The Big Long – Contrary to Popular Belief, Digital Assets Do Have Intrinsic Value: Part 2 –Equities – 02/20/18

in #cryptocurrency4 years ago (edited)

In Part 1, I made the case that blockchain-based tokens have properties and characteristics consistent with physical commodities. In this post, I will make the case that some chains also take on the properties and characteristics of equities.

I have spoken before about the differences between Proof of Work (POW) and Proof of Stake (POS). POW chain tokens generally only manifest as commodities. In POW systems energy, hardware, and human resources are expended to generate new tokens and introduce them into circulation. This is similar to gold and silver, in which machines and human resources are used to extract precious metals out of the ground and introduce them into circulation. Oil, natural gas, copper, tin, zinc, rubber, ect. – all follow a similar path to bring these products to market. Token owners do not participate in this revenue stream or governance process, so the concept of equity generally does not apply in POW systems.

However, in POS-based systems, the native tokens take on the properties of both commodity and equity. They exhibit the characteristics of commodities because they have specific use cases such as fuel for anchoring and solidifying digital identities or as a written-in-stone application to provide document authenticity for a legal contract, among other more financial use cases. Traditional equities do not have use cases other than as ownership in a company.

Most POS-based systems are engineered to allow owners of the native token to ‘stake’ their tokens and earn a fraction of the transaction fees that are generated when the network is used. In some cases, inflationary rewards are also generated and distributed. Many different varieties of POS exist but the latest versions of POS (some of which aren’t live yet) require bonded staking in which stakeholders send their tokens to a smart contract that requires the tokens to be held for a certain period of time (4 months, 6 months, ect.) in order to earn the expected reward from transactions fees and inflation. Inflation is necessary in some cases to distribute coins into circulation and some chains have built-in mechanisms to pay for ongoing operation and maintenance of the chain through inflation. This bonded staking lends these networks to also have functions similar to traditional bond markets.

Next, on-chain governance is usually built in to POS systems in some way, allowing token-holders to vote on changes to the rules and policies of the system. In the case of delegated proof of stake (DPOS), stakeholders vote on a select number of individual node operators to manage the chain, which is very similar to voting on a board of directors in corporate governance. Either directly or indirectly through elected delegates, stakeholders vote in POS systems to manage the ongoing operation of the chain. This corporate-style governance gave way to the concept of a Decentralized Autonomous Corporation (DAC), the idea of which was born around 2013.

Native tokens in POS-based chains are perhaps an entire new breed of asset class that takes on the characteristics of commodities, equities, and, to a certain extent, bonds. I have previously made the case that POS chains are superior, or potentially superior, to POW chains. First and foremost, POS chains need to be at least as secure or more secure than POW chains, especially longer term. If this is achieved, then this hybrid commodity/equity component could be what makes the native tokens of POS chains some of the best investments of the next decade and beyond.

Disclaimer: None of this is advice of any kind