Is Crypto Valuable? A First Principles Approach

“Crypto isn’t intrinsically valuable.” We’ve all heard it before. But what is intrinsically valuable in the first place, economically speaking? I’m confident very few people have actually thought this through. This is a shame because the single most fundamentally important concept any investor should clarify for themselves is this: just what is economic value? This will help us understand if crypto is valuable and if so, which cryptos.

To start I should emphasize that economic value isn’t price. Well it isn’t price alone. While there is no should, only is for price, that doesn’t mean we’re satisfied with whatever the market tells us an asset is worth. We want more than that. We want to know where the price will tend to go. We want robust price appreciation. And robust price appreciation is tied to true economic value. This is of course an assumption, one I feel no need to justify here. Assuming you, dear reader, too think investments with significant economic utility will tend towards sustainable high returns, you might be interested in uncovering where exactly economic value comes from in the first place. In what follows I will outline what it means for an asset to be economically valuable. I will then apply this understanding to different sectors in the crypto space in order to find out whether crypto is speculative hot air, or just another asset class worth looking for undervalued gems. Consider this a primer for any non-crypto-native investor wondering what all the hype is about. Start with economic value.

Economic value in 20 steps or less

  1. It is in the best interest of nearly everyone to abide by the rules of a social contract.
  2. The social contract ensures, in the economic domain, i) (protection of) private property, and ii) contract enforcement.
  3. Private property means we own certain objects, physical, digital, or abstract. If someone tries to take our stuff, the government steps in with force to give our stuff back and/or to disincentivize future violations via punishment. These are part of the terms of the social contract.
  4. There are objects I want but don’t have and can’t or won’t acquire myself.
  5. There are objects you and others want that you don’t have.
  6. Contract enforcement enables two parties to exchange objects without trusting the other party, lest a penalty is enforced by the government backed by force per the terms of the social contract. This is called trade.
  7. Multiple trades for the same pair of objects give rise to markets.
  8. Trade is facilitated by using an intermediary object called money. This reduces the number of trade pairs that need to be liquid for these markets to be efficient.
  9. For money to serve its purpose well as an intermediary for trade it must be
    1. unit of account (price)
    2. fungible (copies are equivalent)
    3. a store of value (purchasing power stays relatively consistent or increases over time)
    4. divisible 
    5. commonly accepted 
    6. transportable 
    7. limited (not necessarily capped)
    8. counterfeit resistant 
  10. The unit of account, or price, of an object is determined by the bids and asks (supply and demand on an exchange) for said object on the open market.
  11. Some objects’ price increases when manipulated in a way such that marginal demand > marginal supply, decreases in the inverse case. 
  12. This manipulation which results in increased price is done by people or machines. This trade of time and effort for more valuable objects or services compared to the raw materials is called labor.
  13. How efficiently one labors (output/time) is called productivity.
  14. Labor efficiency is driven primarily by technological innovations. 
  15. You can make more money selling some goods (objects) or services (labor) than the input costs. Accounting for all costs, this is called profit.
  16. People with money, also called capital, can allocate capital efficiently to rent out labor to make goods and services people want to buy in exchange for profit at scale.
  17. This often requires more upfront capital than this person has on hand.
  18. It is often in people’s two party’s best interest given their risk profile to sign a contract for one party to receive money in exchange for a promise (debt) to pay back this money over time + interest to the other party. This is called credit
  19. Owners sometimes correctly wager that as a result of their capital allocation, the income from their allocations into specific labor arrangements and/or research & development will result in more income than the cost of their debt payments. 
  20. Credit therefore accelerates growth of economic output (the price of all goods and services in an economy) by:
    1. wagering there will be more economic value at a future point in time so the debt can be paid back with interest
    2. efficiently allocating capital to labor organizers or capital allocators (owners)
    3. investing in productivity increases (R&D)

So where’s economic value? Here’s the big insight: it’s none of these things, and it’s all of them. Economic value isn’t merely one thing. Each step in the chain from private property + contract enforcement → trade → money → labor and productivity → credit is vital. Each acts as a catalyst for the next step. All serve to expand what we call the economy. Economic value is not any one thing, it’s a symbiotic relationship. The economic value of an asset isn’t its price. Its price is its price. The economic value of an asset is tied to its relationship with:

  • Markets
  • Money
  • Labor
  • Productivity
  • Credit

There are five questions we can ask about a given investment to better understand if it’s economically valuable (and worth considering as an investment) or pure speculation. Specifically, for trade we should ask:

Does this investment enable more efficient markets?

For money we should ask:

Does this investment do something better than fiat?

For labor we should ask:

Does this investment pay for productive labor?

For productivity we should ask:

Does this investment increase productivity?

For credit we should ask:

Does this asset catalyze credit markets?

The more we answer “yes” for a given investment, the more economically valuable it is and the more secure we can feel in pursuing investments of this type. 

Alright, enough theory. Let’s apply this to crypto assets. There are several sectors all grouped under the asset class “crypto”. But not all sectors were created equal. This is how I like to carve up the crypto asset class:

Crypto sectors

  • Store of value
  • Smartchain (L1)
  • L2 scaling solution
  • Stable coins
  • NFTs
  • Infrastructure
    • Oracles
    • Interoperability
    • File storage
  • Memecoins
  • DeFi Tokens
  • Play-to-Earn Tokens

Due to concerns of length, I will only be focusing on store of value, L1s, stable coins, DeFi protocols (not their incentive coins), NFTs, oracles, and file storage coins. L2 scaling solutions, interoperability, DeFi tokens, and play-to-earn tokens all deserve their own pieces. Memecoins we can safely disregard as speculative assets, but that should come to no surprise to anyone. So without further ado, start with the original crypto: Bitcoin. 

Store of value — Bitcoin

Bitcoin can be thought of as a network of computers all running the Bitcoin protocol program. The Bitcoin protocol enables participants to send digital tokens, also called Bitcoin, from one participant to another. The rules of the protocol outline what constitutes a valid transaction which ensures no one can double spend their Bitcoin. Any alteration to this rule set results in a hard fork. But where does Bitcoin come from in the first place? Tokens are issued to network participants called miners who use massive computer farms to verify that the latest “block” of transactions follow the rules, and to cryptographically secure the network by making it overwhelmingly computationally expensive to mount a hostile attack on the network. This block of transactions is added to the distributed ledger but not before consensus is reached for all participants in the network as to which is the “true” version of the ledger. This ledger, which is really just a series of blocks of transactions, is the Bitcoin blockchain. A copy of the blockchain is stored on all computers running the Bitcoin protocol software.

The Bitcoin protocol is novel because it enables the tracking of a distributed ledger of transactions. This is done in a trustless (no intermediary), immutable (requires 51% of the network power to alter the ledger), and decentralized (copies of the ledger are distributed across the network and updated only once cryptographically proven consensus is reached) manner. 
Bitcoin also has a transparent monetary policy: only 21 million Bitcoin will ever be mined. The Bitcoin issuance reward for securing the network halves roughly every 4 years leading to a predictable inflation rate. Note: Bitcoin is inflationary, it just has a solidified uninflationary monetary policy.

Enough primer on the world’s most well-known crypto. Time to ask relevant fundamental questions. While Bitcoin is certainly an innovation, it is not designed to be economically valuable in all 5 aspects outlined above. It doesn’t aim to, or succeed in making markets more efficient, it does not pay for labor (outside perhaps El Salvador), no worker is more productive because of bitcoin, and Bitcoin is not boosting credit markets (although there are some exceptions). 

So given Bitcoin primarily aims to compete with fiat as money or as a store of value, I will focus instead on just the following question.

Does this investment do something better than fiat?

Recall our criteria for money. For an asset to be effective in its role as money it needs to be: 

  • unit of account 
  • fungible
  • a store of value
  • divisible 
  • commonly accepted 
  • transportable 
  • limited 
  • counterfeit resistant 

How does Bitcoin stack up against fiat currency in these aspects? Bitcoin is of course fungible, it’s more divisible (10^-8 base unit compared to 10^-2 or .01 for fiat), more limited (fixed supply, fiat is not), and counterfeit resistant (it’s the longest and therefore most secure blockchain).
With respect to transportability: Bitcoin takes minutes to settle compared to days or even weeks in the fiat banking system. However, cash is instant. Credit cards too are (functionally) instant for the consumer (actual settlement is limited by credit card service bandwidth ~1,700 transactions per second). Bitcoin cannot and will not compete on this front. The Lightning Network doesn’t fix this either, as you still have to send an initial transaction to open the channel. And unless you do that in advance, you’re stuck sitting at your local coffee shop for 20 minutes for that channel to open up.

As for peer-to-peer transactions, Venmo and Cash App are more than sufficient for the overwhelming majority of banked people. The bankless don’t benefit from Bitcoin as they a) can’t buy any without a bank account in the first place, and b) even if they were sent Bitcoin, they couldn’t cash it out to usable fiat nor could they spend it as Bitcoin isn’t commonly accepted. So barring their entire economies running on Bitcoin (specifically, labor being paid in Bitcoin), Bitcoin fails as a day-to-day currency. 

Bitcoin certainly isn’t commonly accepted or a unit of account and I’m doubtful it ever will be. The moment Bitcoin begins to gain traction as a money instead of just a store of value, governments will react with force. Many governments, the US in particular, get their power from their control over their financial systems. If home grown businesses start ditching, say, the dollar for Bitcoin, they can nip that in the bud. There’s no need for them to do the impossible and shut down the Bitcoin network. All they have to do is declare “if you accept Bitcoin as payment, we will fine you or shut you down.” Watch how quickly that gets put to rest. Bitcoin is not money. 

What about as a store of value? If Bitcoin is anything, it’s volatile.

As a short term store of value, it certainly falls flat. Despite inflation concerns, you’re still better off keeping your checking account in USD. Medium term, if you have flexibility you’re probably going to be okay. You might need to wait a few months if the markets recently dipped which isn’t ideal, but otherwise you’re fine. 

It’s the long term price appreciation where Bitcoin really shines. While Bitcoin volatility has mostly remained the same in the past few years, it’s price has certainly tended to increase. Can we expect this price action trend to continue?

A bet on Bitcoin long term isn’t a bet on it’s transaction speeds or its adoption as a median of exchange. It’s a bet on its main comparative advantages. More clearly stated: it’s a bet that there will be demand for a store of value that is i) transparent (both in monetary policy and in having a public ledger), ii) permissionless, and iii) immutable

i) Bitcoin is transparent. It’s a public ledger with a public unalterable monetary policy. Anyone can track anyone else’s transaction assuming they’ve KYC’d that address as regulators are apt to push for. And the total supply, and issuance schedule are fixed and unalterable (lest a hard fork occur). Markets hate uncertainty. Savers love scarcity. It’s the perfect storm long term barring drastic government action.

ii) Bitcoin is permissionless. The only requirements to participate are a computer. You can even participate from an authoritarian country. As long as you have an internet connection (and a VPN) you can join the party. This is particularly important for citizens who live in poorly economically governed countries like Venezuela, or Turkey. It’s often hard to access strong fiat currencies like the dollar, the euro, or the yen, much less securities markets, so Bitcoin is the natural answer. Its tendency to appreciate certainly helps the select few who can afford to hold for longer periods of time. 

iii) Bitcoin is immutable. In fact, it’s the most immutable coin out there. No one can change the balance sheet of anyone else. No one can alter the protocol without miner network consensus, and even then, it can only be a change which constrains the use of the protocol lest a hard fork is forced. This immutability becomes cryptographically stronger the longer the chain gets. Corporations can’t touch it. Government’s can’t debase it. It’s one of the least inflationary assets out there. This is what separates Bitcoin from the rest. It’s the most secure game in town. 

The older it gets, the lindier it gets. The longer the chain grows, the more secure it becomes. Limited supply, no can can add to the protocol, only restrict it. It’s a one way permissionless, cryptographically irreversible (until quantum computers) conversion of physical value (energy) into economic value (Bitcoin). A true monetary breakthrough.


Bitcoin’s transparent, permissionless, and immutable nature are significant upgrades over fiat. This paired with its predictable, uninflationary, unalterable monetary policy means it will tend to be a good long term store of value.

L1 Smartchains, stable coins, and DeFi

Aside from Bitcoin, layer 1 smart chains (L1s) serve as the foundation for nearly the entire crypto value proposition. Defi, play-to-earn games, DAOs, and NFTs are built on top of them. Oracles connect to them. But are L1s like Ethereum, and therefore most of the crypto space, just hot air? What’s their core value proposition?

Similar to Bitcoin, L1s are permissionless, decentralized, and immutable ledgers. But they have an extra feature which takes blockchain technology to a new level: composability. Let me explain.

What exactly are we keeping track of with this distributed ledger? Let’s take Ethereum for instance. If we’re just shuffling around eth coins and paying transactions in eth, this might seem like a worse version of Bitcoin as it’s somewhat less decentralized and less secure than Bitcoin. This is where composability comes into play. In other words, smart contracts (yes, Bitcoin has smart contracts, but they are not Turing complete, a severe limitation in what’s possible to build). 

Smart contracts enable anyone to deploy a program which, when given conditions are met, automatically execute a transaction. These smart contracts can follow the ERC-20 standard enabled by the community voted EIP-20 proposal and thus allow the creation of tokens which can be sent around the Ethereum blockchain. 

Since ERC-20 there has been a cambrian explosion of tokens in the Ethereum ecosystem made famous by the ICO boom of 2017. For example, DeFi tokens are often used to incentivize providing liquidity for decentralized exchanges. There are also tokens used as rewards of currency in play-to-earn games. Decentralized autonomous organization or DAO tokens can be used to democratically coordinate behavior. Some of these tokens are useful, some are not, all are new and full of potential. Of all the ERC-20 tokens, one class stands above the rest in terms of utility. Enter stable coins.

Stable coins are ERC-20 tokens pegged to the dollar. The dollar needs no explanation: everybody wants dollars. But what does owning stables on ethereum enable you to do that owning USD in the fiat system doesn’t? 

Decentralization, permissionlessness, and immutability (read: censorship resistance) are certainly upgrades to the current financial system. But the fact remains: most people don’t care about those things. Like I said above, I can send my friends cash instantly on Venmo and the time it takes to move a Venmo balance into a checking account is the same it takes to move stables into fiat in a checking account too. Where’s the real upgrade here? 

This is where composability really shines. But how does this get cashed out? This means finance. Specifically, decentralized finance. 

Users on an L1 can do more than just shuffle around their assets from wallet to wallet like on Bitcoin or Venmo. They can:

  1. take out loans
  2. provide credit for yield
  3. swap assets (for stables or an alt-L1 which might have superior tech and is therefore undervalued)
  4. provide liquidity in exchange for transaction fees + other financial rewards

And these are just the basics of DeFi. There’s also algorithmically pegged coins (pegged to other L1s, not just to the dollar, in order to increase total liquidity), decentralized currency reserves (a protocol which owns, not just rents, liquidity like a DEX), vaults to optimize yield farming, and loans using yield-bearing assets as collateral i.e. double dipping. Finally, there is staking where users can “stake” their L1 tokens to help secure the network (by making it more costly to attack) in exchange for a stable yield paid out in that token. While not strictly DeFi, it does constitute a further yield-bearing strategy enabled by most L1s. 
DeFi enables anyone to participate in wealth growing opportunities, independent of asset appreciation. You can make your money work for you, quicker, and without relying on a 3rd party like a bank who will cut you out from most of the profit (what’s your savings account interest rate?). Essentially, the fees that traditional financial gatekeepers collected are now distributed to participants. This is democratized finance.

Here’s the big takeaway for an investor: all of these transactions are paid for in the L1’s native coin. So the more DeFi picks up traction, the more organic demand for the underlying L1 coin grows. So you can benefit from price appreciation from the underlying L1 coin and put that appreciating asset to work in DeFi to stack more stables + L1 tokens. That is a value add.

Then there’s the notorious non-fungible token or NFT technology enabled by community voted EIP-721. NFTs allow data, any type of data, to be brought on-chain and verified as belonging to someone’s wallet or smart contract. This technology, paired with zero-knowledge proofs will enable a class of valuable digital ownership. Some examples include: 

  1. digital art which pay royalties to artists
  2. interoperable video game assets
  3. ID verification while maintaining privacy (zero-knowledge proofs, not limited to NFTs but a natural application thereof)
  4. tradable tickets (e.g. airline tickets, concerts w/o middleman + artist royalties on secondary markets)
  5. entry tickets to exclusive events
  6. proof of attendance receipts (POAPs)
  7. digital assets for non-gaming digital worlds i.e. metaverse property
  8. titles to physical properties (tradable on efficient L1 market places + further composability applications; likely requires further legal clarification + oracles)
  9. licenses and titles (e.g. university degrees, training certificates, liquor licenses)
  10. domain names (plain-english addresses for digital owners e.g. ENS)

On a deeper, more abstract level, recall the two necessary conditions for this entire enterprise we call organized society: 1) private property, and 2) contract enforcement. From these two conditions all of this *gestures to human civilization* blossomed. Hammurabi couldn’t have predicted this. 

Similarly, the digital equivalent of these conditions are 1) NFTs, and 2) smart contracts. While I tried guessing some potential applications from this pair of technological innovations, what will ultimately emerge will be beyond any one person’s imagination. Just like the Sumerians before us, we can’t predict what’s to come. 

Despite this exciting promise, NFTs as they currently stand are largely the backbone of wild art speculation. So until some of these novel use cases of verifiable digital property come to pass, the true benefit of NFTs is severely limited to those select few who are genuinely “in it for the art”.

So how do L1s stack up in our framework? Let’s ask the Big 5 questions:

Does this investment enable more efficient markets?

The primary, currently existing, market L1s make more efficient are the credit markets (more on that below). Other markets may be made more productive but only if both a) oracles bring real-world assets and traditional financial securities on chain and b) the legal ambiguity of ownership enforcement is clarified (if I give you the deed to my house, can you get the police to kick me out?) The securities we do see on chain are still limited in volume. While I do believe we will see more real-world assets and securities come on-chain and benefit from L1’s composability aspect, this is not a significant portion of L1s current value proposition. Given high regulatory uncertainties, it’s also hard to accurately price these potential value-adds in.

Does this investment do something better than fiat?

In many ways yes, it’s very easy to move around crypto compared to fiat locked in the banking system. Stable coins will certainly encroach on the SWIFT banking system (a potential regulatory concern for the US). Once regulators ensure stable coin issuers have a minimum reserve requirement to avoid “bank runs”, traditional financial institutions will inevitably start using stables on the backend in larger volume. 

While L1s do bring some advantages over fiat currency, that is not its primary aim, nor what it does best. Credit cards and cash are simply easier to use. L1 tokens are best thought of as on-chain currency. They are the toll one pays to enter the highway that is the L1 network. It’s what incentivizes miners/validators to ensure the network keeps running so that us (the gas-fee payers) can use this network to move around stable coins or seek yield in DeFi. It is not a direct competitor to fiat, but rather, an enabler of more efficient capital allocation in financial (particularly credit) markets.

Does this investment pay for productive labor?

Yes. L1 tokens pay for miners/validators to ensure the security and operation of the network which enables stable coin transfers + DeFi operations, both productive use cases. In essence, these tokens pay for the ability to participate and run financial markets which suffer from fewer inefficiencies than traditional financial markets due to gatekeepers, custodial fees, slower financial product innovation, etc.

Does this asset catalyze credit markets?

Yes. Due to the permissionless nature of DeFi, anyone can participate in lending protocols. This means more market participants. Novel credit products mean there is more opportunity to add liquidity to these markets further growing credit markets. 

Does this investment increase productivity?

Innovation is the mark of productivity and innovation is in no short supply in L1 protocols. The infinite composability of L1s thanks to smart contracts means capital can not only be allocated more efficiently, but in incredibly unique ways. The game theory of some DeFi protocols are complex, fascinating and potentially sustainably lucrative. DeFi Kingdoms, Olympus DAO, and Tomb Finance offer particularly novel financial products. These are products that either don’t or can’t exist in the current financial landscape, and not simply due to a lack of regulation. 

Some products leverage NFT technology (e.g. DeFi Kingdoms), others leverage algorithmically enabled functionality such as rebasing, buybacks, incentive balancing via bonding when necessary, and token burning/minting. All this is made trustless thanks to smart contract auto-execution. The end result is more efficient automatic market makers, no clearing house needed. This translates to either no fees, or fees which are shared among users of the protocols (imagine making money off iPhone sales simply by owning an iPhone). 
Tokenization enabled by ERC-20 also opens up doors for novel monetization models. Currently “free” websites make money by harvesting user data to either sell or to use for targeted ads. This incentivizes optimizing for “engagement” a notoriously perverse incentive for social media and news websites. A tokenized business model might include selling tokens which enable users to, say, interact with a new social media site. Users can then be rewarded for using the platform with further tokens. As this platform succeeds and demand for these tokens increases, price appreciation is therefore distributed to the community of users. This is just one possible use case of this new business model. A simpler, already existing implementation involves video game in-game currency being an on-chain tradable asset. Demand rises in proportion to how fun the game is for how many players. By virtue of playing the game, and by virtue of the game’s player-base growing, all users benefit from price appreciation of the asset they all hold. Since everyone partially owns the means-of-production for this game, everyone benefits. Truly a Marxist utopia.

NFTs make the digital art market more efficient. Not only do artists get royalties for their work, but there are now more market participants (both buyers and sellers). As a result, the digital art market is now exploding due to ease of use. This all ignores the 10 potential future use cases of NFTs listed above. 

Finally, decentralized autonomous organizations or DAOs enable users from all over the world to coordinate and make protocol-wide decisions via community votes, weighted by the financial stake they have in the protocol being governed. Most major DeFi protocols have governance tied to their native token to incentivize holders to have their say in major protocol changes. One DAO even tried to buy a copy of the US Constitution recently. We’ve yet to see the full extent of DAOs made possible by their underlying L1s.


The main value-add from L1s comes from its composability. This enables: DeFi, NFTs, tokenization, play-to-earn games, DAOs, and much more. Novel financial, gaming, and artistic products are released on a weekly, sometimes daily basis. The contrast between traditional finance and the speed at which this new combination of permissionless, decentralized, composable, and crucially, open-source (read: protocol forking) software hints that we are just at the beginning of a Cambrian explosion of previously unthinkable technology.


Oracles are bridge builders. Their primary aim is to bridge the world of web2, off-chain data, and bring it on-chain to web3 L1 ecosystems. The forerunner in the oracle space is Chainlink. Chainlink, in keeping with the spirit of crypto, aims to bring off-chain data to L1s by doing so in a trustless, decentralized manner. They accomplish this goal by having multiple data providers offer data up to a given data feed such as the price of Bitcoin. Data providers stake LINK, the native token of Chainlink. The more LINK staked, the more likely they are to be selected to fulfill a smart contract’s request for data; a service paid for in LINK. 

Often, but not always, an average is taken of all the feeds. If a data provider consistently deviates with the Trusted answer, that provider has their stake slashed, and their reputation diminished. This disincentivizes bad actors and, given a sufficiently large number of data providers, makes it difficult to corrupt the data feed.

The technology is solid, but what is Chainlink actually being used for? In one way or another, Chainlink is used to secure over $76 billion worth of crypto assets. Chainlink’s dominance in the crypto space has long been secured.

The largest use case is price feeds between exchanges, and between chains. Some examples include: using price feeds to rebase a volatility token, monitoring off-chain asset prices to issue and close loans, tracking cross-chain asset and off-chain securities to fairly price financial derivatives, and more. Chainlink is an invaluable part of the cross-chain DeFi ecosystem. Other use cases involve: verifiable randomness (useful for gambling and gaming applications), proof of off-chain reserves (important for stable coins), and hybrid smart contracts (automatically executing smart contracts using on and off-chain data, upcoming). Hybrid smart contracts full potential is yet to be seen given their recency. 

A particularly exciting use of Chainlink oracles is Mirror protocol on the Terra L1 blockchain. Mirror lets anyone “mint” synthetic assets pegged to stock prices. This is done by depositing an overcollateralized position onto Mirror in exchange for a synthetic asset set to the price of the real-world security. For instance, a user can deposit $258 of UST (Luna’s stable coin), and mint mAAPL at today’s price of $172. This synthetic asset can of course be bought and sold on the open market but Mirror also allows users to long or short these assets. This functionally brings securities trading on the blockchain, no gatekeepers and no holding companies (read: fees) required.

This is particularly advantageous for trading commodities like gold, as holding companies often charge steep fees to store the physical asset. And while voting rights and dividend payments are not possible as these assets are not backed by off-chain securities, bringing securities trading and shorts on chain and to the masses is a step towards integration between traditional and decentralized finance. 

Turn now to the Big 5:

Does this investment enable more efficient markets?

Yes. Price data feeds from Chainlink oracles decrease the need for arbitrage between differently market-priced assets. Whether that’s one chain vs. another chain, or crypto markets vs. securities markets as in the case of synthetic assets. The result is all Chainlink connected markets run more efficiently.

Does this investment do something better than fiat?

Link isn’t meant to be used for, nor is it actually used as, a replacement for fiat. No one is buying a latte with LINK. So while LINK does offer the standard improvements over fiat as any crypto does, it’s a category error to compare the two in the first place. LINK is first and foremost to pay data providers.

Does this investment pay for productive labor?

Yes. Bringing off-chain or cross-chain data onto the block chain in a trustless and decentralized manner is productive, assuming this data is productively used on the blockchain in the first place. So the extent to which oracles provide a productive service depends mostly on the extent to which blockchain markets are productive uses of capital. As I argued above, they are.

Does this investment increase productivity?

Indirectly yes. People and machines deploying capital on decentralized finance markets can do their job more efficiently given their capital is buying assets at a fair market value thanks to oracles. The alternative would be wasted, i.e. less efficient or productive, capital deployed on mispriced assets.

Does this asset catalyze credit markets?

In some cases, yes. Aave, a popular lending protocol on Ethereum with over $24 billion of assets, uses Chainlink oracles to allow users to act as liquidators in order to secure Aave’s liquidity pools. It’s also used to monitor the price of collateral, ensuring that loans are priced fairly which ensures less opportunity for arbitrage thus ensuring more efficient credit markets.


Oracles are an indispensable component of the current DeFi industry. They serve as the backbone which ensures more efficient financial markets on the blockchain. 

Utility — File storage

For the following I will focus on Filecoin as a market case study. There are certainly other file storage services out there, but Filecoin is the most popular. Furthermore, going into every coin would take too much space for the scope of this report. 

What is Filecoin? In short, it’s part of the Interplanetary File System (IPFS), an attempt to permanently and securely store humanity’s data. Filecoin is the subset of IPFS that attempts to create an attractive incentive structure so that people offer up their harddrives to store users’ data in exchange for the FIL token. So how does Filecoin stack up in our framework?

Markets, Labor, and Productivity

Filecoin makes storage markets more efficient, pays for productive labor, and increases productivity all at the same time. 

Storage providers are the labor. The output of their labor is a service: storage. The market consists of the storage providers on the supply side, and customers who want their data stored on the demand side. This marketplace unlocks previously dormant or otherwise underutilized working capital by putting their services on the open market for data storage, all paid for in the FIL token. This is all done with thousands of storage providers compared to the current cloud storage market’s six or so. But how much of an improvement is this exactly? To understand that, we first need to understand the cloud storage market. 

There are two types of cloud storage services. There’s enterprise grade server hosting services primarily for web hosting or deep learning training. This is the domain of Amazon Web Services, Google Cloud, and Microsoft Azure. Then there’s consumer facing cloud storage for things like photos, emails, documents, etc. Think Dropbox, iCloud, and Google Drive. 
Filecoin competes primarily with the latter as speed issues would make it less than ideal for web hosting. So how do the fees compare? Looking at the 2TB/month packages on the leading cloud providers we get the following and comparing with Filecoin’s metrics:

FilecoinDropboxiCloudGoogle One

That’s an insane savings rate. But why is this? The answer lies in lackluster demand. 

Approximately 2.2% of all storage on Filecoin is actually being used. What gives?

Let’s try actually using the service! So we’re gonna go to>Store->Store on Mainnet, and where does that take us? To the docs of course. But wait, the docs are pointing us to different docs. What do we find there? Information on a terminal run application that apparently connects to the Filecoin network. If you can manage to get that up and running, you then have to buy some FIL on an exchange like Coinbase which requires hooking up your bank account so that you can… You get the point. It’s a horrible UX and for what? Most people would rather pay Apple $1/month via Apple Pay to get all the storage they need. Unless you’re a privacy nut there’s really no reason to go through the hassle of getting your files stored in a decentralized way. Remember: if you want a new service to succeed, it not only has to be a good service compared to other crypto alternatives, but it also has to be a good service relative to centralized equivalents. As it stands today, file storage tokens don’t offer that experience for the average end user. 

So what’s missing to upgrade the cloud storage marketplace? Two things: i) desktop + mobile apps which accept credit card payments, and ii) an entry level free storage tier, something like Dropbox’s free 2 GB plan. Going from $0 to $1 is a significant psychological hurdle for consumers to overcome. A nice app that makes the customer onboarding process simple should solve that issue, potentially at the expense of Filecoin’s currently rock bottom pricing. 

Does this investment do something better than fiat?

In settlement times yes, but Filecoin doesn’t largely compete with fiat. Again, comparing the two is a category error.

Does this investment pay for productive labor?

The token one invests in certainly can pay for productive labor. FIL can be used as payment to network providers who offer storage capabilities. That is possibly a useful service.

Does this asset catalyze credit markets?

No. Barring some centralized exchanges where you can use FIL as collateral, Filecoin is largely not affecting credit markets.


File storage tokens have great potential to be large market disruptors. However, until they solve the UX issue and can allow for new customers to be onboarded with free storage options, this project’s organic growth potential will be severely limited.


Despite crypto being rife with scams and elaborate ponzis, many cryptos are certainly worth considering as an investment. Bitcoin offers a unique alternative to traditional assets as a store of value. 

L1 tokens enable a network of decentralized applications, stable coins and DeFi being the clearest useful example. There is much promise in NFT technology, DAO governance, and tokenization business models, but the iPhone-like breakthrough has yet to hit the market. Play-to-earn is another exciting type of decentralized application that shows promise, but the games have a long way to go before they can compete with traditional video games, although monetary incentives will certainly help. 

Oracles too have helped make a stronger case for L1s as they help bridge the moat between traditional and decentralized finance via synthetic assets. More assets are sure to come, keep an eye on real estate and mortgage backed securities. 

Finally, decentralized infrastructure projects like file storage crypto Filecoin offer a glimpse into a possible future where cheap storage is offered to the masses without having to hand over the keys to a large tech company. The current setback is a well functioning app and a free version of the service. Decentralized infrastructure particularly in the cloud storage space might be a large market disruptor to say nothing of censorship resistance. 

While all this might seem very outlandish, and it is, I’d like to invite the reader to focus more on what’s now possible. So in closing, I’d like to share one of my favorite quotes (albeit used in a completely different context): 

At last the horizon appears free to us again… at last our ships may venture out again, venture out to face any danger… the sea, our sea, lies open again; perhaps there has never yet been such an ‘open sea’.


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