Alts: The Salsa Between 0 and Infinity
As capital C Cynicism abounds in the realm of alternative crypto tokens, the environment becomes ripe to re-examine old questions.
Why are alts worth anything?
Ask around sophisticated participants and you’ll receive mostly jaded or shallow answers — that often come down to “Oh, it’s worth 0, but until that happens i’ll try we to win the extraction game” or “everything has always been a memecoin”.
Aside from being uninspiring — this answer is wholly unsatisfying in that it fails to explain why a $860B alts market¹ even exists in the first place.
Cynicism is a good servant, but a bad master
I would like to suggest why it exists, and furthermore, how an aggregate market cap of 100's of billions of dollars arguably is and would continue to be justified. Perhaps not in the hallways of CT, but in the orderbooks, in closed board meetings, and in dimly lit maternal basements (the true nodes of civilization).
This post is dedicated to the aforementioned sophisticated yet cynical participants.
The Stock Exchange vs. The Crypto Frontier
The game of stock speculation has long graduated to common knowledge — everybody knows that everybody knows that equities deserve to command value.
People saw, with their own eyes, the multi-generational ascension of many corporations along with their share prices. The path is well trodden, and little is left to the imagination. The monetization paths are either:
i) cash distributions through buybacks/dividends
ii) liquidation of assets minus liabilities
Those paths are well defined, well understood and widely replicated.
In stark contrast are the frontiers of Crypto markets. Even though some of us swim in it every day, Crypto’s mimetic complex remains incredibly esoteric.
Put yourself in the shoes of a 17th century farmer for a moment— far away from the development of legal systems, enterprises, and global commerce that were all starting to proliferate mostly just in The City.
As a 17th century farmer, everything you produce is done by hand, is of concrete material value, and your trade activities sum up to exchanging physical goods or metal coinage — all of which you can immediately grasp with your hands. To top it off, a visit to a major urban center is likely no more than a bi-annual occurrence.
Therefore, commerce abstractions, let alone financial abstractions, are entirely alien to you.
You need a common-knowledge social framework, aka a mimetic complex, that tells you: “Yes, it’s ok to ascribe significant value to pieces of paper that claim ownership of some abstract, out-of-view enterprise, guaranteed by an abstract bureaucracy and an alien justice system”.
The contemporary equivalent of a 17th century farmer is the non-internet native.
Those people, who comprise the majority of the population (as farmers used to be), have never engaged in peer-2-peer commerce online, have never bought or sold purely digital goods, have never felt the power of pseudonymity, never established familial relationships over the internet, haven’t felt the power of being fully in control of their own money, nor comprehend the astronomical value of a borderless, deterministic financial system that stems from an unstoppable world state machine.
The missing mimetic complex is one that tells them: “Yes, it’s ok to ascribe significant value to cryptographically verified tokens that claim codified rights in a purely digital reality” … or something like that.
Now, why does it feel like even some crypto-natives aren’t confident in the premise that tokens can have true value?
Because crypto tokens rest on future expectations of unknown unknowns.
We operate in a new realm. The road to monetization for token holders is unclear on a few different levels; Tokens face a multitude of uncharted paths, leading to a multitude of possible outcomes. Not only is the choice of path unknown, but the nature of the path itself is unknown. We don’t know what we don’t know.
And yet, despite uncertainty of value accrual, tokens still do and should have value.
The Step-by-Step Thought Progression To Value
- We assign internal probabilities to favorable outcomes and unfavorable outcomes for token frameworks; There is a timeline in which we never figure out a robust framework for value distribution back to token holders, and a timeline in which we do. Without knowing what those paths look like, when they come to be, or what they end up looking like — we assign internal probabilities. For simplicity lets assume bimodal outcomes — that we either figure it out completely or not at all — and assign 50% probability to each.
- Our second operating assumption is that Crypto will continue to slowly infiltrate the financial system and global commerce (particularly cross-border and/or digitally-native commerce). If we value the entire global financial system at $X, Crypto infiltration at 20% very naively leads to a $0.2X total valuation. Forget specifics, this exercise is for principle.
- Since our internal probability of ‘figuring it out’ is 50% (step 1), we’re willing to value Crypto tokens at a $0.1X total valuation.
We have thus established an expected aggregate market cap based on our internal probabilities.
The next step is to do the same exercise but for individual tokens, where we make a second assumption: not just probability of ‘figuring out a framework’ but also the expected dominance of that token’s protocol within Crypto, and consequently its slice of the $0.1X pie.
Now here’s the catch: I’m not saying you should do this exercise. It is dumb and naive.
Instead, I ask that you understand this — subconsciously, this is how the market can (and does) value tokens at 9, 10 and 11 figure valuations despite it being unclear whether the token holders will ever get to monetize the protocol’s success.
Next time you catch yourself or somebody else dismissing a token, or mocking its holders, because it has 0 value capture—consider the probabilities that one day it will, consider the above exercise, and consider what those vaguely defined future possibilities might mean for its fair present valuation.
Don’t be farmer. Familiarize yourself with new abstractions offered in The New City.
Love,
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[1]: TOTAL2-USDT-USDC-DAI
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