Why I’m excited about the Stratis Platform from an investment perspective
My time at the 2018 London Blockchain Expo was fascinating and exciting for many reasons. I want to write about my personal experience meeting the Stratis team and spending time with the Stratis community, and I hope I will get round to writing it soon (though I’m sure I won’t do it as much justice as Khilone has here). This post, however, will concentrate on what is most important to existing and potential investors — STRAT, and what the Stratis Platform means for its future.
(To try to avoid confusion, I will refer to the coin of the Stratis Platform’s blockchain as “STRAT”, the company as “Stratis” and the suite of products as being encompassed by the “Stratis Platform”)
As an investor in crypto, there’s one question you need to be sure you can answer: “Why will someone buy my coins from me for more money than I paid for them?” If you don’t have an answer to that question, you’re not investing: you’re gambling. To be able to answer it, you need to understand what will introduce value to a coin over time.
The principal value of any coin is the value initially invested into a project divided by the total initial supply of coins. For example, let’s say $1m is invested into a project during an ICO and there are 1m coins generated; in this situation, the initial value of the blockchain’s coin is $1 per coin. Any value the coin has after this initial value is created by movements in price.
A movement in the price of a coin is caused by one thing and one thing only: an imbalance in supply and demand.
For the purposes of this post, supply is the number of coins being sold at any one time and demand is the number of coins being bought at any one time. Let’s say the price of a coin is $10. If someone is buying 100 coins, but only 50 are available from someone who is selling them at $10, then the buyer will have to buy the other 50 coins at a higher price. If demand and supply aren’t equal, then the market price has to change. “The Law of Supply and Demand” is exactly what we outlined above: “If there is a disequilibrium in supply and demand for a resource, the price of the resource must change in such a way as to restore equilibrium.” This all makes sense intuitively; if more people want to get hold of something than want to get rid of something, that thing is going to become harder to get.
Armed with this understanding of the introduction of value to a coin, we could change our above question from “Why will someone buy my coins from me for more money than I paid for them?” to “Why will the disequilibrium of supply and demand for this coin increase in favour of demand after I buy?” With this in mind, I’m going to break down exactly why we should be excited about what the Stratis Platform will do to create demand for STRAT.
If you want to use any feature of the Stratis Platform, you need STRAT. I’ll talk about four of these and why customers will need STRAT to use them. These are:
- Smart Contracts
- The ICO Platform
- Side Chains
Jordan Andrew’s talk on Stratis’s Smart Contracts was eye-opening. In practical terms (and in my humble opinion), Smart Contracts are the technology which will see the most adoption of all blockchain technologies. Not just for Stratis, but for the blockchain space in general. I genuinely believe that in the future thousands of Smart Contracts will be executed through the Stratis Platform every single day. Maybe even more. Once the official videos of Jordan’s talks are out, I’ll post an article outlining the reasons why I think this, as well as why I think that the Stratis Platform will be by far and away the most popular platform for the development of Smart Contracts. For now, I’ll stick to how Smart Contracts can drive up demand for STRAT.
Bear in mind that this information has been gleaned from Jordan’s talk, and until there’s a full production release, nothing is set in stone.
A Smart Contract is software which can be run from computers operating the nodes of a blockchain. STRAT’s blockchain is PoS, so the nodes which run the Smart Contracts are the wallets staking the Full Node Stratis main chain. When they are executed, Smart Contracts require computing resources in order to be run. An estimate of the resource requirements of each Smart Contract will be automatically tallied up by giving a weighting to every segment of code. This weighting will translate into an amount of STRAT, which will cover the resource costs of running a Smart Contract. So, in order to execute a Smart Contract, the user will need to pay the node operators in STRAT, and every Smart Contract will cost a certain amount of STRAT to run (this is the gas we’re familiar with in other Smart Contract offering platforms).
Smart Contracts are going to allow people to do some things that have never been possible before and do some things in a cheaper, more efficient and more secure way than ever before. Imagine an autonomous, secure, peer-to-peer decentralised auction service which requires no central company to manage, no dedicated servers to maintain and no other costs which are usually passed on to the consumer. eBay without eBay, and without all the costs needed to keep it running. This is what Smart Contracts could make possible.
The demand for Smart Contracts could be huge. Imagine thousands, or maybe even tens of thousands, of Smart Contracts being executed every single day. Each time someone wants to execute one, the demand for STRAT is increased as they will need to have STRAT in order to use them. Given that the limiting factors for the adoption and usage of Smart Contracts are quite few, and the reasons for wanting to use them are many, the sky is the limit for the size of the disequilibrium they could create between supply and demand. “Why will the disequilibrium of supply and demand for this coin increase in favour of demand after I buy?” Because, while you or I may be buying STRAT as an investment, a lot more people will be buying them because they want to use Smart Contracts.
The ICO Platform
An ICO is a proven, effective way of getting a project off the ground. It may not seem like they are as hot a topic as they once were, but in fact projects in January and February of 2018 raised 1/3 as much money as was invested in ICOs for the whole of 2017. Interest in ICOs is actually growing. The Stratis ICO Platform will be deployed in Azure and will be available to be used by any project to run their ICO. A participant in the ICO will be able to invest using a number of different coins, including STRAT, ETH, BTC and LTC. Any coins which aren’t BTC or STRAT will automatically be converted into STRAT via Changelly. In essence, these other invested coins will be used to buy STRAT off the market on a few different exchanges. You can read more about how this is done here. The reason BTC won’t be converted into STRAT along with the other currencies is all down to the same supply and demand considerations we’re dealing with throughout the whole post.
The ICO Platform is a no brainer; I think it’s quite easy to see how it drives up demand for STRAT. If an ICO is promising, and people want to invest, one of four things will happen: 1) they will use STRAT which they already own to invest, 2) they will buy STRAT in order to invest, 3) they will invest using another currency (besides BTC) which will be used to buy STRAT or 4) they will invest using BTC. Two of those four scenarios result in an immediate increase in the demand for STRAT. This in turn, according to the law of supply and demand, will push up the price of STRAT.
Why will BTC not be converted into STRAT by the ICO Platform?
For any resource with a fixed total supply, all of the supply and demand considerations are symmetrical. Let’s use the ICO Platform as an example. At some point, a project will have to liquidate some of the coins it received in order to pay for development. This will constitute an immediate increase in supply, which will push down the price. We’ve seen this happen with at least two other notable ICO Platforms. It makes intuitive sense that any increase in demand created by an ICO will eventually be balanced exactly by an increase in supply once the project has cashed out everything it received. This is one of the reasons Stratis chose to allow BTC to be received by a project during their ICO. Rather than be forced to flood the market with STRAT in order to pay for development, a project can spread their impact to the BTC market as well, which has far greater volume than the STRAT market, and hence vastly improved liquidity.
Even still, surely the ICO Platform’s impact on the price of STRAT will eventually balance back to nothing over a long enough time frame? Yes, if the STRAT passing through the ICO Platform is being bought off the market at the same rate that the STRAT is being liquidated by projects. However, as we have seen with other ICO Platforms, usage will increase over time. More projects will use the service as time goes on, and the increase in demand for STRAT as a result will occur over a shorter time frame (the length of the ICO period) than the supply increase of STRAT due to their cashing out for development (which will likely not happen all at once, but rather be spread out over a longer period of time). Moreover, many projects will no doubt opt to use other features of the Stratis Platform which require STRAT (such as side chains) and use the STRAT they receive during their ICO for this, which means that STRAT won’t be contributing to an increase in supply any time soon.
Not a huge amount has been made public about Stratis’s side chain offering. Suffice it to say that it is unlikely they will stray too far from the standard approach.
A side chain is a new blockchain which is connected to a main chain via the locking up of coins from the main chain. Someone who wishes to set up a side chain must send a number of STRAT to an output address which locks the STRAT so that they are unable to be spent. A confirmation is communicated across the chains once this transaction has been completed, and a number of coins are released for the side chain (this doesn’t have to be 1:1, but the sum initial value of the new side chain will be a chief consideration). This process is followed in reverse when moving back from the side chain to the main chain. The side chain can then be used like any other blockchain with whatever rules the user chooses to implement. This is without the constraints of the main chain’s existing consensus rules, but with the security of the main chain’s public blockchain, given its peg to the STRAT main chain.
Anyone who wishes to spin a side chain will need STRAT coins. Moreover, they will need to lock that STRAT up for the duration of the side chain’s existence. Side chains have many applications and will also play a large part in the other features of the Stratis Platform, notably with Smart Contracts. Enterprises will likely take a lot of interest in side chains: it will allow them to have their own blockchain, without having to take into consideration many of the difficulties that come with designing a blockchain for themselves. Any time someone wants to set one up, they need to have STRAT coins. This means they will either need to buy them off the market, or have them already (for example, STRAT that they received while running an ICO). If they buy them off the market, this will constitute an increase in demand for STRAT, and if they use STRAT they received during an ICO, this will be STRAT which doesn’t make its way back onto the market to increase supply. Any way you look at it, side chains will create a disequilibrium in supply and demand in favour of demand and, as a result, a higher price for STRAT.
Masternodes are a slightly different feature of the Stratis Platform than the other three I’ve concentrated on. In developing their Breeze Privacy Protocol, Stratis opted for decentralising the TumbleBit technology and making it available through their multi-chain light wallet, the Breeze wallet. A user will be able to tumble BTC through the Breeze wallet (which can hold both BTC and STRAT), introducing privacy to their BTC holdings. The tumbling will be done via Masternodes. These Masternodes require 250,000 STRAT be locked up for the duration of the Masternode’s operation. When you tumble BTC, it will cost you a fee. This will go to the Masternode operators, both as an incentive and as a reward.
Privacy is another hot topic in the crypto space. You only need to look at the number of BTC being tumbled by tumbling services to get a good idea of the huge volume that could pass through the Breeze Privacy Protocol. Just before shutting down, BitMixer was tumbling 25,000 BTC a month. Let’s say we get 10% of that passing through the Breeze Privacy Protocol. At transaction fees of 1%, that means 300 BTC a year shared among the Masternode operators. The more the Breeze Privacy Protocol is used, the greater the income from the Masternodes. If the usage is significantly high, then there will be competition for Masternodes. If, say, we get the same volume as BitMixer was getting and there are only 20 Masternodes, then each Masternode will be providing a passive income of 2.88 BTC every week. You best believe that there will be competition to receive such a huge passive income. This competition will provide demand for the STRAT coin, and that demand will only go up as the Breeze Privacy Protocol sees more usage.
We can hypothesise that for any given volume passing through the Breeze Privacy Protocol, there will be a natural plateau in the demand created by the competition for Masternodes given the increase in the price of STRAT due to the increase in demand. If this is the case, we can be comfortable with the supposition that as volume passing through the Breeze Privacy Protocol grows, so too will the disequilibrium in demand and supply in favour of demand for STRAT. Conversely, of course, if volume drops, so too will that very same disequilibrium in demand and supply, perhaps even to the point where it is in favour of supply. I think that as crypto continues to mature, the interest in privacy will only continue to grow.
“It is likely to be used by discerning individuals and businesses that accept cryptocurrencies and do not want to leave traces that may reveal their customer and supplier lists.” https://stratisplatform.com/2017/09/20/breeze-wallet-with-breeze-privacy-protocol-dev-update/
Enterprises will no doubt wish to keep their balances private and the Breeze Privacy Protocol will allow them to do that. Individuals will also have an interest in increased privacy for their personal finances, something which is tough to achieve in crypto at the moment.
Crypto is a unique asset class. When you invest in a project by buying the coin of its network, your investment is not just a share of the value of the project’s product; in many cases it is something with real utility. When you invest in Stratis by buying STRAT, you are buying a coin which will required by every feature of the Stratis Platform. If you believe that the Stratis Platform will be used, which I do, then when you buy STRAT, you’re buying something which people will want to buy off you. Not because they want to make money from it, but because they NEED it to use the Stratis Platform.
An Afterword on Speculation and Manipulation
Critics of this post will no doubt be quick to bring up the fact that I’ve so far avoided what many may think of as the main driving forces behind movements in price: speculation and market manipulation. In the next few paragraphs I hope to show that they both play into the same value introduction I’ve talked about throughout.
Speculation is the act of buying or selling based on what you think will happen in the future.
Let’s say STRAT goes -10% tomorrow. I might look at this and speculate that short term there will be a bounce. Long term nothing has changed so my long-term speculation is still that I could see X% from here. Either way I look at it, I’d want to buy. However, someone else might look at that -10% and see that STRAT has broken through one of the support lines they had drawn and so speculate it will drop further. They might then choose to sell to try and lose less value in their portfolio, or perhaps to try to buy back in at the next good opportunity to increase their holdings. The long-term picture might not play into their short-term behaviour. Both of us are speculating, and both of us directly impacting the balance of supply and demand. This whole post has been about why our speculation long term should be pointing in an upwards direction. It’s easy to see how this could become a kind of self-fulfilling prophecy.
Any time you buy or sell speculatively, you are increasing either supply or demand. If enough people speculate in the same direction, the disequilibrium created by this will actually push the price in that direction. I’m of the opinion that most of the value for all altcoins comes from price movements which are due to this speculation-driven disequilibrium.
I think the STRAT price is no different.
Up until now, I’m happy to claim that all of the STRAT value has been imparted to it by speculation (you could argue that competition for staking might manifest a utility-driven disequilibrium; however, given that the share of the network which is staking has been pretty much 33% since day one, I’d argue that this was priced in from the beginning). Speculation is not necessarily a bad thing, so long as it is well founded. However, a lot of speculation is unsustainable. You need only look at projects which pumped on some rumour, which, when it turned out to be ill founded, caused the price to drop right back down to where it was originally. Moreover, crypto is littered with adages such as “buy the rumour, sell the news”, the kind of wisdom which has built-in symmetry for supply/demand considerations.
There will always be speculation in crypto. It is the life-blood of all investments. Currently, the speculative value introduced into STRAT has brought us above $6. This speculative value is playing above an initial price of $0.007. Just imagine what might happen when that floor is raised through utility-driven disequilibrium. The speculation-driven movements will always be there, but they will be happening at a much higher price.
Market manipulation can just be an addendum to the speculation discussion. Market manipulation is, at its heart, simply a way of playing with people’s speculations: stacking order books, pumping out media and sometimes just straight-up lying to move the price in one direction or another.
I’ve been a part of the Stratis community for a long time. There’s no way I’m not biased. I tried to keep this post to principles which can be extended to all of crypto, but concentrated on what they can tell us about the future of STRAT from an investor’s perspective. It should be clear that this is not investment advice: I’d never tell someone to buy STRAT. Rather, I try to be very careful only to provide them with all the information I can to help them make up their own mind. Do your own research, always. Ask your own questions; you owe it to yourself to be confident in the knowledge that the only person who made your investment choices is you.
Come join the Stratis community on Discord, Reddit or Telegram! If you’ve got something you want to say about this post, please feel free: I’m always trying to learn and get better at everything I do. Regardless, just come hang out with the community, IMHO it’s the best in crypto.
Many thanks to Kevin Loubser (@zeptin) and Jordan Andrews (@codingupastorm) for making sure I’m not talking rubbish about side chains and smart contracts.