Conflict: Store of Value vs Utility
A battle as old as time itself?
Stores of Value (SoV) such as Bitcoin should optimize for a level of predictability in the long-term. In the digital world, censorship resistance, scarcity, security, and self-sovereignty are crucial to achieving this outcome. In contrast, utility platforms such as Ethereum and EOS are experimenting with flexible programming, on-chain governance models, and new consensus algorithms. The winning projects will be those that are the most agile and innovative. These projects will gain significant traction in the highly competitive utility platform race. The agility and innovation required to gain traction as a utility platform, inherently conflict with the predictability and security of a long-term store of value. Optimizing for general utility or feature richness inherently degrades the store of value qualities of a digital asset.
Valuing digital assets of utility platforms is different than traditional approaches for valuing companies. In this new all-digital paradigm, networks replace companies, and native assets or network tokens replace cash and cash flow. As the network grows, the value of the asset should increase. Asset velocity, the speed by which an asset changes hands can suppress price of the digital asset. Additionally, the open source nature of this space invites serious and aggressive competition.
Scenarios for Platforms
If a network is popular, its network value should also be high. This seems intuitive, but only to a point. Take Ethereum as the most basic example. There are two possible scenarios.
1. There is a robust ecosystem built on Ethereum. Sharding and layer 2 solutions have successfully improved scalability and reduced prices to the end-user. The network is cheap, fast, and popular. The cost to run an operation should be negligible. But as fee prices decrease by orders of magnitude, so does the demand for ether which pays the fees. As throughput increases, so does the velocity of ether. This decreases its scarcity. Low network fees and high throughput are great for the user, but not for the investor.
2. The network is expensive, slow, and unpopular. In this scenario, dApps refuse to build on the network because of high fee prices and high latency. Consequently, users aren’t driven towards the platform, demand for ether is low, and the price follows.
There is a price ceiling on platform tokens and it’s lower than most think. Increased user adoption will not be enough to offset the decrease in service fees. John Pfeffer breaks this down in Institutional Investor’s Take on Cyptoassets. At equilibrium, some platform tokens and dApps will have a fair market value in the billions. Others will become obsolete due to extreme competition and overlap in functionality.
Path to Value Creation: Store of Value, Not Network Utility
The greatest potential for high return on investment is not in a utility network, but in a store of value (SoV). People will face an increasing need to securely store wealth as we transition into the digital world. Kyle Samani’s piece Paths to Tens of Trillions details several scenarios for becoming a store of value. In doing so, Mr. Samani seems to acknowledge that the most wealth will transfer to some digital store of value. There are three paths to becoming a dominant SoV.
1. Store value with limited generalized utility. These assets optimize for self-sovereignty, censorship resistance, scarcity, and security. For example, gold’s price is not representative of its generalized utility, but it is the globally accepted standard for parking money. In the crypto space, good examples are Bitcoin, ZCash, Monero, and Decred.
2. Provide maximum utility to application developers and end users. In providing this utility there will be an inherent stickiness associated with the underlying asset. If Ethereum is the dominant network, why not store all wealth in ether? Examples are Ethereum, EOS, Dash, Tezos, Dfinity, and Cosmos.
3. Collateralize assets to create a stablecoin. A stablecoin would remove volatility and, as a result, encourage spending. Similarly, lots of people use cash. Examples are Tether, Maker, and Basecoin.
Mr. Samani’s categorization of assets serves as a good basis for understanding the potential drivers of SoV.
Stablecoins are promising, but they currently represent a relatively small percentage of total market capitalization. Here we will focus on utility vs. pure SoV.
Evolve or die. Technological Darwinism dictates that the best technology and the most agile community will drive innovation and beat out competition. Providing the highest-utility platform could result in a large and passionate user base. Because a utility platform could be ubiquitous, users may choose to keep all their net worth in the platform’s native token. This would remove the need to change between an arbitrary SoV and the dominant utility token. The platform that provides the greatest generalized utility could see its token become the largest store of value.
But utility platforms have to innovate quickly in order to provide the highest utility in the market. As a platform grows larger, it becomes more difficult to rapidly innovate. Herein lies “The Innovators Dilemma.” It is the digital analog to biological gigantism. That is, if you get too big, you become, slow, clumsy and get eaten by faster moving predators. In these circumstances frustrated participants may decide to fork the network and create several similar, but more agile, platforms. Undoubtedly, some of these new platforms will fail but some of the more innovative platforms will provide greatly improved utility. Holding utility above all else, participants from the incumbent begin to use the competing networks. Since some participants are now using a new network, would they decide to transfer all of their net worth to the new platform’s native token?
Store of Value Case
In contrast, a digital gold may have relatively low generalized utility and flexibility. It evolves slowly but maximizes sovereignty, censorship resistance, and security. Users may decide to store their net wealth in the digital gold because it’s familiar, secure, and relatively predictable. This choice is sometimes more emotional than logical; it has value because we agree it does.
Some participants may decide to fork this digital gold to provide increased utility. Some users may decide to try out the new utility, but most users won’t store their wealth in digital gold for general utility and functionality. They do it for the sovereignty, censorship resistance and security. It provides them comfort that their wealth is stored in an anti-fragile asset. The slow pace of innovation is an attractive and key feature. Participants can be confident that the instrument that stores their wealth will not suddenly change.
The key features important to an SoV vs. those important to a utility platform are in conflict. Utility is fleeting and, in the digital world, often ethereal. Importantly, this rate of change will only increase. As a utility platform grows in network size, innovation becomes correspondingly more difficult. Users will adopt new platforms with increased functionality and feature richness.
Rapid innovation and feature development are crucial to mainstream adoption. Protocols that optimize for agility will serve as fundamental infrastructure for value creation. However, the asset that captures the SoV use case will optimize for a level of predictability by holding self-sovereignty, censorship resistance, and security above all else. Identifying the winning asset will yield huge return on investment in the coming decade.