Rethinking Web3: Why Cost-Based Valuation Could Be the Key to a Stable Crypto Future

Rethinking Web3: Why Cost-Based Valuation Could Be the Key to a Stable Crypto Future

Web3, the decentralized web, has been a topic of significant interest and speculation. However, despite the buzz, it remains in its early stages of consensus-building. Comparing today's Web3 to its earlier days, the participation has increased, but it still faces numerous challenges. Reflecting on Satoshi Nakamoto's early emails, Bitcoin (BTC) was envisioned as a social experiment. The conclusion of this experiment is still unclear, and for now, there seems to be no better alternative to fiat currency payments than this model.

Over the past decade, while Bitcoin and other cryptocurrencies have grown, they haven't fully escaped the influence of fiat currency pricing. The narrative around cryptocurrencies is still heavily tied to concepts like tax evasion and money laundering, which are entrenched in fiat currency discussions. This year, with the approval of the BTC ETF by the SEC and the entry of institutional investors, the landscape has changed, leading to Bitcoin gradually losing its pricing power, much like the stock market.

Key Takeaways

1. Early Stage Consensus-Building: Web3 is still developing its foundational consensus, with increased participation compared to earlier times.
2. Fiat Currency Dependence: Cryptocurrencies, including Bitcoin, are still largely influenced by fiat currency pricing and narratives.
3. Institutional Influence: The approval of BTC ETFs and institutional investments have shifted the dynamics, reducing Bitcoin's independent pricing power.
4. Challenges with PoS Chains: Proof of Stake (PoS) chains are seen as extensions of Web2 practices, leading to wealth centralization similar to fiat currencies.

Analysis

To fundamentally change the current scenario, it's essential to break down the cost of each unit of computational power into all technical aspects of mining machinery production and then price it in terms of cryptocurrency. This involves a few critical steps:

• Detailed Cost Breakdown: The production of mining machinery includes several components: hardware (ASICs, GPUs), software development, energy consumption, cooling systems, and maintenance. Each of these aspects has a cost associated with it, which needs to be meticulously calculated.

• Comprehensive Pricing Model: Once the cost of each technical aspect is determined, these costs need to be aggregated to establish the total cost of mining one unit of cryptocurrency. This model should account for initial capital expenditure, ongoing operational costs, and the depreciation of mining equipment.

• Cryptocurrency Valuation: Instead of relying on market speculation or fiat currency comparisons, the value of a cryptocurrency should reflect the true cost of its production. This cost-based valuation would provide a more stable and intrinsic value, potentially reducing the volatility associated with cryptocurrencies.

Benefits:

1. Intrinsic Value: A cost-based valuation provides a baseline intrinsic value for the cryptocurrency, offering a fundamental anchor in the face of market volatility and speculation.

2. Stability and Predictability: Linking value to production costs can reduce extreme price fluctuations, making cryptocurrencies more reliable for everyday transactions and long-term investments.

3. Economic Incentives for Miners: Ensuring the cryptocurrency's value reflects its production cost maintains economic incentives for miners, crucial for the security and stability of PoW networks.

4. Transparency and Trust: A transparent cost-based valuation method can build trust among users and investors, making the cryptocurrency more attractive and credible.

5. Deterrent to Speculation: Providing a clear and logical basis for valuation can deter excessive speculative trading and reduce market manipulation, leading to a healthier market environment.

6. Benchmark for Comparison: Cost-based valuation allows investors and users to assess whether a cryptocurrency is overvalued or undervalued relative to its production cost.

7. Informed Decision-Making: Investors can make more rational investment strategies with an understanding of the underlying production costs.

8. Foundation for Regulation: Regulators can use cost-based valuations to develop standardized and fair policies for cryptocurrencies.

9. Support for Economic Modeling: This valuation approach provides a solid foundation for economic modeling and analysis, helping predict future market trends.

Limitations:

1. Market Dynamics: Cryptocurrency values are heavily influenced by market demand and supply, which a static cost-based value does not account for.

2. Technological Changes: Advances in technology can rapidly reduce production costs, leading to discrepancies between static and market values.

3. Network Security: If market value drops below production costs, miners may leave the network, compromising security and stability.

Despite these limitations, the benefits of a cost-based valuation method provide a more stable, transparent, and credible foundation for the future of Web3. By emphasizing intrinsic value and reducing market manipulation, this approach can help realize the true potential of decentralized technologies.

Predictions for the Future:

• Technological Breakthroughs in PoW: In the future, there will likely be technological advancements that maintain the PoW model while breaking through the blockchain trilemma (decentralization, security, and scalability). We can expect new public chains infras to emerge from these innovations.

• Comprehensive Cost-Based Valuation: A new technology might emerge that allows for comprehensive cost-based valuation of computational power units. This could extend to all real-life items, formally initiating an era where everything is valued based on cryptocurrency metrics.

Did You Know?

1. Technical Breakthroughs in PoW: Future advancements may address the blockchain trilemma, balancing decentralization, security, and scalability, paving the way for new public chains.
2. Regulatory Impact on Stablecoins: As stablecoins face increasing regulatory scrutiny due to concerns over tax evasion and social stability, their future remains uncertain. This could lead to a significant shift in how cryptocurrencies are priced and valued.
3. Cost-Based Valuation Era: A technological breakthrough might soon allow for the precise valuation of all aspects of computational power, marking the beginning of a new era where cryptocurrencies are priced based on their inherent cost, not just market speculation.

These developments, referred to as the personal sovereignty trilogy of currency, highlight the steps needed to realize the true potential of Web3. By achieving these milestones, Web3 can move beyond theoretical discussions and become a tangible, transformative force in the digital economy.