Taxi Medallions: A Conceptual Framework For Work Tokens
Classifying cryptoassets is by no means intuitive, they are a brand-new asset class that according to your favorite government regulator could be currencies, commodities or securities. The reality is that there is no one correct lens with which to view them. They are natively digital assets that can share traits with many of the real-world assets we are familiar with today. To add more layers of complexity, their programmable nature allows for a seemingly infinite number of potential structures.
Some might make more sense to others such as bitcoin as digital gold, or stablecoins as currency; but others like a Token Curated Registry are far more abstract. In this article, I hope to shed light on one of the more interesting token structures that I believe create use cases uniquely enabled by censorship resistant, trust-reduced, distributed ledgers. (Thanks Nic Carter and Rocco for pushing me to avoid using “Decentralized Blockchains”)
In John Pfeffer’s An Institutional Investor’s Take on Cryptoassets, he touches on how certain token staking models can be compared to Taxi Medallions. However, I don’t believe he examines the idea thoroughly enough, especially when cash flows can be denominated in stablecoins or a non-sovereign monetary store of value. Max Mersch in his related piece also touched on this analogy, which I will look to expand as I believe it is a helpful conceptual framework for understanding work tokens. This analogy has helped me understand and explain to others how many projects function and create value for both users and investors.
To start off, it is helpful to look at the Taxi Medallion system, which was created by the government in order to limit the supply of taxi cabs. It required a medallion to be purchased for the right to operate a taxi. Once purchased, these medallions allowed drivers to legally get paid for driving people around major cities. Savvy investors realized that they could even be a lucrative investment given the perpetual demand for easy transportation. As a city’s population increases, more people will need rides and since there is a capped supply of medallions, each one gives the owner the right to a growing stream of cash flows.
Looking at historical prices in New York you can see that in the span of a decade prices increased ~5x. To put that in perspective, over the same period the S&P 500 increased by about a factor of 1.6x. Investors could have purchased medallions, held them for a decade, and dramatically outperformed the equity markets. This shows the potential scarce assets have to capture value when they provide the right to constantly growing revenue streams. That being said, it is easy to imagine how prices respond to disruptions in these cash flows when the industry faces existential threats from competitors with a superior business model.
So now if your an even savvier investor, you might be thinking of the income potential an asset like this has to supplement the price appreciation. Since you are an investor and not a taxi cab driver you don’t want to do the work in order to receive the income, but you can still own the asset and lease it out to others to use while receiving a portion of the proceeds. This is exactly what many did to generate the most value out of an asset like a Taxi Medallion.
Now how does this relate to cryptoassets? With the ability to create provably scarce digital assets, it is possible to create a system whereby one needs to own one of these assets to have the right to provide work and receive cash flows in a digital economy. To further illustrate, it makes sense to walk through a highly simplified example.
Augur is a decentralized (sorry Rocco) prediction market that allows anyone in the world to create a market (e.g. who will win the Super Bowl) or trade on any existing market. It effectively disintermediates casinos that control what bets can be placed and takes a hefty cut from users. Augur has a native REP token that acts like a medallion where instead of driving a taxi, the work performed is reporting on the outcome of events people are gambling on. You can purchase a REP token and stake it (imagine putting it into a digital lock box) in order to have the right to report on the true outcome of events and then receive a pro rata portion of the fees. In order to ensure an honest functioning market, those who try and cheat the system by reporting false outcomes lose their staked REP tokens.
If you were going to value an asset like REP, you can simply look at the discounted cash flows you believe reporters will earn from the fees of those using the Augur platform. If you believe people will flock to this platform like they did to New York and its Yellow Taxis, then you can purchase REP as an investment hoping the asset will appreciate via the rights to a growing revenue stream. Once again, if you’re a savvy investor who doesn’t want to provide the work themselves but want to earn some of the revenue while still benefiting from the price appreciation, you can delegate your tokens to someone with the technical wherewithal to perform the work for you.
Cryptoassets are a complex new asset class, and understanding the various nuances can be quite a daunting task. It can be helpful to separate and classify them based on common characteristics. From there you can begin to dive into individual categories to try and understand at a deeper level. One category, work tokens, I believe are much easier to understand with a simple analogy that was taken from the prior work I mentioned, which helped me wrap my head them. I hope this article was able to expand on those ideas and provide a clearer framework with which to think about work tokens.
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