As the crypto market matures, what will be the reason for premium for blockspace in like chains?
This is a question often unasked by crypto speculators, but one of the most important questions one should ask when thinking about the long-term valuation of these networks. Why do you employ a cryptocurrency network?
Let’s start with the idea that substitution allows for many implementations of chains w/ similar secuirty models to compete for market share within each niche of this new monetary world. Eric Voskuil says it best so I’ll quote, “There is nothing preventing the evolution of multiple similar coins. It is possible for these to exhibit nearly indistinguishable monetary properties, minimizing the substitution tradeoff. As shown in Consolidation Principle, there is always pressure toward a single money, as this eliminates the exchange cost. However this pressure is at odds with rising costs, and at some level of use must give way to substitution (or disuse).” https://github.com/libbitcoin/libbitcoin-system/wiki/Substitution-Principle
We have already witnessed this happen when Ethereum fees rose earlier this year. Projects in the “defi” world migrated to alt-chains that have similar functional capability, and in this specific case, most migrated to BSC.
If I can still do the same financial applications on BSC, why pay the high cost of using ETH? From a user’s perspective, what’s the value in paying a premium for blockspace on one chain from another?
This raises the more fundamental question of what applications actually need to be decentralized? What’s the relative value add over applications built on low-cost centralized databases run by private companies?
Decentralization is needed for protection of digital assets in cyberspace that are separate from traditional protection under political systems. It’s easy to see that bitcoin is a money that competes against politically secured monies as it allows individuals to ignore laws and operate regardless of what the political system mandates. This system therefore must be designed in a way to resist political pressure or it won’t work. The value in “defi” is similar in that it allows individuals to get around regulation in order to have access to capital, financial infastructure, and markets like they previously had been barred from. So that would lead most to ask the question that if it isn’t illegal in whatever jurisdiction users need the financial service, does it need to be decentralized?
Decentralization is expensive. Unlike the evolution of the internet and private companeis built on top of it, crypto actually scales in the opposite direction. It is far more efficient to run financial applications on centralized servers where the marginal cost of adding users is far less than the value they bring to the network. What makes centralized servers unappealing to some individuals is that they’re easy to regulate and control by the state, and the state can discriminate against people based on wealth, status, race, etc. Like with bitcoin, the reason you would want to do anything on-chain is because the government isn’t allowing the market to provide you with those services, or alternatively the cost of seeking on-chain security is cheaper than what the political system is charging. Most of the applications on Ethereum aren’t somehow changing the nature of how finance works, it’s just providing an alternative under a different medium. Crypto democratizes access to money and markets similarly to how the internet democratized access to information.
Now that we understand the value prop of using a crypto-currency over a financial institution within a political jurisdiction, what is going to attract a user into one chain over another? It’s important to think about this not from the perspective of new speculators, but from the perspective of actual users of these technologies.
Imagine a future in which applications are agnostic to the chain they settle on. These applications are optimized based on user preferences so that they can arbitrage between chains via atomic swaps in order to get the security they need at the lowest price.
It’s important to distinguish between the two distinct areas of value for the user:
- The value in that the application works and users are able to borrow or lend against their digital assets or, for example, create businesses w/ multi-signature wallets to establish business operating agreements that automatically execute on-chain w/o the need to use existing legal systems.
- Assurance that the contracts they enter into will hold over the long-term. In political systems you want to minimize uncertainty, so chains that have been tried and tested and have successfully thwarted government attacks will be trusted by the market over time.
Demand for protection of the asset and minimization of uncertainty = value of the network. Because many still are yet to understand the political risk of government breakdown, they don’t yet see the value in securing protection outside of government.
Demand for usability of these networks = value that will accrue to 2nd layer applications.
Far thinking evolution of political systems over time:
I think this evolution will naturally lead to the formation of merchant republics online where members provide protection over important trade routes or other aspects that were previously protected by local political systems.
People right now are arguing about how to provide “identity” to billions of people on a blockchain. But why do people even want identity provided by this system? What value does identity bring to the masses? It is unlikely this type of identity means anything over the long-term as identity is only valuable in closed political systems that permit access to their jurisdiction/services based upon the issuance of their ID certificate.
I bring up identity because I believe that it is inevitable that these merchant republics will issue their own private passports in order to provide protection to individuals who trade a portion of their individual economic contribution for protection. Individuals in a pseudonymous economy can be issued a private key by merchant republics on a public chain to identify themselves to allied regions/trading partners in order to travel between these jurisdictions freely while ensuring safety. ID doesn’t need to be based upon physical bodily characteristics, and likely won’t be in the future.
In this new world, where the anarchic relationship that currently exists between nation states now is felt by the massses of people as technological trends in diseconomies of scale break down large nation states into more abundant and smaller states, protection of property both digital and physical becomes a top priority in the minds of the public as violence on the smaller scale increases as the welfare state crumbles.
Cryptocurrency networks become more valuable as large governments and institutions are replaced by smaller firms and smaller governments because the demand for settlement increases. The reason for increased demand for monetary settlement is that competing companies and government’s don’t have a shared balance sheet and cannot trust one another.
The next topic of interest to me is in thinking about the value range proof-of-work chains can accomodate in a world of infinite competition?