Hi Johnny

Thank you for your thoughtful comments.

Antos: “ Could there exist utility tokens that naturally have low velocity, and thus would not resemble working capital? By natural, I mean as opposed to “artificial” methods of trying to incentivize hodling through PoS or other contrived mechanisms.”

No, I don’t think artificial velocity sinks resolve the issue.

1. Artificial velocity sinks are cynical attempts to prop up the value of a token for the benefit of promoters and early owners at the expense of new users. Given that the number of tokens is arbitrary to begin with, what other meaning could contorted efforts to remove some tokens from circulation have? Why not just issue fewer tokens to begin with? Because the goal is to prop up values for existing token-holders.
2. As I said in my post, staking does not fix the velocity problem. In a protocol-land where protocol usage is managed by capital-efficiency optimising intelligent bots (which seems likely), let’s assume for simplicity the absolute floor on 1/V is the block time of the chain in question. Let’s then take ETH with a 2.5 minute block time as an example (highly theoretical, just to make a simple maths point). This implies each token could be used (assuming fixed block times, which in fact will likely shorten) 210,240 times a year. Buterin, Choi, etc. talk about, say, 10% of ETH being staked (let’s assume staked tokens never move at all). That would bring V down to 189,216 per year. Assume 50%, then V=105,120. Multiply this last number by $50b of network value (i.e., ETH just maintains its current value, and you’d need $5.25 quadrillion of economic activity denominated in ETH (i.e., excluding any ERC20/ ERC721-denominated economic activity), that is to say, 65x the current global GDP of $80 trillion. These numbers are all just varying shades of silly. That’s the point. As long as some of your tokens are circulating at a high V, your overall V is high.
3. To the extent a utility protocol did manage to prop up its value somehow, it would expose itself to arbitrage from a fork, copy, etc. that would be less expensive for new users to adopt.

The options-based approach that you posit in your paper suggests that any present value could be justifiable, which is clearly not the case.

Just as we can invent new objects but we can’t invent new laws of physics, we can invent new things that have value, but we can’t invent new reasons for things to have value. For all intents and purposes, things can have financial value for one of three reasons: it’s a claim on a cash flow, it’s money or it’s a collectible.

I share your optimism when it comes to the extent of the potential future utility of permissionless blockchains and the ability for developers to overcome obstacles. The problem isn’t there. The problem is simply to suss out, in the context of this optimism, what utility protocol cryptoassets might be worth someday taking into account what they actually are. In light of the exponential development of technology that you describe together with protocol interoperability, open-source, forkability, etc. that we will end up with many, hyper-specialised protocols with very high token velocity. Tokenised TCP/IP would still be worthless today as it is currently designed. Similar to today’s utility protocols, it has no claim on a cash flow and it’s open-source software that can be freely copied and used by anyone.

When trying to make a decision about whether to invest in something where you are given a present price and where there’s extreme uncertainty, a useful heuristic is “what do I have to believe”. You compound the current price times the risk adjusted rate of return you would expect for a similarly risky investment over your planned holding period and you figure out what set of assumptions about the future state of the world would be required to justify the current price. You then decide whether you feel the likelihood of that future state coming to pass is high enough in relation to your expected return to make it a sensible investment.

Regarding the implications of what I am saying, yes, I am saying that it is irrational for a purely financially-motivated investor to invest in utility cryptoassets. They might invest if they have non-financial motivations or if they are betting that they can flip their investment to less thoughtful investors. It also implies that a financially-motivated developer would arrive at a similar conclusion. Of course, developers (and investors) may have altruistic, non-financial motivations. But the absence of financial incentives may indeed result in fewer things being built. That is the nature of capital rationing. Only the best-returning projects get funded and built. If an economy fails to allocate capital effectively, it suffers. Rational capital allocation is a good thing.

As far as other ways open-source projects might get funded, I’d invite you to look at pre-2017 open-source software projects. Think Linux/Red Hat for example.

Let me also clarify that I think decentralised blockchain technology is great. As a user and consumer, I’m happy to see things built. But as investors, we need to be rational, and as an economy, we need to fight against capital mis-allocation.