Again, here’s a long-overdue post, but the last few weeks have been interesting with respect to client attitudes toward crypto assets and the industry’s willingness to work toward solving the issues around the trade, payment, and movement of (digital) goods and money. Some of my focus has been around not only the economic viability of solutions, business models, and governance, but also the fundamental tenets of blockchain and its correct use in use cases, such as:
1. The payments landscape: retail, wholesale, interbank, and cross-border issues
2. The relevance to GPI Phase 3 and blockchain’s role with respect to Nostros Vostro
3. Stable coin and digital fiat: payment innovation, payment velocity, and emerging business models
4. Innovation in B2B products, such as accounts payable, accounts receivable, and B2B money transfers
While we are building a value network that is able to transfer value with embedded trust and transparency, in many cases, the value is created either via principles of crypto economic models (mining, minting, or simply induced value) or, in the case of permissioned networks, a vehicle called asset tokenization, which is a digital representation of a physical asset that was already valued with conventional valuation models (which are industry-specific). I think that it is important to understand the primary drivers of value in a blockchain network, which leads to understanding core tenets of evaluating the economic value of blockchain entities. There are various drivers of valuation, such as tokens driven by crypto economic models that are driven by supply & demand and the utility of the network; non-fungible tokens (NFTs) that have an intrinsic value, such as identity, diplomas, and healthcare records—essentially tokens that are simple proof-validations of the existence, authenticity, and ownership of digital assets; and fungible tokens that are valued either by the sum total of economic activity in the network (cryptocurrency), its utility (smart contracts and transaction network processing), assigned values—as in stable coins and security tokens—and so on.
In my previous post, I talked about tokenized value. There are many different token types and classifications that exist today, and while there is no standardized nomenclature, all of these tokens have one thing in common: They represent and digitize value. Some of the token types include (but are not limited to):
1. Pegged tokens
2. Stable coins
3. Tokenized securities
4. Security tokens
5. Utility tokens
6. Collateralized, decentralized tokens
7. Non-collateralized, decentralized tokens
8. Collateralized, centralized tokens
9. ICO (Initial Coin Offering)ICOs
10. STOs (Security Token Offering)
Defining Fungibility
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable (Wikipedia).
It is vital for us to understand the tokens, their economic models, and above all, two fundamentals of token-based systems:
1. The token evaluation model
2. Token fungibility and asset exchange mechanisms
In this post I will not discuss NFTs, as they broaden the conversation; perhaps I will get to them in a future post.
1. The Token Evaluation Model: This is a way to determine the value of a systemic asset, and as such, it is important to understand the valuation; if we choose to engage in economic activity such as transaction processing, using it as a currency, or using tokens as a utility or security, we need to know what it is worth!
Considerations for Evaluating the Economic Values of Blockchain Companies
1. Business Solutions
a. Problem domains: What is the business problem we are solving? What is the industry landscape? What is our evolution through innovation?
b. Addressable markets: The overall cost of problem domains; e.g., the cost of the problem itself or industry sub-segments
c. The regulatory and compliance landscape: The regulatory landscape that can help or impede the adoption of new technology-led business models
d. Competitive frameworks/alternatives: How are the other framework entities trying to solve the issue with or without DLT/blockchain?
2. Technology Design and Architecture
a. Consensus design: Leads to trust systems and the economic viability of the blockchain network
b. Blockchain tenets: Shared ledgers, crypto elements, smart contracts, and security elements
c. Blockchain deployment infrastructure: The Cloud, geo-specific deployment, technical talent (or access to it), SLAs, etc.
3. Monetization Strategies
a. Token-Based Models: Operation fees are used to write to the blockchain-powered business network’s distributed database
b. Tokens as a Medium of Exchange: Lend or sell tokens as a step-through currency
c. Asset-Pair Trading: Monetizing margins
d. Commercialization of the Protocol: Technology services; this includes Cloud and software, lab, and consulting services
The Power of Networks
Extrapolating the power of networks and the exponential power of co-creation models, leading to new business models and resulting economic value.
2. Token Fungibility and Asset Exchange Mechanisms: It is important to understand token fungibility and asset exchange mechanisms in order to understand the duality of transaction processing; i.e., the ability for me to exchange the (digital) value of things we consider worth trading. This concept of fungibility and subsequent asset trading brings an interesting dynamic to the crypto asset world, primarily because every crypto asset is confined to its network of origination, and without a measurable and defined valuation model, it is impossible to determine the real value of these crypto assets or tokens, regardless of their classification, which implies that the exchange would just be a speculative value. It is very difficult to create a sustainable economic ecosystem/marketplace based on speculation. Interestingly, the industry has evolved with various approaches to dealing with enabling asset exchange by providing a facility and business to provide a fungibility and asset exchange model.
a. Centralized Exchanges: These are centralized entities that neither use nor conform to the decentralized nature of blockchain technology, and just like any other exchange, the business model is based on an intermediary that provides specialized exchange services for crypto assets.
b. Decentralized Exchanges (DEX): These are meant to address the disintermediation of centralized exchanges, removing cost and friction while specializing in exchanging services for crypto assets, adhering to a true decentralized model, thus enabling a peer-to-peer exchange. For example, atomic swaps, or atomic cross-chain trading, are the exchange of one cryptocurrency to another cryptocurrency, without the need to trust a third party.
c. Cross-Chain Transactions: This is an idea for transactions between various token types, ensuring that the integrity of assets (and transactions) is preserved as the token or its definition moves across networks.
d. Asset Bridging: Similar to cross-chain transactions, the idea addresses the issue of a token that remains confined to its network due to its creation, validity, and lifecycle. With use of technology-like asset locks, the bridges ensure that locked assets are not traded and do not change ownership.
Conclusion
This is a way to determine the value of a systemic asset. It is important to understand the valuation; if we choose to engage in economic activity, such as transaction processing, using it as a currency, or using tokens as a utility or security, we need to know what it is worth! This concept of fungibility and subsequent asset trading brings an interesting dynamic to the crypto asset world, primarily because every crypto asset is confined to its network of origination, and without a measurable and defined valuation model, it is impossible to determine the real value of these crypto assets or tokens, regardless of their classification, which implies that the exchange would be just a speculative value. It is very difficult to create a sustainable economic ecosystem/marketplace based on speculation. Interestingly, the industry has evolved with various approaches to dealing with enabling asset exchange, thereby providing us with a facility and business to provide a fungibility and asset exchange model, in an effort to provide more concrete market structure not based solely on speculation.[.1] The challenge lies in defining the right evaluation model and choosing the right option to enable token fungibility and facilitate exchange. The opportunity lies in the technological advancement and resulting business opportunities with not only first-market advantages, but also with enabling new industries and business models that have not existed before.
Interesting Reads
1. https://blockgeeks.com/guides/blockchain-battle/?utm_source=ActiveCampaign&utm_medium=email&utm_content=Does+Your+Business+Really+Need+the+Blockchain%3F&utm_campaign=daily
2. https://media.consensys.net/state-of-decentralized-exchanges-2018-276dad340c79
3. https://media.consensys.net/ethereum-gas-fuel-and-fees-3333e17fe1dc
4. https://medium.com/0xcert/fungible-vs-non-fungible-tokens-on-the-blockchain-ab4b12e0181a
5. https://www.coindesk.com/decentralized-exchange-crypto-dex/