There two big, emerging areas of value creation in the crypto space. These are centred around what we call ‘Money-ness’ and ‘Governance’.
We added the suffix ‘- ness’ after money to emphasise the breadth of this category. Money-ness encompass everything from a global store of value to a currency specific to a crypto-economy or use-case.
The categorisation of crypto assets is oftentimes not clearcut (actually, almost never clearcut!). Take Bitcoin as an example. It’s deflationary and limited in supply, global, and not issued by a central authority. These qualities make it look very similar to gold. On the other hand, however, bitcoin derives value from being used as a currency to pay for goods and services. This is because it is easily and cheaply globally transferable and highly divisible. (Bitcoin’s smallest unit, a Satoshi, is one hundred millionth of a single bitcoin or 0.00000001 BTC.) In this sense, it acts both as a digital gold equivalent and as an M1 (or cash) equivalent. With the introduction of the Lightening Network, the dual-character of bitcoin becomes even more pronounced.
On the other end of the money-ness spectrum you have a pure utility tokens like the Binance Coin (BNB). Utility tokens are used to pay for a good or service in a particular crypto-economy, much like a laundry token is used in the physical world. In the BNB case, it is used to pay transaction fees on the Binance crypto exchange. But there exists an obvious issue. If every good or service had its own utility token, we would all be driven mad trying to keep up with such a variety of currencies. So we wouldn’t want to hold hundreds of utility coins that pay for hundeds of goods and services.
The implication is that the velocity for many if these coins is likely to be be very high. The reason being that rather than holding all these currencies we are much more likely to hold one currency, then seamlessly swap in and out of utility tokens as we need them.
The value exchange equation implies that the network value naturally decreases with increased velocity.
M = Money Supply
V = Velocity of Money Supply (i.e. the amount of times the money supplies turns over)
P = Price Level
Q = Index of new real expenditures
Another example for where a utility token may be need is for a decentralised markets in the sharing economy. Mike Novogratz, founder of crypto merchant bank Galaxy Digital Management, likes to highlight the example of Uber.
But the value of the dUber (Decentralised-Uber) network might capture very little value in the dUber token itself. Meanwhile, Uber is the highest valued private tech company in the world with a value of $69.9bn. We can think of that difference in value between Uber and dUber being due to the radical reduction in the 25%+ cut that Uber captures in fees which would by definition be practially eliminated in the dUber world.
Secondly, it is uncertain what network effects utility tokens provide or if an existent crypto asset like Bitcoin or Ethereum could be used in place of a utility token like the Binance Coin. Many of the projects we meet at Apollo Capital might not be in need of its own token.
- Pure utility tokens might not capture much value at all, especially if the velocity is high, which is likely
- Many projects might not need their own tokens and value of an artificial token used for fundraising is highly questionable
- On the investment side, we want to be more in the money-ness side of the spectrum
Again, many tokens are not pure cut, and crypto-assets used to fuel smart contract platforms like Ethereum’s ETH can be in part store of value, in part currency, and in part utility for paying gas on the Ethereum platform. There are different degrees of ‘Moneyness’.
The other big value creator in crypto is governance. We’re in a phase where projects experiment with how governance is distributed and architectured within crypto networks.
Bitcoin’s governance is distributed between different stakeholders like miners, developers, users, wallets, and exchanges. In Decred, the coin holders have a much larger say in how the network is developed through their hybrid proof-of-stake system. Other systems like Tezos are inventing new forms of on-chain governance. The 0x project was thought of as a utility token, but is turning into more of a pure governance token. The relayers in the 0x eco-system do not actually need to use the 0x token for payments, and are using it rather to vote on governance. The team behind 0x realises that as velocity goes to infinity, the payment aspect of 0x is not actually where the value lies.
Teams behind ICOs, developers and investors all have an interest in increased network value over time. This have lead to discussions over clever ways to create ‘velocity sinks’ in order to increase the token value. However, this is probably not a viable way to create value.
Governance in itself is valuable. If you want to control the future of the protocol you’re investing in or building an app on top of, the governance is very valuable. The app developers on iOS have no say on the governance of the Apple app store, that’s very different from these new, open networks that crypto assets enable.
Crypto assets represent new methods to organise society based on merit and free markets. Governance is a critical factor in these networks. This is an excellent article about network governance by Mike Maple, Jr.
In our emerging decentralised world of crypto assets, Moneyness and Governance are two of the leading value creators. How these values are captured are critical issues to think about for developers as well as for investors in this space.