Blockchain Value Theory
Much has been written about the technological aspects of the blockchain, but almost nothing, so far as I can tell, has been written outside of individual blockchain whitepapers about a theory of value for prospective users and investors in the technology.
The Cryptocurrency Market
Since the inception of Bitcoin in 2008, at least 1657 (and growing) other distinct cryptocurrencies have been introduced into the marketplace. For now, it makes little difference to the new investor which cryptocurrency to buy (and, at this early stage of implementation, even people who are simply seeking to use the technology find themselves in the position of being investors, due to the continuing volatility of cryptocurrencies), because they have a strong tendency to rise and fall more or less in unison. This is because the value Cryptocurrency itself – as an idea – is still a hotly debated topic in the marketplace of ideas, and the prices are still rising and falling in response to the general market consensus about the value of blockchain per se. This will change, and it will change soon.
Once the market reaches an approximate consensus about the value of blockchain as an idea, which blockchain you choose to invest in will be a matter of some significance, and you will have to know how to discriminate between the relative values of individual coins. One should look for this to occur in the near future because awareness of blockchain is becoming increasingly mainstream. Once basic knowledge of blockchain becomes ubiquitous, in very short order, consumers and business leaders will begin deciding what role it should play in their day to day activities. This process has already begun to occur.
Once this process is in full swing, the market will reach a consensus about the general value of the technology. Then, the market will be choosing which coins will be favored, and which coins will be marginalized, and once that starts happening, you will no longer see all coins rising and falling together. Then you will see some coins become winners, and other coins become losers. You don’t want to bet the farm on a loser. For this reason, a theory of value pertaining to blockchain is necessary.
Technological Value Analysis
Because all technology is inherently solution oriented, usefulness has to the primary criterion of any technological theory of value. In order to analyze the usefulness of a technology, you have to identify its purpose, and then determine how well it fulfills that purpose. This aspect of the analysis is the most fundamental to a theory of value – even more so than an analysis of what it actually is, and how it works – because those purely technical criteria are only relevant to the analysis insofar as they inform us about the technology’s efficacy of fulfillment. With that in mind, it is clear that the first step in determining the value of blockchain – even more so than a description of the technology itself – is identifying its various uses.
Technological Value Analysis Applied to Blockchain
Comprehensive use identification of blockchain is actually far less simple than it sounds; particularly at this still relatively early stage, because innovators in this space are constantly developing new uses for the technology. For the purposes of this essay, we will limit ourselves to a very general analysis of use by broad category.
Categories of Use
The current broad categories of use for blockchain technology are:
(1) Use as a store of value,
(2) use as a means of exchange,
(3) use as a means of protecting online privacy,
(4) use as a means of protecting assets from loss and theft,
(5) use as a means of securing transactions,
(6) use as a distributor of data,
(7) use as a means of logistical analysis,
(8) use as an online system of reward for intellectual and labor contribution,
(9) use as a tool of institutional and individual independence from the state, and
(10) use as an enabler of black market transactions.
Currently, these categories are the means by which we can evaluate the potential value of any given coin. But bear in mind, one should fully anticipate that this list will grow, not contract. It is worthwhile to continually stay abreast of new innovations in the field – especially at this juncture.
Approaches Towards Use Analysis
In analyzing an individual coin on the basis of these criteria, there are two possible basic approaches:
(1) Does this coin fulfill several of these criteria better than a majority of other coins, or
(2) does this coin fulfill one particular criterion better than any other available coin?
If the answer to either of those questions is “yes,” then that is a coin that you should be following closely. You should consider buying some of it, because, if the first case is true, then it is a coin that is likely to enjoy wide adoption as a medium of exchange, due to its flexibility of use, and, if the second case is true, it is likely to find a permanent and expanding niche in the blockchain universe. In either case, you can expect that coin’s value to grow.
If the answer to both of those question is “no,” then you should sell it immediately because as individuals and corporate and government actors become increasingly aware of the state of the blockchain market, you can expect them to abandon any cryptocurrencies that do not have any exceptional aspect of usefulness.
As you learn more about the technical aspects of blockchain and individual cryptocurrencies, as well as the role that investment and internal governance structures play in the future implementation and innovation of a coin, you will be able to answer those questions more confidently and exactly, and you’ll be able to see when one of them is being made obsolete by some other coin.
Future Analysis of Distinct Blockchains
I will analyze each of these uses in more depth in future posts. Secondarily, I will show how the technical aspects of the technology bring themselves to bear upon these uses. I will also spotlight individual coins from the perspective of this theory of value. For now, just realize that if a coin is not performing well on several of these criteria, or better than any of the others at one particular criterion, then you should not buy it, because soon enough, as the market finds its bearing in this field, it will leave it in the dust in favor of a better performing coin.
For now, I’ll leave you with one hint; Bitcoin’s only inherently exceptional value relative to other cryptocurrencies is its market cap and broad recognizability. Both of these benefits are fleeting. Buy something else.