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Value Accrual - The Daily Gwei #520
Searching for the crypto-assets that actually accrue long-term value.
There’s been a lot of hot debate over the years around how coins/tokens in crypto can accrue long-term value. Of course, 99% of these assets trend towards being worthless or end up at least 95%+ down from their all time highs but are there crypto-assets that actually trend up over time? Of course there is - you just have to look very closely to find them.
The first way for a coin/token to accrue value long-term is to become a money and a store of value and this is a very difficult thing to accomplish. I think the main reason for this is because a lot of the value that comes from being a money/SoV is born mostly out of collective belief rather than some hard fundamentals. For example, if BTC were valued based solely on the amount of fee revenue that the Bitcoin network generates, then BTC would be considered highly overvalued as it has a price-to-sales ratio of 2800! Obviously BTC is valued on the social belief that it is a pristine money/SoV and people mostly buy it for that purpose.
The second way for a coin/token to accrue value long-term is to become equity-like. Obviously many of the projects in crypto have avoided doing this due to securities laws/regulations and this has hampered the growth of many tokens. Instead, the tokens are usually designed to be “valueless governance tokens” and really do stay true to their name - even UNI has performed quite poorly in the face of growing Uniswap dominance (because no revenue is shared with UNI token holders). On top of this, many tokens start their life with a low circulating supply and high fully diluted valuation so even if the token does have a claim on protocol revenue, it still trends down over time because of the real (and assumed) future sell pressure from non-circulating tokens.
I think that ETH as an asset is both a money/SoV and has equity-like properties with the pseudo-dividend via EIP-1559. ETH is also used as a staking asset (internet bond), used in DeFi as collateral and is used to pay fees on not just layer 1 Ethereum, but many layer 2 networks as well (this makes ETH the defacto MoE for the Ethereum network). On top of this, ETHs supply will be net deflationary in a post-merge world which strengthens its store of value properties and causes a nice feedback loop when coupled with staking (higher ETH price > higher USD-measured rewards for stakers > more ETH staked to capture those rewards).
Obviously there are other mechanisms that have been used in crypto to try and drive value to tokens - from algorithmic stablecoin schemes to recursive liquidity schemes - but these things do not generate long-term value for tokens (they seem to do the exact opposite). This is why I’ve come to my conclusions above and why I’m personally most bullish on assets that fit into the 2 categories - especially assets like ETH that fit into both categories.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.