& the Decentralized P2P Global Market
The Global Derivatives market is estimated to have a market cap of ~$500 trillion on the low end & ~$1.5 quadrillion on the high end, making for an average estimate of ~$1 quadrillion.
To put things into perspective:
The world’s 1st transatlantic stock exchange was form’d in 2007 when the NYSE Group merged w/ Euronext to form NYSE Euronext. In 2013 Intercontinental Exchange (ICE) aquired NYSE Euronext for ~$11 billion.
Some background on ICE: Jeffrey C. Sprecher, founder, chairman, and Chief Executive Officer, was a power plant developer who spotted a need for a seamless market in natural gas used to power generators. In the late 1990s, Sprecher acquired Continental Power Exchange, Inc. with the objective of developing an Internet-based platform to provide a more transparent and efficient market structure for OTC energy commodity trading.
Sprecher started ICE in 2000 as an online marketplace for energy trading in Atlanta — “a sort of eBay for energy.” They sold equity stakes to “big hitters like Goldman Sachs and Morgan Stanley.” The idea was to be a “competitor to Enron”. “Specher’s business model was to provide an electronic marketplace where buyers and sellers could trade directly”. When Enron imploded, ICE soared.”
A Change In Perception
Each Bitcoin is divisible to 8 decimal places (100,000,000 individual units). The fiat currency we have always known is divisible to only 2 decimal places. This represents a huge paradigm shift.
“If we have a larger nominal number of currency units, does that change people’s behaviour?”
This question has far reaching implications for adoption. At its heart lay the decimal place and the psychological impact of nominal representations of wealth.
A Bitcoin is only a mathematical construct. So as a representation of value it is incredibly precise. Allowing for protocol changes it has the potential to be even more precise. Bitcoins are anything but rounded. For the inexperienced this precision must be intimidating.
There is also a trend towards denominating bitcoins in mBTC and uBTC. Still, handing over so much fiat to own a just small fraction of a purely digital unit is a challenging psychological barrier to breach. Especially given our current preconceptions as to money and value.
It may be the case that the Bitcoin network does not find its eventual long-term success as ‘money’ or ‘currency’ at all. Richard Brown believes that “Bitcoin’s true significance lies in its potential as a global digital asset register”. This is just another potentially revolutionary and disruptive use case.
The technological quantum leap here is not necessarily a new type of money. Rather, it is the ability to now achieve global consensus over a decentralized and distributed network without a trusted third party. This has many potential applications for various fields of endeavour.
The Token Economy
By owning a token one has the right and the incentive to participate in an economy (existing or future). As long as participating in such economy is expected to yield some sort of utility value to the holder of the tokens, the tokens will have a market clearing price that is a monetary reflection of such utility. To state the obvious, it does not reflect an equity ownership in a company.
Imagine a funfair issues a limited number of tokens which customers have to buy in order to get into the various attractions. I’ll call them Funcoins, the default currency of the “funfair economy” (imagine it’s a country where everything is priced in Funcoins). Most intend to use the tokens to actually have fun, but inevitably there will be some speculators who just buy Funcoins to then resell them to other suitors in the expectation they can make a profit.
The funfair turns out to be super fun, so much so that at one point if you multiply the total number of Funcoins issued by the going price it totals a stupidly high number, say $1 billion. Does that mean that the funfair is ‘worth’ $1b? Most definitely not. So what’s worth $1 billion tangibly, and to whom?
A ‘decentralised funfair’ would actually be one where anyone can participate as a ‘fun provider’ (earning Funcoins for that service) and/or ‘fun beneficiary’ (giving out Funcoins to receive it), with the economics flowing directly between the two parties. The decentralised funfair would have no employees nor middlemen, only utilitarian participants; there would actually be no end to it, as long as the economic incentives on both sides remain attractive enough.
If I wanted to own all the Funcoins myself with my $1b in cash, I would remove all the incentives from the system for participants to provide and buy ‘fun’. The funfair economy would dry up and ultimately die and its Funcoins would be worthless. I would be left all alone, entertaining myself. This is fundamentally different from the equity world, where control actually warrants a valuation premium, not a discount.
In a decentralised economy, democratising (rather than concentrating) ownership via incentives creates value. Tokens should not be valued in the same way a company’s equity gets valued, they should be valued as (potential) self-sustaining economies that generate utility exclusively for their participants. Because such economies are decentralised, i.e. they have no central authority taking a toll, the most liquid tokens in any economy should in theory ultimately prevail and that would constitute the best outcome for its participants.
It gets a bit surreal, but, continuing along the decentralised funfair parallel, let’s imagine there are multiple funfairs where a fun provider or a fun beneficiary can participate: inevitably they would choose the one that provides the most attractive incentives (i.e. more fun, higher rewards). So ultimately there will only be one decentralised funfair left and its “fun token”, the most liquid one that delivers the most value to its participants.
So when our jaws drop at some token’s market cap, we are immediately drawn to think that a pre-product company gets valued sky-highly and to call it a bubble. What’s actually happening is that the market is anticipating that the utility value of that economy / use case will one day be $x and that there may not be any other currency to participate in it, then applies some sort of discount rate reflective of risk to NPV it to today. Since most crypto tokens are coded to be scarce, a thriving underlying decentralised economy will result in the appreciation of its only currency.
It’s not simple to immediately grasp this idea for anyone used to valuing equity based on future earnings potential because it’s a whole new way of looking at value creation that requires a different level of abstraction.
It also helps to draw some comparisons: comparing crypto market cap to the equity value of all public and private companies (maybe $200 trillion in total?), or comparing it to global GDP (c. $80 trillion) would be apples to oranges. Some think that the M1 and (some parts) of the M2 money supply is the most meaningful comparable in the long run as it represents the total amount of cash and liquid assets sitting in savers pockets or bank accounts, which could theoretically be converted into tokens if all goods and services ended up being delivered through token-based decentralised economies. Globally, that’s anywhere between $40–100 trillion.
Both an index and a token representing the asset class of the global distributed index.
Prediction market game w/ stored value tokens.
Cross-border transactions across asset classes.
Multi asset class clearing strategy.
Global research index platform.