When we hear a narrative about crypto from major financial institutions, it seems to always boil down to the same question: “How can we fit crypto into the world of finance?”. This question sounds alien to me, akin to “How can we fit computers in the world of typewriters?”.
In both cases, we can certainly try to wrap older concept around newer and better model but it would be illogical to do so. Crypto is superior to the traditional financial instruments the same way computers are superior to the typewriters. However, old and new can still have a positive relationship: computers did borrow the keyboard and fonts from typewriters after all. Similarly, crypto can capitalize on something that traditional finance does better: valuation.
Therefore, the success of current and future tokens, in my opinion, will heavily depend on sound and verifiable evidence of its fair value. As cryptomarket matures and the hype dies, ICO should shift from issuing cryptocurrencies, a mere form of payment, to cryptoassets that can justify and anchor their price. Traditional finance tells us that this can be achieved by organic supply & demand and/or representative value.
Organic Supply & Demand.
Every open market product has two components in determining its price: supply & demand and expectations. If there is a current shortage of wheat on the global commodity market, the price quite naturally will go up, as demand for wheat is stable and hardly replaceable. What happens next depends on the expectations, or shall we say hype: if shortages are predicted to persist in the foreseeable future the price will be pushed even higher.
Hence, successful ICOs should focus not on mere tokens but the whole ecosystem that will ensure a constant, non-alternative demand for a given token. Moreover, teams should very carefully look into the future and create a long-term game plan, engineering a universal expectation of growth among market participants.
Blockchain and smart contracts offer a unique opportunity to create cryptoassets that are entirely based on the value of the underlying scheme. I deliberately avoid a word “derivative” as in conventional finance there are many opaque layers between base asset and eventual price of the derivative. In contrast, I describe the product with fair value that could be calculated in a matter of minutes by every market participant.
For instance, a certain team starts the ICO that plans to buy rental properties, which have a)resale value b)rental income. The fair value of such token will be determined as
[the appraised value of the rental properties + total rental income + expectations for growth]/ # tokens
The concept is very similar to REITs but without managers, prospectuses, regulators, and banks between properties and investors. Smart contracts will allow automatic, faultless, and instant distribution of profits among token holders once a fresh tranche of rental payments hit the certain account. Due to full transparency of the real estate pool, one can easily calculate the appraised value of tokens using simple Excel calculation.
Overall, I believe that ICO teams can greatly increase the value of their product by adopting sound and robust concepts from traditional finance. Doing so will increase the transparency and trust in the cryptomarket, attracting larger and better capital for the universal long-term benefit.