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Michael J. Casey is the chairman of the CoinDesk advisory committee and a senior blockchain research consultant at MIT's Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a personalized newsletter that is delivered every Sunday exclusively to our subscribers.
The most commonly cited number to compare the value of different cryptographic projects is market capitalization. It is an extremely bad metric.
Critics point out, for example, that the lack of liquidity, combined with lax rules in many exchanges, allows founders and large holders to easily manipulate the stock market quotations at sites like CoinMarketCap. This caused all kinds of abuse during last year's ICO mania.
But there is a deeper philosophical problem with market capitalization. Being a benchmark in dollars, this measure (which simply reflects the price of a token multiplied by the number of tokens issued) implicitly judges the success of each encryption project in terms of some "exit" future legal currency.
For an industry rooted in efforts to reinvent money and create alternative forms of exchange of non-legal values, this is a contradiction. And it encourages bad behavior.
Prioritizing the return on dollar-based investment promotes communities of wild fanatics rather than those of passionate software and business developers focused on building successful, decentralized crypto-economic projects.
Yet day traders and YouTube consultants, although they are ubiquitous, do not hold a monopoly on the culture of cryptography. There are still many people attracted to this technology for reasons other than making a quick coin toss.
More than any other type of good, the encrypted tokens are defined by the communities they attract: groups of ad hoc individuals motivated by a belief freely formed in an idea, a unique proposal to decentralize an economic ecosystem. Of course, the central idea of all tokens is good, but the point is that enthusiasm in the idea is a determining factor in the value of a project.
This passion also varies a lot, especially in the degrees in which it manifests itself as a true commitment to the development of technology and the community. If we really want to measure the value of these resources, we must also find ways to quantify those qualities, which are, by definition, independent of the dollar-based price of each token.
Access Crypto-Economics Explorer
That's why I'm excited about the launch of the Crypto-Economics Explorer by the CoinDesk data team. Not only does it use a more relevant encrypted benchmark of the dollar – bitcoin – but it also minimizes the importance of the price itself as a measure of value.
The Explorer offers a weighted and multidimensional representation of the value that incorporates a series of objective measures of involvement and interest in each cryptographic project. Market price / capitalization is only one of five chosen sizes. The others are developer activities, exchange transactions, blockchain transactions and social media activities.
If you compare every coin with this lens, give it a chance; this easy-to-use tool includes a useful zoom feature: you will discover that it opens up a whole new way of understanding the specific factors of community involvement and common interest in each project.
Zcash, for example, is strongly oriented towards the involvement of developers, presumably reflecting the passion that many cryptographers have for the zero-knowledge-proof pro-privacy technology that supports money. But it has very few transactions and very little involvement of social media.
The profile for XRP, on the other hand, is dominated by the engagement of social media, perhaps reflecting the vocal presence of "XRP Army" on Twitter and other sites, in addition to the fact that the development is done internally by Ripple.
Critics of ripple might be tempted to see this as proof that XRP is all about show and no substance. But according to the terms based on the bitcoin benchmark of Crypto Explorer itself, community development is an important factor in the value of any cryptographic project, and social media is a relevant proxy for this.
Why bitcoin?
Already, critics have attacked the choice of bitcoin as a benchmark, presumably displaying this status as a support for the prejudices of so-called "bitcoin masscoists".
A benchmark based on a certain weighted average of all currencies could have dispelled these concerns, but it would have been unnecessarily complicated. It is important to note that the 100 percent score for bitcoins on all five dimensions does not reflect an absolute value; it is simply a basis for comparison. As explained in the supporting documents, it is perfectly possible that a competitor coin outweighs the bitcoin on one or all of the metrics – in other words, to get over 100 percent.
In this sense, the model is not different from that of world currency markets, which use the US dollar as a benchmark. On a purely numerical basis, one could say that the British pound and the euro – currently at $ 1.28 and $ 1.14, respectively – are both "worth more" than the dollar. Of course, it would be meaningless. The point is to have the basis for a comparison over time.
In choosing a landmark, CoinDesk had to start somewhere. And, with the measures chosen, the bitcoin is undoubtedly the grandfather of the crypto coins. In the future, perhaps another composite could be used in his case. But for now, this is a good starting point for a comparative value model.
Work in progress
However, it is important to note that, as with any standard of value, the choices made in the Explorer methodology of Crypto-Economics are, by definition, arbitrary. They are not based on some absolute truths.
The good news is that CoinDesk considers this project to be a work in progress and, in the words of the editor-in-chief Pete Rizzo, is inviting community leaders to "beat our instrument, kick it to death." The collaborative iteration will bring to a constantly improving model.
So immerse yourself in the methodology. Perhaps you can think of an alternative bitcoin benchmark. Perhaps there are good arguments for changing the weightings within each category. Should mining revenues represent more or less than 20% to which it is currently weighted within Explorer's "Network" measure? Are there other relevant metrics to measure developer activity beyond the eight numbers derived from GitHub?
This is a starting point, not an end point. But it is a good starting point to reformulate the conversation about what we should evaluate in the cryptocurrency universe.
And times could not be better.
No, not because the dollar prices of encrypted assets snapped up last week and we need some other non-price distraction, but because institutional investors are on the verge of entering the market and it is crucial that they put their valuation models focused on the dollar and recognize that value is a different concept in the cryptic world.
These new big players speak of crypto as "a new asset class" – as if the encrypted tokens were just an alternative value deposit, not too dissimilar to stocks, bonds or commodities, which would one day bring them returns in dollars when they will cash in again at fiat. Yet what they are really "buying" by investing in a cryptographic token is the exposure to the whims of a community that has formed around a fundamental idea. And very often that idea has as its objective the disintermediation of the same institutions from which this new breed of investors comes. There is a confusing and contradictory logic in investing in something that is designed to kill you.
Regardless of this, the deep pockets of these investors have the potential to add greater volatility to the single price metric for many token projects. So, since an even greater attention goes to traders, it is great to have a model with which to highlight that there are other ways to look at this sector if not with dollars.
Image via Shutterstock
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