Crypto tokens are productive assets
The cash flows of a protocol are eventually directed to its token holders
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As we’ve outlined before, the majority of the leading crypto protocols (blockchains and decentralised applications) function like marketplace businesses.
Let’s unpack what this means. 👇
How do crypto protocols work?
At a high-level:
They provide a service
Charge a fee for it, and
Distribute the fees between the stakeholders, i.e. supply-side participants and token holders
Even if a protocol initially operates without a revenue share ( = the supply-side participants get to keep 100% of the fees generated), it doesn’t mean that one couldn’t be activated once the service has grown defensible enough.
In other words, as long as a protocol has paying users, turning its token from an unproductive to a productive asset depends only on the token holders' decision to activate a revenue share, and thereby direct a part of the fees from users to the protocol, rather than its supply-side participants.
Let’s go through a few examples to illustrate this point better.
BTC is still unproductive, whereas ETH isn’t anymore
On November 12th, the Bitcoin blockchain generated $981,839.65 in transaction fees, all of which were paid to the miners.
If you look at Bitcoin as a static system, you can argue that BTC the asset is purely speculative and unproductive, as it does not accrue a share of the transaction fee revenue.
Fortunately, we can already point to another blockchain, namely Ethereum, where its token evolved from non-productive to income-generating through a governance process that activated a revenue share between the miners and ETH holders. 👇
On November 12th, the Ethereum blockchain generated $70,246,289.66 in transaction fees, of which $6,685,104.34 were paid to miners, and the rest $63,561,185.32 were burned and thereby distributed to ETH holders (the burn mechanism functions similar to a share buyback).
If you look at Ethereum as a dynamic system, you can see how ETH the asset evolved from unproductive to productive, as it now does accrue a share of the transaction fee revenue.
UNI is still unproductive, whereas SUSHI isn’t anymore
On November 12th, the decentralised exchange Uniswap generated $6,651.894.76 in trading fees, all of which were paid to liquidity providers.
If you look at Uniswap as a static system, you can argue that UNI the asset is purely speculative and unproductive, as it does not accrue a share of the trading fee revenue.
Fortunately, we can already point to another decentralised exchange, namely SushiSwap, where its token evolved from non-productive to income-generating through a governance process that activated a revenue share between liquidity providers and SUSHI holders. 👇
On November 12th, the decentralised exchange SushiSwap generated $1,493,064.30 in trading fees, of which $1,244,220.25 were paid to liquidity providers, and the rest $248,844.05 were distributed to SUSHI holders.
If you look at SushiSwap as a dynamic system, you can see how SUSHI the asset evolved from unproductive to productive, as it now does accrue a share of the trading fee revenue.
In summary
Even if many protocols are initially bootstrapped through the use of token incentives or liquidity mining, there’s nothing fundamentally speculative or unproductive about how crypto protocols work.
As long as a protocol has paying users, the only thing that keeps its token from being productive is if the token holders haven’t yet decided to activate a revenue share vs. the supply-side participants.
Someone please inform Bill Ackman of Pershing Square whose SPAC has been economically less productive than many non-cashflowing tokens ;)