Cryptocurrency: Value-making coins vs value-giving coins
Is there an actual reason to use a cryptocurrency or is it just a monetary policy sandbox?
How much is money worth, and why?
These questions were prominently on show at the recent Voice of Blockchain conference, with bitcoin developer Jimmy Song and Nano founder Colin LaMahieu enthusiastically sparring over them and putting forward very different answers.
Song emphatically argued in favour of the value-making model used by bitcoin and gold, while LaMahieu argued for Nano's value-giving model being more reminiscent of a kind of decentralised fiat currency.
For someone wondering which cryptocurrency horse to back from a purely economic point, it might be worth examining their arguments in line with lessons from gold, silver and fiat value.
The value of a unit of value
Based on what Song and LaMahieu said on the panel, the following table might be filled out like so.
|How much it's worth||Why?||Result|
|Gold doubloons||The value of the gold used in its creation – plus any applicable historical value||The scarcity and difficulty of acquiring gold, and its wide acceptance in any form||Value-making. Doubloons are imbued with the value of gold|
|Bitcoin||Its free-market value based on supply and demand||Scarcity, plus being difficult and expensive to produce||Value-making. Bitcoin is imbued with the value of its blockchain and the cost of energy used in its creation|
|Fiat currency||Its purchasing power||"Because men with guns say so"||A value-giving store of value. It finds value through wide acceptance, convenience and stability|
|Nano||Its free-market value based on supply and demand||Scarcity, plus practicality as a payment method||A value-giving store of value. It finds value and wide acceptance by being quick and free to use|
As the thinking around gold went, no matter what happened, gold in any form could always be melted down, assembled or divided into a more convenient form such as gold bars or the coin of the day without any discernible loss of total value. It also helps that gold is also easy on the eyes, malleable and reassuringly dense.
A gold coin's value as a currency was entirely dependent on the gold, not anything else. When a gold coin was minted, no new value was created. Rather, it just turned the existing value into a more useful form where the purity and quantity of the gold involved could be determined at a glance rather than needing to be tested and measured every time someone wanted to buy something.
The inherent value of gold was supported by the difficulty of acquiring it, which drove the coin's value as a currency. It was fantastically impractical, but for the most part exceptionally reliable.
Bitcoin aims to drive value in the same way by simultaneously imposing a steep cost on the creation of new coins and by leaning on the inherent value of the bitcoin blockchain as a decentralised global immutability machine.
As with gold, this system is inherently impractical but has so far been exceptionally reliable relative to other less-tested cryptocurrencies. And as with other scarce commodities, including gold, one theoretical price floor is the cost of creating or mining it. The more difficult this is, the higher the inherent value of an asset might be.
Bitcoin puts value first and foremost by making bitcoin difficult and expensive to produce. This creation of value in turn drives its usefulness as a currency by making it more desirable and more widely accepted as well as by attracting a bigger community to develop various wallets, side-chains, off-chain scaling solutions and other infrastructure.
This kind of gold-like approach is no coincidence. The bitcoin whitepaper (PDF) explicitly says, "the steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation." The bitcoin genesis block hash specifically includes the message, "The times 03/Jan/2009 Chancellor on brink of second bailout for banks" in a clear reference to the classic libertarian concerns around fiat mismanagement which typically accompany calls for a return to the gold standard.
And more pragmatically, when you're attempting an unprecedented re-invention of money from the ground up, it makes sense to go with the tried and tested method of creating a value-making currency.
By contrast, Nano, and to a certain extent fiat currencies, aim to start with useability and widespread acceptance and then count on that functionality to drive value. It does this by shooting for near-instant, zero-fee global transactions to create a genuinely attractive value proposition for merchants. By getting merchants to accept Nano, LaMahieu says, the currency grows inherent value.
The most important element of money, LaMahieu says, "is will someone accept my currency?"
He goes on to say that the reason bitcoin is struggling with adoption as an actual currency, and will always continue to struggle, is largely because it can't offer a good value proposition for merchants. A good cryptocurrency is a good payment system, he argues, rather than just a good currency.
He describes bitcoin as a system where merchants and customers lose money to the gold miners, rather than one which everyone can actually use, and as a fundamentally weak value proposition as an actual currency.
Despite the long history of gold and the success of value-making currencies, value-giving currencies might have stronger economic chops, going right to the heart of supply and demand.
"Does somebody want to use your bitcoins?" LaMahieu asked. "That's what gives it value. It doesn't matter how much energy you spent to produce them."
Which will succeed in the end?
On paper, value-giving coins like Nano have a clear advantage over value-making ones like bitcoin. There's a reason society migrated from the gold standard to fiat currency, and its objective superiority as a payment system gives it a value proposition that bitcoin can't match.
The bad news for bitcoin and other value-making proof-of-work cryptocurrencies is that they're inconvenient, inefficient and all-around impractical as well as environmentally and ethically hazardous. The good news is that it doesn't matter.
A bet on bitcoin is a bet on lustre and greed beating prudence and practicality, and that might be one of the safest bets there is. Just look at gold and silver.
Gold vs Silver
Hundreds of years ago it was common to tether gold and silver prices to each other for currency management, often at about 15:1. But now, market forces have pushed the price ratio to over 80:1. In other words, pound for pound, gold is more than 80 times as valuable as silver.
But about half the global demand for gold is for purely cosmetic nonsense while the other half is for pure money-related nonsense. Real practical applications are very much the minority.
By contrast, the vast majority of global demand for silver is for industrial applications, and there's still much more demand for silver from the coin and bar industry, the jewellery industry and in electronics than there is for gold.
Note regarding the numbers: The previous silver link uses millions of ounces, while the above gold chart uses metric tons. 1 million ounces is about 28 metric tons. The gist is that by weight there's many times more demand for silver than gold, both overall and in any given industry.
Part of this is a response to the higher silver supply – each year about 8.1 times more silver than gold is mined – and the sheer heaviness of gold which throws off measurements by weight. But even those don't come close to explaining the premium value still placed on gold long after it has stopped being used as a currency or for many practical applications.
Pound for pound, gold is over 80 times more expensive than silver, and the vast majority of that value comes from pointless gold fetishism and an impractical yet effective reliance on it as a driver of value. There's no reason why bitcoin can't share the same sickness.
Bitcoin may have been initially conceived as a gold standard-esque type of peer-to-peer digital cash before its inherent limitations saw the goalposts shift to bitcoin being a digital store of value, rather than an actual payment system. In the meantime, alternative cryptocurrencies are emerging to fill the niche left by bitcoin's vacancy. As a pure cash-type crypto with zero fees and near-instant transactions, Nano is arguably in the best place to fill its intended shoes.
In a way, this development is broadly similar to the original evolution of money, starting with value-making tokens and then moving to value-giving coins, with both coinciding along the way.
If there's one takeaway from drawing parallels to gold, it's that sensibility and sustainability have nothing to do with anything. Humans have always been willing to devastate the planet for money, and thanks to bitcoin, we're now able to do so more effectively than ever before. Even the most catastrophic downsides are no reason to expect bitcoin to fail.
If there are two takeaways, it's that looking at cryptocurrencies from the angle of value-making vs value-giving coins can help highlight the differences between similar-on-the-surface cryptocurrencies and some of the factors that really drive each currency's value.
If there are three takeaways, it's that crypto town probably isn't big enough for any value-making currencies other than bitcoin. Desirability is the more important element and despite, or perhaps because of, all its flaws, nothing can match bitcoin. If other currencies want to succeed, they need to be driving real value to users with real functions and features beyond monetary massages.
By themselves, staking dividends, ASIC-resistance, deflationary elements, loyal communities and other value-making features just aren't enough to go anywhere. Cryptocurrencies need to be giving value too. Bitcoin might be the only exception, but that's the exception not the rule.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.