Cryptocurrency Utility and Store of Value: Complementary Network Effect?

Can a Coin Function as a Utility Token and a Store of Value?

We typically classify cryptoassets as either a store of value (SoV) or a utility token. But can we have both? Is it possible for a coin to function as both a utility token and a store of value?

Qiao Wang attempted to answer that question in a recent Medium blog post.

“There seems to be a growing belief that a cryptoasset doesn’t need to have high utility to be a good store of value (SoV), and conversely, it doesn’t need to be a good SoV to have high utility,” explains Wang in his post.

“A more radical version of this even says that a good SoV cannot have high utility, and a high-utility asset cannot be a good SoV.”

Wang argues that this leads to a dichotomy within the crypto space: we have a binary classification system where tokens are either a SoV or a utility token.

“This leads to a popular, binary classification of tokens as being either a SoV or a utility token. For instance, people tend to classify Bitcoin as a SoV, and Ethereum as a utility token.”

Bitcoin, for example, is primarily a currency and a store of value. It can be transferred between individuals without the need for a central bank. Its core function is to act as peer-to-peer electronic cash, according to Satoshi’s original whitepaper. Ethereum’s token, meanwhile, is designed to provide access to Ethereum’s decentralized platform and its decentralized apps.

Wang’s post explores where this dichotomy comes from – and why it could be incorrect. He calls it a “false dichotomy of utility and store of value.”

Where Does the Dichotomy Come From?

Why did we begin to classify coins into utility tokens or stores of value? Where did this binary classification system come from?

Wang believes the dichotomy comes from a decision made at the base layers of any digital currency project. Projects need to choose between decentralization versus scalability and security versus “featurefulness.”

Decentralization Versus Scalability: If a currency needs to process a lot of transactions at the base layer, then you may need to sacrifice decentralization – say, by increasing the block size or reducing the number of validators.

Security Versus Featurefulness: If you want the base layer of the digital currency to be feature-rich – say, by introducing Turing-completeness – then you sacrifice security by doing so, enlarging the attack surface.

Stores of value have enhanced decentralization and security – like bitcoin. Utility coins, meanwhile, are scalable and feature-rich. That’s why this dichotomy exists.

Utility and SoV Are a False Dichotomy: They Can Co-Exist

Wang argues that the dichotomy between utility tokens and SoV tokens is a false dichotomy. Wang avoids arguing for combining the two tokens from a technical standpoint because it’s beyond the point of the article. He does, however, argue that they’re compatible – even complementary – from an economic point of view due to a complementary network effect:

“Complementary network effect refers to situations where increase in usage and value of one product increases usage and value of a separate product, which in turn increases usage and value of the original product.”

Wang argues that the two can coexist, even if they don’t get combined into the single coin. As an example, he cites iOS and DVDs:

“For instance, an increase in the number of useful iOS apps make iOS devices more valuable, which in turn leads to more development of apps on iOS. An increase in the variety of available DVDs make DVD players more valuable, which in turn leads to more DVD production.”

SoV Tokens Can Complement Utility Tokens

Wang is arguing that SoV tokens can lead to better utility tokens. The two types of tokens can have a symbiotic relationship with each other.

“The key insight here is that utility involves exchange, and an exchange involves both a buyer and a seller. If you are a buyer, you may not care about whether the utility asset you are giving up is a good SoV. In fact, if you had a choice between spending a good SoV and a bad SoV, you’d probably want to spend the bad one. But the seller, who is your counterparty, prefers to accept a good SoV, because obviously they are the one who will hold the asset.”

Beyond usability, Wang cites electoral power as a second-order effect of being a good SoV:

“A second-order effect of being a good SoV is that, if a critical mass of people hold the asset in a democratic country, it makes it very hard for the government to ban or otherwise suppress the asset, which clears the path for utility adoption.

Utility Tokens Can Complement SoV Tokens

At the same time, Wang argues that the relationship can be complementary in the other direction. Up above, we discussed how SoV tokens can complement utility tokens, but utility tokens can also complement SoV tokens.

Utility tokens can complement SoV tokens by increasing liquidity, for example:

“Utility increases liquidity because people need to trade the asset in order to use it. For instance, imagine that prediction markets and gambling platforms, which are prohibited by many governments around the world, become wildly successful on a censorship-resistant platform like Ethereum. Then people will have to exchange fiat for Ethers in order to use those apps, and then exchange Ethers for fiat to cash out.”

Utility tokens can also complement SoV tokens by providing security.

“The perfect example of this is Bitcoin, which currently is the best SoV cryptoasset. As its inflation trends to 0, miner rewards will have to come from transaction fees. If they are no longer incentivized to secure the network due to the lack of block rewards and transaction fees, then Bitcoin will obviously lose its SoV status.”

Finally, utility tokens can complement SoV tokens by enhancing decentralization. Utility directly encourages decentralization:

“…the more utility a network has, the more likely it is to have a diverse set of stakeholders, none of whom can change the rules of the network on a whim.”

Conclusion

Ultimately, Wang’s full essay on Medium is worth a read. He explains why there’s a false dichotomy between utility tokens and store of value (SoV) tokens. technical tradeoffs can be solved in the future, allowing SoV and utility tokens to be combined into one powerful token. Today, however, the tokens are complementary with each other from an economic standpoint: they drive benefits on each other’s networks to push the overall crypto industry forward.

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B.E.G. Editorial Team is a gracious group of giving cryptocurrency advocates and blockchain believers who want to ensure we do our part in spreading digital currency awareness and adoption. We are a team of over forty individuals all working as a collective whole to produce around the clock daily news, reviews and insights regarding all major coin updates, token announcements and new releases. Make sure to read our editorial policies and follow us on Twitter, Join us in Telegram. Stay tuned. #bitcoin

[Alert] Use the author's self-conducted information at your own risk, do you own research, never invest more than you are willing to lose.

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