What Makes a Cryptocurrency Token Valuable?

Besides price increases from exuberant market conditions, what makes a token valuable? This may be important for considering what you own and how to classify the asset. The reasons vary depending on the asset, but there’s a common thread that’s fairly typical across most crypto assets. Currently three things make most of our token investments intrinsically valuable. 

Policy (“Governance”)

Arguably the most valuable thing about a token is its pro-rata voting right, since most protocols use token-weighted voting to coordinate, finalize, and sometimes even execute decisions about the protocol itself. There’s often an on-chain treasury with funds that can be spent by voting on a proposal. In future, the voters in a network may elect to change the protocol to enable new ways of capturing the value that the protocol generates, such as adjusting the transaction cost or taking a share of the network’s economic activity. 

New Issuance (“Inflation”)

The next most valuable thing is that when staked, your ownership of the network increases relative to those who are not staking. Many people call this “inflation,” though we consider this to be a misnomer. Based on the protocol’s policy (often dictated by governance), as the token supply increases, the treasury and stakers receive all of the new tokens.

Network Activity (“Fees”)

Finally, your staked tokens enable you to capture value from transactions on the network. Typically a transaction fee is based upon operating capacity–the ability and incentive for a validator to prioritize and include bundles of transactions in a single new block. This is currently the least valuable trait, since most networks have very low volumes of activity when compared with those of Ethereum, Uniswap, Binance Smart Chain, Sushiswap, Aave, Bitcoin, and Compound (see here). However, these protocols are intended to have vast volumes of future transactional activity that will ideally outpace the value captured from new issuance. Some protocols are enabling stakers to capture a portion of the financial activity instead of just the operational costs.

It’s worth noting that the term “staking” tends to be used liberally to mean “getting paid to lock your tokens” in order to create market scarcity and reduce market velocity. Figment thinks of staking relative to its origins in Proof of Stake (PoS), in which the asset is a security bond for the right to help run the network and to do work for the network. Many networks enable stake to be delegated so that a token-holder can back a staking node, like a validator or worker node. Staking often gives the token-holder the right to vote on policies and to capture value from the network.

There are many exceptions to the above (like Ethereum’s non-token-based governance), but this is a good mental model for evaluating the purpose of a token in a network protocol.

While the current value capture opportunities for tokens are notoriously difficult to evaluate, the bet here is that 1) token holders own the network, 2) the network will become much more valuable and over time will be able to retain its value, and 3) there will be a clear path for token-holders to sustainably capture a relatively predictable amount of value from the network.

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