In this post we want to take a look at cryptoassets. This is a catch-all term for all the digital tokens out there powered by blockchain ledgers. There was a long debate in the community about what to call them, and so they are sometimes also called digital tokens, crypto coins or various other names. However, beyond this basic definition, in this post we want to answer the question as to what is the economic nature of these assets.
One of the signature features of the cryptoasset world is the sheer variety and quantity of tokens on the market now. Unfortunately, this also makes it very hard to analyze and come to grips in understanding them.
A key concept to understand is that cryptoassets are not financial instruments. Set aside the regulatory definition (which is a whole other BIG subject), and set aside for a moment the fact that many people treat cryptoassets as an investments. They are not equities, that is they do not (typically) convey ownership rights to a stream of cash flows. And they are definitely not a form of debt, they come with very few obligations attached. At heart, digital tokens are a driving component in the technology of blockchain ledgers. They are software, and buying a cryptoasset brings with it participation in particular software networks.
And this where the confusion sets in. There are all kinds of software out there doing all kinds of things. We are planning a future post (or series of posts) which will attempt to classify cryptoassets into various categories describing their purpose. These include identity, stores of value, logistics, collectibles, governance, storage and compute and many, many more. Cryptoassets carry with them the right to participate in all these varied purposes.
But what does it mean to ‘participate’ in a software project? One useful mental framework was coined by venture investor Fred Wilson (at least, we think he coined it). He calls blockchains “decentralized infrastructure”. When viewed in this light, a lot of blockchain projects make more sense. Projects like Stellar Lumens and Ripple XRP are infrastructure for moving money around. Ethereum is basically decentralized compute infrastructure.
This still leaves open the question of what it means when to buy a piece of that infrastructure. If you buy a box of rivets that are then used on a bridge the most it will get you is a commemorative plaque somewhere. The difference here is that the tokens remain in use as long as the project exists, as if those rivets are used over and over again.
When you boil down the marketing materials behind most token sales, the implication is that the tokens become more valuable the more the network is used. In this light, our bridge metaphor does not quite work. We propose the best way to think of many blockchain tokens is that of as providing a piece of software for broader use. In many ways, this harkens back to the days of early capitalism in the 15th century. Many of the original European exploration expeditions were structured as joint stock companies. The investors underwrote expeditions in exchange for trading rights. So in this (somewhat tortured) example, digital coins are the ships upon which trading networks around the world were built. This metaphor only goes so far, as those trade charters did have explicit rights to cash flows, and the ships themselves held intrinsic value. For cryptoassets, such rights are not included. Nonetheless, digital tokens are the medium used for building some larger purpose.
Another way to think about this is to imagine some massive software implementation, say a giant ERP system used to power some enormous, globe-spanning supply chain. Buying a cryptocoin provides a small piece of that system. If the supply chain is successful, the value of the system grows, and others will be willing to pay more to keep the machine ‘well-oiled’.
Of course, this leads to two intertwined problems. Are cryptoassets all a form of financial securities or are they just some altruistic software endeavor that will greatly benefit someone else? Without getting into all the nitty-gritty of regulatory matters, a key element of the definition of a security (Step two of the Howey Test) is the expectation of a profit. This is not always the explicit goal for blockchain projects.
And as much as we would like to provide a clear answer to the question posed in the title, the truth is that no one is entirely clear where cryptoassets will end up. There is clearly a lot of money betting that cryptoassets will provide economic benefits. At the same time, there is no guarantee that this will happen, at least with the vast majority of the projects out there.
At heart, the whole crypto project is an attempt to rebuild the software infrastructure for ‘everything’. In this light, it is easy to understand how crypto can attract a strain of Utopian thinking – tearing down the Establishment to build the Future. In more practical terms, cryptoassets appear to be a new form of participating in the economics of software. So if Software Eats the World, owning a piece of that could be valuable.