One of the oldest debates in crypto focuses on the relationship between the adoption of L1 blockchain networks and the value accrual of their native tokens. The debate is unresolved but it is generally believed that, as long as the L1 token is the preferred asset for transacting on the network, the most widely adopted networks will also end up hosting the most valuable tokens. While the details of the exact argument are network- and token-specific, there is one additional idea that has been echoing in these discussions for at least 10 years. For many, it is the most important distinguishing factor between a handful of L1 ’blue chips’ and the evergrowing long tail of the cryptoasset universe at large. That idea is known as ’monetary premium’ and it is rooted in a fundamental misunderstanding of money.
In its most recognizable form, money can be defined as a generally accepted medium of exchange and a unit of account for denominating prices and financial obligations. While it is possible to find numerous historical examples that meet this definition to varying degrees, in most contemporary societies, the only generally accepted medium of exchange is the national currency issued by the government (or, in some cases, issued by a foreign government) and currency-denominated deposits held in (and mostly issued as loans by) regulated financial institutions.
In practice, however, money is a much more elusive concept than the definition above suggests. Since various promises to pay money (promissory notes) and other money-denominated representations of value may, depending on the context, function similarly to physical currency and bank deposits, it is common to view money as existing on a spectrum or hierarchy of ’moneyness’ with the most liquid and widely accepted forms on one extreme, and the least liquid and sparsely accepted forms on the other. While such monetary hierarchies are usually separated by currency (i.e., each currency has its own hierarchy), for the sake of the argument, let’s accept that money in general exists on a similar spectrum and, therefore, the notion of cryptoassets as money is more a matter of degree than of kind.
‘Monetary premium’ refers to the idea that a L1 token should command a higher valuation compared to other cryptoassets because it is particularly well-positioned to serve as money – i.e., as a monetary unit of account, medium of exchange, and store of value – as well as a highly sought after and liquid form of collateral for the onchain economy and beyond. The theory of ’monetary premium’ ultimately stems from a theory of money that was shared by many early proponents of Bitcoin (the network) and BTC (the asset) who were critical of government-issued fiat and, more generally, credit (as opposed to commodity) money. Inspired by the idea of a digital alternative to gold that, similar to the historical Gold Standard, would ’naturally’ limit the ability of anyone to easily expand the supply of base money, early Bitcoiners envisioned a future in which the endlessly inflating fiat monies of the world would struggle to compete with the ’hardness’ of BTC. The high price volatility of BTC was often dismissed as inevitable in the short run but inconsequential in the long run. The societal adoption of BTC as money was theorized as the final destination in a long, multi-decadal journey in which BTC is first embraced as a speculative investment asset and a collectible, followed by its growing use as a store of value, eventually opening the door to it being adopted as a monetary unit of account and a generally accepted medium of exchange.
More recently, the idea that BTC is well-positioned to challenge government-issued fiat currencies in facilitating everyday payments has lost much of its momentum. Instead, BTC is typically described simply as ’digital gold’ – the world’s first, most secure, and most valuable digital commodity that has earned its place in any well-rounded investment portfolio, regardless of its potential to compete as money, strictly defined. Even though the idea of BTC as a universally adopted hard monetary base (a ’Bitcoin Standard’) on top of which a more elastic credit economy could be built does occasionally re-emerge in discussions about Bitcoin’s ultimate purpose and destiny, it is generally not viewed as a necessary condition for its success as an investment vehicle or a long-term store of value.
Despite no longer dominating the Bitcoin narrative, the concept of money (and, to a lesser degree, the ideology of ’hard money’) continues to echo in discussions about the value accrual of other L1 tokens. Almost universally, these tokens are used to pay for the products and services available on their respective networks (most notably transaction fees charged by the network’s operators for adding data to the blockchain), are among the main forms of collateral in decentralized financial (DeFi) applications, and often serve as the first and most liquid trading pair for other assets issued on the network. Thus, on most L1 networks, the native token performs a variety of money-like functions, and it is common among the proponents of these networks to highlight ’monetary premium’ as one of the main reasons why these tokens are valuable. On the surface, such claims appear reasonable: by definition, money is the most liquid asset; on each L1 network, the native token tends to be the most liquid; ergo, it has the most ’moneyness’ and, as long as the demand for the services provided by the network grows, the demand for its native asset should also naturally grow, thereby putting upward pressure on its exchange value. And the more ’moneyness’ a L1 token acquires within its network’s onchain economy, the higher the likelihood that it starts acquiring monetary utility more broadly, thus creating a positive feedback loop. On closer examination, however, there are at least three major issues with this line of thinking:
The use of L1 tokens to denominate prices and facilitate the exchange of goods and services (the most defining functions of money) tends to be very narrow and insular, and is often a choice made out of necessity rather than preference. It is largely limited to the network associated with each individual token and nominally concentrated in trades against other tokens issued on the network. Granted, the most successful L1 tokens have significant liquidity against major national currencies on secondary (offchain) exchanges and some acceptability in online and even physical payments but, relative to their supply and market capitalization, their use as money outside of cryptoasset trading is marginal. As such, L1 tokens may have more ’moneyness’ than typical API credits or brand loyalty points (both of which are usually non-transferable and thus lack monetary utility outside of their technological or commercial venues of issuance) but are nowhere near competing with traditional forms of money in the broader economy. However, the same cannot be said about the opposite – i.e., traditional forms of money competing with L1 tokens onchain – which brings us to the second issue:
L1 tokens as onchain money are being challenged by stablecoins. Stablecoins have the benefit of being tied to national currencies – money that consumers are already using on a daily basis. Since the vast majority of prices, financial liabilities, and monetary accounting in general are denominated in national currencies, it is not surprising that the same standard is being replicated onchain. It began with the sensible practice of displaying onchain values (fees, exchange outcomes, etc.) in national currency denominations even when the underlying transactions were in cryptocurrencies. More importantly, once tokenized versions of national currencies became available onchain, it was only a matter of time until they started to compete with all other tokens as money and – with zero reference to ’monetary premium’ – have done so quite successfully. This can be seen in the use of ’paymasters’ where users no longer need to have the native L1 token to transact on the network and can use any other token instead, most commonly a stablecoin. While the native token is still utilized in the background, from an end user’s perspective, the complexity of having to acquire an unfamiliar and volatile L1 asset is replaced with the more approachable concept of an onchain version of national currency. This is accompanied by the growing use of stablecoins as collateral in DeFi applications, as the preferred token in blockchain-based payment solutions, and in denominating payroll and other types of financial accounting in onchain organizations, all of which inevitably reduces the use of L1 tokens for similar purposes. But there’s an even deeper issue with trying to tie the value accrual mechanism of L1 tokens to their adoption as money:
When proponents speak about ’monetary premium’, what they’re implicitly concerned with is the exchange value of single units of a token (i.e., price), not the exchange value of all units combined (i.e., market capitalization). In other words, L1 tokens are often construed simultaneously as investment vehicles and money – a major category error. It is true that money has to be a reasonably good store of value in the short to medium term but, whenever money itself becomes an attractive investment vehicle, it starts to lose its usefulness as money. A good money is one that everyone is readily willing to part with in payment for goods and services, and comfortable denominating almost all prices, debts, and contracts in. With few exceptions, financial debts and contracts are nominally rigid, which explains why there’s general aversion towards denominating financial obligations (mortgages, business loans, payroll, etc.) in assets that are expected to appreciate in terms of their exchange value over time. Capitalism is a financial system, and financial systems are fundamentally dependent on the outcomes of nominal accounting. Firm profitability, investment returns, and personal savings are all typically measured in money. While it certainly matters what the economic outcomes are in terms of real purchasing power, accumulating monetary gains vs. losses is almost always of more immediate concern, because that’s what determines the ability to service nominal obligations inherited from the past. In any growth-oriented capitalist economy where economic agents are free to enter into money-denominated contracts, the expansion of nominal liabilities cannot be directly controlled (nor should it be), and for such an economy to be reasonably stable, most agents should be able to make most of their payments most of the time. When combined with universal demand for monetary profits, investment returns, and savings growth, it is difficult to rationalize any society adopting a good investment vehicle with a relatively inelastic supply as its money because there will rarely be enough of it circulating to support the liability structure of a healthy, dynamic economy. And therein lies the cognitive dissonance in tying the long-term value accrual mechanism of single units of L1 tokens to their usage as money.
The ’moneyness’ of L1 tokens – especially in terms of their utility in accessing the services and assets available on their underlying networks – can occasionally be an important source of demand for these tokens, and L1 tokens that give access to more or better services and assets are likely to end up with more ’moneyness’ (and holders) than L1 tokens associated with fewer or less attractive services and assets. However, the broader adoption of L1 tokens as money is directly hampered by their success as investment vehicles. Unless the token is specifically optimized to serve all commonly agreed upon functions of money, it will always struggle competing against more conventional forms of currency (including stablecoins) and thus breaking out of the ’less moneyness’ end of the spectrum. It’s time to acknowledge that L1 tokens can’t have it both ways, and the whole concept of ’monetary premium’ may be not just semantically but theoretically misguided.
Does this mean that any L1 network should not carry a valuation premium beyond the assumed demand for its token strictly to transact on the network, or perhaps a simple discounted cash flow calculation based on the network’s transaction fees and/or staking yield? Not at all. But instead of ’money’, the more appropriate foundational terms for constructing the argument are ’alternative investment’ and ’non-sovereign store of value’. The former has been danced around for many years largely due to unclear (and, at times, maliciously unreasonable) regulatory guidance but it should be obvious to anyone who’s intellectually honest that the potential to generate positive investment returns, measured in national currencies, is a core aspect of many of the most important cryptoassets. And it should be equally clear by now that a L1 token can be an excellent investment vehicle and categorically not a security.
The second term – ’non-sovereign store of value’ – maintains an implicit connection to monetary assets, and should therefore satisfy anyone who still wants to believe that, in the long run, certain L1 tokens are particularly well-suited to function as money. Arguably, this belief stems more from the ideological roots of Bitcoin than a neutral analysis of both the theoretical requirements and the practical experience of advanced monetary production economies. However, the discursive inertia of the commodity theory of money – a theory that will likely always have a following among economists, financial professionals, and the general public – should not be a central component of the value accrual narrative of L1 tokens, because their success from an investment perspective is not strictly dependent on their adoption as commodity monies. Just like an asset can be a great investment vehicle but not a security, it can also be a great store of value with only limited or even no monetary usage whatsoever. Perhaps counterintuitively, adopting the much broader terms of ’alternative investment’ and ’non-sovereign store of value’ as opposed to tying L1 tokens to the mast of ’money’ does not undermine their long-term value proposition. On the contrary, it liberates these assets from the theoretical contradictions and practical challenges of actually becoming money on any meaningful scale while still maintaining all of the properties required to make a strong case for their valuation premium relative to other cryptoassets.
The natural question to ask then is: what makes a good non-sovereign investment vehicle and a store of value? For cryptoassets, the following features can be viewed as particularly important:
Digital (and thus easy and cheap to store and transfer)
Provably scarce (i.e., a verifiable supply that is costly to inflate)
Secure and decentralized (and thus difficult to corrupt, censor, or confiscate)
Technologically stable (i.e., major upgrades are rare or extremely carefully managed)
Highly liquid under most market conditions (i.e., able to absorb large inflows/outflows)
Stable or growing market share among potential substitutes (amplifies the Lindy Effect)
Easy to self-custody, if need be, but also widely supported by institutional custodians
Broadly accessible and distributed (i.e., a sufficiently large societal recognition/footprint)
Upward trending exchange value over many economic cycles (both an outcome of the above features and the most important source of narrative reinforcement)
Given how early blockchain networks are in their development, it is difficult to predict the number of L1 tokens that will be competitive in the non-sovereign store of value category. While it may be tempting to ascribe that role to just BTC, a category of one would constitute a single point of failure, which runs counter to the core ethos of crypto. Ideally, there would be at least a handful of assets that meet the criteria above, providing room for competitive differentiation and thus a more robust digital asset market overall.
From an investment perspective, the most successful cryptoassets in terms of serving as non-sovereign stores of value and the most successful blockchain networks in terms of revenue-generating activity are both standing on solid foundations, while the same cannot be said about the theory of ’monetary premium’. The door to adopting L1 tokens as money will always remain open – and especially inviting for those aiming to make a political statement – but, when it comes to a coherent framework for understanding their value accrual, there are better paths to take.