Proof Of Stake Cryptocurrencies with Non-zero Cumulative Transaction Fees Have Legible Fundamental Value

Summary

A common critique of bitcoin and other cryptocurrencies is that they lack intrinsic value for the simple reason that owning BTC does not, legally or practically, entitle one to any future cash flows. There are arguments for a non-zero value BTC, but these tend to be dismissed out of hand as unproven or illegible. This post will show that Proof of Stake cryptocurrencies with non-zero cumulative transaction fees do not have this problem, as they have real future cash flow linked to the coin.

Introduction

A Proof of Work cryptocurrency like BTC does not generate any native cash flows. The only way to make a profit from buying BTC (either via cash or goods/services) is to be able to resell it in the future at a higher price to someone else (who then has the same problem). This dynamic is then compared to a Ponzi or other zero-sum ‘investment’ scheme where individual profits can only be made on the backs of individual losses (see this post for a good explanation of this argument).

PoW Valuation Issues

A common argument against this thesis: if there are goods and services that can either only or preferably be purchased with BTC, then buyers have a reason to buy BTC that is not speculative. Effectively, as long as there is demand for the use of Bitcoin block space, there is demand for the object that can buy Bitcoin block space.

The issue with this argument is it’s illegibility. There are no good estimates of how much economic value Bitcoin blockspace currently has, how its value will change in the future, or how to use this estimated value to find an intrinsic price for a bitcoin itself. There is an argument that the quantity theory of money can be used for this purpose, but that has fundamental flaws.

This argument also runs into two strong headwinds. First, the high volatility of BTC makes it difficult to transact with. Second, much BTC trading takes place off-chan - where no possible value can accrue.

In the current world, merchants have costs that are denominated in USD, therefore the merchant is incentivized to trade their BTC for USD as soon as possible or risk losing money if the market unexpectedly turns. In addition, the fact that BTC is digital and can be transferred very quickly at any time means buyers and sellers can get rid of it after a transaction very quickly, whereas a physical coin would have to be sold in person.

Finally, most BTC is held on exchanges and shuffled back and forth in speculative frenzy, not traded for goods and services through merchants. This should be obvious, but if no one uses the Bitcoin network it can’t have any fundamental value. If BTC in practice means an arbitrary exchange ticker, then it is indeed isomorphic to a Ponzi scheme.

In Proof of Work currencies such as Bitcoin, transaction fees go to miners to protect the network. Miners then compete for these fees (as well as any block rewards) by spending electricity and hardware costs. These profits generated from this are unrelated to the holders of the coin and instead subsidize (often dirty) electricity generation and chip manufacturing businesses.

PoS Valuations

There is an alternative consensus mechanism class that can be used to support a blockchain - Proof of Stake (PoS). In a PoS system, nodes generate blocks by locking up (‘staking’) coins. They then receive fees from transactions that are included in these blocks. Although primarily intended to remove the large electricity and equipment cost of PoW, PoS also has the side effect of linking the acquisition of transaction fees via the staking mechanism to holding the coin itself. In effect, this gives the coin real cash flow, which can be used to estimate the fundamental value of the coin using discounted cash flow models.

Ethereum for instance, is in the process of transitioning to Proof of Stake. The current ETH supply is around 115 million and the cumulative ETH transaction fees (in $) for 2020 was almost $600 million. If you assumed that all of those fees were evenly distributed among ETH holders, each ETH would have accrued around $5 of value in 2020. Assuming that the Ethereum network could maintain that fee flow in perpetuity, this would imply a fundamental value for ETH of over $200. (Assuming a 2% discount rate)

This analysis is very rough, and is likely off by an order of magnitude or more. In addition, ETH has not yet actually transitioned over to PoS, so ETH holders do not capture of the value of the network transaction fees

Regardless, it is obvious that the fundamental value of ETH (assuming it ever does complete the transaction to Proof of Stake) is not zero. In addition, the value of the coin is related to the total fee throughput of the network, meaning the more scalable the network is, the greater the fundamental value of the coin.

Conclusion

The Causevest Network and XCV will be Proof of Stake from the genesis block. This will give the coin fundamental value as long as there is demand for network block space. In addition, some of the transaction fees will be redirected to good causes using our voting and redistribution features. These features encourage people to compete with each other in using the network, and so it comes full circle.

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