Introduction
In the ever-evolving world of cryptocurrencies, narratives often shift, leading to confusion about the true nature and purpose of blockchain tokens. Amid the noise, it's crucial to return to the fundamentals, particularly when it comes to layer 1 tokens—the native cryptocurrencies of blockchain platforms like Ethereum, Bitcoin, and Solana. These tokens are, at their core, currencies, and we should analyze and value them through this lens.
Drawing inspiration from Tascha’s insightful tweet thread, this article reexamines layer 1 tokens by applying fundamental principles of currency valuation, shedding light on their role in decentralized economies.
Many people try to value layer 1 blockchain tokens like stocks.
That’s absurd.
Instead of pricing Ethereum, Solana & so on like *companies*, you should price them like *countries*.
Here’s how.
That’s absurd.
Instead of pricing Ethereum, Solana & so on like *companies*, you should price them like *countries*.
Here’s how.
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What Are Layer 1 Tokens?
Layer 1 tokens are the lifeblood of blockchain networks, serving as both a medium of exchange and a mechanism for incentivizing network security and activity. Examples include Bitcoin (BTC) on the Bitcoin network, Ether (ETH) on Ethereum, and SOL on Solana. These tokens underpin the functionality of their respective networks, enabling:
Transactions: Facilitating value transfer between users.
Security: Rewarding miners or validators who maintain the network’s integrity.
Governance: Allowing holders to participate in network decision-making (in some cases).
Yet, despite their technological underpinnings, these tokens function as currencies and exhibit properties common to fiat money and other forms of money.
Layer 1 Tokens as Currencies
To understand why layer 1 tokens are best viewed as currencies, let’s revisit what makes something a currency:
Medium of Exchange: A currency’s primary purpose is to facilitate trade. Layer 1 tokens achieve this by enabling seamless, trustless transactions across a decentralized network.
Store of Value: Like traditional currencies, these tokens derive their value from the trust and utility they provide within their ecosystem. Holders expect them to retain or grow in value over time.
Unit of Account: In many blockchain ecosystems, goods and services are priced in the native token, reinforcing its role as a currency.
Layer 1 tokens are uniquely positioned as both the economic engine and governance tool for their networks, making them more than just speculative assets.
The Role of Growth Indicators in Valuation
To value layer 1 tokens effectively, it’s essential to consider their ecosystem’s growth dynamics. Key metrics such as wallet growth, developer activity, and network transactions serve as leading indicators of a platform’s economic expansion. For instance:
Wallet Growth: The acceleration of new wallets correlates closely with price growth, reflecting increased adoption.
Developer Activity: As Tascha’s thread highlights, developer contributions on platforms like Ethereum and Solana signal future economic growth, akin to the construction sector as a leading indicator in traditional economies.
Network Activity: Transactions alone aren’t the full picture; the depth and diversity of applications built on the network are critical.
These indicators provide a more comprehensive view of a blockchain nation’s "GDP growth," helping investors anticipate long-term value.
Fiscal Anchors in Blockchain Economies
A unique advantage of blockchain tokens is their built-in mechanisms for creating fiscal stability, akin to government currencies. Traditional governments rely on taxation to underpin their currencies, providing a "fiscal anchor" that ensures confidence among holders. Blockchain nations achieve a similar effect through:
Transaction Fees: Programmed into every economic activity, these fees generate consistent cash flow.
Tokenomics: Mechanisms such as token burning or staking rewards create a fiscal backing that stabilizes token exchange rates over time.
While these mechanisms don’t directly determine token price, they contribute to long-term stability and confidence.
Challenges in the Current Narrative
One reason this currency perspective often gets overlooked is the speculative nature of the crypto market. Many participants treat tokens as commodities or stocks, focusing on price movements rather than utility. This leads to:
Misaligned incentives in token design and network development.
Overemphasis on short-term gains over long-term sustainability.
A disconnect between the intrinsic value of a token and its market price.
Reframing the Narrative
To align with the currency framework, here are some actionable steps for the crypto community:
Educate Investors: Promote understanding of token utility and the fundamentals of currency economics.
Prioritize Sustainable Design: Encourage projects to focus on tokenomics that foster long-term adoption and stability.
Adopt Practical Use Cases: Drive adoption by highlighting real-world applications of layer 1 tokens, such as remittances, decentralized finance (DeFi), and digital identity.
Conclusion
Layer 1 tokens are the currencies of the blockchain world, integral to the operation and success of decentralized networks. By recognizing their role as currencies, we can better appreciate their value, promote healthier market dynamics, and pave the way for meaningful adoption. As we revisit the basics, let’s shift the focus from speculation to utility, ensuring that these digital currencies fulfill their promise of reshaping economies and empowering individuals.
The metaverse and decentralized applications are still in their infancy, but as these ecosystems mature, the GDP of crypto nations will undoubtedly expand. Now is the time to recalibrate our understanding and strategy, treating layer 1 tokens not as speculative commodities but as foundational currencies for a new digital era.
