How to Grasp the Worth of Crypto Tokens?
In Brief
The writer shares actionable insights and a forward-thinking perspective regarding decentralized finance, concentrating on the comprehension and categorization of token value, drawing from extensive experience in the analysis, design, and modeling of tokenized economies.
An Unresolved Inquiry: What Gives Cryptocurrencies Their Value?
Tokens function as digital assets integral to the operation of decentralized networks, protocols, decentralized applications (dApps), decentralized autonomous organizations (DAOs), and online communities. CoinMarketCap currently lists over 20,000 tokens, with the count increasing consistently. Solana, for instance, sees the creation of approximately 10,000 new tokens each week. tracks While many of these recently minted tokens may just be memecoins or lack robust economic fundamentals, there are still thousands of assets that deserve long-term attention. This raises a crucial question: how can we navigate the vast landscape of tokens, and more importantly, what unique value does each token hold?
Even with various classification models available, determining the value of tokens is still a perplexing topic. From this complexity arose the concept of developing a method for token classification and comprehending the economic dynamics that govern them. So, what inspired this idea?
Since 2013, I have immersed myself in the crypto space, initially as an enthusiast and miner of Litecoins along with other GPU-minable coins. My activity in this space surged after the 2017 ICO frenzy, and I’ve been diligently tracking and investigating new ventures and tokens entering the marketplace.
With a background rooted in chemistry, I can confidently say that chemistry is fundamentally about classification. This principle might also be applicable when assessing cryptocurrencies and tokens. I'm eager to share these valuable insights with you, but through my research, I've identified that certain issues need addressing.
The available literature primarily delves into token distribution (how tokens have been or will be allocated) and their legal standing, often neglecting to consider their intrinsic economic worth, which is incredibly pertinent.
While I bring practical insights and a forward-looking vision to the realm of decentralized finance, I aspire to delve deeper into the subject of token value. This series of articles will lay out a framework for understanding and classifying the inherent economic value of tokens, particularly for those looking to expand their knowledge. Drawing from my expertise in analyzing, designing, and crafting tokenized economic systems and DeFi innovations, I intend to offer you clearer insights into the fundamental value behind tokens.
The key areas I aim to explore in these upcoming blog entries include:
How value is created and retained within decentralized protocols;
- The economic mechanisms that facilitate value capture.
- Structure of the captured value;
- From Zero to One: Value Generation and Capture in Token Ecosystems
In decentralized communities and systems, value is not generated by a single centralized body; rather, it emerges from the collaboration of various agents within the network. This principle holds true for blockchain platforms, DeFi projects, DAOs, NFT-based communities, metaverse initiatives, among others.
Value creation
The integral digital asset, or token, embedded within these decentralized systems captures a proportion of the value generated when the system functions. Essentially, the token serves as a gateway, granting its owner access to a fraction of the value produced within the network, facilitated through utility functions linked to the token.
Value capturing
To illustrate, consider a decentralized exchange (DEX). These platforms facilitate asset trading for users, which is their primary market offering. If we look at a DEX that lacks a native token (for instance, Uniswap back in mid-2020), we identify several agent groups involved in the protocol: creators of new liquidity pools, liquidity providers, and trading users.
Every new pool established enhances the variety of assets available for trading on the DEX and increases the number of swap routes within its framework.
- Enhanced liquidity from any pool makes the overall liquidity of the DEX greater, thereby attracting more traders (higher liquidity equates to reduced slippage).
- Each executed trade through the DEX leads to swap fees, making liquidity provision increasingly appealing for LPs.
- Therefore, the collaboration among pool creators, liquidity providers, and traders within a DEX generates value that is accessible to:
Participants actively engaged within the ecosystem (those contributing value);
- Indirect users of the DEX, such as data analysts who may not directly utilize the DEX;
- Direct users of DEX;
- Individuals who possess and utilize the DEX’s native token.
- To fully appreciate the worth of the DEX token, it's essential to comprehend how its holders might share in the value produced during DEX activities. A token's governance function could act as a 'gateway' to accessing this value.
The governance mechanism provides a distinct opportunity to oversee DEX operations, strategic execution, and, at times, the allocation of treasury funds. Whether this is considered valuable depends on DEX metrics such as total value locked (TVL), user engagement, and market influence within DeFi. Integrating shared protocol fees can considerably enhance the token's value capture, similar to what has been observed with Uniswap’s (UNI) token.
Addressing this inquiry necessitates an understanding of the fundamental set of typical token utility functions and their capacity for value capture. In the forthcoming blog posts, I plan to clarify these complex concepts, making them more comprehensible and actionable.
Please be advised that the content on this page is not intended to constitute, nor should it be interpreted as, legal, tax, investment, financial, or any other type of advice. It’s crucial only to invest assets you can afford to lose and seek independent financial advice if you harbor any uncertainties. For additional information, we recommend reviewing the terms and conditions as well as the assistance and support sections provided by the issuer or promoter. MetaversePost is dedicated to accurate and impartial reporting, yet market conditions may shift without notice.
Disclaimer
In line with the Trust Project guidelines Dr. Vasily, who leads research efforts within the PowerPool protocol, focuses on the intersection of blockchain and economic principles. Throughout his Web3 journey, Vasily has engaged in analyzing, designing, and crafting tokenized economic frameworks and DeFi products. He is also an early contributor to the Token Engineering Community.
