Some time ago Mike Goldin published a Cryptosystems Manifesto.
In it he posits that:
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A token must work as a necessary element of a self-sustaining system which is a public utility.
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A token is a necessary element of a system if the use of any other in its place would damage the system’s normal functioning.
This can be summed up into a simple heuristic that can be used to determine if an SNT use case is strong.
“If we replace SNT with another token or remove all tokens from the design will it function as good or better?”
If the answer to the above is Yes, then it’s a weak use case at best.
While Mike was likely thinking about utility to users, from various research in the past year around token value accrual it leads to believe this heuristic will drive value accrual as well.
Medium of exchange
When utility cases are being designed often one of the first ideas to be thrown out is to use it as a medium of exchange in the form of requiring users to pay for things using it. Even before the proliferation of stablecoins the flaws with this approach have been articulated. If there are tokens with more market liquidity (ETH) or less volatility (DAI) then why should the token be used for payments? In most cases it should not.
Velocity problem
The reason often given for using the token for payments is it will drive value to the token. In reality if it does drive value, it will be in the weakest form and ephemeral. The intuition here is if SNT is $1, someone purchases SNT to buy a good or service and the price is now $2, they exchange it with a provider of good/service and then the provider exchanges it to whatever token they value most bringing the price back to $1.
The higher the velocity of token turnover the lower the value of the token all else the same. This can be expressed as: Marketcap = (Price X Quantity) / Velocity
Example: Using SNT as means of exchange in payment network
In a given year 1,000,000 payments are done at an average price of $1. The SNT being used in network turns over about 20x in a year. This gives a value contribution of $50,000 to the SNT marketcap ($1 X 1,000,000) / 20.
If the turnover is 50x, the value contribution goes down to $20,000.
100x = $10,000 and so on. As velocity approaches infinity value becomes $0.
Example: Using DAI as means of exchange in payment network
We will assume the payment volume will be the same as the example above although it would be reasonable to assume higher volume when users don’t need to deal with coin volatility.
If on each transaction there is a fee that goes to a vault controlled by SNT holders of 5%, at the end of the year there will be 50,000 DAI in the vault.
In the base case this adds a minimum of $50,000 in value to SNT, as the community can choose to liquidate the vault and distribute the funds to SNT holders. If the community chooses to direct those funds to projects that grow the network it’s value can be a multiple of the original $50,000.
Furthermore the parameters of the network have an economic impact on participants (the 5% fee) and being able to adjust those parameters using SNT drives economic value to it.
Going back to our heuristic of can we replace SNT here? Perhaps there is a way to have no token and still have the Status network decide how those changes are managed and funds directed, but it’s not obvious.
Can we replace SNT with ETH or another token like DAI? In doing so the direction of the vault and network parameters is now being decided by a different community which is perverse and would likely prioritize it’s own communities/networks over the Status Network.
Governance as the ultimate use case
From a utility standpoint, governance is the opposite of medium of exchange use cases because it becomes very hard to find a way to remove the token from the use case.
It is in discussions around how a cryptosystem and network will be governed, developed and upgraded that a viable SNT use case is likely to be found.
