Doubts about the Long-Term Viability of Utility Cryptoassets

I’m increasingly sceptical about the long-term value of utility tokens. When I wrote An (Institutional) Investor’s Take on Cryptoassets last year, I thought utility cryptoassets might end up being collectively worth hundreds of billions of USD, which is a lot of money but not enough potential return over current valuations to compensate for the risk. Now, I’m increasingly thinking that few or no utility cryptoassets will be long-term viable at all.

Setting aside tokenised claims on protocol-exogenous cash flows and digital collectibles (which have their own behaviour and are another topic), post the current speculative phase (which must end simply because valuations can’t maintain high growth rates forever) if a cryptoasset isn’t a dominant non-sovereign monetary store of value (“SoV”), it’s somebody’s working capital. Economic agents seek to minimise working capital (because of the opportunity cost of capital) and the level they hold is a function of the friction, latency and uncertainty of replenishment. Protocol-land will be frictionless, interoperable, forkable and open-source, so users won’t need to tie up capital in stocks of utility protocols, which will push their velocity to very high levels (staking under proof of stake (“PoS”) doesn’t fix this as very high velocity of non-staked tokens still results in very high average overall velocity). High velocity will mean that the network value of a cryptoasset (as measured in some external measure of value) will be low compared to the economic activity denominated in that cryptoasset (measured in the same external value measure). This circumstance means that it will not be possible to secure the blockchain in question without reliance on transaction and/or other kinds of usage fees paid in non-native currencies (could be fiat or a dominant non-sovereign monetary SoV cryptoasset). At that point, there’s no reason to have a native currency for that protocol anymore, the native currency collapses and the protocol switches to a transaction/usage fee-only model paid in a non-native currency. In that world, you end up with a multitude of miners / forgers / etc. (probably specialised and segmented by type of consensus algorithm) providing compute services to maintain a multitude of protocols in exchange for transaction/usage fees paid in fiat and/or a dominant non-sovereign monetary SoV cryptoasset. Note that this applies to proof of work as well as PoS consensus algorithms (staking could be in a non-native currency).

Which protocol will end up being the dominant non-sovereign monetary SoV? The framework I use to think about that question is the following. Frictionlessness and interoperability make it overwhelmingly likely that the future will be massively multi-protocol and that protocols will be hyper-specialised to maximise on whatever dimensions are most important for the niche they serve. The things a protocol must maximise to be the best smart contract cloud compute platform (different combinations of speed, cost, throughput, decentralisation, perhaps even in certain circumstances deliberate censorability) aren’t the same things a protocol must maximise to be the dominant non-sovereign monetary SoV (censorship-resistance, path dependency). The monetary non-sovereign SoV use case tends to be winner-takes-most if not winner-takes-all. On the other hand, we’ll likely end up with many smart contract cloud compute platforms, each with slightly different strengths and weaknesses for different use cases and also to mitigate risk (via redundancy) to dApps executing on top of them. It’s much less likely that we’ll end up with one all-singing, all-dancing protocol of all trades.

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