A Cure for Token Tunnel Vision

Filtered: August 14 – 18

Aug 18, 2023

“Are you trying to get me to throw this mic across the room in disgust?”

Yup, I just quoted myself. One of our conversations on the latest Alpha Bites episode provoked an unusually strong response from me.

And no, somebody wasn’t telling me how Folgers was a good cup of coffee.

Instead, the xChanging Good gang and I were knee-deep in a discussion about a subject near and dear to this economist’s heart: how (and why) a token should accrue value.

It all started with our token design expert, Kodi, breaking down some projects on his radar in his weekly “Like It or Spike It” segment, where he gives his take on a handful of protocols or headlines making waves in DeFi.

One of his topics this week focused on Cosmos (ATOM). If you’re not familiar, Cosmos is basically a whole ecosystem of different appchains, secured by the original Cosmos chain. It might help to think of it as similar to the relationship between the European Union (the Cosmos base chain) and its member countries (the appchains).

It’s also a token that you’ll find among mid-curvers like Kodi and myself…

While there were big hopes for Cosmos early on, the token price never really took off like people were expecting. But on the podcast, Kodi wanted to spotlight a new chain built on Cosmos called Agoric (BLD), which could finally turn the tide for the ecosystem:

Here’s Kodi:

If you look at the success of ATOM, it really hasn't done what it's supposed to do or what people expected of it. And I think everyone in Cosmos Land has been [saying], “Okay, are we going to fix ATOM, or is something else going to take its place?” And I think Agoric might be the project that actually does take ATOM's place.
Agoric is a smart contract chain. So it's like Ethereum, [in that] people can write smart contracts on it and create apps on top and whatnot. But the differentiator is that the smart contracts use this JavaScript. It’s a slightly different JavaScript to the one you usually see, but it's basically the same. And it has a lot of security guarantees that I think a lot of people are very excited about.

All well and good. But then, Kodi went on to say that Agoric’s BLD token won’t always be issued as staking rewards...and that was when I had to butt into the conversation with my response from above.

Kodi went ahead and told me Agoric wants to replace BLD rewards with some sort of stablecoin. Anybody who has endured my ranting knows I’m an advocate for creating price stability into the native token, and not bringing another token into the ecosystem to accomplish what the native token should.

Not to mention, the BLD token is the yield of the protocol that people should work for…not another asset. All you’re doing is signaling to the world that BLD is worthless – it’s why we don’t pay those that secure the chain with it.

Here’s a bigger snippet of my rant:

Cosmos has had this existential crisis of, “Why is this token not doing what other tokens are doing?” And one of the debates last cycle was around this value accrual discussion, and why aren’t the economics better so that the ATOM token starts to respond with more users?
I mean anybody who's used this ecosystem [knows] it is very smooth to go from chain to chain. It's probably one of the best experiences I’ve had of bridging assets and just kind of working within DeFi. Is [Agoric] going to be a new breath of fresh life?
...
We first need a galaxy system to show up. We need all these various planets. We need all these protocols [and] applications to show up that start to bring this BLD token to different protocols and find different use cases.
Because right now, the primary use case is these tokens keep getting unlocked, I think at the first of every month, but you don't have a lot of use cases right now for the token, primary [one] just being staking [which is just maintaining purchasing power].

If you want to listen to the rest of our Agoric/Cosmos debate, you can listen to the full episode here or on Apple Podcasts or Spotify. And we got into plenty of more token talk over some projects making it into headlines again, including Solana and Hedera Hashgraph.

But don’t worry, I wasn’t on my soapbox for the entire episode. We got plenty of insights from the rest of our crew, including independent analyst Ray, who wants to caution all those soaking up the hopium right now to avoid having “tunnel vision” when it comes to the market:

I think that's something to really keep front-of-mind, because it's so easy to get sucked into a crypto price action tunnel that's agnostic to macro and other factors that do impact Bitcoin’s price.
The narrative that we've been hearing for weeks now is, “Volatility is low. Accumulators are accumulating. On-chain data is bullish.” We're just waiting on this decisive trending move to take place, and it seems that the bias of everyone who's trading cryptocurrency believes that it's going to be to the upside, when in reality, it could be to the downside.
So keeping a close eye on equities and what [the dollar] is doing, I think, is pretty important. Given what we're expecting with Bitcoin’s price, it can always go the opposite direction of where you expect.
So, I like that in J.J.'s most recent article, he's kind of guiding people to not go too heavy long yet. Don't become an ape just yet. It's good to just kind of wait and see what [the dollar] does before casting your bets.

Ray’s advice is spot-on. And it’s why I encourage you to read the article he’s referencing, which our favorite janitor published this week in Espresso.

It’s all in the chart he shared below, which shows Bitcoin’s historical volatility index (BVOL, white line) overlaid with Bitcoin’s price (orange line). Today’s volatility has only been this low three times before, marked by the vertical red lines, which eventually triggered big moves in BTC (red boxes).

But as J.J. wrote on Monday, we get a clearer picture of the takeaway here if you bring macro into the picture – specifically, the U.S. dollar:

Now, interestingly enough, low volatility isn’t the only thing these three periods have had in common in the lead up to their mega moves. There’s another leading indicator that signaled each of these moves were coming well before they manifested, and it’s on the verge of flashing us yet another directional signal right now.
…
The common thread in each of these periods has been that our old friend the dollar, as represented by the U.S. Dollar Index (DXY), tipped off the big moves just before.
Each previous time Bitcoin has gone from “boring” to “boing” on the volatility scale, the dollar has been behind it.

You can check out the whole piece right here.

And finally, yours truly went deep this week on one of the more controversial theories in crypto: the stock-to-flow model, or S2F.

Popularized by anonymous analyst PlanB, stock-to-flow is the ratio of the market cap of a commodity (like a precious metal, or even Bitcoin) to the amount of new supply of the commodity created in a year. And PlanB used it as the basis for several, shall we say, overambitious price predictions for BTC.

Here’s what I wrote in the Blend:

Now, PlanB has received a ton of hate over his model, and to be fair, much of it is for good reason.
He used it to put out wildly massive claims on the future market cap of Bitcoin. Then when he was wrong, he seemed to just brush it off by basically saying, the models are just that, models.
And he most recently gave a price prediction between $100,000–$1 million, which is the equivalent of the broad side of the barn in terms of targets. Hate deserved.
But I’ll be the first to admit: I sort of like the model. It has some merit.
It does show the relationship between an asset’s supply and its market cap: Increase the new supply coming into the market, reduce the price of the individual asset.
But while S2F is very good at modeling this dynamic, that also alludes to one of its flaws.

In the full essay, I gave PlanB a crash course in Econ 101 to explain exactly what’s wrong with his model. Plus, I explained why Arkham’s new token could be due for a rally soon, and went over the clues hinting that FedNow is dipping its toes into Web3.

As always, you can find links to all the content we published this week below – along with our Tweet of the Week.

That’s all from me this week. Enjoy the weekend.

Your Pulse on Crypto,

Ben Lilly