How To Determine a Token's Value (wen moon?) 🤔

GM folks 👋🏻 - happy hump day 🐫

It is by far the quietest week in crypto since I started this newsletter about 2 months ago. The bear market is truly here 🧸

Crypto markets fell slightly as BTC and ETH went below $24,000 and $1,650. In other news, Coinbase beats its Q4 2022 revenue estimates (bald CEO supremacy 👨‍🦲), and SBF really doesn’t want to testify in Voyager’s bankruptcy case.

In Today's Email:

• What Matters: What's with crypto in China? 🧧

• Case Study: How your tokens will accrue value 📈

• Governance & Features: Klaytn wants to burn $1.6B of KLAY tokens 🔥

We’re adding a new mini section called narratives. What is it? 👀

It helps you understand what’s being talked about in crypto, specifically around trading and market movements.

WHAT MATTERS

What’s Going On in China? 🧧

State of play: The talk around town is that China is quietly warming up toward crypto. As a result, speculators in the west are predicting which coins are going to be popular in the east, while speculators in the east are looking into what the speculators in the west think will be popular in the east. It’s literally an Ouroboros 🐉

Putting aside the snake-dragon eating its own tail kind of markets, Hong Kong seems to be renewing its crypto ambition.

• The Hong Kong’s Securities and Futures Commission (SFC) has started a consultation process that might eventually enable crypto exchanges to serve retail investors.

• Stablecoins are also set to be regulated in HK by the Hong Kong Monetary Authority (HKMA), which mandates full that any stablecoin issued in the jurisdiction must be fully backed by high-quality liquid assets. There are no further details as to what types of assets would suffice.

Here's a little hopium.

However, it's not like crypto is totally banned in China. Binance and OKX have both been actively offering OTC crypto markets for Chinese users. Payments can even be done via WeChat or a domestic Chinese bank transfer 🤷

While crypto regulation in China can certainly use more clarity, it's not outright banned.

• Hong Kong seems to be gunning to become China's way of slowly opening itself back up to crypto, with an aim to become the crypto hub of Asia; especially after Singapore experienced multiple negative presses from bankrupt crypto firms that were domiciled in the country.

Why it matters: China is the world’s second-largest superpower after the United States. Whatever China decides to do, whether it be in microchips or renewable technology, or crypto, will be studied extensively by the US government 🔎

• China understands FinTech, digital payments, and the importance of owning your own currency in a trade war. The country has experimented with CBDC, and we can certainly bet that it understands the importance of stablecoins.

• Amidst the crypto regulatory crackdown in the US, we can hope that China’s relatively friendlier action towards crypto will provide lawmakers in the US with new perspectives.

For builders: Regulatory risks will become more prominent in the next few years. Depending on the products that you're building, understand that you might find certain advantages by relocating to friendlier jurisdictions, as well as by implementing a decentralized organizational structure (see: LidoDAO) 💭

For institutional investors: Pay attention to what other jurisdictions are doing with regard to crypto. It's a truly global technology and asset class. The rules and developments in Emerging Markets such as the Middle East, Asia, LatAm, and Southeast Asia matter. Find team members that truly understand these markets.

For retail investors: Understand the ongoing narratives and manage your portfolio accordingly. It's easy to get whipsawed in the crypto markets if you're not disciplined with the size of your trades.

CASE STUDY

How Does Your Token Accrues Value?

State of play: Today I'm bringing you a mental model to help think about how your tokens can accrue value. This piece was originally written here, but it's more relevant than ever in the current "bear market rallies" that we're experiencing.

Presented below are snippets and summaries of the original article.

Quick Takeaways:

• The endgame for tokens is to become “equity-like”, but with more use-cases.

• Tokens will become the digital-native asset, more seamless and interoperable than all existing asset classes.

• Values can’t accrue to both tokens & equities effectively.

• The regulatory environment will catch up to this new reality, but it will take time.

• The next crypto bull cycle requires tokens to integrate with real economic activities.

UBER Token

Uber and other ride-hailing firms subsidized ride costs in their early days by providing cheap rides at the expense of venture capital dollars to acquire users. This growth hacking strategy worked and has since been copied by many tech firms, hoping that the products combined with cheap costs will create a network effect and retain users when they eventually discover ways to be profitable.

Now imagine if instead of giving cheaper rides, Uber gave out tokens to its early adopters, enabling them to become part of the community and get rewards for being active consumers of said product. For every ride that you order and for every ride that you pick (as drivers), you will receive rewards in UBER tokens.

It is safe to say that the majority of end-users, including the earliest adopters, will dump UBER tokens for cash unless there is a reason to hold them. In crypto, this usually means that the price of a token will be sacrificed, at least in the short term, to help bootstrap the project’s user base and achieve growth (DEX liquidity mining pool2).

It is also safe to assume that opportunistic actors will try to game the reward system and suck out as much short-term profit as possible. Granted, if the product is actually good, users will still stay (e.g. STEPN has more stickiness vs Axie Infinity), but this means that projects need to be able to balance their growth hacking strategies with good products and sustainable token distribution.

Oftentimes, projects try to achieve this balance by obfuscating the true use-cases of their tokens or creating a use-case to artificially delay the selling pressure instead of improving on their products or simply turning on value accrual mechanisms.

Even then, this doesn’t address the question: who will be eligible for the cash flow?

Can I submit a proposal to the Uber governance forum and turn on the fee switch so that UBER token holders get a part of the revenue?

Maybe — but if that’s the case, then what is the Uber equity used for?

If UBER token holders receive cash flows and have the power to govern the future of the business, then it should just be a tokenized Uber equity with more utilities, or else one of the assets is going to be rendered worthless.

So What’s The Conclusion?

Web 3.0 founders need to balance:

1. how “equity-like” their token is while making sure it’s useful

2. where to market & sell their token

3. create a truly remarkable product that people love even without the token

The token is not the product, but it needs to enhance the product.

Unfortunately, achieving decentralization via token is one of the easiest ways to claim that you’ve enhanced the product, but properly doing so might make your token too “equity-like”. So your best bet is most likely to target Emerging Markets where the laws might be more friendly and raise the majority of your capital from accredited investors and HNWs.

If I own 10% of Apple stock, even if the stock goes down by 50%, that still means that I own 10% of the company and everything that’s associated with that ownership.

If I own 10% of UNI's total supply, and the token goes down by 50%, what do I actually own…? (For now, it’s the promise of a future value).

Until owning a token becomes as simple as owning Apple, we have a long way to go.

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FEATURES & GOVERNANCE UPDATE

Klaytn Proposes Burning $1.6B KLAY Tokens

Klaytn proposes to cut its token supply by 50%. The South Korea-based layer 1 blockchain network has proposed to burn 5.28B in KLAY tokens, which would effectively cut its token supply by ~50%. The proposal was submitted by the Klaytn Foundation.

• The governance voting period is from February 22 to 28.

• The proposal will burn 73% of the reserve supply, which is roughly ~50% of the current total supply of KLAY tokens.

• The Klaytn Growth Fund (KGF) and Klaytn Improvement Reserve (KIR) will merge and re-establish as the Klaytn Community Fund and the Klaytn Foundation Fund. Both new entities will be managed by the Klaytn’s Governance Council.

Why it matters: The proposal aims to create long-term value for KLAY tokens, increasing its demand and reducing the available supply. The move can also be seen as a way to further decentralize the governance mechanism of Klaytn amidst the ongoing regulatory scrutiny towards crypto.

• This is especially true as the Klaytn Governance Council consists of primarily traditional web2 companies.

• “The Council consists of 23 global top-tier companies that have successfully produced massive user-based popular services in various industry domains including IT, telecommunications, content, game, and finance.” — you can see the full list here.

Other notable feature updates:

• Timeswap goes live on Polygon.

• Sudo passes the transferability of SUDO token.

• Kava launches version 12.

• Olympus launches lending markets.

• zkSync goes live on mainnet.

• Pendulum goes live on mainnet.

QUICK BITES

• Hong Kong renews crypto ambitions, with Beijing backing.

• Coinbase beats Q4 2022 revenue estimates.

• Polygon cuts staff by 20%.

• Immutable cuts staff by 11%.

• SBF resists to testify in Voyager bankruptcy.

• Arbitrum surpasses Ethereum in daily transactions.

• Euro Coin to trade on Coinbase.

• eToro gains NY BitLicense.

• Microsoft partners with Ankr to offer blockchain node infrastructure.

• BlockTower parts ways with top executives.

• Paxos in talks with the SEC, ends Binance relationship.

MEME & NOTEWORTHY READS

• Packy McCormick’s article on why crypto and AI are perfect bedfellows.

• @gregthegreek’s thread on Goerli-ETH testnet market.

• Joel John’s article on web3 venture funding situation.

If you enjoy reading this issue, please consider subscribing. It takes 1 minute of your time but it would mean the world to us 🙇

Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.