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On the immaturity of tokenized value capture mechanisms

Pursuing value in an age of borderless-ness, experimental monetary policies, costless forks and unlimited innovation.

Photo by Carl Raw on Unsplash

do cryptoassets really capture the value of something, at all?

1. What is value?

by Adioma

1.1. What is value capture?

P/E rations of top ~100 global internet stocks (in 2014). Wondering about the lack of uniformity? They all capture value differently!

1.2. Approaches towards value capture

data from “Measuring the Moat” (2013), by CreditSuisse.

1.3 Profit pools (value-capture heterogeneity)

Visualising profit pools: the evolution of value capture in the healthcare industry, throughout a decade (source).

2. On the value of financial assets

An asset’s value is the present value of its (expected) future cash flows.

3. What do token valuation frameworks say about value accretion?

  1. Chris Burniske: sets the equation of exchange (MV = PQ) as a cornerstone to evaluate cryptoassets (those which are means of exchange, stores of value and units of account for their protocols), basically proposing we find the GDP for a given cryptoeconomy and divide it by the circulating token supply.
  2. TwoBitIdiot: disbelieves most utility tokens out there, but praises some of them as likely to endure — specially, proof-of-human-work tokens and TCRs, which are more likely to maintain subjective differentiation.
  3. John Pfeffer: suggests equating the Marginal Costs of running a decentralised network to its Marginal Revenue (MC = MV) in order to find a point of equilibrium (potentially ignores a lot of unknowns, as Johnny Antos points out).
  4. Brendan Bernstein: criticises absurd valuations and thinks about value accretion along two dimensions, also upon the quantity theory of money (see chart below).
Brendan Bernstein’s “Making Sense of Crypto Asset Valuation Insanity”: the quantity theory of money as a framework for reasoning about crypto.

4. What does the crypto market say about value accretion mechanisms?

#TRX’s correlations between price and Reddit New Comments, Reddit Active Users an Github Commits, in past months, via CoinShilling.

5. How are utility tokens claiming to accrue value?

Tokens which are uniquely required to incentivize or disincentivize behavior in order to provide a service accrue value relative to that services utility”.

5.1. Stores of Value

5.2. Security tokens

5.3. Utility tokens

  • Examples: Augur, Numerai, Filecoin, TrueBit, Livepeer.
  • Value accretion: strongly driven by competing demand among contributors/providers. As demand for the underlying service grows, revenue flowing to service providers increases. Under a fixed supply of tokens (or a monetary base that grows slower than the demand for the service), contributors will rationally pay more, per token, for the right to bite a larger part of growing cash flow streams. Kyle Samani’s back-of-the-envelope calculation proposes this model, by design, accrues ~100x more value than that of the means of payment token.
  • Examples: AdChain, Paratii, Medcredits, Relevant.
  • Value accretion: if a list accurately represents its focal point; and (2) this focal point is of interest to certain audience(s); TCRs tokens will accrue value proportionally to the value that listees earn by being in the list. This can be measured differently according to the use-case: in AdChain’s example, one can assess/project the difference in revenue between whitelisted and rejected applying publishers. Besides, whenever there’s loss of value due to entropy (a list loses relevance to its audience), token holders can recapture this by participating in value-relocating propose-challenge games.
  • Examples: Gnosis, SpankChain, VeChain.
  • Value accretion: end-user’s demand for tokens grow if platform’s usage increases, and it is perceivable that the “credits” they are entitled to become worth more value. Note that one can make a one-time purchase of a sufficient amount of primary (e.g. GNO) tokens and increasingly use its underlying services as demand for them grows.
  • Examples: Factom uses the scheme described above (within its own double-token model); some other tokens incorporate “proof-of-burn” also as one of their issuance mechanism, like Blockstack’s stacks or Counterpary’s XCPs.
  • Value accretion: if platform usage is burning more tokens than the rate of issuance, supply decreases and pushes prices up. Vice-versa. In the long-run, there should be linear relationship between token value and platform usage.
  • Examples: ICN, Refind.
  • Value accretion: happens through direct reduction of the outstanding supply, thus increasing individual network ownership. Creation is somehow presumed, when a token is set to be bought back by its issuing entity (Iconomi had seen staggering growth of reserves when it announced it; Refind plans to do it after reaching certain revenue milestones).
  • Examples: TAY, Sweetbridge.
  • Value accretion: the size of the discount that each token realises for its owner is designed to grow in step with the overall usage of the network. But most of this value accretion is captured by individual token holders when they exercise their discounts - passive holders are by definition under-exploring the tokens’ potential, able only to capture their resale value, but not their discount value.
  • Examples: STEEM, SP (Steem Power), SBD (Steem Dollars). The unit of account (STEEM) is the point of entry to the system, and, besides being traded, it can be locked in two contracts. The first turns it into a long-time commitment (SP), giving one the right to capture a share of network rewards, and weight the staked amount on curation activities (contributing to the protocol). The second turns the locked amount into “stable” currencies pegged to a fixed dollar price (SBD), redeemable in the system’s original unit of account (STEEM) at any given time, and capable of yielding an interest rate.
  • Value accretion: The scheme has been feverishly compared to Ponzis, but I believe that to partly fruit of misunderstanding. Holding the original unit of account has a daily dilution cost, so rational users should either switch to long-term commitments or get exposed to a more predictable interest rate. Both measures put velocity sinks in place for the primary token, pushing its price up, as per the equation of exchange. But wait: where does the value being distributed as network rewards (part of the incentive to lock primary tokens) come from? That’s where most critiques focus on, many assuming the value redistributed comes from new entrants to the market - if growth halts abruptly, there might be no source to pay debts from. If you look closely, this resembles an access-based token model that incorporates a half-baked stablecoin. Worth noting, the solidification of the latter as a standalone category may make this scheme obsolete.
  • Examples: above.
  • Value accretion: in its simplest form, happens as the network grows, and with it, the demand for the stablecoin. Under a fixed supply, prices increase, the system issues new coins to push it down to its target price, and this newly issued coins go to holders of the network’s share-like token (most stablecoins follow a dual-token model). These tokens hence represent future claims on new stablecoins to be issued if network’s usage and demand increases. The inverse is where most of the quirks and flavours of each approach come to place: augmenting the outstanding supply is easy (print money), but reducing it is more complex (see more here).

7. How to program value accretion in the long-run?

“The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.” — Warren Buffet

7.1 The governance hypothesis

Chris Burniske and Luke Duncan’s representations for governance as the “non-commoditisable” good of the moment.

7.2 Consider forks (protect, foresee or foster… just don’t ignore)

by Teemu Paivinen, on Thin Protocols

7.3 Competitiveness in mining may be more important than user stickiness

7.4 Capturing value <-> Distributing value

8. The death of value capture (or “the Red Queen effect”)

made upon Karla Vasos’ illustration on Dribble.
Photo by Alexander Popov on Unsplash

9. Go deeper



Decentralising video and putting revenue in control of content producers.

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