A Powerful Tool for Valuing Tokens and Cryptoassets

Blockchains, with their tokens and cryptoassets, are micro-economies.

What’s cool about that is it’s possible to analyze these micro-economies to determine the value of a given token or cryptoasset today and in the future.

Several people in the blockchain universe with financial analysis backgrounds and skills are building early frameworks to value these tokens and opensourcing them.

And startups, or established businesses that want to add a token to their business model, such as a project called PROPS from YouNow to decentralize video applications, are using these early frameworks to figure out the right economic model for their particular token offering.

Things are moving fast.

My interest is to use and contribute to these valuation frameworks to invest in blockchain-driven businesses and social initiatives. I’m also interested in taking the complexity out of these frameworks, moving the complexity to the background, so that more and more people can participate in these micro-economies.

Fundamentally, blockchain applications and their tokens are for everyone. They’re digital communities with digital money and, most importantly, a level playing field. They thrive on network effects, smart governance, and the principle that anyone can participate and therefore value is distributed among all participants.

You may or may not care about blockchain technology and its micro-economics, thinking it’s boring, arcane, or over your head.

But what I’m pretty sure you do care about is having more options, more wealth, and more freedom for yourself and the people you care about. That’s what this blockchain and cryptomoney thing is all about.

In order to participate in these micro-economies we need a framework, a valuation framework, to guide us. And it’s emerging right now.

A conceptual framework is like a map. It’s a frame of reference that defines the most important things in a system so you can evaluate and achieve a desired outcome. Specifically, a valuation framework, and the mathematical model that emerges from it, is a way to value an asset relative to the other components in the system.

What does a valuation framework for blockchain tokens and cryptoassets looks like?

Chris Burniske of Placeholder Capital, one pioneer of this type of framework, starts with the premise that each blockchain project, given its relatively closed economy, can be valued, as a starting point, with what’s called the equation of exchange.

The equation of exchange looks at the relationship of four factors in an economy.

The four factors are an economy’s money supply (M), the frequency with which a unit of that money is spent in a period of time, which is referred to as velocity (V), the average price (P) of the products and services in that economy, and, finally, the quantity (Q) of transactions.

The idea is that these four factors, given how one influences another, can serve as the skeletal framework for valuing a blockchain based micro-economy.

The equation of exchange is written this way:


If that’s true – if MV=PQ is in fact a good way to value a blockchain’s token economy and individual tokens – the exercise one needs to go through is to determine the values for each variable, what the “M” monetary supply is, what the “V” velocity of the money is, and so on. In many cases, you need to make assumptions about what’s driving the calculation (e.g., what the “P” price will be for an available resource) for each variable.

Taking advantage of the equation of exchange is not a trivial exercise. And it’s not the only aspect of a valuation framework. It’s the core. But the point is that using a valuation framework is very doable and it’s well worth the effort. It’s a very powerful tool.

“Quality inputs, quality outputs” is what it comes down to. Let’s take advantage of the equation of exchange, and a broader valuation framework, to identify, use, and support the best blockchain projects and communities out there.

Everyone Gets To Partcipate In the Token Economy

What’s amazing about the Blockchain is that it’s recreating money.

It’s not just helping transition money from the physical to the digital world. It’s turning money into tokens.

Tokens are a superior form of money.

Tokens are programmable, divisible, and shareable.

You can use a token to request support for something you want to do, and if that something is perceived as worthwhile, you’ll get support from people who

  • Want to go all-in on what you’re creating
  • Don’t understand (or specificially care about) what you’re creating but want to bet on you
  • See the crowd is “voting up” what you’re creating and follow along
  • Contribute for purely speculative or uninformed reasons

What’s remarkable is that for the first time anyone can request support through a token for something they want to create and theoretically anyone can participate. I’m not talking about all the scamming that’s going on with ICOs, I’m talking about something more basic.

Yes, we had crowdfunding and kickstarting before the Blockchain and its tokens came on the scene, but this is next level because of the way the Blockchain is engineered and a token is designed with code, math, and some unique intention.

Tokens are the easiest and coolest way to exchange value among all 7.4 billion people on the planet. So eveyone can, and eventually will, participate in the token economy.

The token economy will create more value for all of us, and more quickly, than anything we’ve seen up to this point.

Blockchains and Tokens In A Sentence 

It’s a little strange that the blockchain, and its tokens, aren’t actually that complex, and yet they can seem that way.

If you’re not careful you can veer off into an area like “mining” that leaves the person you’re talking to confused. It’s true blockchains have a lot of dimensions and depth.

But here’s why they’re simple: Think about the idea of a blockchain apart from any technology.

Imagine a big sheet of paper that magically records the details of two or more people exchanging money (e.g., Cameron sends Andre thirty cents).This magic paper knows the identity of each person.

This sheet of paper is also magically owned, and kept, by lots and lots of people and therefore no one can own it. And it allows anyone to see details about the money that’s been exchanged.

So this big piece of paper magically records the exchange of money between people it can identify, the full record is freely distributed to many, many people, and it’s transparent to all. And because the blockchain system is built this way, it’s highly secure.

A token (or cryptocurrency) is special money used for the blockchain, which is exchanged in this secure and open way. In fact, any type of asset, truly anything of value, can be exchanged on the blockchain using a token.

So in a sentence:

The blockchain is an ownerless, transparent, and highly secure way to exchange and record value.

Laura Shin’s recent podcast on “How To Explain Cryptocurrencies and Blockchains” with Jamie Smith and Amanda Gutterman is a great way to explore why blockchains and cryptocurrencies are inherently simple. Highly recommended.

(Photo: source)

Is There a Blockchain App With 10 Million Users?

The blockchain is out there waiting to be used.

But how can you use it to, as the Ecomonist said in 2015, as “a way of making and preserving truths“? I like that definition.

The blockchain potentially offers something radically new because of its inherent ability to make and preserve truth between us at scale.

How do we use it, though? What’s stopping millions of people from using it right now?

Fred Ehrsam gave one very good reason why in April this year, which is the blockchain needs the right elements, or stack, to support the development of the applications that people can use.

His list of elements in this developer stack are computation, file storage, external data, monetization, and payments. He scored these elements in that post and concluded the stack was 20% ready in 2014 and 70% ready in April 2017.

Fred followed-up that post with a more detailed one on June 2017. His feeling is that the blockchain, specifically Ethereum, which is furthest along, is still “orders of magnitude  off from being able to support applications with millions of users”.

Yet, there is significant progress on scaling Ethereum, in his view, and we might see an app with up to 10 million users by the end of 2018.

One thing that will surely help this happen is the token aspect of the blockchain. Tokens mean incentives for eveyone.

Fred and Chris Dixon talk about why crypto tokens matter on a a16z podcast.

(Photo source.)