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Why is KLAY necessary? — Jaesun Han, CEO of Ground X

The following article has been translated from the post made by the CEO of Ground X, Jaesun Han, on June 7th, 2020. You can find his original post in Korean here. Keep in mind that there is a possibility of translation errors, so please refer to the original text for any information you might be acting upon.

Last week, Klip, on which we've been working hard for some time now, finally saw the light of day and we were thrilled by the interest and support we’ve received, exceeding all our expectations. Our biggest doubt while working on Klip was “How will digital assets be accepted by everyday users?” — at that time KLAY was already live, but the fundamental goal of Klip is to store, issue and send various digital assets, becoming a platform to facilitate blockchain services ecosystem growth and while KLAY is one of those assets, there are many more beside it.

So, first things first, what is KLAY? KLAY is the native token of Klaytn, the public blockchain platform upon which Klip is built. Native tokens are primarily issued to facilitate network operation, such as transaction fees and block rewards, but they can be more than that. The value of the native token is determined by the socio-economic value of the underlying ecosystem, boiling down to the actual and potential use and adoption of the ecosystem.

Therefore, our goal is to attract successful businesses to Klaytn and focus on creating long-term ecosystem value, which can then help the markets determine the price of KLAY on exchanges. I’d like to share an email I’ve sent out a year ago, explaining the reasoning behind our native token. It’s a lengthy one, but I feel it will help you understand my point of view better.

[CEO Letter-2019.06.10]

Today we’ll talk about the role native tokens/coin play in a public blockchain. So far, we’ve discussed it a lot from the network perspective, but not from the perspective of the coin (KLAY) itself, so I’d like to share my thoughts on the matter.

Role of the native coin in a public blockchain

Klaytn is a public blockchain, so naturally, it will have a native coin (of course, we can discuss if a public blockchain has to have a native coin or not, but generally they do) and KLAY acts as that native coin.

Now, why do we need a native coin in the first place? Let’s take a look at the role ETH plays on the Ethereum network which is a fine example of an ecosystem coin:

1. It provides means of paying transaction fees

2. It provides a way of rewarding the decentralized consensus mechanism (mining rewards)

3. Provides initial funding for the Ethereum network development

4. Opens the possibility of fund-raising of Ethereum-based dApps (ICOs)

It’s also worth noting that points 1–3 are part of the original concept for the Ethereum network, while 4 evolved from the implementation of said concepts. As ETH gains more adoption it becomes an asset in its own right, regardless of the platform it was designed to serve. We’ve already seen something similar happen with Bitcoin, and ETH could be the next to follow.

Is it possible to take care of roles 1, 2, and 3 without coins or tokens? Can it be done with traditional fiat currency? Of course, it is possible. It’s just very difficult. Let’s see what would happen if we used fiat currency in each of the use-cases one by one.

#1 How do I pay fees in fiat currency? You could make monthly payments using your bank or a credit card company. However, in the conventional payment system, transaction fees are not feasible due to fees and processing speed (it doesn’t support micropayments). If the fee was $10 per month, and due at the end of each month, who’s actually benefiting from it? The fee doesn’t go to the Ethereum Foundation, but the miners that mined the block containing the transactions. If you made 200 transactions, you’d have to track down each of those miners and send each (so up to 200 miners) their corresponding fee. And they could all be spread across the globe, bringing foreign currency exchange and transactions into play, complicating the matters further. Ethereum’s transaction fee payment system has thus already implemented a global-scale micropayment system, which is difficult to reproduce without the use of native coins/tokens.

#2 What if you paid miner rewards in fiat currency? The current mining reward (June 9th, 2019) stands at around $539.87. With new blocks generated (issuing rewards) roughly every 15 seconds, existing payment systems could process the payments. But who is sending the rewards? As you know, mining a block includes minting the reward itself, there isn’t some pile of ETH (or in our example fiat currency) from which the rewards are sent out. If that were the case, the mining rewards could indeed be paid out using fiat currency and traditional payment systems. However, the very nature of blockchain renders that option impossible.

#3 Raising initial funding in fiat currency? Out of all three, this one seems the most feasible as the funds received in ETH (or at least a part of them) would be converted into fiat money anyway, to deal with various expenses that need to be paid in fiat. However, if you opted for fiat currency funding, it’s considered equity funding and you’d have to go through the same procedures as with any VC investment. If you held a successful seed funding round, your expectations are probably high. However, Ethereum’s ICO raised $18M in funding and it would be a real feat to achieve this level of funding. Nonetheless, to receive such funding in the form of equity investment, they would have had to form a company, liable to its shareholders and add a concept of ownership to Ethereum products. It would also mean that the Ethereum Foundation couldn’t operate in the decentralized manner it operates now, which would be going in the completely opposite direction from the project’s core philosophy.

To summarize, a blockchain platform powered by fiat currency is so far off that its philosophy, operating principles and methods would be completely different from currently existing systems and platforms.

Also, here are some of the other key features a native coin brings to the table we haven’t yet mentioned. Tokens fluctuate in value. In other words, they are assets. This can serve as an incentive for continued engagement. If the reward is fiat currency, the incentive ends with receiving it. Without providing a further incentive, the interaction stops. However, if the reward is a coin, the interaction doesn’t end there –you’re incentivized to contribute in a way that will drive up the value of the token, even if there is no further incentive given. In this way, we can see token holders become active participants in the ecosystem, contributing to the flatform until a critical network effect is achieved and the valuation of the ecosystem explodes. Bitcoin and Ethereum are perfect examples of this effect.

The concept of ICOs was designed with this principle in mind. In theory, it makes sense, and the biggest problem with projects is a “Cold Start”, in which stakeholders participate in the token sale of a platform without users. While researching a project and investing capital might make you more active than most, but it didn’t work out that way in reality. People taking part in the ICO are for the most part not interested in the project, focusing on the projects most likely to turn a profit, transforming ICOs into speculation at short-term profits. So, while actual users are supposed to be token holders, investors become token holders, only to see the tokens sold off following a listing in order to secure short-term profits.

Considering all of this, these tokens aren’t similar to anything in the current financial systems. At the same time, they are not a currency yet have little to none utility. So, are they a stock-like asset? They aren’t that either, but they could be a little bit of everything we just listed — this uncertainty is what worries regulators. However, as we mentioned before, there are advantages that can be achieved only by the use of tokens: micropayment, remittance/cross-border payments, continuous and flexible incentives, programmatic algorithmic processing, decentralize operation, etc. These benefits are nowhere to be found in existing financial systems. How is this possible? The main reason behind it is that you’re not relying on the existing financial services and are not bound by its inherent limitations.

The current (June 9th, 2019) Ethereum market cap is $25 billion. This is roughly 27 trillion won, but why is it worth 27 trillion won? Ethereum Genesis Block issued about 72 million ETH and with the mining rewards so far, that number has slightly exceeded 100 million. So, 100 million ETH might be worth 27 trillion won, but what is ETH worth? If you look at the token as a product and ask about its intrinsic value, you’re starting an endless debate — it would be more reasonable to consider the entire ecosystem/network called Ethereum as a product worth 27 trillion won. Compared to other Unicorn companies, this would make it similar to SpaceX. Given the impact Ethereum is currently creating, that doesn’t seem like an absurd market value. Uber, which is yet to see a profit has been valued at 80 trillion won. Why on earth would it be worth 80 trillion won? This market cap cannot be explained or justified by Uber’s sales or operating profit.

In the end, what I want to say is that it is meaningless to look at individual tokens and ascertain their value. Tokens have no individual meaning. The token merely reflects the socio-economic value created by the platform and its ecosystem and therefore when discussing token value, it should be done in the context of the platform and its ecosystem the token constitutes. The problem is that there are no standards to objectively estimate the value of the platform and its ecosystem so we resort to the market capitalization — the market value of the tokens traded on exchanges multiplied by the number of tokens. Then again, is the market value of the tokens a true reflection of the platform’s value? What we need is a platform or a network that has a built-in standard allowing it to calculate its market value and I think this might become the standard for market values of tokens. I wonder how much this would change things, but it is a very difficult topic.

To conclude, the native token will inevitably service various functions of the public blockchain. The basic function of decentralized cross-border transactions acts as an incentive to platform’s stakeholders to develop their own platforms while maximizing their profits without control by a single actor. In order to achieve this, a well-designed and operated transaction fee system, token economy, and governance are key. The value of the native token will be determined by the socio-economic value contained within the platform, stemming from the business value the platform creates in turn. No matter how good the platform, if only useless programs are run on it, the business value created will be zero and eventually, the token value will also converge to zero.

One thing I’d ask you to do, considering this logic flow, is not to be too concerned with the market value of tokens. It is hard to ignore it but remember — eventually, if the platform creates real business value, this will reflect on the token value as well. What we have to do is attract successful businesses to Klaytn. They will be the ultimate platform value and token value drivers.

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Bobby BLocker

Bobby BLocker

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Blockchain technology enthusiast, Senior Editor and Marketing Manager for t.me/DeFiRaccoons