To answer the broad question you make we created an specific document that discuss the POKT token and its relation to money. Yo can find the document here:
Some speculations about the POKT token
Before getting into the article and document analysis we will briefly address the question regarding the velocity of the money.
The Pocket Network abused the seigniorage mechanism (minting out of nothing), which lead to a loss of confidence in the token and the increase in the speed due to the excess of token offer. Due to this, it stopped working as a reserve of value.
If we don’t do anything, then it is true that POKT cannot be money because it is not a store of value. However, we can control this, we have the theory of money to do it and the tools to implement the solutions (as we describe in several threads). The first and most efficient, is to stop using seigniorage as a source of founding the ecosystem, which is already being done.
If we analyze this, its clear that the velocity problem will exist regardless the definition of the POKT token.
Now, back to the main article and the provided document. The cited article is based on the foundational principles behind capital. So we will start by making some comments on this foundational article.
Foundational Principles Behind Capital
In his 2019 article, Joel Monegro begins by stating that:
All forms of capital offer some kind of control over the distribution of economic resources across a group of people – in effect, governance over that pool of resources.
And he adds:
This insight, that capital is governance (and vice versa) leads to the source of its intrinsic value. Whoever has control over a pool of important resources also has the potential to direct some of those resources to their own benefit. So the value of a system’s capital is proportional to the value of the resources it governs.
We seriously believe that it is a major mistake to confuse the rights held by the owner of
capital with the governance of capital.
We believe that whoever owned the rights to the capital decided how to use it may have been
true in the mid-nineteenth century, when the owner of the factory was the one who ran the
factory (the one who made the decisions). With the emergence of super-specialized management, the managers of the companies (the ones making decisions) rarely know the owners of these. This means, that whoever owns the capital hardly governs an organization, and whoever governs it is rare to be the owner of the capital. Some people study for many years to get to run an organization, although they may never be owners of that organization.
Let’s be extremely severe, let’s say that a person owns a hospital. Does anyone imagine that the owner of that hospital would think of making any governance decision about the hospital? Or does anyone think that the owner of the hospital is not a capital holder because he does not decide how to manage the organization he owns?
In another section of the text Monegro points out that:
Certain proof-of-stake systems are good examples of this idea. Here, miners are required to lock a certain amount of tokens in order to be allowed the right to work for the network. The value which flows from users to the supply side is then distributed to miners proportionally to their stake. This way, tokens that can be staked are a form of capital in that they represent the power to organize some of the economic resources of the network, such as production capacity and distribution of income. And ultimately this is a form of governance, in the sense that staking is a mechanism for deciding how income should be allocated across miners. And so, as the value of that income grows with user demand, so does the value of stakeable tokens.
We do not agree that the power to organize some economic resources is synonymous with
value, rather we believe that the value is in the efficiency of an organization.
It is obvious to us that it is important to establish what portion of the cake will be given to each
member of the organization.
If the cake is small, even if we keep seven portions out of eight, we will go hungry. On the other hand, if the cake is huge, with a a small part of it we will surely be satisfied.
We insist that the value of a capital is not in the ability to distribute the resources at will, but in the efficiency with which those resources are applied, beyond how they were managed and distributed.
These objections to the foundational article in which Chris Burniske from (placeholder.vc) bases his article are crucial, as any conclusion based on a false premise is not valid, even when such conclusion might appear to be correct.
Value Capture and Quantification: Cryptocapital vs Cryptocommodities
The article makes a distinction between two broad categories of cryptoassets, namely those that may resemble capital and those that may resemble commodities, while we find the distinction interesting, we believe that for the case of POKT the relevant question is whether a given token can be thought of as money or not, and we do not believe that this depends on whether it is a capital asset or a commodity, it depends on a much deeper concept which is,
what is money?.
To go deeper into this subject we suggest to refer to the linked document at the beginning of this post.
The article states:
The TLDR is that cryptocapital will take inspiration from its capital asset peers, and as a productive asset its value will be calculated as the net present value (NPV) of annual value flows to supply-siders. …
We do not believe that NPV is a good model for valuing assets per se beyond whether those assets are digital or not. What we do believe is that NPV can be a good idea for valuing investment projects, to some the difference may seem subtle, but to us it seems foundational.
Different investment projects, based on the same cryptoasset can generate different present values of expected future cash flows, and the value of the cryptoasset will not be determined by the NPV of one project or another, but will be determined by the laws of supply and demand of the market.
We can agree that those projects related to cryptoassets that are not called money and that
have an expected future cash flow, can be valued quite accurately by the present value of the
expected future cash flow, and perhaps this will help us to value cryptoassets with which it is
possible to assign only one investment project. However POKT its a token associated with a number of possible investments:
- Servicing relays (node-runnning)
- Securing the network (Validators)
- Selling relays (Gateways)
- Monitoring the network QoS (Watchers/ a.k.a Fishermen)
This rises the question, which is the investment that we will use to evaluate the POKT token?
Besides the particularity of POKT, the criticisms to this are the usual: how to know what probability of occurrence to attribute to each cash flow? What cost of capital will each company have? Because if two organizations have different costs of capital, even for the same project, and discount the expected cash flows at different rates, it is clear that they will have different present values.
But still, we believe that under certain circumstances, and for cryptoasset-based projects that are not called money, and have expected future cash flows, the expected NPV model can be a good idea for valuing those projects.
The article continues:
… Meanwhile, the equation of exchange (MV = PQ) remains our best bet at pricing non-productive cryptocommodities, where PQ = annual transaction volumes using the native asset. Note that “annual value flows to supply-siders” and “transaction volumes” are separate metrics, and serve as the respective linchpin metrics for cryptocapital and cryptocommodities.
We humbly believe that the article makes the mistake of confusing the general price level with the price of money (the price of POKT, or the token we are talking about) thinking that the quantitative equation of money describes its price.
For those that are not familiar, the quantitative equation of money is the following:
M. V = p Q
The equation describes the preference for liquidity, and not the price of a currency. The equilibrium conditions of an economy, such as those governing the POKT ecosystem, will occur when production, exports and the quantity of money are in equilibrium.
The other discrepancy we have with the previous work is that we are looking at the functions of the cryptoasset, in our case POKT. If the cryptoasset fulfills the functions of money, it should be called money, and should be treated as such. This means, seeking the macroeconomic equilibrium of the ecosystem where the cryptoasset functions, and this goes beyond the nature of the cryptoasset, whether it is a utility token, a commodity, a governance token, or a store of value. Again, if the token fulfills the functions of money, it should be considered money and studied as such.
To go deeper into these concepts, we suggest to refer to the other work that studies how to develop POKT considering it as money (linked article).
Regardless of whether a cryptoasset is more similar to a commodity, a consumable/transformable, a capital asset or a simple store of value, the ability to become money will be determined by how many the members of the community believe that this asset will continue to be money.
As stated in the article:
Converging on consensus models to value cryptoassets is essential to improving the efficiency and thereby stabilizing the volatility of the crypto markets.
We agree on the fact that converging on consensus models to value cryptoassets is essential to improve efficiency and thus stabilize the volatility of cryptocurrency markets. But we want to make it clear that the price volatility of non-cash cryptoassets, well developed (i.e. with a dynamic and frictionless options market) is going to be better modeled by the developments of
Black, Scholes and Merton (Robert C. Merton 1973) and their successors. Also, for cryptoassets that can be called money, the volatility of the exchange rate is going to be fundamentally governed by the expectations that this currency generates.
Regarding the superclasses of digital assets, it is certain that it seems to us a very interesting classification, but we want to make it clear that we are focused on studying whether or not POKT is a cryptoasset that can be called money or not.
The article poses then:
Most physical commodities have marginal costs of production that fall as the system scales in its ability to extract it, because as more capital is invested in the process of production, economies of scale are achieved and incrementally more units are produced. Bitcoin and its proof-of-work peers have marginal costs of production that rise as more people work to “mine it,” because while more resources are contributed to mining, the rate of supply production of new BTC stays fixed.
It is strange to raise the issue of diminishing marginal costs, because since Adam Smith’s time (16th century) it is considered that the existence of diminishing returns may seem logical if we think about it from the following point of view: just because there are more workers in a construction site, the work is not necessarily done faster and more efficiently.
There may come a point in which so many people working in the same space may get in the way of each other due to lack of space and not perform their tasks correctly. A greater number of workers will cause the level of production to decrease for each unit of worker employed. In this case the marginal increase in production is negative.
The same thing happens by increasing the capital factor. For example, imagine the reader that only one person works in an orchard. The work he has to do to produce is enormous. If he buys a tractor he will be able to perform his tasks much better. But if he buys another tractor it will be of no use to him since he cannot drive both at the same time. Just as the first tractor caused production to increase, the second tractor did not, i.e. the marginal yield was zero when the second tractor was added. Let’s imagine that he is given 10 more tractors. Because he will have to use part of his orchard to park them, production will be reduced, with the marginal yield decreasing for each tractor added.
It is also important to add to this point that Pocket Network and Bitcoin are two completely different animals. Bitcoin does not need increasing hashrate to grow (as the farmer did not need so many tractors) it only needs to make sure that a given hashrate relates to effort (and resources) in the real world. Bitcoins marginal production cost rise with added “miners” is a design choice, used to keep block rate constant in time. The difficulty of Bitcoin is modulated by the hash-mining power of the network, but it does not care on the absolute value of its hashrate.
On the other hand, Pocket Network does need to increase its relay-rate to grow. More relays means more network usage and that translates to token usability (and healthy economy).
Thinking that Pocket needs to follow Bitcoin’s path and create a diminishing gain for node runners (or increasing the marginal cost) as the relay-rate grows is to join two completely different concepts. Bitcoin and other Proof of Work network relies on hash-mining which is a different (and maybe opposite concept) to relay-mining. Hence thinking of POKT as a simple cryptocomodity (like Bitcoin) is not accurate.
In general it seems to us that with respect to cryptoassets that are store of value, the article poses is very focused on stocks. We believe that while stocks are a fundamental part of the valuation of an entire cryptoasset, we believe that in the case of those that can be called money, it is necessary to look at a few more things…