At Variant, a core part of our investment philosophy revolves around the belief that people should be able to own their money, identity, and data.
We look for large markets that support and expand the ways in which individuals and organizations can access and own these components of their everyday life. Many of these beliefs have materialized through our investments in crypto networks. They are coordination protocols with sovereignty and autonomy at the core.
Yet questions abound as to how these networks should be valued. Protocols and projects vary dramatically in what they’re trying to achieve, and consequently differ on the fundamental metrics that matter when tracking success and projecting growth.
Our view is that every token falls into one of two categories: a store of value (“SOV”) asset, or an equity-like instrument. In particular, we believe the SOV framing is useful for evaluating Layer 1 blockchains (“L1s”) – some of the largest and most important monetary coordination protocols within the modern financial system.
Throughout significant discussion, we’ve identified a set of fundamental metrics to understand, evaluate, and track the future of these networks. The goal of this piece is to externalize some of that thinking, in the hopes that it may be a useful input to how others reason about these assets as well.
L1 Assets Can Be Stores of Value
One of our core frameworks is that L1s can be analyzed and modeled as stores of value.
So, what constitutes a good store of value? Our key fundamentals are as follows (roughly stack-ranked in our order of importance):
- Technical durability: Will the asset still be around in 5-10 years? To what extent will it still look / function the same?
- Scarcity: Is the asset widely available and accessible? How easy is it to inflate the asset? How predictable is the inflation curve?
- Censorship resistance: How easily can the asset be seized by a single entity? To what extent can economic activity associated with the asset be blocked or shut down?
- Economic productivity: Can the asset be used to help enable economic activity? To what extent is it useful in financial contexts, e.g. does it have collateral value?
- Memetics: Do other people believe the asset to be a store of value? An important characteristic of any money is that society collectively agrees upon its value and use.
- Liquidity: is the asset widely available to folks (of all sizes) that may want to hold it in their portfolio? We rank this last because it is often downstream of mimetics; liquidity often begets liquidity, and the more interest in an asset the larger it is likely to grow (relative to the inflating currency). Bitcoin was not very liquid in its first few years, but now it is one of the most liquid assets in the world.
Few markets are larger than the TAM for stores of value. Gold – the largest, and most widely-accepted SOV – is a $31T asset. Silver is a $4T asset. We believe select L1s are strong contenders for even better stores of value.
SOV Assets
Three L1 assets currently stand out as having particularly credible shots on goal at becoming major stores of value: BTC, ETH, and ZEC. Each spikes on a different dimension within our framework.
Bitcoin dominates memetic mindshare. Its moniker is “digital gold.” The reflexivity of strong mimetics is a powerful force and important fundamental consideration in any SOV contender: the more people that believe it is a store of value, the more likely the marginal person is to believe it’s a store of value. Over the past decade and a half, individuals, funds, corporations, institutions, and even nation states have invested behind this belief.
Ethereum may prove to be more technically durable than Bitcoin. It is more easily upgradable, and its roadmap provides transparent, trackable, and underwritable insight into how the developer community is thinking ahead. When looking toward the future – and the new risks introduced by innovations like quantum computing – we believe such adaptability is a feature rather than a bug. Core to any quality SOV asset is the conviction that it will still be around in a decade. Ethereum has shown to be resilient through major technical and social challenges – the DAO hack, the merge, and more – and we believe it will continue to thrive on this front.
ZCash excels on censorship resistance and privacy. The mere optionality provided by shielded pools (ZCash’s private transaction functionality) gives individuals a potential offramp from the risk of future wealth seizures or extensive state surveillance. It’s a durable differentiator in how ZCash offers a path toward entities preserving and protecting their assets over time.
In aggregate, the store of value category is worth many trillions of dollars. That fact is observable simply by looking at the status quo. It’s our belief that the category will continue to grow dramatically, and that multiple SOVs can credibly co-exist.
Yet when we look at the landscape today, digital SOV assets today represent a small fraction of the total SOV market – despite outperforming gold or silver on many of the fundamental dimensions listed above. That to us represents an ambitious, exciting opportunity.
This piece reflects a synthesis of significant internal Variant team discussion.