Value of DLT tokens
New mode of capturing enterprise value.
We often hear the question of whether digital currencies and DLT tokens are backed by anything and what would be their inherent value. These questions stem from our conditioned way of thinking about ownership and value.
Traditionally, over hundreds and thousands of years spent in the physical world it was clear to think about what was owned by someone. The assets were physical and therefore the ownership of assets was delineated almost in a physical sense. Objects had value and value was directly associated with physical objects. In the cavemen times a caveman would take an obsidian rock that was used to cut things and the physical possession of this rock made the ownership clear, as well as the physical properties of the rock and the value of owning it were clear through objective and visible results in the physical world. In later times people would own houses and the physical occupation of the house made the ownership clear; the value of the house was clear through clear and visible benefits of owning the house. Even now we natively understand ownership as physical possession of something, and the item value is derived through clear and visible benefits of ownership of such item.
Next in the 17–18th centuries came the capital markets and the theorizing of ownership of assets by a company to produce value that exceeded the value of aggregated assets. In other words, some assets were pulled together to produce a product or service, which was sold to generate revenue. After subtracting various liabilities and costs of running the business the value was captured in the form of net income, which would increase shareholders’ equity. The link between value and physical assets was again clear, however the value of the company exceeded the sum value of its assets. The owners could claim a portion of the value of the company, which was determined based on physical assets and their productive capacity.
Come 21st century and the new model of generating value through an open-source code present a paradigm shift. Digital tokens issued on a decentralized ledger do not seem to be backed by any physical assets so how can they have value? Let’s look into this further.
As was elegantly described by Nick Szabo in this podcast, the codes such as http, etc. that were used in the first wave of data sharing (that we know as Internet) are ‘thin’ protocols — they represent only the code structure that was subsequently used to build companies such as Google, Facebook, etc. ‘on top’ of this code. The code by itself is not worth much but the companies are worth billions because they generate value based on the user data they capture. So we have established that while these firms may have physical assets such as servers, etc they generate value by managing, sending and capturing data in the digital space using the code, therefore their true value generation is founded on data services (ownership, storage, transactions).
This brings us to the next evolutionary step in data sharing — decentralized ledgers, which some are calling Internet 2.0. These decentralized ledgers represent a code as well as a database, therefore they have the ability to capture and store data. Now suddenly a code becomes a ‘fat protocol’ as it is capable of doing something with the real source of value — data. You can see the paradigm shift in thinking about tokens now, but lets explore further.
Some of these decentralized ledgers can be considered as primary — such as Bitcoin Blockchain, Ethereum, i.e. those that have their own language and base token which is tied only to its own network and not tethered to any other token. These DLTs become primary platform on top of which other applications can be built, much in a way that Google and Facebook were built ‘on top’ of http. However in this case, since Bitcoin Blockchain and Ethereum are the primary providers for data capture, storage and transfer, they are more valuable than the subsequent apps that can be built on top. This reverses the pyramid of value generation in the digital space.
Value capture in the Internet economy
Value capture in DLT economy