|Introducing: FPF (First Person Friyay)
A few weeks back I wrote a Friday post on my broader market outlook. The main ideas covered in the writeup are:
- (1) the pop in private/ICO markets is a possible warning sign for collapse,
- (2) scaling solution impasses are weighing heavily on existing projects,
- (3) there is much to learn about crypto asset valuation metrics and token velocity,
- (4) institutional money is on the sidelines with custodial solutions and related infrastructure still on the proverbial operating table, and
- (5) unknown regulatory clap backs are dissuading investments even further.
That was a cool article to write, namely because it allowed us to dive into a topic further before having to switch gears for other content. We got some positive feedback on that as well.
And with that, First Person Friyay’s were born.
The idea is simple: an op ed style format where I’ll dial in on an area in crypto and share coherent rabble on why I think it’s interesting, the vantage point from 35,000 feet up, and so on.
The goal? End the week with a thought provoking jump off that’ll keep your brain fueled until our return on Monday.
FPF: Token inflation on valuation
I found a Reddit post on Stellar Lumens (XLM) recently where someone was harping about XLM’s inflation rate. To their understanding, the supply of XLM was going to increase by roughly 85 billion units over the next ten years. With ~19 billion in circulating supply, that supply schedule *as presented* could be a red flag.
And that’s all thanks to… inflation. XLM’s alleged supply schedule for the next 3 years would look something like this:
- Year 1: 19B + 8B released = ~42% inflation
- Year 2: 27B + 8B released = ~30% inflation
- Year 3: 35B + 8B released = ~23% inflation
For the record, this is Fake News – Stellar’s website lists inflation at 1% per year. That’s a relief for XLM users because as we know, inflation can be problematic – hyper inflation more specifically. Look to Venezuela, Argentina, and Zimbabwe to see those effects in real time. Life is incredibly challenging in areas where currencies are unable to function as a store of value.
That’s where crypto has its perks
Programmable money has a huge advantage over fiat currency systems when it comes to supply schedules. If I was asked how many Bitcoins would be in circulation 50 years down the road, I’d have no problem pulling that number. Doing the same for US dollars is like trying to find Waldo – nobody knows.
A fixed inflation rate doesn’t offer much flexibility in a monetary systems, but it provides certainty. That’s something governments today can’t do due to political motives and an ever revolving economic flux. Whether folks want to stick with the current system or opt for something that may not work but has a guaranteed inflation rate is entirely up to them. No twisting of arms here.
But for countries such as the 3 noted above, citizens are already sold. Their current monetary systems have already failed. Digital currencies offer more certainty.
Circling back: not all cryptos are created equal
Graphing a token’s circulating supply over time produces what’s known as a token emission curve. In the hypothetical example above, XLM’s supply would rise ~8B per year. In that example, 100% of the supply would also be circulating in a decade.
For comparison, the final Bitcoin’s will be released around 2140, which is a relatively flat token emission curve over the long run. That’s one reason why Bitcoin is considered an attractive Store of Value (SoV).
Takeaway: Token emission curves are vastly different, and that will ultimately impact the public’s perceived utility of the token over the years.
Let’s hop over to OnChainFX
The website displays metrics for crypto assets, two of the most interesting being ‘Y2050 Marketcap’ and ‘Supply % Issued’. The terms are simple to grasp – (1) the market cap in 2050 according to current price and circulating supply at 2050, and (2) % issued tokens from the total supply.
Why this is helpful: Again – inflation. Imagine each crypto asset is a ball at the top of a hill, the slopes of which reflect their inflation rates. Higher inflation = steeper slope. Marking their progress (I.e. market cap) only while the majority are barely halfway down is iffy. It’s like being the announcer for Wacky Races.
Market cap isn’t as reliable with supply schedules constantly on the move. Sizing up the landscape when the balls are losing steam feels like a better approach.
But, there’s another caveat: prices are assumed to remain the same. Of course, that’s baloney – they’ll jump up and down like the crowd at Goldman’s latest rave.
From a Store of Value (SoV) perspective, it seems like there are a few things that need to be figured out (by no means comprehensive):
- Whether the token’s inflation rate is reasonable,
- What the token’s use cases will be,
- Token governance (on-chain versus off-chain voting), and
- What consensus protocols (Proof of Work, Proof of Stake, etc.) aligns with the token’s objectives/
Back to OnChainFX
There are several tokens that already have 100% of their supply issued: Iota(IOTA), New Economy Movement (XEM), OmiseGO (OMG), Augur (REP), Nano (NANO), and Waves (WAVES), to name a few. That alone doesn’t warrant a red flag. Tokens are created to serve different purposes. It’s like comparing Apples to Oranges, or in crypto terms, Bitcoin to Ethereum.
On the flip side, OnChainFX lists several tokens with circulation supplies under 15%. They are Dentacoin (DCN, 4.07%), Numeraire (NMR, 6.43%), NEO GAS (GAS, 10.13%), MaidSafeCoin, (MAID, 10.52%), Gnosis (GNO, 11.05%), Decentraland (MANA, 11.68%), and our anchor, Stellar Lumens(XLM, 13.16%).
Again, a low circulating supply isn’t grounds for foul play
But, there are scams out there (not displayed on OnChainFX) that look to mislead folks into buying their tokens by due to “low prices” in terms of USD. By low I mean pennies on the dollar.
The reason? The projects had very small market caps and billions of total tokens, most of which weren’t in circulation and were dumped by the teams once enough investors rushed in. That went into full swing in the latter half of 2017.
That’s all for today. If you have feedback or suggestions for a future First Person Friyay, give me a shout on twitter @thedailybitnews or send an email to [email protected]
Cheers – See you Monday.