Protocol Tokens as Money
There’s an increasing amount of discussion in the crypto community as to whether or not protocol tokens are money.
Not surprisingly, the outcome of the debate is heavily influenced by how we choose to define money.
A protocol token is money like public company stock
Crypto protocols are Internet-based, open source marketplaces that provide digital services and protocol tokens represent their freely tradable equity.
Similar to how a publicly listed company can use its stock as money in an M&A transaction, the owners of a crypto protocol can use tokens as money to pay for different transactions.
Since protocol tokens are freely tradable on the Internet, there are fewer restrictions for using them as money, when compared with regionally regulated public company stock.
This means that tokens can be more widely used as means of payment than traditional stock.
It’s this instant and global tradability that, in part, serves to boost the “illusion” of protocol tokens as money. The more liquid a protocol token is, the easier it is to use it as a means of payment.
For example, the reason ETH is used as a means of payment today — over many other protocol tokens — is due to the relative maturity of Ethereum and ETH. ETH triumphs more nascent protocol tokens in terms of liquidity and volatility, which is why it’s logical that some people want to use it as money.
Although, there are many other protocol tokens that can, and will, serve the exact same payment function as ETH.
For example, Augur’s native token REP, Livepeer’s LPT and 0x’s ZRX are all productive assets, which — once they mature and become more derisked — will serve a similar payment function as ETH does today.
Stablecoins are a superior form of money from a UX point of view
But even if protocol tokens can be used as a means of payment, they are often more valuable being used as collateral in protocols that are built for the specific purpose of generating price-stable currencies or stablecoins.
Similar to how we do not expect public company stock to achieve the same kind of low volatility characteristic of currencies such as the dollar or euro, we should not expect protocol tokens to outcompete stablecoins in that regard either.
Instead of using a protocol token as a means of payment, it makes more sense to use it as collateral in systems such as the MakerDAO, which is a protocol purpose-built to generate a stablecoin called DAI.
For example, it’s unfeasible to expect users to make bets on Augur, when there’s a risk that they’re right about the market outcome, but still end up losing money as the currency they used to make the bet with lost a portion of its value during the same time.
Should other protocols, similar to Augur, prefer to integrate DAI (or another stablecoin) as the primary currency used to pay for the protocol’s service, it is unlikely that we will see (L1) protocol tokens capture a “monetary premium” beyond their utility value in the longer term.
Instead, it is more likely that the protocol that is purpose-built for generating a stablecoin will end up capturing the value from generating money.
Token Terminal provides financial and business metrics on crypto protocols — metrics we’re used to seeing applied to traditional companies, e.g the P/E ratio. Crypto protocols operate like traditional businesses, only they do it directly on the Internet.
