Smart Contract Platforms Have to be Store of Value
Preserving the value of assets issued on top of a platform is an essential part of its cryptoeconomic design
There have been a lot of discussions on scalability of smart contract or DApp platforms, but very few on how they would function as value preservation platforms. Unlike payment networks like Bitcoin, DApp platforms provide security to not only their own native coins, but the value of all crypto-assets issued on top of it (typically represented as “tokens”). “Store of Value” for multi-asset platforms therefore refers to the value preservation property benefitting both its native tokens and the crypto-assets on the platform.
The key requirement of a “Store of Value” asset platform is that the security it provides has to grow with the value of the assets it preserves. For example, if demand for owning crypto-assets on Ethereum grows rapidly, causing the value of the aggregated asset on the platform to grow one hundred fold, the security (measured by attacking cost) of Ethereum needs to grow along with it to provide adequate protection against attacks. Otherwise, there’ll be more attacks on the network to “double-spend” those assets, when the potential rewards get higher and the cost stays the same.
We can approximate an asset platform’s security with the income of all its miners or validators — the higher this amount, the higher hash rate or staked capital it’ll generate and the platform will be more costly to attack. Assuming miners are paid with the platform’s native tokens and there’s a predictable issuance policy, the growth of a platform’s security is driven by the price appreciation of its native tokens. This requires the native tokens of a “Store of Value” asset platform to be a good value capture of its aggregated asset value.
In other words, the demand for on-chain assets has to have a clear way to generate demand for the native tokens as an asset. Only then can the success of token projects contribute to the platform security and the entire ecosystem can be sustainable. This is a unique challenge to multi-asset platforms, because in single asset “Store of Value” networks like Bitcoin, their native coins automatically “capture” the value of this only asset.
When a platform’s native tokens are designed to facilitate transactions, there aren’t obvious reasons that the price of native tokens will appreciate with the value of the assets. For example in Ethereum, the intrinsic value of the ether token is to pay for decentralized computation, therefore its price should reflect computation demand on the blockchain and the liquid available ether tokens on the market as supply at any given time. The appreciation of Ethereum-based assets doesn’t generate demand for more computation nor reduce ether’s supply, therefore would have little impact on ether’s price.
When a platform’s native tokens are also used for staking, one could argue that the most valuable assets themselves on the platform have incentives to participate in staking, helping increase the platform’s security. However, this may not be realistic for many reasons — for example, the DApp themselves are decentralized communities, and this could become a coordination problem even if there’s willingness to do so; additionally, even if the coordination problem can somehow be solved, it’s always in a project’s best interest to have other projects shoulder the cost of improving the platform’s security and enjoy a free ride — the typical “tragedy of the commons” situation and not a stable equilibrium.
Token economics not designed for “Store of Value” put a ceiling on how valuable an asset platform’s assets can become. When the value of an asset grows too high for the level of security the platform can provide, transaction liquidity for this asset would dry up since nobody would be willing to transact knowing it’s profitable to reorganize the chain and reverse those transactions.
If blockchain technologies will truly revolutionize finance, and decentralized networks are where we move to express asset ownership, we as a community need more research on a new kind of token economics for multi-asset “Store of Value” platforms. The economic research team at Nervos has been working on this for some time and we’ll share our findings soon in our upcoming token economics RFC. Stay tuned!