Subvert the three views: Liquidity is the source of the value of Token

Note: I haven’t posted on Mirror for a long time since I was mainly posted on “X”, if you want to get timely updates, please go to X:@web3thinking.

Today is the 4th Halving of BTC, which has attracted the attention of the whole network. Also attracting attention is the launch of the Runes protocol, once BRC20 was launched, ORDI, SATS and other inscription assets to create a k, 10,000 times wealth myth, to the chagrin of the lost. Runes, on the other hand, as a BTC-layer asset issuance protocol is an improved version of the BRC20 long wick candle protocol creators of Ordinals. So will the launch of Runes bring a huge wealth effect again?

Image source: @_0xSea_
Grandpa, why doesn’t our family have a single $BTC?
Kid, I’m going to rush the runes on April 20, 2024

Once again, we feel the fear of missing out (FOMO) across the web, and this sentiment has continued to emerge and spread since the Bear Market in the encryption industry, often exciting, restless, but unremarkable. So in addition to fear of missing out (FOMO), take this opportunity of Halving and new asset issuance to try to explore some underlying logic.

In order to facilitate the later understanding of the encryption industry, here starts from the traditional economy and abstracts the traditional real economy and the Web2 Internet economic model:

Traditional products have a transaction-focused value/demand model

There are several aspects to understand here:

l Value and value delivery: The value here refers to the product as the carrier, the object of interaction to the user, that is, the function of the product, to meet the needs of the user’s eyes, ears, nose, tongue, body and mind, such as seeing, listening, smelling, eating, wearing, living, playing, etc. Therefore, the whole process from innovation, production to sales of products is actually the process of creating value and delivering value. On the product side, this is functional/application-oriented, as the application corresponds to the user’s needs.

l Value and price: With value, price is generated on the basis of value, and value and demand jointly determine price, but in essence, it is the development context from value to price. With price, transactions arise on the basis of demand, which in turn generates circulation (liquidity).

l Complete transaction (exchange): Normally, coins are the medium to efficiently complete value delivery (product circulation) and coin payment (coin circulation), building a complete transaction closed loop. It can be seen that “transactions” are the core, and countless transactions build various types of economies.

The above-mentioned model involves the basic elements of value, price, transaction and circulation and their interrelationships, and builds an economic model that is simple, efficient, and ubiquitous, permeating the daily life and behavior of every place and person.

However, the emergence of Blockchain, especially the continuous innovation and development of Crypto, seems to have subverted this traditional model and is bringing a strong impact to people, making them look at flowers in the fog and not know what is going on in the complex appearance.

However, in fact, no matter how chaotic and complex the Crypto field long may seem, it still does not jump out of the category defined by “economy”, but the nature and relationship of several elements have changed, thus bringing about differences in the order and path of development.

Here needs to briefly introduce the background, the encryption industry has developed for longing years, and has been criticized for being self-exalted in the circle - what is the use of cryptocurrency trading. Therefore, Builders always hope to find practical application scenarios and achieve large-scale applications and get out of the circle. Under this kind of thinking logic of “thinking trapped”, it still maintains the inertia of “application orientation”, and once hoped to find a “killer application” to break through the bottleneck and achieve vigorous development.

But the development of the fact is not so, going around and around, now everyone is seeing more and more clearly that the fundamental core of the encryption field is “Token”, and the biggest application around Token is “Cryptocurrency Trading”. “Token” is “gold”, that is, encryption digital asset, and “Cryptocurrency Trading” is “financing”, that is, the flow and financing of assets, which is precisely the core logic of finance.

If you think about this logic, you can understand that the encryption field is based on finance, and its mission may be completed by establishing the financial logic of Crypto, getting things through and developing. However, on the contrary, because they grasped this fundamental, they “stood up and gave birth to the Tao”, so as to break out of the circle and expand the vast shorts for development. At present, there has been considerable development in the fields of games and social networking, although these fields also start from Token, but because of the asset class innovation to break through the application bottleneck, there has been a more long intersection with the traditional Web2, and the development trajectory tends to converge, so I will not expand it in detail here.

In order to further sort out the different development contexts of Crypto, the following abstract model is established for the initial stage of an innovative Crypto asset:

The relationship model between Token and Holder in Crypto

When a token is just deployed and created, it must be distributed to users through various ways, including reservation, investment and financing, mining, auction, minting, allowlist, airdrop, etc.; the distribution objects include developers, investors, miners, bidders, community contributors, etc. These people will become the original holders, be the stakeholders of the token, and become the builders of the token’s value.

In other words, from the very beginning, there has been a co-creation, symbiosis and consistent relationship between Token and Holder. In the traditional mode, the relationship between the product and the user is longing loose and plays people for suckers.

Why is there such a relationship between Token and Holder? This model contains some general and basic underlying logic.

l Token is initially worthless, just an shorter shell, but it may become a carrier of value. In the traditional economy, when a product is launched, it already carries the actual usable value. But tokens were almost useless and worthless from the start. But it may carry expectations, which were given to it by the creator, the white paper, or the evangelist. So, how to make the possible and expected become a reality? Therefore, it is necessary to empower the value of the token, and the empowerment starts from the distribution.

l Token distribution is the beginning of empowerment, and the innovation of distribution methods is particularly important, which is related to fairness, decentralization, consensus formation and longest other aspects. There are longers and longer distribution methods, and one of the most important purposes is to use Token as a link to reach Holder, aggregate resources, build consensus, give full play to their respective advantages, become builders, and jointly empower Token. It can be said that the distribution method of Token will have a direct impact on the effect and efficiency of empowerment.

l Token initially has no value, but it can have a price, which is very important. And this price has a certain arbitrariness, “precision” is not so important at this point, it can even be arbitrarily given, as long as it can trigger a trade. At this point, the price acts as a trigger to attract traders in demand to execute trades. Therefore, the price of Token in the early stage is basically only related to transaction demand, and any initial price will be realized with the change of transaction demand and subsequent price discovery. This is also very different from tradition, where the path of traditional products is from value to price, where value and demand jointly determine price, and price Fluctuation revolves around value.

The price triggers the trade, and the trade brings liquidity. Normally, a start-up token is useless except for trading, and trading is its greatest function. Whether it is liquidity methods such as order book, AMM, Token binding smart contracts, and graph coin duality, it is essentially through plug-in or built-in transactions to achieve the liquidity of Token. The Liquidity here refers to the ability and efficiency of one encryption digital asset to be exchanged for another encryption digital asset.

l Liquidity injects value into Token and becomes the source of Token value. Once the token is Liquidity, it will be able to provide ongoing support and support for its price. The so-called support means that a high-Liquidity token can always achieve smooth trading without drastic Fluctuation and loss of price balance. The so-called support means that in liquidity market making, Token will achieve price discovery and can even further provide price language.

l Most importantly, from then on, tokens with liquidity will expand to other values. Based on the Liquidity, the value of the token is derived on the basis of the support and support provided by the Liquidity for the price. Token will transform from a short shell of value, a medium that only carries value expectations, to a real encryption digital asset with a continuous price, rather than a “scamcoin” as k Fu refers to.

What value will be extended? This is the innovation of financial applications based on highly liquidity encryption assets, such as:

l Payment means: Token can be used as a means of payment to realize the exchange of coins in the encryption world and consumption in the virtual world;

l Mortgage interest and lending: As a encryption digital asset with price and value, Token can be mortgaged to earn interest and mortgage lending;

l Derivation creation and combination: Token, as the underlying value asset, creates and combines derivatives to meet the needs of different risk and return preferences;

l …

In short, once the price is consistent, it is very long that Crypto financial applications can be innovated to attract new users and bring prosperity.

So far, starting from the value/demand model of traditional products with trading as the core, we explore the interrelationship between value, price, price and liquidity in the tradition; and based on the relationship model between Token and Holder, we focus on the source of value of Token, and the important conclusion is that Liquidity is the source of value of Token, and other values of Token are derived from it.

In order to deepen my understanding, I will further summarize the previous content, which I call the value triangle of Crypto:

Crypto’s value triangle

l Assets are the foundation: Focus on asset class innovation and issuance method innovation. Different asset classes have their own capability boundaries and focus on different financial application innovations, such as BTC for P2P encryption digital asset transmission, ERC20 for Decentralized Finance, ERC721 for digital collections, and Ordinals & BRC20 for inscribed assets. The asset issuance method is benefit distribution, which is related to the operating principles and development pattern of Decentralization, fairness, Liquidity, etc., and will have a profound impact on the formation of Token consensus.

l Liquidity is the source of Token value: As mentioned earlier, unlike the traditional development path from actual value to price, this is the logic of developing the real economy. Crypto is financial logic, and Token is to have a price first, and then bring liquidity through trading. Once established, the Liquidity will feed back the price, provide support and support for the price, and further expand the other value of the token.

l Financial application innovation is the value derivation of Token: As previously analyzed, Token application innovation such as payment, mortgage interest, loan financing, derivation innovation and trading, etc. And with the continuous innovation of the Token asset class, the application boundary will continue to expand, and financial innovation will continue to emerge.

At present, we are witnessing the explosive innovation rise of the BTC ecosystem, at this stage, asset class and issuance mode innovation is becoming the largest narrative, such as BRC20, RUNES, ARC20, RGB++ and other asset issuance protocol and various Fairlanch issuance mode innovation, and with the rise of coin and transaction size on CEXs and DEXs, other Liquidity methods are established, and the Liquidity of Token is gradually established. Next, Token features such as data inscription, one coin, one Satoshi, and L1/L2 asset duality will inevitably give rise to a variety of complex application innovations and L2 gameplay. These developments are basically within the framework of the model described in this article. Understanding these basic logics will help you grasp the basic points and advance routes, not get lost when traveling, and even be surprisingly upright.