A Brief Analysis of the Significance and Source of Token Value

Original Title: "Narrative Tracking - Casual Talk on the Value of Tokens"

Source: One-Sided Crypto

Today I want to briefly discuss the Value Capture of Tokens, which is the issue of the value of cryptocurrencies.

First of all, this topic is very broad, and the economic design of Tokens can encompass many issues, so it is almost impossible to clarify this matter. Over the past couple of days, I've been discussing related content with friends and reflecting on it myself, so I thought I would organize some thoughts to share.

The main content includes:

• What is the significance of Tokens?
• Where does the value of a protocol's Token lie?
• Does a protocol really need a Token?
• Why do some protocols perform well, but their Tokens are declining?
• Other thoughts as they come to mind.

What is the significance of Tokens?

This question is simple yet complex to answer. I remember a few years ago, a regulatory body in Switzerland issued a classification of Tokens, categorizing them into:

• Security Tokens
• Utility Tokens
• Payment Tokens

Today, of course, all Tokens can still be classified according to this standard, but in reality, the community may prefer to categorize Tokens as:

• Governance - Tokens used for project governance voting
• Utility - Key elements for project operation, with rights such as dividends, staking, and earnings
• Store of Value - Like Bitcoin, gradually being viewed as an alternative investment asset/class commodity
• Ownership - With the rise of DAOs, more and more protocols emphasize community ownership, where one of the key signs of decentralization is granting all decision-making and profit rights related to the project to Token holders.

Forcibly categorizing Tokens may not be very meaningful. In an information-exploding industry, where information and innovation are constantly emerging, identifying commonalities and capturing the characteristic values of market conditions/protocol behaviors may better depict future development paths. Therefore, I will not attempt to create a so-called classification standard but will instead extract and share some commonalities/characteristic values.

Today, a friend from the community asked: "Can the tokenization of productivity and means of production really improve production efficiency?" "Is blockchain technology a transformation of human society's incentive model?"

First, as I said before, this question is indeed too big and difficult to answer. "Productivity" and "means of production" are concepts from Marxist economics, and these concepts are somewhat overly abstract. Personally, I believe that if we must apply these concepts, Tokens should only relate to the distribution system and not to productivity and means of production. The improvement of productivity and means of production relies more on advancements in science and technology, while the distribution system influences the incentive system, which in turn affects the use of productivity and means of production, thereby indirectly but significantly impacting efficiency.

However, blockchain technology may indeed influence the means of production, and it is one of the most important means of production in today's and future societies: data. The time span for data preservation and the retrieval of historical data are the most intuitive examples. The historical data preservation and uniqueness of blockchain ledger technology change the nature of data as a means of production, further influencing the upper-level processing of data.

But I have always felt that the concept of "permanent storage" should not be overly emphasized; nothing is permanent, not even the sun has its own lifespan, and even love is not permanent.

Returning to the topic, Tokens change the distribution mechanism, including the distribution of means of production and the distribution mechanism of returns generated from processing the means of production. Therefore, Web3 emphasizes ownership, which includes the ownership of any content generated by individuals and the ownership of returns based on that content.

If you write a song that exists in your account in the form of an NFT, the asset itself serves as a certificate confirming the ownership of that song. Based on this, commercial activities can better determine that the returns should belong to you.

So, on this basis, we can look at the value of any protocol/project's Token:

• Does the Token profoundly influence the distribution of means of production?
• Does the Token profoundly influence the distribution of returns obtained from the means of production?

Sources of Token Price/Value

The two points I mentioned above ultimately determine the on-chain value of a project/protocol. Below, I have divided the price performance of Tokens (using price rather than value) into three components:

• On-chain - The economic design and incentive design of the Token
• Off-chain - Information such as the track, team, etc. (e.g., the reliability of the team)
• Market sentiment - The factor that has the greatest impact on price in the short term

On-chain Status

On-chain status includes what is commonly referred to as Token economics model design. We can actually categorize a large number of voting governance mechanisms that determine key project parameters into the logic of means of production distribution, while the protocol's dividends or buybacks and burns belong to the distribution mechanism of returns generated from the means of production. These two points together constitute the most important part of the Token economics model, and these mechanisms ultimately form the fundamental on-chain data of a mature project.

Specific voting may include the following aspects:

• Control of the protocol - Determining the core parameters of the protocol
• Control of the protocol - Determining the deployment direction of the protocol
• Control of protocol assets - The right to dispose of the assets owned by the protocol

For example, in GameFi/DAO organizational protocols, how NFT assets and so-called national treasury storage assets are used are generally decided through voting. These all belong to a protocol's means of production distribution method. For instance, Uniswap has a large amount of Uni belonging to the national treasury, and decisions regarding key data such as lending collateral liquidation in Maker, and assets belonging to the Ribbon protocol, etc.

Means of production should be the most important element, but in reality, the impact of means of production on Token prices in the medium to short term is often quite limited. More importantly, the decisions regarding these means of production generally have very limited impact on ordinary users, leading many ordinary users to not care about these voting decisions at all. Another reason why governance voting does not seem to have much impact on Token prices is that many projects are still in their early stages, and these projects essentially have nothing significant to decide. To make the community feel that the Token has value, they can only forcibly empower the Token, making users feel that holding the Token can truly influence the future development of the protocol, and that the Token is indeed valuable. However, in reality, the future development of the protocol may not even be clear to the project team, so how could it be entrusted to the users?

In addition to empowering Tokens through governance derived from means of production, the distribution of returns generated from means of production seems to be a more practical and feasible option. Generally speaking, mature and successful protocols will have cash flow income from Tokens; if not, they will claim that they will have it in the future (in more cases). Users participating in the friction generated on the protocol or the protocol's own earnings are the sources of these funds. Projects generally adopt:

• Buybacks/burns
• "Real" reduction of the circulating supply of project Tokens
• Dividends
• Earning returns by holding

Currently, mainstream projects will also combine the two, locking Token liquidity to gain rights to protocol dividends, while the protocol's income will also be used to buy back project Tokens. Typical projects include CRV, SUSHI, and ALPHA. CRV allows users to earn protocol returns by locking CRV, while also enhancing the returns from providing liquidity to Curve. SUSHI, when locked, provides xSUSHI, which represents the right to claim platform earnings. ALPHA works similarly, where locking yields xALPHA, which has the right to dividends from protocol earnings and also benefits from other business activities like Alpha Launchpad.

This approach is currently very feasible and has proven effective. However, almost all projects mimic these practices, and many times simply copying does not work because:

• Where do the repurchased Tokens come from? If they were never in circulation, then the buyback is meaningless.
• The earned returns are often given to users in the form of Tokens - a case of drinking poison to quench thirst.

Since we are on this topic, let me elaborate on why many previously so-called DeFi blue-chip projects are now lifeless, with Uniswap being a typical representative. Uniswap actually has no mechanisms for buybacks, dividends, etc. The reason for the absence of these mechanisms may be more related to regulatory risks. Once buybacks or dividends are involved, they may fall under the category of securities. The decline of these DeFi blue chips, or "classical DeFi," is largely due to the waning market enthusiasm. Everyone's understanding of these projects is basically clear; if there are no particularly clear and significant holding returns, many users are reluctant to continue holding, especially since holding implies opportunity cost. The pace of change in this circle is so fast, with so many opportunities outside, why tie up funds in projects that are no longer appealing?

This leads to the next point: at this stage, market sentiment has the greatest impact on asset prices. However, if a project has stable revenue and can slightly empower the Token, the story will eventually return; it's just a matter of time.

Another reason is that classical DeFi projects emphasize TVL, the value locked in protocols, or the ratio of locked value to market capitalization. Locking is actually a very vague concept and sometimes cannot accurately reflect the value contained in a protocol:

• Locked assets may include a large amount contributed by investors
• Locked assets may include a lot of illiquid assets, such as the protocol's own Tokens

The ratio of locked value to market capitalization essentially reflects the utilization rate of funds. It is difficult to compare different protocols, so this ratio does not hold up under scrutiny. With the same amount of funds, the revenue of exchanges is certainly much better than that of wallets/DeFi protocols. In exchanges, the funds are primarily managed by the exchange, and all user actions must flow/trade these funds through the exchange's services; any friction generates income for the exchange.

However, for wallets, especially decentralized wallets, users interact with assets more with other protocols, and there is not much interaction with the wallet itself. Therefore, the friction/flow generated by such interactions primarily benefits ETH miners (transaction fees) and various protocols.

Let me add that the future role of wallets as intermediaries is crucial. Moreover, the direction must be to increase user asset interaction with the wallet itself, consolidating users' asset friction trading behaviors internally, which will enhance the value of individual users and increase revenue. One of the most promising business directions in this regard may be the recommendation business that was very popular in Web 2.0. Imagine going to a bank app to buy financial products; do you look at each product one by one, or do you directly buy the products recommended by others?

Off-chain Status

This part of the value is actually the hardest for ordinary users to capture. The core reason lies in the lack of transparency of information. This information includes the project team, future development plans, team status, work patterns, processes, efficiency, etc.

These contents are generally reflected during the early investment (private placement) stage and are often communicated through informal discussions. Investors pay close attention to these messages.

An excellent team can often determine the lower limit of a protocol's value. When the market is poor or the project encounters problems, the differences in teams often determine the different fates of investors and projects.

Of course, in the public market, appropriate marketing of this basic information can also enhance ordinary users' understanding and confidence in the project.

Market Sentiment

Acknowledging that market sentiment has the greatest impact on Token prices is both a painful and exciting realization.

The painful aspect is that if market sentiment is the biggest driving force, it means that cryptocurrencies lack fundamental value or do not rely on fundamentals at all. Politely put, it's called market sentiment; bluntly speaking, it's essentially "bubbles" + "price manipulation."

Looking back at when DeFi first gained traction, articles in the market touted DeFi as Lego, more efficient than traditional finance, and blue chips with unlimited potential. Then dYdX began to claim that decentralized derivatives were a huge market, even the future of the industry. MEME needs no mention, a captivating and crazy phenomenon. Then came NFTs, Loot, fragmentation, SocialFi, DAOs, Web3.

The exciting aspect is that since storytelling is still essential, either this industry is entirely a scam, or it is genuinely in a very early stage. Whether or not it is a scam is subjective, but if you are reading this text, you likely do not think this is a scam industry. The remaining possibility is what makes it exciting.

Final Thoughts

A few days ago, Tencent reported on two programmers, and to some extent, I can partially relate to that mindset. Each of us, most of us, are ordinary people who must face a reality: we can only live a mundane, unremarkable life without much meaning. Just like "in the long run, we all die," realizing this, work and life ultimately revolve around that bit of sustenance, and the material pleasures most people pursue today— is it worth it? Is there anything truly meaningful to dedicate oneself to?

Most young people may not only be psychologically in a state of "lying flat," but they are also in a physically "lying flat" state. Speaking of this, I actually think of those so-called "big dreams" ideas; I have never thought there is anything wrong with "drawing big cakes."

Why should we respect a person with ideals and ambitions, but when a company has ideals and ambitions, it is seen as deceptive, a means to exploit employees?

If possible, which young person does not dream of changing the world?

A person must believe in something. I love this industry, like many others who love it, because it is new enough, open enough, and offers enough opportunities to do what you love. Laziness may not be an excuse for not achieving anything in many industries, but in the Crypto industry, although luck plays a larger role, laziness is likely to become an excuse for poor performance, and this applies to both individuals and companies.

I have digressed a bit. It is indeed challenging to clarify the economics of Tokens; I have just shared my thoughts as they came to mind.