Stakeholders In A Cryptonetwork

Joel Monegro, who is one of the Partners at Placeholder and a former USV analyst, has written an important post that outlines the relationships between the three primary stakeholders in a cryptonetwork; users, miners/validators, and investors.

Joel calls it the Cryptoeconomic Circle, although it sure looks like a triangle to me 🙂

The most important “aha” that this post generated for me was the role of capital/investors in a cryptonetwork.

Maybe because I come from the world of venture capital, where the role of capital is to fund the cost of developing the technology and business, I had always seen the role of capital in a cryptonetwork similarly.

But as Joel points out in his post, that is one of two roles of capital in a cryptonetwork. The other role is to support and sustain the network by supplying financial capital to the validators who do the work in the system.

As Joel explains in his post:

There are short-term investors (traders), and long term investors (holders). Traders create liquidity for the token so miners can cover operational costs, while holders capitalize the network for growth by supporting token prices. The former is a direct form of value transfer where miners sell earned tokens in the open market to cover their costs and reinvest profits, and the latter is an indirect transfer of value that shows up in miners’ balance sheets rather than their income statements.

Like Joel’s post on Fat Protocols two and a half years ago, I think this will be an important post in helping people understand how these networks actually operate and exchange/capture value. As Joel says at the end of the post:

it helped me see cryptonetworks as systems for exchanging labor for capital (vs. currency), the fundamental concepts of network capital, and what the different roles are for investors like us in the development of these new economies


Comments (Archived):

  1. Mac

    Thanks, Joel. Is this essentially the same as other networks and stakeholder relationships: adopters, producers and investors?

  2. William Mougayar

    It’s that sort of new thinking that flies over the heads of regulators who don’t get it that tokens are a new asset class that doesn’t squarely fit the old Securities Act paradigm.What we have here is an instrument that is both a currency and a stock unit. That’s new in itself, and deserves a new lens for understanding it.

    1. Pointsandfigures

      I think you are selling the regulators I know a bit short. The CFTC certainly understands this

      1. JamesHRH

        Do they like it?

        1. JLM

          .Regulators hate corruption and breaking the rules. A good read is to peruse the SEC’s announced enforcement actions. You realize what scumbags are out there.A lot of folks don’t know that the SEC audits public companies every 3 years. Their audits are quite good.In a dozen years of running a public company, the only issue I ever had was using the term EBITDA which is not a GAAP term.They told me I had to “derive” it every time I used it.JLMwww.themusingsofthebigredca…

          1. William Mougayar

            There are precedents for adapting / interpreting securities laws to fit new technological paradigms.

      2. William Mougayar

        Agreed on the CFTC, but the one other regulator that counts more and putting spokes in the system (SEC) doesn’t.

    2. awaldstein

      You talk at times like it is their problem to fix when in effect it is ours to educate and get them there.

      1. LE

        You talk at times like it is their problem to fixWilliam hasn’t said anything (at least in this comment which you replied to) which indicates that at all.I have said frequently similar things here as you are saying. If someone ‘doesn’t get it’ it’s probably because (among other things as always) you are not doing a good job of communicating or selling (or brainwashing my favorite go to).

      2. William Mougayar

        We have been trying to do that. But they don’t seem to budge from their positions. http://startupmanagement.or

        1. awaldstein

          Then its still your problem to solve.

          1. William Mougayar

            Easier said than done. There has been a lot of industry efforts, and still ongoing.

          2. awaldstein

            Not belittling the magnitude of this in the least!Curious sometime whether your efforts are part of an organized whole as it appears that there are a number–actually quite a few serious players–trying to impact change at a legislative perspective but only loosely organized.The energy, expense and focus of such an effort would appear to need more than an ‘industry’ and more of a collective approach is all.

    3. JLM

      .Bit unfair and ill informed.Within the US SEC regs are hand tailored rules relating to incredibly different types of securities from common stock to derivatives to bonds with a broad range of add-on characteristics pertaining to the size of the offeror and the methodology used to make the solicitation.There is a clear preference for an underwriter and a comprehensive body of disclosures in a written offering prospectus published by the underwriter who is a registered entity under the US SEC 33/34 Acts.This type of offering provides the first universal hook — the submittal of the offering docs to the US SEC for approval.The SEC routinely deals with convertibles from bonds to preferred stock and the CFTC regulates the delivery of financial futures in their underlying commodity (such as purchasing a lumber contract for 1MM BF for delivery a year from today). The Commodity Futures Trading Commission lords over the futures business except for the creation of firms that trade in such things. That is the SEC’s job.The issue of conversion is clearly not novel. In every instance, the issue from a securities perspective is to carefully and accurately describe what the security truly is and the nature of the conversion. What happened in the before and after transaction — the IRS wants to know if it is a taxable event (which it should not be in a perfect world).The test of whether an asset is a security is fairly cut and dried. It is worthwhile to understand the “Howey Test” that comes from a SCOTUS decision in SEC v WJ Howey Co.There is no wrong outcome under the Howey Test, but if the answer is “yes” then the thing is a security and its issuance to the public is regulated by the SEC. It also triggers registration which, in turn, triggers periodic reporting.Reporting is made under pain of perjury.[An editorial comment — people way overstate the difficulty of SEC reporting. It is truly as easy as pie. What it requires is setting up templates, timely financial accounts, and dropping the info into the required formats on a timely basis. Public companies issue three 10Qs and one 10K with footnotes. It is truly easy. The numbers have to be “reviewed” quarterly and “audited” annually but that also is easy.]The test is simple — An investment contract (a security) is made if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Going from memory, I think this case was a 1946 case. It has been out there forever.The IRS has anointed all forms of crypto currency as assets (rather than something else) in the way they are taxed. This logic is clear and published.The burden on the crypto world is to accurately describe what they think is going on, to correlate that to existing regulatory principles, and to engage with the SEC to inform them as a means of engagement. This dialogue has to be in the language of the regulator, not crypto gibberish.There is a bit of a precedent in what happened with the issue of barter transactions. Approximately 40 years ago, people were doing barter transactions in which they were trading excess inventory for a “barter currency” with barter exchanges. They then used the barter currency to facilitate a trade with a third party.As an example, I traded vacant office space for barter credits and then used those barter credits to purchase undeveloped lots and office supplies.Everybody thought this was untaxed. Well, until the IRS showed up and ran it through their “recognition of value” meatgrinder. It got worked out in a reasonable manner with the value of what one traded being the basis of the barter credits and the use of the barter credits then creating the tax basis in the bartered for asset.Members of the barter exchange who had a big deal they were trying to do often tried to acquire barter credits for cash from other members. They traded at a slight discount, sometimes a deep discount based on their age.When one sold the bartered for asset, it had a tax basis as set above. You could obtain long term capital gain treatment based on the holding period of the asset purchased with the barter credits.It took some of the mojo out of the barter world, but it was perfectly reasonable once you dug through it.The US SEC is not going to create a new regulatory regime for crypto. They are going to patiently figure out where crypto fits into their financial world and under the umbrella of the SEC’s mission which is to create orderly markets and protect investors through a regulatory scheme that lays out the rules and punishes the transgressors.We have seen this movie before regardless of how novel everyone wants it to be. We are dealing with regulators here, not NASA.JLMwww.themusingsofthebigredca…

      1. Richard

        William sounds off on those not in the weeds crypto, he should spend this timepursuing a JD.

        1. JLM

          .Having had a taste of that torture, I cannot recommend it to anyone.Luckily I spit the bit because I had to go in the Army and never returned.Oddly, I am thinking about finishing.JLMwww.themusingsofthebigredca…

          1. Richard

            Some of the best have come from Texas.

      2. LE

        people way overstate the difficulty of SEC reportingWhy is this? Why do they say that? I have wondered that. [1][1] It reminds me of when I was a kid and we wanted a pool and my parents said ‘a pool is a lot of work’. I use that expression often. The difference is something that is a ‘labor of love’ vs. ‘labor’ maybe. Dogs are an example of ‘a labor of love’. Cats (we have one) are way less work. But in no way provide as much love (or I should say positive feedback).

        1. JLM

          .A pool is the best thing when you have little kids. All through middle school and high school the kids will be at your house.If you have a good intercom, you can eavesdrop on all of them and gut their evil plans before they get launched.I have done some of my best thinking floating in my pool on a hot afternoon. Incredibly refreshing.JLMwww.themusingsofthebigredca…

          1. Vasudev Ram

            >If you have a good intercom, you can eavesdrop on all of them and gut their evil plans before they get launched.Beat evil with smarter evil (or at least, smartness :)I loved swimming backstroke on a hot sunny day and floating on my back in a pool.As a teen I also read about a technique for staying afloat for long periods, which can be useful if you go overboard or are shipwrecked in the ocean: you keep your whole body relaxed, stay nearly vertical in the water (bent forward slightly at the waist), exhale and then inhale while your head is just a bit above the water, then let your body sink down a bit, depending on your body density (which differs for different people), you will typically sink slightly below the surface, stay there for a bit, then when it is time for your next exhale/inhale cycle, propel yourself upwards with movement of legs and hands, do the exhale/inhale, and repeat – until you are hopefully saved.I tried it out in a pool, and IIRC, it worked. The idea is that you expend the least amount of energy by this method, since you don’t try to keep your head above water all the time, fighting gravity. Rather you fight it only some of the time, and let your body’s natural buoyancy / equilibrium in water do the rest.

        2. Richard

          The Delano, Miami – diving boards were removed long ago. “Art Deco” Best hotel architecture of all time .https://uploads.disquscdn.c

      3. LE

        As an example, I traded vacant office space for barter credits and then used those barter credits to purchase undeveloped lots and office supplies.I did a fair amount of bartering as well. In one case bartered for both my apartment and also the apartments of a few employees. [1] We had the perfect goods to barter also. It worked out really well. The apartments were with large property groups. Nice stuff no issues either. Free rent essentially. You just fit it into excess mfg capacity.I remember when the barter exchange took on a new client that had supplies that we used frequently (graphic arts supplies). The person at the barter exchange was new. I sucked up all the trade credits for that account. The guy at the barter exchange didn’t know he was supposed to dole those out and not let one business take all the credits. When he found out he was really upset. Later he ended up coming and working for me and became my manager. After I sold the business he went off and started his own company and did quite well. I think one of the things that got him interested is when he saw how I pulled that off with him. You know one guy thinks you are shady the other thinks you are smart. Plus I taught him a lesson early on. He should thank me.With what we bartered for we were able to charge more than we would for a non barter accounts. It was like funny money to some people who bartered. So we could get maybe 20% more for the same type of work (with no bidding). Maybe more. I would guess you did similar ‘rack rate +’ perhaps. My first accountant I got for barter and a host of other things.[1] Also restaurants and vacations.

      4. William Mougayar

        Please see this. Many in the industry see the SEC as a stumbling block. They are sending US blockchain innovation overseas.http://startupmanagement.or

        1. JLM

          .EVERYBODY sees the SEC as a stumbling block. No argument there.That is part of their mission — to ensure orderly markets and to protect investors.Getting a prostate exam is not pleasant, but it is a necessary element in a program of good health.Think of the SEC like a prostate exam — don’t want to do it, but happy when it’s done.There is a lot of corruption in crypto and no prudent man would fail to regulate it IAW the SEC’s mission.JLMwww.themusingsofthebigredca…

          1. William Mougayar

            See this new bill, introduced by 2 Congressmen, proposing to update the Securities Act.

          2. JLM

            .That proposed bill was introduced at the end of the last term of Congress. When a bill is introduced at the end of a term, it does not roll over to the next term of Congress. It dies.What it also means is that a couple of Congressmen were making good for some lobbyists — a good thing for the lobbyists.When there is no related bill in the Senate, it is a sign of weakness. Strong legislation has a House and a Senate version of the same bill. Strong legislation has dozens of co-sponsors.There are a handful of similar bills — you can search for them on — which means something.Because of the subject matter of the bill, it will be referred to two committees, one of them being Ways & Means. Unless one or both of the co-sponsors is on W & M, it is not likely to get a hearing. Ever.You should take some comfort that somebody — a lobbyist — drafted a bill and got a Congressman to carry it to the House, but its introduction at the end of the year (during a lame duck session) is not encouraging.There are hundreds and hundreds of bills introduced that never get a hearing in committee.Ways & Means is one of the big ones.A lobbyist is able to report back to their client, “I got your bill introduced.” This then gets the lobbyist an assignment to go lobby staffs for $$$.JLMwww.themusingsofthebigredca…

          3. William Mougayar

            Interesting. I hope they carry it forward and give it some legs.

    4. Richard

      Chutzpah! Mendacity! You are the ones who called it – and hyped it – as “cryptocurrency”. The promoters – have themselves to blame for confusing price and value. you now distance yourself from the anarchists who said we are doing this to take print money that was not in control of the federal reserve, not withstanding the US constition strictly prohibits the coining of currency. Fiat currency has the federal governent behind it. Interesting how you also distance yourself from the waste of electricity. The proof of work element is a shortcoming that only the anarchists believe in. Now you are going to the crypto is a pseudo- security. What a circus!

      1. JLM

        .Buy a consonant, a “d” for “mendacity” — one of my favorite words since Jimmy Swaggart used it.JLMwww.themusingsofthebigredca…

        1. Richard

          My favorite use case was when Paul Newman used it in “Cat on a Hot Tim Roof” ? What a flick!

          1. sigmaalgebra

            She was totally drop dead gorgeous when she was 17. Also in the movies about “Father” with Spencer Tracy. Too bad her first husband died. Then she was not successful with any of the next six or eight.My family has an oil of my mother when she was 15 — her face looked a lot like E. Taylor’s. Mom also had a great figure and did some lunch room, department store modelling in her 40s.

          2. JLM

            <iframe width=”1280″ height=”759″ src=”…” frameborder=”0″ allow=”accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture” allowfullscreen=””></iframe>.Mendacity, indeed.JLMwww.themusingsofthebigredca…

      2. William Mougayar

        Not correct. Please read my blogs and tweets if you want to be more informed about me, instead of rushing to spitball a comment.I have been a proponent of sound ICOs, and never hyped them. I have criticized bad ICOs practices longer and harder than any pundit in the space.

  3. LIAD

    How value flows is all well and good. But we’re seemingly still somewhat stuck on how value accrues. And arguably, that’s more important.

  4. Pointsandfigures

    Sort of like traditional commodity markets. Think oil or gold. The big banks and hedge funds play in the market, and in the periphery of those markets.

    1. JLM

      .The other important thing being that actual users often trade in commodities for delivery as a means of controlling prices.JLMwww.themusingsofthebigredca…

  5. iggyfanlo

    Joel has given new and valuable insight again.His cycle model to me is more valuable than the Howie test for securities as it seems to apply to utility tokens but not to security tokens.Joel clearly points out the user requirement of work for token from miners which is the key definition of utility versus security.

    1. iggyfanlo

      Or at least more clearly differentiates

  6. JamesHRH

    Very elegant schematic of the economics of the product class.

  7. iggyfanlo

    Joel comments about fundamental value also ring true.If BTC’s limited supply and (until now) rising cost of mining drive fundamental value versus market price, this would seem to imply a calculable cost of capital. And would also seem to drive a higher long term price.On the other side, utility tokens like Storj or Filecoin where the underlying cost of storage (until now falling) would drive fundamental value of token downward all else being equal

  8. Tom Labus

    VCs and capital become a form “specialist” for the marketplace as there were specialists for individual stocks. Liquidity also which is crucial in shit storms.

  9. cavepainting

    the real question is how value ultimately gets created for the user from the work being done on the network and if/how it is better than alternatives for the same work.if there is adequate actual (non speculative) value for user, everything else can be worked out.

  10. scottythebody

    Same as it ever was, I guess. So much for the disruptive power of cryptocurrency.

  11. Mike

    The reference to Traders is interesting. Is the current thinking to model crypto assets similar to commodities and stocks as opposed to traditional stable currencies? Is there a long term vision where a crypto asset could behave like a traditional stable currency, or will it be something else? Not an expert but an interested observer.

  12. James R Moreau

    Would need to be slightly modified/explained differently for POS networks. But still useful.

  13. kidmercury

    does anyone have any thoughts on if/how this vision can be applied to profit/revenue sharing tokens, like binancecoin?

  14. OurielOhayon

    This is a great model but for the economic cycle to truly work you cannot discard what remains and will remain for the near and long future a key player of any modern web service: mobile app stores. I find that the crypto community too often ignore that reality and they will be one way or another part of that cycle. how exactly? This is not clear (except for now, being “legislators”)