Person A: So what gives LND its value anyway?

Person B: What gives anything value? If enough people desire it, and it has a limited supply, its price will go up as people compete over acquiring it. It is the same with any cryptocurrency.

Every good cryptocurrency must have amongst other things, a utility value, market demand, and sound economic incentives. In this article we will look at the LND token and how it fares in implementing the three aspects mentioned above believed to be the core foundation of sound token economics. But before we dive into this topic, we must first dismiss a common misconception:

Price is not Value

“Price is what you pay. Value is what you get.” — Warren Buffett

In our everyday lives, the notions of price and value can be used interchangeably, yet in the more rigorous context of economic sciences, price is a matter of supply and demand, while value is a matter of utility. And while cryptocurrencies differ in nature from fiat currencies, they too do follow basic economic principles. So while the price of an LND token and its value may at first sight appear interchangeable, in truth, they are only indirectly related by two distinct economic principles:

Utility Value

“Nothing can have value without being an object of utility.” — Karl Marx

In economics and in game theory, utility stands for “the satisfaction a person receives from the use of a good or service.” Satisfaction (or the desire for satisfaction) drives demand, which in turn drives the price of a good or service. While the measurement and quantification of satisfaction is far from being an exact science, in the context of cryptocurrencies, one thing we can measure is utility, for utility is a function of technological innovation. The utility of LND is the enabling of cross-chain lending, of matching lenders and borrowers with digital assets on a real-time exchange.

“ The man who takes the cloth I supplied to him and makes me an article of clothing out of it gives me a use value.” — Karl Marx, The Grundisse (1857)

While crypto-to-crypto lending already exists (platforms like SALT, ETHlend, Nexo, Cred, etc), instant cross-chain lending on an open market is indeed a technological innovation. This new use case will tap into the existing capital in the crypto economy, and put it to use creating a greater amount of liquidity in the market. In this way, LND has a utility for lenders, for borrowers, but also for the entire crypto market. Furthermore, this additional liquidity will be used to enable sophisticated financial operations like short selling, arbitrage, or hedging. Those sophisticated financial operations add valuable information about the crypto marketplace, the same information large financial institutions use to gage the health of traditional markets. In this way, the LND token will help make the crypto market more transparent and more appealing to institutional investors. LND will help make crypto market more efficient.

Supply and Demand

“All money is a matter of belief.” — Adam Smith

When it comes to supply and demand of LND, one part of the equation is pretty straightforward: there’s only ever going to be 1 billion tokens (if you don’t believe me, check it your damn self). Half of the supply is already in circulation. Out of the remaining half, a third has been placed in a growth fund, and another third is vested for founders. So while the circulating supply will gradually increase over time, the total supply will always remain the same. With supply being constant, the only variable is demand.

Institutional Demand

“It’s all about the bucks kid, the rest is conversation.” — Gordon Gekko

Demand is what fuels of the economy, the aggregated drives of individuals willing to pay for a given good or service. Currently, the crypto market is driven by whales, early adopters, and retail investors. However, institutions and their legions of brokers, traders and hedge fund managers are entering the market. Beyond the pale veil of F.U.D, institutional appetite for cryptocurrencies and digital assets is growing. In the words printed on the website, “Lendingblock is here to satisfy the institutional demand for borrowing and lending digital assets.”

Incentives

“Man is an animal that makes bargains: no other animal does this — no dog exchanges bones with another.” — Adam Smith

Utility? Check. Demand? Check. Last but not least, economic incentives are elements of game theory nudging players to engage in a desired set of behaviors. For crypto to disintermediate organizations into networks or markets, the economic agents (miners, stakeholders, etc) must be incentivized to coordinate activities within the resulting network or market. This coordination is made possible by the price mechanism, i.e by the forces of supply and demand.

Bitcoin’s Proof-of-Work (PoW) incentivizes miners to process transactions on the network in return for a monetary reward. Proof-of-Stake (PoS) incentivizes token holders to verify transactions on the network in return for a monetary reward. Interests incentivize lenders to supply their tokens to borrowers in return for a monetary reward paid in LND.

Economic incentives are a way to align the interests of the various economic agents within a market or network. When properly design, each agent, driven by his or her own interest, acts in the interest of the larger network or market. Aligned in this way, greed is good! Gordon Gekko was a visionary, and LND, — you mark my words — will not only bring institutional lenders and borrowers to crypto, but will also bring market efficiency to crypto.

“True economics is the study of human action and good token models acknowledge the power of bottom-up economic activity.” — Don Yocham, Incentive Fundamental for a Token Economy.

Links

Website: https://lendingblock.com/

Twitter: https://twitter.com/lendingblock

Reddit: https://www.reddit.com/r/Lendingblock/

Telegram: https://t.me/Lendingblock