Are cryptocurrencies better looked at as a commodity?
So I have been thinking about the state of crypto for the last few weeks. Markets have cooled significantly. Interest rates are up and crypto seems to be trading like a risk-on asset. Terra and Luna collapsed highlighting the vulnerabilities that are very much still in the system. I'm a builder, our team is building a platform/tool on top of a blockchain network, and as we build and start to think through our revenue and unit economic model something dawned on me. Our framework for crypto is off, you shouldn't think of it like a currency, but more of a commodity. Let's dive in.
For builders, this framework becomes clear very quickly once you start to really look at your economic model. But first, why are they called crypto"currencies". Well, a blockchain network like Algorand, Solana, or Ethereum all use a cryptographic consensus to allow the network to agree on the state of the network as well as for voting on a new block of transactions to be added to the network and thus changing the overall consensus. For participants wanting to participate in the network, you do so by paying the network in its native cryptocurrency hence where the name originally came from. Participant pay to help secure the network (for bad actors it would get expensive to spam the network) and for validators or those who maintain the network, you get paid via these fees to do so. This is a highly oversimplified overview but the point is the currency part comes from this mechanic.
Now let's go back to builders like us. Our platform is built to both help deploy and manage assets that live on the network as well as process transactions via the network on behalf of the users within our system. So in this way, for us, the fees we need to pay are more akin to CORS (cost of revenue sold). The network fee is literally a cost for us as a business in order to generate the revenue that a client pays us for the service we provide. Think of it as if we were a wooden chair shop. To build the chairs we would need wood. We as a business would have to go buy that wood on the open market and at market price and then sell the finished chair at a markup.
Wood is a commodity. But once turned into a chair it is economically valuable and can be sold to you or to me for currency or even another commodity. The interesting thing about this mechanic is how it changes how you look at the price of the commodity. For us, the price of the cryptocurrency in the blockchain we are building on is actually better for us when the price is depressed like it is right now. Not only can we acquire more of it for less money, but it also makes our costs on our service cheaper and for each asset and each transaction we manage on behalf of a client our unit economics improves.
Now we are prepared and have built models to handle what happens if the price of the native cryptocurrency rises, which like any commodity will when demand increases over time. That increase in price is healthy for the underlying network and given that we are built on top of it that is also good for us. Just like a supply chain for wood being really strong, steady, and secure as the price of the network's native currency rises the network becomes more stable and secure which is good for everyone.
So do I want their token to go "to the moon" as many crypto investors would say? Possibly someday. But in reality, for builders to come in and build in this space which will help bring applications and blockchain to the masses, we need predictability in the price of the goods we needed to build our businesses. If the price of your token spikes 1000% in a short time period, your economic model is in trouble as a business and sure some investors might make a few $$ but overall it is a more short-sighted economic impact on the network as opposed to an application running on the network for the next decade scooping up tokens and increasing demand which ultimately will lift prices over time.
The last few months as an investor in crypto probably haven't felt great. But if you're a builder it has never been a better time. The costs of the goods that you need are down making it more affordable than ever to bring your ideas to the world.