactly the contrary preoccupation : it aims to create order, not to increase entropy.

Neither of these work in practice, for very good fundamental reasons, which means they will never work regardless of the quality of implementationvi. Moreover, the implementations seen to date are about on par with what you'd expect from the people that spent years thinking PMBs were good investments.

It is still the case, today as at any point in the future, as at any point in the past, that Bitcoin's eventual success strictly hinges on the ability of its financiers and the quality of their work. Code writing has no bearing in this matter, it is to Bitcoin what shining the boots of soldiers is to winning the war. Sure, the shoe shiners care. "Market penetration", in the sense of gaining exposure to the day to day dabble of pizzas, phone credits, hairspray and sneakers has no bearing in this matter, it is to Bitcoin what shining the cock of soldiers is to winning the war. Sure, the camp followers think they're important. They aren't. "Regulation" or "government approval" or even social acceptance have no bearing in this matter, they're to Bitcoin what the press back at home is to the winning of the war. Sure, the people that dodged the draft imagine they're the more important party to the discussion, but this simply flows from their inferiority complex in the matter. No war was ever won by newspaper clippings.

Moreover, the tools do exist. What we're discussing today doesn't land into a vacuum. There is such a thing as a GPG contract, amply discussed and I would hope well understood. We have an entire construction of identity, and law, and accounting, and general process and procedure. We, the community, already have these things, mostly through the dedication of the better among us. What is left to do today is to study these, to understand them and to apply them. To apply them well.

What's not left to do, today or any other day, is to herp and derp. What's not left to do is for random Joe Schmuck to take himself seriously on the grounds that as he doesn't know jack shit then therefore nothing else exists and so he's the best that there is. What's not left to do is to slap together websites and imagine this yields businesses. What's not left to do is dubious "blood sweat and tears" efforts towards nowhere for no actual purpose.

  1. 100 originally owned by the investor + 100 recently acquired by the fisherman, in exchange for his warrants. []
  2. Or moreover, it allows such translation be enacted in practice. In a field where the risk is principally to the boat, because the sea is rough and trecherous, the fisherman may only get 80, or 50 or 3 warrants to the investor's 100 shares. In a field where risk is principally to labour, because the fish is sparse but the sea calm, the fisherman may get 200, or 500 or 85`000 warrants to the investor's 100 shares. These are parameters to be fiddled with, and what negotiation is all about. Negotiation can not however fruitfully proceed until and unless someone has put the right function on the face of reality. []
  3. One way to think about finance is to think of it as interpolation. The job of the financier is then to choose the correct function that best fits the points in the dataset, and a correct or judiciously chosen financial instrument or financial structure would in this representation be that which allows fitting to the data by mere fiddling of the paramenters, the various numerical constants. Obviously there can exist datasets that are not matched by any function. Nevertheless, the attempt to use linear fittings for clearly parabolic datasets, especially when repeated failure is met with repeated, unthinking insistence does not recommend one for the job. []
  4. At the best this reduces to an argument that present value of future labour contributions may be considered as an equitable contribution equivalent. This argument is nonsense of the same substance as any other mark-to-unicorn model employed by undisciplined (and often dishonest) financial institutions. []
  5. For that matter quite similar to the SolidCoin "privileged nodes" exercise in dysfunctional implementation of non solutions. []
  6. To paraphrase Buffett, when a person with a reputation of intelligence approaches a problem in a manner with a reputation for idiocy, it is the reputation of the manner that survives intact. []
Category: Actiuni si Optiuni
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3 Responses

  1. odd, I can't decide if this is gloomy or happy.

  2. Mircea Popescu`s avatar
    Mircea Popescu 
    Tuesday, 5 November 2013

    It's perhaps glooppy.

  3. venture capital`s avatar
    venture capital 
    Friday, 1 May 2020

    What an fascinating article!

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