Store of Value Remains Crypto’s Best Use Case
This post is part of CoinDesk’s 2019 Year in Review, a collection of 100 op-eds, interviews and takes on the state of blockchain and the world. Ryan Zurrer is founder of Dialectic, a Swiss-based crypto-asset firm focused on on-chain opportunities. Previously, he led investments at Polychain Capital and served as chief commercial officer at the Web3 Foundation.
Store of value was the most viable and desirable use case across crypto in 2019 and offers a basis to increase users in the second decade of crypto.
Collateral-backed crypto assets and alternative stores of value (SoVs) found their niche in 2019. Seeing crypto-natives begin to stake and save as part of the decentralized finance (DeFi) revolution was one of the most exciting trends in the space. We’re also seeing the re-emergence of community-directed capital pools known as DAOs, which are arguably a SoV in their own right.
The bitcoin community seemed to find common ground on its primary niche as a store of value rather than a payment mechanism. The SoV use case has become so compelling that the ethereum community sought to refocus around “programmable money” use cases: “ETH is money” dominated the discourse.
DeFi projects grew quickly. Synthetix grew its collateral-backed synthetic derivatives market by more than 680 percent in the second half of the year. However, DeFi has always been dominated by MakerDAO, which offers loans in the Dai (now Sai) stablecoin backed by a basket of other ethereum-based assets. Dai/Sai may look like very capital-inefficient mechanisms with an interest rate that reached as high as 20.5 percent p.a. in 2019, while collateral deposits sit in excess of 320 percent on average.
But it’s early days.
These rates price in all of the risks inherent in crypto, from the security perspective to the protocol layer. DeFi interest rates should look more like emerging market rates (i.e. 20 percent+) than, say, LIBOR+1 percent.
Moving into the second decade of crypto, I would not be surprised if we see some calamitous black swan event in DeFi, followed by a period of repricing risk appropriately. It is important we maintain perspective here and recognize many DeFi crypto-economic models remain highly experimental and there are important lessons to be learned.
DAOs generated renewed excitement this year. Aragon passed 1,000 DAOs launched, which is a remarkable achievement. MolochDAO spawned dozens of topical offspring and considerable research is being undertaken to make DAOs sustainable and profitable, legally compliant, and more attractive to a wider audience. While DAO experiments flourished, especially noble mission-driven DAOs, most of these organizations were capital pools that store a certain amount of value, funded and coordinated by relatively small groups of known participants.
Detractors argue that DAOs have significant regulatory risk and are currently not truly decentralized, autonomous nor particularly well-organized. But DAOs are evolving quickly, as are the coordination tools to allow disparate participants to efficiently self-organize. There is considerable discussion about how the use of reputation-weighted peer-review combined with the right social tools can dramatically improve DAO coordination.
As we see DAOs professionalize in 2020, we will see premiums offered to enter the most compelling DAO communities while the vast majority of DAOs will trade at a discount to their assets under management (i.e. the store of liquid value that they hold). In cases where the management of a DAO diverges substantially from the original mandate for whatever reason, DAOs will unwind and return value to token-holders in a manner that is quicker and cleaner than what we’ve seen in the past.
The next decade in SoVs
SoVs will continue to reign supreme as the primary use case across crypto in 2020. However, we must tackle a few issues to allow SoVs to form the base for a variety of financial applications.
Primarily, we could make for more capital-efficient DeFi mechanisms. One option is to introduce non-transferrable reputation as part of a user’s collateral options. If a debtor is to suffer public reputational risk, they are far less likely to default on a loan. This would enable lower implied interest rates. We could also increase capital efficiency by allowing the underlying capital in DeFi pools to be staked, when a given PoS protocol permits, thereby reducing the interest rate by leveraging the protocol staking returns.
Second, we need to figure out how to appropriately represent off-chain assets on-chain without being confined to walled gardens known as security-token exchanges or excessive use of centralized proxies. Intelligent DAO capital pools should probably have some exposure to gold and other compelling non-correlated assets in order to lower asset-correlation and portfolio volatility. I would personally be more interested in a portfolio that had diverse asset based while still ensuring decentralization.
Thirdly, considerable evangelism needs to be dedicated to markets where crypto has the best chance for advancement – areas that have a combination of:
- Large population bases,
- Mistrust in authorities driven from ineffective fiscal and monetary policies and
- Strong technical education programs churning out talent.
Cities like Beijing, Hangzhou, Mumbai, Bangalore, Taipei, São Paulo and Buenos Aires are good examples of where SoV use-cases could gain substantial traction.
Finally, we will need to figure out how to deal in multiple currencies across multiple chains as a new generation of technically sophisticated crypto-networks come online and begin to interact. Ethereum and the space generally will benefit greatly by interaction with other Layer 1 protocols and I’m optimistic that we will begin to see these initial cross-chain synergies in 2020 as other projects such as Filecoin, NEAR, Cosmos, Polkadot and others come online and gain traction.
The adage that if you give someone a lever and an incentive, she can move the world seems especially poignant for our industry at this juncture. Using crypto still implies significant friction for most. Thus, new users to our space will tend to hurdle these considerable obstacles only when there is an extremely compelling financial incentive to do so. This may be avoidance of their country’s monetary misfortunes, the search for higher yield opportunities in an economic downturn and/or otherwise seeking better financing conditions. Nevertheless, a decade since the birth of bitcoin, we can safely say that crypto has found a compelling use case as the store of value reigns supreme.
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