Examine the rights vacuum of token holders from cases like Venice and Aave.

Written by: Prathik Desai

Translated by: Saoirse, Foresight News

When you hold stock in a company, you enjoy the right to residual claims: after the company pays off all other creditors, all remaining assets belong to the shareholders. The order of capital repayment is first for employee wages, then bondholders and lenders, ordinary creditors, taxes, preferred stock, and finally common stock shareholders.

This right to residual claims comes with exclusive rights: you have the right to vote for company managers, share in dividends distributed by the company, and if the company is sold or liquidated, you can also share in the remaining assets.

For a long time, various crypto protocols have painted a similar blueprint for token holders — at least in terms of promotional language. As long as you hold tokens, you can participate in network governance decisions and share in the future profits and growth dividends of the project. However, this rhetoric has been one-sided from the start. The crypto industry has long deliberately avoided this fact, simply because there were no sharp conflicts of interest in the past. But now, the situation is changing.

Previously, regulatory gaps allowed crypto protocols to maintain this rhetoric to placate token holders, but the upcoming CLARITY Act will close this gray area. Some crypto protocols issue equity while also offering tokens to the public, creating a situation where both types of holders coexist, further highlighting the massive rights differences between shareholders and token holders.

What Ownership Really Means

The reason stocks are a lasting financial tool is not solely due to investment returns. Many times, bond yields are higher and less volatile. The unique appeal of equity comes from its rights structure: it represents a legally binding ownership in the company. After the company profits, the board can issue dividends, and shareholders are entitled to the revenue by law; if the board refuses to distribute dividends, shareholders can vote to reorganize the board; if a majority of shareholders wish to sell the company, there is a pathway for that demand to be realized. All these rights do not simply rely on the goodwill of the management.

Over the past century, companies have continuously adjusted the control exerted by shareholders over daily operations, but the legal right to profit from the company has basically never wavered.

In Google's 2004 IPO, a dual-class equity structure was established, granting founders Larry Page, Sergey Brin, and then-CEO Eric Schmidt ten times the voting rights of ordinary public shareholders, yet the economic rights enjoyed by ordinary shareholders are completely equivalent to those of founders and insiders. Snap Inc. issued non-voting shares in 2017; Berkshire Hathaway has implemented a dual-class share system since 1996.

Although these cases have reshaped traditional holding patterns, they all retain the core foundation of equity: legally enforceable claims to the remaining value of the company through the courts.

In contrast, token holders of crypto protocols do not have this right at all. They have no right to receive dividends, and when a company is acquired, they are not entitled to any of the sale proceeds. This is the essential difference between truly owning an asset and being told that you own an asset. All legal systems related to ownership assume that the owner possesses enforceable rights, while token holders have nothing.

A common way to support token prices is for the project to buy back and burn tokens in the secondary market using a portion of its revenue. However, the worst part is: these arrangements are not subject to any contractual constraints. The protocol can modify, suspend, or even entirely terminate buyback and burn policies without board approval. Token holders with diminished rights have no grounds to initiate legal claims.

Since the gap in rights has always existed, why is it being discussed now? In the early days of the crypto industry, this contradiction was not prominent; there was no reference object of equity holders at that time, as only tokens existed in the market. Community users, founding teams, and project parties all held tokens, and the interests of all parties naturally aligned.

But the balance is now being disrupted.

Mature crypto protocols are gradually shifting towards commercial operations, with revenue, products, and user volumes becoming core indicators. Sooner or later, they will need large-scale financing to expand, and the most mature way to obtain significant capital remains fundraising from traditional capital markets, just as Google and Snap went public and companies like Tesla and SpaceX conducted private placements before going public.

On July 1, Venice AI completed a $65 million Series A financing round, led by Dragonfly and Coinbase Ventures, valuing the company at $1 billion. Investors received 8.98% equity plus token rewards. This financing structure fundamentally changed the ownership structure, exposing the structural flaws that the crypto industry has deliberately ignored for the past decade.

Before the financing, Venice had only one type of equity holder; after financing, it split into two groups: the first group consists of equity investors, who possess formal legal contracts, board seats, rights to information, and anti-dilution protection, and legally enjoy the revenue corresponding to 8.98% of the company’s assets; the second group consists of native token VVV holders, who rely solely on the company’s voluntarily implemented burn plan, which the project team can terminate at any time.

This round of financing established a market valuation for Venice's equity. The future appreciation generated by the company's growth is directly accessible to equity investors through legal contracts; token holders do not automatically share in the growth dividends, as their revenue entirely depends on whether Venice's management continues to execute the buyback and burn policy. In other words, the allocation of every revenue generated by the company in the future is in the hands of the management — the management can treat both types of holders fairly or directly abandon the token buyback.

Venice is not an isolated case. Aave uses 100% of its protocol revenue for AAVE token buybacks; Hyperliquid has created a top-tier buyback mechanism in the crypto market, investing over $1.2 billion of protocol revenue in HYPE buybacks and distributing 97% of transaction fees each year, corresponding to an annual buyback ratio of approximately 5%~6% based on market value. Although these projects have yet to engage in equity financing like Venice, they all face the same underlying dilemma: the buyback policy is completely at the discretion of the team, and there are no rules to stop the Hyperliquid team from misusing the support funds.

A real case demonstrates the outcome well: in May 2026, Sol Strategies acquired Houdini Swap for $18 million. The acquisition funds were entirely paid to the founders and equity holders, leaving the native token LOCK holders of Houdini Swap empty-handed as the token price plummeted to zero.

Source: @coingecko

The above case confirms that mechanisms originally meant to protect the interests of token holders ultimately have control in the hands of the protocol. The returns that investors holding tokens expect entirely depend on whether the project management will change their minds. The root cause is that the acquiring party has no legal obligation to compensate token holders.

Legal Challenges

The CLARITY Act passed the US House of Representatives in July 2025 and remained shelved in the Senate as of July 2026. Once enacted, it will further intensify the above contradictions. The legislation plans to classify all crypto tokens into two major regulatory categories:

• Digital Commodities: regulated by the CFTC (the same agency that oversees commodities such as crude oil, wheat, and gold);
• Investment Contract Assets (Securities): regulated by the SEC (the agency governing stocks and bonds).

Almost all protocols wish their tokens to be classified as digital commodities so they can be freely traded on public exchanges; once classified as securities, token liquidity would significantly shrink, and compliance costs would crush the vast majority of projects.

The constraints associated with these two regulatory tracks are the key contradiction.

The legislation explicitly states: digital commodity tokens can provide governance rights and staking rewards, and their value can increase with the protocol's usage. However, issuers are strictly prohibited from granting token holders legal claims to the company's revenue, profits, assets, and debts. In simple terms: tokens can capture the value generated by network usage but cannot partake in the corporate appreciation of the company operating that network.

Protocols can still design tokens linked to value and trading activity, but they cannot base token appreciation on corporate operating income. Buyback and burn policies fall precisely within this regulatory gray area. So far, the SEC has not made a clear determination, but regulatory agencies are not obliged to provide interpretations that favor token holders.

During the regulatory void, projects navigated through legal fog, promoting tokens akin to informal equity and leveraging rule ambiguity to attract investors. Although the CLARITY Act has not yet taken effect, and no statutes prohibit such promotion; once the act is enacted, projects can no longer classify tokens as commodities while promising holders equity in the company.

Many protocols have already attempted to find balance on the compliance edge. Aave launched Aavenomics 3.0 on June 27, abolishing the manually controlled buyback model by replacing it with an automated, unalterable on-chain mechanism, where all revenue from the protocol and GHO (Aave's decentralized over-collateralized stablecoin) will be used to buy AAVE on the secondary market.

Aave founder Stani Kulechov described this mechanism as automated and unchangeable. This might be the ultimate attempt for DeFi projects to make binding commitments to the community.

However, Aavenomics 3.0 is ultimately just a piece of code, and the legally binding contracts that should provide enforcement are still missing. The Aave governance council can still initiate votes to shut down the buyback mechanism. Disadvantaged token holders cannot sue the project for breach of contract. At best, it can be viewed as a policy that most holders are willing to trust the governance team to adhere to. All protocols attempting to circumvent securities registration and build value capture mechanisms will face restrictions imposed by the CLARITY Act in the future.

Meanwhile, Aave will soon face the challenges encountered by Venice. At the end of June, reports emerged that Kraken's parent company Payward is negotiating to acquire 15% equity in Aave Group, at a corresponding valuation of $385 million. Stani Kulechov questioned the pricing of the transaction but did not deny the negotiations were legitimate. If the deal goes through, Aave will become the second major protocol to establish formal equity over circulating tokens.

Can crypto projects rationalize this "equity + token" dual ownership structure?

The common defense used in the industry is that tokens have real utility. For example, Venice's DIEM token can be exchanged for a daily quota of $1 worth of AI computing power, making it a utility token; various exchange fee tokens operate similarly. However, utility tokens have inherent limitations: their value is tied to specific use cases, making it difficult for long-term compounding appreciation. This is like casino chips, which can only be used for consumption within the casino, and after the end of a game, are exchanged for cash; even if someone holds chips long-term, they lose their value storage attribute outside the casino context. The logic of DIEM, which can be exchanged for equivalent computing power, is analogous. Short-term supply-demand imbalances might push prices up but cannot lead to sustainable long-term appreciation.

Once the core marketing pitch for a project when selling tokens is that "the protocol will utilize profits to increase token value," that token is essentially pseudo-equity, making it hard to evade the SEC's criteria for recognizing securities assets.

Protocols only have two clear paths to choose from: the first, acknowledge tokens as digital commodities and stop promoting tokens as sharing in operational revenue of the company; the second, if they wish for token holders to enjoy real economic benefits, they must register tokens as securities and bear the corresponding compliance costs.

For the past decade, the narrative that "tokens equal assets" has been valid because no one wanted to delve into the fine print. As long as market participants tacitly accept this set of rules, the game can continue. However, once external equity investors enter with formal investment agreements, the old narrative will crumble. Aave's automated buyback mechanism might be the best solution to appease token holders, but the efficacy of this guarantee halts on the day management votes to change the rules. And that day may only be a list of investment terms away for major leading projects.