A story about two horses
Economists have been studying the relationship between value and price since the 19th century, and so far they have basically agreed that they are two different things. We can determine the market capitalization of a cryptocurrency project fairly precisely. Just look at the market capitalization of a given network and we can immediately see the price of coins. The price represents the reality of the market, as it is the result of price negotiations between buyers and sellers. What is, however, the correlation between price and value?
Can we say that the more expensive the coins of a given project are, the more valuable the project is? So why do we see such high volatility in the market? Project prices rise and fall by tens of percentages in a short period of time. The real value of a project may be unknown for a long time, but it certainly cannot fluctuate by tens of percent. We can conclude by saying that the current value of projects does not match the volatile market capitalization.
Where the value of cryptocurrencies comes from is still a big unknown for many. Generally speaking, value can be defined as the ability to satisfy a need. Cryptocurrencies can be seen in part as expensive works of art, as people may have a need to own them. The concept of scarcity or exclusivity figures here. But we can also see blockchain technology as a global network that is able to transfer value from one end of the world to the other. Thus, a specific utility or service is at play. The utility of this property increases proportionally with the adoption rate. In the case of digital scarcity, adoption can be very low, but due to high demand, coins can maintain their value. A service that depends on network interaction between users is more dependent on the number of users, i.e. the network effect.
While digital scarcity is a static and immutable property, technological capabilities can continue to evolve and improve. Blockchain technologies have the ability to induce trust between participants who do not know and trust each other. This area will fully develop with the increased use of smart contracts and the need to perform more sophisticated value operations than simply transferring volatile native coins. So we have the promise of a better future in terms of technological progress. Technological progress is a dynamic property.
In general, therefore, cryptocurrencies can be seen as a profitable investment or a kind of speculation on future developments. People can bet on two horses. The first horse is represented by digital scarcity and the belief that more people will demand the coins of a given project. The second horse is represented by technology and the belief that more people will use the same decentralized project in their daily lives.
Every cryptocurrency project involves both horses. People may desire to own the coins of a given project for both of the reasons described. Cardano has capped the number of ADA coins at 45,000,000,000. The limited number creates scarcity. At the same time, the IOG team is working on many innovations to expand the project’s uses. More options offered and the usefulness of services have the potential to attract more users. Note that adoption is the key to success in both cases. However, as we said, in the first case it is not necessary for the project to have mass adoption and yet it can have a high market capitalization.
It may be that within a project people prefer digital scarcity and overlook the need for direct everyday use. It is also possible that people will use the project as a regular internet service on a daily basis. Both horses can have high social and financial value. As the adoption of projects increases, so will the price of coins. At the moment we don’t know which horse will be more in demand. We also don’t know if a single project can satisfy people’s needs for both digital scarcity and usability. Cardano is going more down the path of technological advancement and real network usability.
In terms of demand, the two horses complement each other, because in the case of cryptocurrency you cannot separate scarcity from technology. Success will attract attention, which will attract demand for coins. So it doesn’t matter whether the project is successful more because of scarcity or more because of technology.
Blockchain is a foundational technology. Many smart and influential people believe that blockchain technology will change the world. But the question is how exactly this will happen and what technology we will need to make it happen. There is a lot of room for speculation here. Speculation can drive the market capitalization of projects upwards in the nascent market. Speculations on price do not necessarily reflect the real fundamentals of the project and take into account the long-term perspective. Needs, trends, technology, and everything around us are constantly changing. What is valid today may not be valid tomorrow.
Foundational technologies often get caught in multiple narrative fallacies. To avoid that, it is necessary to take a long-term view and accept changes that can occur on the way. Narratives are transitory and they can be seasonal. Moreover, they can be transferred from one project to another. Narratives are ephemeral, fundamentals are eternal. It is imperative not to get caught up in narrative fallacies and focus on what is eternal.
What is eternal in the world of digital technologies? Technologies appear to get obsolete over time and be overcome by better ones. Technology can be considered eternal in a sense of continuous improvement and innovations. For example, the internet allowed us to transfer information. This is an absolutely essential capability of the Internet that has been around since the beginning. We take advantage of that capability and we don’t care that every few years the technology evolves and we use different protocols.
Cryptocurrencies allow us to create digital scarcity and allow individuals to exclusively own and freely dispose of value. This is a new feature, but it is not exclusively tied to one project. The transfer of information over the internet can be implemented by many protocols. The same can be said of the creation of digital scarcity. Digital scarcity can come in many forms and flavors. It is a narrative trap to think that there will be only one single form of digital scarcity and no one in the world will prefer other forms.
Let’s look briefly at one example for all. Cryptocurrencies were born through the use of PoW consensus. PoW has been the standard for 10 years. However, it currently appears that the huge consumption of electricity is not in line with people’s desire to reduce our carbon footprint and be more conservative with energy in general. Many countries around the world are trying to switch to green energy and there is a risk that there will not be enough energy. Complicating matters is the trend towards ESG investing, which emphasizes keeping nature and social welfare in mind when seeking to profit from investments. Many people and investors who care about our planet will be more comfortable with the alternative PoS consensus that Cardano is coming up with. It would be very naive and selfish not to give people the chance to choose a project according to their personal preferences. One of the widespread narrative fallacies is that one and only one project can win and everything else will die. This false narrative assumes that the winner is already decided, that the current highest market capitalization forever predetermines the winner, or that technological advances will only happen within a single project. Any technological advances, which are also sought by the team behind the Cardano project, are doomed to fail. All this seems to us to be a trap into which it is not advisable to fall.
No one can forbid the emergence of new forms of digital scarcity. This is a basic principle of decentralization. Decentralization and freedom are very close to each other. Trying to enforce one version of a digital scarcity in an ultimate way is itself a form of centralization and a desire to seize power. People will always fight for power, and decentralization is not the solution to prevent this. Wealth often fuels the desire for power. If one form of digital scarcity were to take hold, the early adopters would become very wealthy and would naturally begin to fight for social power over others through their economic power. Diversity and the ability to weaken the power of the rich and influential is a powerful weapon of decentralization as a concept.
From a purely economic perspective, inflation can be fought through decentralization and digital scarcity. However, from a social perspective, it is a bit more complicated, as we would like to avoid the influence of rich people or institutions. Decentralization aims to get rid of the middlemen. It turns out that we need technological progress a bit more than decentralized monetary policy to achieve this. There will always be rich people in society and no technology can prevent that. What is more valuable to us, a new kind of digital scarcity, or the ability of technology to cut out the middleman? We would probably agree that both are interesting, but the latter will be more useful and valuable to us.
As we have already written, every project has both horses under the hood in some form. Gold is the ultimate and time-tested solution to fighting inflation. Cryptocurrencies in particular benefit from the fact that the world is going digital and we have learned to transmit value over the internet. Cryptocurrencies are fighting the current financial world on a technological level. From our point of view, this is more of a technological than an economic battle. The key to success is not only the ability to create immutable monetary policy but more importantly the ability to transmit value quickly and cheaply without an intermediary.
At the moment we have only saddled the first horse. However, it is still uncertain whether the current projects are economically sustainable in the long term. If we are talking about digital scarcity, we are talking about decades, if not hundreds of years. Projects that have a limited number of coins will one day survive mainly on network usage fees. We are still at the beginning of this and we need to saddle up the other horse as well.
If one cryptocurrency project massively succeeds, the concept of decentralization can be said to have succeeded. It is very likely that more projects will succeed as they will offer the same or similar functionality. It is unlikely that people would massively embrace one project and reject all others. Each new attempt would be a new chance for a paradigm shift. In the open-source digital world, you cannot create exclusive features at the technology level. It is possible to create a protocol that people adopt for its features. One project can clone another’s technology, but that may not be enough for success. What cannot be cloned is adoption and community. However, the rate of adoption is ephemeral. It is probably impossible to create an eternal project, protocol, or money. If it does, a strong and capable team will be the most important thing.
What can survive forever is the concept of decentralization, which will improve and evolve. Everything else will be an implementation detail.
Price speculations, technology, and adoption
The adoption of cryptocurrencies is very low at the moment, so the market capitalization of projects is mainly driven by the promise of higher market capitalization in the future. For speculative coin holdings, the first horse is more important. That is a digital scarcity. Speculation is also helped by the fact that it works without the need for mass adoption. That may or may not happen. A few whales and large investors can keep the market cap high and wait to see how the situation unfolds in the future. Pure speculation on the future cannot keep the price stable. Without growing adoption, it’s hard to predict success. It could be said that growing adoption is a guarantee of future success.
As we said, the second horse is linked to the development of technology, but technology must be adopted to be considered successful. Technologies are still under development. It could be said that there is actually nearly nothing to adopt yet. A certain group of users wants to adopt working and proven services. It takes some time for new users to build trust in new technologies. It can take years. Here too we can talk about speculation on adoption. However, in this case, we need to be more patient and follow trends.
The price of ADA will be driven by both the price speculation and the development of technologies. In the case of Cardano, investors bet mainly on technology. This can be seen as a bet on the team, as technology development is always about people. Cardano is going as a mission-critical project that is built on academic research and mathematics. This is absolutely important as delivering a global scalable distributed network is one of the biggest challenges in the networking world. Technology will be the major differentiator among competitive projects. It is certainly not possible to say that all projects are in the same situation. While you can find thousands of cryptocurrency projects, literally only a few have a team as strong as IOG.
If you look at the long-term evolution of the market capitalization curve of major projects, you will see that they are rising. What is actually growing is mainly increasing speculation. There is big investor money coming into cryptocurrencies. Don’t confuse the market capitalization of projects with adoption rates. Adoption in terms of the number of users holding coins in their wallets is not growing that fast. If we were to count users who use a decentralized network on a daily basis to solve a real problem, we are only at the very beginning there. That is if we compare it to the adoption rate of the Internet. Participating cryptocurrency holders are mostly speculators on price. Large investors are just inflating the price, but they certainly don’t plan to use cryptocurrencies for payments or anything else.
Cardano may be one of the first projects to break out of the speculative nature of cryptocurrencies and offer the world a globally scalable network. A network on which some infrastructure can be built that takes advantage of the key features of a decentralized network. We need to reach a state where we have an upward curve in technology adoption. This metric can ultimately stabilize the market capitalization of projects as well. The market capitalization will reflect adoption and actual use. The price of coins will not necessarily be as volatile as it is today. The growing success of the network will quite naturally drive demand for project coins. Adoption will be gradual and will grow rather slowly. The price of coins could behave very similarly. It doesn’t make much sense for the price to rise several times in a short bull market, only to fall to the bottom for several years afterward. The speculative nature will always be present, but it will be more reflective of the real fundamentals of the project. Right now, speculation relies mainly on narratives. As we have discussed, narratives can be misleading and are transferable.
We certainly don’t mean to say that narrative alone cannot ensure success. That is of course possible. If people all over the world, or a significant portion of it, agree that the coin of a project will be the new money or store of value, it can happen. As for this scenario, we are rather skeptical because people are greedy. People do not wish wealth for others and look for ways to make themselves rich. The world of cryptocurrencies will always offer an alternative and a certain portion of people will take advantage of it. Rather than agreeing on one global solution, they will competitively choose other projects to root for. This will be done by small investors as well as large ones. Adoption of cryptocurrencies is voluntary, so it’s hardly ever going to happen that people in the same territory will unanimously adopt one project. This kind of adoption must be in cooperation with governments. Something like non-state money may be an interesting idea, but unrealistic in practice.
National governments and their central banks are closely linked. A state can hardly function without monetary and fiscal policy. When it comes to economics, most people on the planet do not have the necessary education to fully understand the issue of money. Many people like to rely on their governments, whether they trust them more or less.
Financial sector disruption will be all about technology
Adoption of decentralized technologies will be faster through technology than speculation on price. Cardano will enable the use of decentralized technologies and insulate users from the volatile nature of native ADA coins. It will build services that people can start using with little risk of losing wealth. These services need to be cheap, fast, reliable, easy to understand, and, most importantly, deliver some user benefits. This is an achievable goal through the development of technology. Decentralization is a concept that is interesting for many reasons. Now, new applications must be considered and implemented.
The current financial and banking system is very outdated and rigid. It has hardly evolved for several long years. The transfer of money across national borders is slow, expensive, and unreliable. Decentralization brings innovations that, although they do not come directly from the financial world, have the potential to disrupt the financial world. Value transfer is only the beginning. Financial contracts between users and their automatic execution will be a logical extension that can bring a fresh wind to the stale waters of banking. The internet is here to connect people. Blockchain networks are inherently global, so creating a global bank is not an entirely unrealistic goal. In fact, it’s one of the narratives that has been with the cryptocurrency world since the beginning, “be your own bank”. We can add others, like “bank the unbanked”. These are nice narratives, but so far we have not been able to fully satisfy them.
To be able to provide banking services to those who need it most, we need to continue to build technology. There is a real demand for micro-lending or an alternative to traditional bank services, especially in developing countries. Cardano will be a network that can provide banking services to the two billion people who do not have them today. If it succeeds, it will be an important financial service that will also be very valuable.
Financial services are always about the interaction between users. Holding cryptocurrencies in your wallet and speculating on the price is an individual selfish affair that has little to do with real financial interaction. Again, we prefer to reiterate that this is not to say that digital scarcity cannot be a solution to printing money. It is just a question of whether it is sustainable in the long term, especially with the advent of projects that will offer innovation and many improvements. The moment a project manages to achieve a high network effect, it will also be successful and investors will take notice. No one can prevent the flow of money from one project to another. The future of projects is therefore very uncertain.
Our view is that real usability will always be more valuable than speculation on price. Moreover, only real usability at the network level can generate profit, which is critically important for the network. A public network must generate profit in order to reward the people who care about its security and decentralization. Keeping coins in the wallet does not generate profit, which may prove to be a problem. Cardano seems to have a big advantage over PoW projects, as PoS consensus is more easily sustainable in the long term. PoS can handle orders of magnitude more transactions in a given time than PoW. In addition to being fast at the first layer, transactions will also be cheap, ensuring inclusiveness and availability of services.
Usability will grow with innovation. At this stage of cryptocurrency adoption, innovation must be seen as an integral part of projects. The Cardano team is definitely going down this path as they see this as the future. Second layers can play a key role in adoption, but so can other features. The market has to choose what it wants. Nothing is certain at the moment. Rather, it looks like the big investors are starting to diversify and asking for real usability. They are no longer satisfied with just narratives and speculation on price. Investors want to see quality transaction networks, smart contracts, and other services. But most of all, we need adoption. Without further adoption of cryptocurrencies, we won’t know what we want. The current narratives may be false and misleading. We see the future in increased adoption that will influence the evolution of technology.
The price of coins on the open market is determined by supply and demand. Creating a limited supply of coins is not a problem in the digital world. So the question is what will increase demand. Demand can definitely be influenced by the success of projects at the adoption level. We believe that the network effect will play a significantly higher role than speculative coin holding in the wallet. Cardano enables coin staking. This is a great advantage as coin holders directly receive a proportionate share of the fees collected. This kind of passive income is very interesting from a speculation point of view. In addition, the coins are linked to the governance of the project. Thus, the coin holders have decision-making rights.
It doesn’t matter which horse you bet on. Either way, betting against technology is very tricky. No one is able to predict what technology will be developed and what it will bring us. So betting on the team may seem like a good choice. Success will ultimately be measured by the social and financial impact of the technology. This is not easy to predict in advance.