To take a practical example, let’s look at a hypothetical pure Work Token (in its current state of the art) and how it relates to the core criticisms put out against payment tokens:

a) Expected high velocity b) No incentives to hold c) No need for token (can be forked out) d) Using MV=PQ to value tokens

a) Velocity

Work tokens generally act as a “licence”. Users or other entities controlling a given number of nodes must acquire and stake these tokens to perform a service in the network.

The network commonly then chooses workers on a probabilistic basis, where the odds of being chosen are proportional to the number of staked tokens. These staked tokens also act as a security deposit, which can be taken from the node in cases of misbehaviour.

Instead of acting as a currency for exchange of value, work tokens grants the right to capture future value from the network, much like a taxi medallion allows a driver to earn a living in New York City. Contrary to the US Dollars used to settle each individual trip, the velocity of such tokens will be as negligible as that of a taxi medallion.

→ Work tokens will primarily be owned by entities providing work to the network, these will be staked, and therefore held, for as long as these entities desire to participate in the network. The velocity signature of such a token will clearly be lower than that of a purely transactional one.

b) Incentives to hold

While users of a payment token can expect to store their assets in a stablecoin or a SoV and quickly switch into a payment token as it’s needed, keepers in a work token network cannot buy their token after the fact — they need to continuously hold & stake the token in order to benefit from it.

Additionally, within these digital economies, there are frequently data level network effects that result from increased & consistent staking e.g. reputation data is deepened; credit scores become more accurate; and ‘back catalogue’ of content is increased. These network effects reinforce the “relative value” of staked tokens to their staker, and decrease their likelihood of transacting them (e.g. losing the reputation they’ve built up over a period of time of providing good work).

→ Keepers have even stronger incentives to hold over time.

c) Need for the token

On the note of forking, we don’t believe this to be as easy as often claimed. From a technical perspective — forking a network and meaningfully differentiating it in terms of features is non-trivial. But perhaps more importantly, we’re convinced that teams matter, that communities matter, and that brands matter & strengthen network effects.

From a “hodler’s” perspective, a fork is generally easy & effortless to adopt. However from an active user’s perspective, a fork creates complications around ecosystem integrations, development updates, and technical tools. Furthermore, the team and community of early adopters will have skin-in-the-game with the tokens they’ve designed and will not move on so easily. Instead they will keep building exciting new features in order to maintain the networks in a dynamic state. As a result, the networks never reach the “final steady state equilibrium” where such static forking could be possible.

But more importantly, work tokens are needed by the network, not as means of payment, but as instruments for coordination and security of the network. When looking at the cost of a potential attack, these work tokens make it extremely expensive and difficult for an attacker to succeed. Their very specialisation and scarcity delivers greater value the more in demand or under pressure the network become. As an illustration, consider the case of a 51% attack where a bad actor is attacking a network that has $50m staked.

Buying $26m worth of native tokens will be very difficult: as this represents a large part of the outstanding tokens, each additional buy will significantly push up the market price. In fact, it’s even highly likely that total market liquidity would be insufficient to acquire enough tokens to perform a 51% attack. These prohibitively high attack costs combined with the expected loss of value in native tokens following the attack make native tokens an efficient security mechanism.

The same attack would be significantly simpler and cheaper if the staking was performed in BTC or ETH. Buying $26m of BTC or ETH would barely move the market price, and additionally the attacker would not stand to lose any value in their staked BTC or ETH as their price is uncorrelated to the value of the network they are attacking.

Work tokens are effectively the only thing that puts skin-in-the-game for the keepers of the network. Just as Bitcoin miners have significant costs locked up in ASICs which would lose significant value if they were to attack the Bitcoin Blockchain, keepers of networks have costs locked up in staked tokens which would lose significant value if they were to attack the network.

→ The native token is therefore a necessity to both trustlessly coordinate actors & secure the network.

d) Valuation mechanisms

The starting point of an analysis of the value of such work tokens would not consider them as a medium of exchange, unit of account or a store of value, which they primarily are not. As such, the application of MV=PQ would be an incorrectly retrofitted model. Instead, such tokens should be valued based of the future expected cash flows attributable to workers in the network, which can be modelled out based on assumptions on pricing and usage of the network. This can be achieved by traditional Discounted Cash Flow (DCF) analyses or even by looking at valuation techniques for Taxi Medallions.

If employing a DCF model, one would calculate the expected future cash flows of all keepers (“mining” rewards & service payments), which, assuming a constant service rate, will increase proportionally to the usage of the network. An equilibrium valuation would be found at a point where the net present value of the keepers’ cash flows marginally outsize the cost of staked capital & running costs for a threshold internal rate of return.