Contemplating the Value of a Blockchain Token

“Why do any of these coins have value? I get the tech is cool. What are the economics available to the owners of the chain now? Is it because the ethos is about decentralization and democratizing ownership?”  ~ Astute observer of value markets, 2021.

If we stipulate the relativism of value is part nature and nurture, then the question shifts to the dimension of value that is closest to economic utility. Blockchain technologies are in an awkward phase of institutional isomorphism. They want to be like the stock market. They want to have shareholders, customers, payments, and profits. Yet the uncertainty of whether and when governments will enforce their securities laws in this domain makes crypto sponsors skirt perceived lines and mimic official markets while simultaneously wrapping themselves in business models, organizing principles, and technology patterns meant to distinguish them from securities. At some point this masquerade ball will end. 

Therefore, let us analyze them like digital business models. They are disruptive technologies seeking to do a job for a customer in exchange for value. The vast majority of people, in every nation, rely on their government’s official fiat currencies as the primary store and exchange of value. Cryptocurrencies only have real value when: a) they can be exchanged for goods or services, or b) they can be converted back into fiat currencies for the same purpose. The tokens/coins/securities have some fundamental value because markets exist to convert them back into Ethereum and then back into fiat currencies (net of significant transaction fees in and out of the blockchain).

After that foundational factor of value, they have designed utility. As Clayton Christiansen observes in the Innovator’s Dilemma, they are subject to resource dependence theory, which makes them pursue customers and/or investors. So they use the tokens to serve as both: tickets to enter a game, loyalty points for actions taken, a unit of ownership in a new enterprise in exchange for a more valuable currency like Bitcoin or Ether to pay service providers to write more code or promote more adoption. It is friends and family and angel investor financing, just without clarity on how to follow the Regulation A and CF listing requirements.

IPFS is trying to disrupt S3. You cannot take down my offensive content from S3 when the file is decentralized across dozens of volunteer servers via the same erasure coding methods S3 uses. After that, we know the familiar pattern; free become tiered pricing, which leads to revenue, which gives the FILE token an ability to either pay a dividend or buy back its tokens and increase their unit price.

Aave is providing one of the oldest economic benefits known to man by bringing another mousetrap to usury…err, money market accounts: interest income. This business model relies on token holders to let Aave lend their tokens to another party at an interest rate they both share in. The only plausible use for these lending proceeds is to fund the mining and network infrastructure of these blockchains. To avoid the high gas fees of paying miners to process my transactions, I pay a different party to process them off-chain, i.e., pay to use someone else’s computer(s) to do a less mathematically and electrically intensive calculation on some or all of my transaction before porting the important results back into the blockchain. Everyone is paying Ethereum for these transactions. Aave and other such tokens are simply a sub-ledger to remember who is owed which share of the Ethereum transactions. Those rights are allocated as tokens that only have value when they get traded back into Ethereum and back into fiat. The interest has perceived value because it looks like I am earning income by parking my Ethereum in their token’s denominations. Like a bank, as long as I can withdraw when I want to and the accounts settle in my favor, then it has even more perceived value. Of course, the full faith and credit of the “Aave Bank” is somewhat thin in comparison to a Vanguard money market fund or an FDIC-insured savings account. BUT NEITHER OF THEM PAY ME A 4% APY WITH DAILY DEPOSITS!!!!  (Sorry, FOMO attack…. It has passed now.)

Audius and Basic Attention Token feel really accessible to me in terms of their business models. Disrupting music distribution again to give artists a larger share in their revenues is like how content providers are trying to remonetize their content in the midst of the transition from cable distribution networks to decentralized over-the-top content networks. Why is Discovery+ okay but Busta Rhymes using Audius not? Google monetizes my clickstream every day, but if I switch to the Brave browser then I cen receive Basic Attention Tokens as a share in that clickstream revenue. The risk in holding them is akin to the risk in holding a low float OTC stock. There is a really convoluted, high transaction fee method for buying them. Compared to passive index funds, there is really low investor interest and information asymmetry (e.g., analyst coverage, reporting requirements, transparency). But in the “normal” investing world, this is a style of investing. I’m buying in at a depressed price. I am have to have the stomach of a VC or private equity investor, i.e. I am prepared for 100% loss. I have to be patient for the time when this idea becomes obvious, normal, sanctioned, and graduates into the “normal” markets. This a risky form of angel investing in microcap disruptive technologies. No one will ever use their phone to summon a stranger to drive them to the airport. No one will ever invite strangers to rent their basement for a weekend. No one will every buy stocks without picking up their landline and calling their broker and paying them a $19.95 transaction fee.

Caveat Emptor. The barriers of entry for listing a token are extremely low, i.e., much less than listing a pink sheet company. Most tokens are a community who rallied around a meme and are surviving on attracting new buyers to prop up the price. Cryptocurrencies will join the regulated world eventually. The seemingly implausible worst case is that the global governments wage a new war on financial instability and like terrorists they hunt down every last mining machine and set up large scale choke points and firewalls to block anything on the Internet that looks like a blockchain transaction. Hopefully this is a far-fetched impossible idea, but there is presently no antidote for groupthink; so, buyer — beware!