Crypto Clarified: What is the Underlying 'Asset' and How are Prices Set?

BIS, which is the global bank regulator, defines crypto assets as “private digital assets that depend primarily on cryptographic technology”. So, we would say that the underlying asset is a piece software, it’s written with cryptographic game theory in mind, and that software facilitates a cheaper, faster and more secure way of arriving at consensus and effectuating a money transfer.

Similar to the FANG stocks (Facebook, Amazon, Netflix and Google, etc) that have powered so much of the global equity gains in the last decade, many of these decentralized protocols are essentially software cooperatives whose members are developers building intangible assets through sweat equity or R&D.

They then govern those intangible assets via on-chain, or blockchain, governance voting not dissimilar to how corporations use proxy voting. And they often use that governance to set a pricing equation for network usage which, although often very complicated, aims to be more transparent, and more rules-based, than a Federal Reserve meeting and gives all ecosystem participants a stake in the value created by the network. So in our view the fact that these assets are intangible doesn’t make them any less real. They generate cash flow by collecting a small portion, call it 5 to 50 basis points of every transaction that is sent across the network, accrues to the protocol who then distributes it to all stakeholders via either new issuance – which would be inflation – or some type of fee structure, those rule are set by supply & demand and are oftentimes voted on by users and communicated to everyone equally.

And thus all ecosystem participants can theoretically participate in equity-like upside as the cryptographic network scales, and as long as the developers attached to that project continue to innovate, and the protocol holds market share, they will collect those usage fees.

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