Rethinking Tokens: Both Assets and Liabilities

Words: Kylo@Foresight Ventures

Tips:

• Unlike web2 businesses, web3 projects can realize the tokenization of equity and the fair issuance of equity
• The essence of fair issuance after equity tokenization is to acquire early users and complete the cold start of the ecosystem
• Web3 issues assets include narrative, asset leverage, and equity tokenization
• LSD is a lossless leveraged process in DeFi
• The debt of the system can be eliminated by exchanging time for space and producing child coins in the parent currency

The main focus of this article is to explore the characteristics of Web3 business models and how they differ from Web2. When we mention that a project has a certain business model, it means that in order to maximize customer value, the project can integrate the internal and external elements of the enterprise’s operation to form a complete and efficient operation system with unique core competitiveness. Compared with Web2 enterprises, Web3 integrates tokens in the business model, that is, it realizes Internet + assetization. Assetization is a major feature of Web3 compared with Web2, which can capitalize various rights and interests such as IP, traffic, property rights, etc. in the form of tokens. The business model of Web3 enterprises has a more flexible and operational space than Web2 as a whole due to the introduction of tokens.

I. The connection and difference between Web2 and Web3 business models

The definition of Web3 is derived from Web2, and to some extent it is a continuation of the Web2 business model. The business model of Web2 is clear and clear: hold high and seize the market to obtain monopoly pricing power, and with monopoly pricing power comes naturally monopoly benefits. The process of holding high and fighting high will inevitably be accompanied by various subsidy behaviors, and the subsidy is financed by the high premium financing of equity. Finally, through a large number of subsidies and promotion, it occupies the minds of users and the market, forms a market monopoly, and obtains monopoly benefits. The essence of the high-premium valuation based on equity in the Web2 era is based on LTV, and the overall bubble is blown up by VC, and the bubble is passed on to ordinary traders through listing.

The business model of Web3 has some connections and differences with Web2, the similarity lies in the same subsidy process and monopoly outcome, and the difference is that Web3 can realize the tokenization of equity and the fair issuance of equity.

For Web2 businesses, the company can only sustain the entire business through cash flow income and VC financing. The process of equity issuance in the early stage is only open to VC, and the exit of VC capital can only be completed after it has been listed and opened to retail trading. However, for Web3, token issuance is essentially the listing process of equity, and due to the existence of tokens, there are more retail investors who accept financing, and the collective and irrational characteristics of retail investors are more likely to make tokens (equity) generate premiums.

To better understand the above process, we can take Meituan as an example. In the Web2 scenario, Meituan’s subsidies to merchants, riders, and users are mainly in the form of cash subsidies, which come from the platform’s business cash flow income and the financing funds obtained by the platform selling its equity to VC. However, in the Web3 scenario, the platform essentially omits the financing process, but directly conducts a fair equity issuance, and the participants in the platform’s business operation (riders, merchants, users) will directly acquire the company’s equity.

But there is a question of equity pricing at this point. Web2 companies have a set of scientific valuation logic when conducting VC financing, which finalizes the equity value. But for Web3, the value of a company’s equity is priced directly at the secondary market price in the form of a paper valuation. Due to the irrational nature of the group, it is likely that there will be a significant premium to the equity valuation. In addition, in order to be more attractive in terms of revenue, Web3 companies also want to generate a premium on the pricing of equity to attract user participation, so they may manipulate the market at an early stage.

1.1 Asset Attributes and Debt Attributes of Token

From the above model, it can be seen that the asset attribute of the token is that as the “equity” of the platform, it is fairly issued to the platform participants. The reason why platform participants are willing to participate in the activities of the platform is that they believe that the tokens issued by the platform have value, which means that the token itself is an asset. However, if the token generates a premium, then the premium itself becomes the debt of the system, and the token also has debt attributes in the case of high valuation. The debt properties of the token are different from the corporate debt of Web2 in terms of form, but the kernel is the same. From a web2 perspective, there are essentially two types of financing for companies: equity financing and debt financing. The company’s debt financing needs to rely on the company’s cash flow income to repay, and when the cash flow is broken, the debt is also facing default, and the corresponding debt value will face a collapse. From the perspective of Web3, the process of fair equity issuance by the project party using the token is likely to be a premium issuance, and when the platform’s business cash flow income cannot offset the premium generated in the token issuance process, the value of the token will be like a creditor’s right, facing the possibility of substantial depreciation, so from this perspective, the token issued at a premium is essentially a claim of the system, and this is the so-called debt attribute of the token. At present, there are only two ways to eliminate the debt of the system: time for space and finding cannon fodder.

The game and balance between the assetization and debtization attributes of Token is a problem that Web3 protocols have always had to face. The so-called token model design and trading methods in the industry are essentially balancing the two-sided nature of the token. It seems that we can understand the essence of Web3 if we fully understand how Web3 is to issue assets, how to acquire users through token premiums (the debt nature of tokens), and ultimately how to eliminate debt.

1.2 How Web3 Publishes Assets

When we talked about the difference between Web2 and Web3 business models, we mentioned the fact that tokens are a mapping of equity. But in fact, the tokenization of equity is only one of the ways of Web3 asset issuance, and the remaining two ways are narrative and asset leverage.

1.3 Issuing assets through narrative

The essence of the narrative comes from consensus or the coercive power or credibility of a centralized subject. From this point of view, the asset issuance of the credit currency system also comes from this logic, and the fiat currency is backed by the credit of the centralized institution and circulated through the coercive power of the state. Before the invention of the modern monetary system, the reason why precious metals such as gold and silver were used as money was due to national consensus. The existence of consensus gives a certain value to an object. From this perspective, NFTs, BRC-20, and various memes are extensions of consensus at the value level. When “I think the item has value and am willing to buy it at a psychological expected price”, the item becomes an asset in a way. If we further refine the classification of consensus, consensus also contains complex factors such as public emotional identity, property rights, and IP. When these factors accumulate to a certain extent, the item will complete the transformation into an asset.

1.4 Asset Leverage

Asset leverage is often encountered in TradFi. When we make a large time deposit at the bank, we receive a large certificate of deposit bill. The note can also be pledged as an asset and borrowed. The issuance process of this large-denomination certificate of deposit is the process of asset leverage. In DeFi, the issuance of LSD and LP tokens is essentially asset leverage, so that a large number of assets appear out of thin air in the entire system. A large portion of the DeFi TVL or AUM we see is likely to come from leveraged assets.

When a bull market comes, the AUM or TVL of the entire Web3 system will expand rapidly, and the expansion rate will increase at an aggregate rate. In addition to the large number of assets being issued, another major driver is the leveraging of assets. The ETH shift to POS is a great boon to ETH’s DeFi ecosystem, and the essential reason is that LSD is the lossless leverage process of ETH. Leverage generally has various costs, mainly interest rate costs and liquidity losses. For example, the common Uni V3 LP token, which can be used as an asset by nature, but is not suitable for wide circulation due to liquidity problems, and MakerDAO and crvUSD do issue a large number of stablecoin assets, but the price of the asset is the interest rate cost.

The biggest use of LSD for DeFi as a whole is lossless leverage, i.e., there are no interest rate costs and no liquidity loss. The DeFi development process in the last cycle is based on the DeFi ecosystem developed on the ETH standard, and the introduction of LSD in the system is equivalent to an additional asset transmission chain in the entire DeFi system. This means that DeFi will be more leveraged in the next cycle than in the previous cycle, which is why we bet on LSDFi.

1.5 Equity Tokenization

Equity tokenization is an asset issuance method that is different from narrative and asset leverage. This type of distribution requires that the project can meet real user needs and generate real external benefits. There are currently a variety of scenarios for Web3 with real benefits:

• Financial Services Fees: Swap Fees, Borrow Fees, Perp Trading Fees
• Election bribery costs
• Externalities: For example, the Render Network charges a fee for GPU rendering
• Asset sale fees: the sale of GameFi NFTs and tokens, and the sale of depin hardware

When the protocol can generate the above-mentioned real income, its equity tokenized asset issuance method can also be operated. In a sense, the token is also designed with an economic model, with the purpose of maintaining the assetized nature of the token through external revenue injection. Under normal circumstances, the project will adopt a certain method to allow the stakeholders of the entire ecosystem, or the participants, to participate in the fair issuance of equity, and complete the cold start of the ecology with the help of this process. In other words, we can think that the essence of fair issuance after equity tokenization is to acquire early users and complete the cold start of the ecosystem.

There are various ways to tokenize equitable equity, and the commonly used methods include:

• Liquidity mining
• Transaction mining
• DePin mining
• X2E

There is a whole set of systematic ways to play behind this marketing model, for example, for common liquidity mining, the most commonly used strategy is to have high FDV in low liquidity pools, and complete price manipulation through low liquidity. Since the nominal rate of return of liquidity mining is determined by the secondary price of the token and the number of tokens released per unit time, the optimal strategy is to subjectively or objectively maintain the secondary price of the token at a high level without changing the amount of token released, and then affect the nominal rate of return of liquidity mining. Since ordinary users are essentially at a relatively confused stage of the theory of project valuation, they will most likely regard the nominal rate of return they see so far as the real rate of return. The project team has also achieved the purpose of attracting a large number of users to participate through a higher nominal rate of return.

Therefore, there are actually two driving factors behind this marketing model:

• Deliberate manipulation by the project team
• Irrational judgment of ordinary users on valuation

The combination of these two approaches is the only way to promote the success of the marketing model. At this point, two more questions arise:

• Why did you choose price manipulation when your project was initially marketed?
• When do ordinary users have irrational judgments about valuation?

The answer to the first question is cost, and the answer to the second question is experience. When the chips are the cleanest, the best results can be achieved with the least resources, and in the face of the new narrative, no one can accurately value with a reasonable valuation system. Then the way to find the target and the right time to enter the market are also very clear.

The process of equitable issuance after tokenization is likely to be a long-term process, which is generally accompanied by an equity premium. Equity premiums are essentially bubbles and are also systemic debt. When debt accumulates, the system is at risk of collapsing. Therefore, it is necessary to resolve the debt of the system in various ways (de-bubble).

II. How to Eliminate the Debt Attribute of Token

Tokens can indeed attract a large number of users in the early stage through high-premium subsidies, but excessive subsidies make every token issued a straw that crushes the system. At present, there seem to be many ways to eliminate the debt attribute of tokens, and which is suitable for different projects needs to be judged according to the characteristics of the project and scalability.

2.1 Time for space

“There is no bank without bad debts”, it seems that this is a consensus in the banking industry. When bad debts occur, the bank only needs to extend the cycle for a long time and use the subsequent interest to cover the previous bad debts, so that the bank can continue to operate without being affected. If we compare the issuance of tokens to banking business, bad debts represent the system debt accumulated by the excessive subsidy of tokens, and the source of revenue is the service fees obtained by the platform through the provision of services. Due to the dual nature of the token’s assets and liabilities, the collapse of the token’s secondary price is essentially a process of cutting assets and debts at the same time. When we look at the debt situation of the system over a longer period of time, the decline in secondary prices and the accumulation of financial service fees will reduce the debt of the system to an acceptable range. When the asset attributes and debt attributes of the token reach a balance in some aspect, the next bubble cycle based on token debt will gradually begin to brew.

The most typical example of this time-for-space pattern is Curve Finance. In the early days, it seized market share through high subsidies, and now it has a monopoly at the liquidity level, and after the monopoly is formed, it also has monopoly pricing power for bribe fees. From the last bull market to the present, the secondary price of $Crv has been falling, the debt has been eliminated through the decline of assets, and the bribe fee has been continuously charged by veCRV, which has extended the timeline to smoothly land the debt.

2.2 Parent coin produces sub-coin

If the project itself is composable or scalable, then it can find a large number of high-quality coins for itself to eliminate its own debt or bubbles. Before the launch of Last, Blur may want to take Curve Finance’s time-for-space model, occupy a monopoly position, and turn on Blur’s staking fee switch to gradually reduce the system debt caused by excessive subsidies. The introduction of Blast further accelerated the process of Blur’s debt elimination. Blast acts as cannon fodder for Blur, passing on Blur’s system debt due to over-subsidy.

If we take the token issued first as the mother currency, and the token issued later as the child currency, there are three relationships between the parent currency and the child coin:

• The mother coin is a sacrifice
• Coins are sacrificed
• The parent coin and the child coin complement each other

The introduction of each sub-coin is a huge trading opportunity for us, which requires us to determine the largest profit side between the sub-coin and the parent coin. When Blast introduces blur staking, it means that Blur has completed the transfer of debt, and blur is the biggest beneficiary. However, in special cases, we cannot use the conventional rational perspective to think about the relationship between the mother coin and the sub-coin, especially when the mother coin is in a near-death state, the first instinct will make us think that new trading opportunities are in the sub-coin, but it is very likely that our first instinct and consensus are wrong, such as the case of USTC.

When a new USTC product is announced, we always look at the ponzi structure of the new product, how it eliminates more foam, and the implications of its own possibility. When we limit our vision to the things themselves, we may lose, and we lose. Why so serious, the new project mechanics may indeed be good and can achieve nirvana from the old projects, and the future may be accompanied by unlimited potential. But is it possible that this so-called new project is essentially just a narrative for the old one?

When the great trader lured countless so-called smart people to explore the mechanics and gameplay of the ponzi with a PPT about the design of the ponzi, and when the energy on the market was attracted by the novelty of the new project, the great trader’s intention to sit on the banker’s mother coin was revealed. At this point, it didn’t matter if the new product actually existed, and he only provided a PPT anyway. Beliefs that were once dead occupy the hearts of users again, the community seems to be reborn, and USTC’s market operation is complete.

III. Summary

Users and project parties have different preferences for the asset attributes and debt attributes of the token at different times. The bull market earns more of a capital premium, and users have a higher sensitivity to returns. At this time, the protocol party is more willing to use the debt attribute of the token to expand the debt ratio of the protocol, and expects to pass on the debt to the secondary retail investors from the perspective of the secondary market, and then carry out the next round of debt planning after eliminating a certain bubble;

From the perspective of fair issuance of equity tokens, DeFi Farming, GameFi Farming, Depin, PoW, and transaction mining are essentially a business model: how to affect the paper yield through the secondary market price to achieve the purpose of marketing. However, the excessive issuance of subsidies also makes the whole system face the serious impact of token debt attributes, and the protocol will adopt a series of methods to eliminate or pass on the bubble in order to reduce the debt level.

The above theories can actually explain many secondary market phenomena, such as the use of marketing logic to explain the rise of TAO, Clore.AI, and RBN, and the sharp rise in the price of GALA in 2021 from the perspective of maintaining cash flow. The logic of Gala’s rise is very similar to that of most depin and POW projects. Gala has been selling nodes before launching its own public chain, and the unit of value of nodes is ETH, while the output of Gala nodes is priced in Gala. In the case of Gala nodes that are not selling, it is the least efficient way to promote the sale of nodes through BD and sales. The most effective way to do this is to give GALA value far beyond its fundamentals from a secondary market perspective. Since the yield of the node is determined by the secondary market price of GALA, the high paper rate of return makes the rapid sale of the node a natural thing. So here comes the question, the excessively high price of GALA means that the debt attribute of the token has been used to the extreme, how can GALA eliminate the system debt in the end?