The differing tokenomics of Bitcoin, Ethereum, and Decred
Tokenomics covers the economic incentives of digital tokens, as incentives dictate their value capture. Here’s a comparison of how Bitcoin, Ethereum and Decred apply varying approaches in their protocol design:
Bitcoin is the current gold standard for cryptocurrencies. It is an apolitical scarce monetary asset much like a digital gold, but with greater divisibility and portability. Bitcoin has a fixed maximum supply of 21 million tokens, each of which are subdivisible into 100 million units.
Software products need mechanisms for upgrades. Bitcoin is the most secure public blockchain today, but it will need technical feature upgrades over the coming decades, many of which will be major decision points. If Bitcoin adoption reaches a billion plus people, it’s lack of governance will present risks whenever there are diverging decision gates. Bitcoin’s network has already seen community forks over different approaches for speediness, and the near future will require upgrades to privacy, with no clear preferred solution.
From an economic sense, Bitcoin’s apolitical fixed supply makes it an inflation and seizure proof store of value. Where Bitcoin is highly divisible and portable, it does not provide incentives for day to day use. While Bitcoin is great to protect against inflation and property rights confiscation, it doesn’t generate ongoing yield or solve for near term applications as a medium of exchange. The lack of ongoing yield has given rise to an emerging market of secondary providers who provide interest bearing services in exchange for custodial risk.
Bitcoin’s lack of yield has interesting implications. Where Bitcoin derives value by addressing confiscation and counter party risk, Bitcoin users are already seeking alpha by staking their $BTC with centralized third parties.
Where Bitcoin leads all cryptocurrencies as a store of value candidate, Ethereum has the world’s largest blockchain developer ecosystem. The 2014 creation of Ethereum was a technological improvement on Bitcoin as a programmable smart contract platform which trades off the monetary hardness of Bitcoin for increased technical scalability.
From a tokenomics perspective, Ethereum uses $ETH as a currency of applications on the Ethereum platform. Unlike Bitcoin, which uses $BTC as sole currency in its applications, Ethereum’s protocol design enables other businesses to create their own ERC tokens on top of the base layer token. While this makes Ethereum easier to scale, it creates a susceptibility of a free loader problem, where intermediary tokens can siphon economic value without using $ETH as a medium of exchange. In economic terms, this is an example of value creation without value capture.
Google monetizes its searches better than Twitter monetizes its tweets. Tokenomics offer business models for cryptocurrencies to create and capture value.
Bitcoin employs a single token model to capture the entirety of economic activity in its network, whereas value capture in Ethereum is distributed across multiple tokens.
Contrasting with Bitcoin’s fixed supply of 21 million tokens, Ethereum does not have a defined maximum supply. The pre-sale launch of Ethereum saw 60 million ETH created for contributors, 12 million ETH created towards a development fund, and an annual issuance capped at 18 million ETH per year. Scarcity in an Ethereum ecosystem is also driven by DeFi applications which use $ETH as a collateral.
The Ethereum ecosystem has shown a demand for tokens with governance rights. As of fall 2019, governance bearing ERC tokens like $MKR and $ZRX have been able to accrue considerable value, rising to be top 50 crypto market caps in their own right.
Decred’s token design follows the Bitcoin model, where economic activity is tied to a single base token ($DCR), and which also shares a 21 million max supply. Where both cryptocurrencies share similar characteristics of scarcity and divisibility, Decred expands Bitcoin’s design with additional behavioural incentives. While cryptocurrencies rely on scarcity as an incentive for value retention, Decred has solved for additional use cases as a store of value and as a medium of exchange.
Decred has novel features to incentivize long term token retention:
- Ongoing yield: Decred provides staking rewards (akin to dividends) for people who agree to lock away their $DCR for a minimum of 28 days. Decred currently yields a ~10% cash flow, which ranks high amongst most asset classes. Decred’s staking process has already shown product market fit, with over 50% of circulating $DCR supply being locked away. The yield from staking will gradually decrease over time, which is designed to reward early “buy and hold” behaviors and long term believers. As a contrast to Bitcoin, Decred’s design does not require intermediaries and third party risk to generate cash flow.
- Decision making rights: Decred rewards $DCR stakeholders by providing voting rights over its ecosystem upgrades. In this function, $DCR carries additional utility as a governance token. Where the governance of fiat money is vested in the hands of central bank regulators, Decred vests this power directly in the hands of every $DCR owner. As a new form of money which is scarce like gold, unseizable like Bitcoin, and provides cash flow and shareholder rights, $DCR represents a breakthrough in monetary economics.
Decred has unique applications for a permanence in $DCR use:
- Payments for community contribution: $DCR is the currency of payments in a larger ecosystem where contractors of a Decentralized Autonomous Organization (DAO) contribute to the Decred network. Where other cryptocurrencies rely on a voluntary peer to peer application of their native token, Decred has a self funding community treasury which always pays its contributors in $DCR. This treasury is worth between $10 and $20 million today, but could potentially be worth exponentially more in the future. This can provide a recurring market use for Decred’s native token.
- Fees for time-stamping as a service: Where other cryptocurrencies focus on a sole monetary application, the Decred ecosystem also provides time-stamping as a blockchain solution. The use of time-stamping to identify the authenticity of digital documents is one of the most promising long term applications of blockchain technology, and Decred already has a working product to support this use case. Much like traditional businesses focus on product market fit before moving to monetization, Decred’s timestamping solution (dcrtime) is free today, with an opportunity to be monetized with $DCR fees for time-stamping as a service.
- Cross chain interoperability with a Decentralized Exchange (DEX): Cross chain compatibility is a saleable characteristic for cryptocurrencies. Today, the most important trading pairs for cryptocurrencies are those with fiat money, but the future is likely to be a multicoin world where government issued digital currencies exist alongside free market digital tokens. Where cryptocurrency trades today have to incur fees facilitated by for-profit exchanges, Decred is building a Decentralized Exchange (DEX) to enable trustless cross-chain interoperability without a for-profit motive. Bitcoin solves for political gatekeepers in the traditional fiat based system, but Decred also solves for rent seekers in the cryptocurrency world.