Research: Exploring the economic principles of digital assets from the underlying logic

Author: Jason Di Piazza, Yuan Han Li; Source: BlockchainCapital; Compiler: Yvonne, Mars Finance   

The pursuit of self-interest in a free and open market will unconsciously promote social welfare, a principle first proposed by Adam Smith and later affirmed by economists Milton Friedman and Paul Samuelson. This concept remains the cornerstone of modern economics.  

Douglas North expanded on this view, pointing out that a well-designed system that protects property rights and contract enforcement shapes individual behavior and mitigates economic uncertainty through a clear incentive framework. As we have seen in the United States, the United Kingdom, Japan, and other countries, this legal framework enables people to trust the fairness and reliability of the economic system, ultimately stimulating entrepreneurship, investment, and sustained economic growth.

Conversely, trust will decrease with the emergence of corruption, opacity, misaligned incentives, or monopolistic behavior, thereby stifling economic activity and innovation. The potential for mutual benefit is lost. As power becomes concentrated, so too does the risk of abuse and misaligned incentives, threatening the integrity of a free and open economy.

History is full of examples of this. For example, in the late 19th century in the United States, the rise of powerful railroad monopolies led to widespread price discrimination, market manipulation, and suppression of competition. These practices undermined confidence in the fairness and efficiency of markets.

While legislative actions such as the Sherman Antitrust Act were a direct response to curb these monopolistic practices, technological advances have also played a vital role in diversifying transportation and logistics. The invention and mass production of the automobile and the development of the interstate highway system are powerful examples.

There are parallels with today’s internet monopolies. Just as the 19th century railroad monopolies concentrated power and stifled competition, today’s dominant digital platforms have created a similarly unequal economic landscape despite their undeniable contributions to global connectivity.

Just as the automobile challenged the railroad monopoly, the emergence of blockchain-powered decentralized systems—enabling trustless peer-to-peer interactions—offers a potential solution for democratizing today’s digital economy.

Tokens are at the heart of this revolution, a new coordination mechanism for digital participation and value exchange. At their core, tokens are assets. What makes tokens different is their programmable nature, which transforms them from static units of value to dynamic, multi-functional tools that can instill trust, fairness, and reliability in economic systems.

Just like a concert ticket gives access to an event, a token gives access to digital services and/or resources, with additional features such as expiration dates, transferability, and even revenue sharing agreements. Imagine if owning Apple stock not only represented equity value and governance rights, but also gave you exclusive access to the latest iPhone or discounts on Apple services. That’s the power of tokens.

At their core, both equity and digital assets represent a stake in the future success and growth of a company or protocol. As such, investors should focus primarily on two key factors: the potential to increase in value (accumulation of value) and the ability to influence the direction of the company (governance rights).

Like other assets, tokens are not all the same. While stocks are fractional ownership shares of a company, their specifics vary but all follow the principles of equity, tokens are a heterogeneous asset class. Some tokens offer equity-like exposure, while others grant access to services, governance rights, or units that embody ecosystem value. This heterogeneity requires an assessment of how unique each token is within its ecosystem.

For example, we can juxtapose Uniswap and Doge. In the former, Uniswap’s token value derives from its governance role and potential fee capture in a widely adopted decentralized exchange. Dogecoin’s value, on the other hand, derives primarily from its meme-driven popularity and speculative demand, rather than clear fundamental utility.

While sentiment and momentum factors can drive short-term price action, sustainable value creation relies on two interdependent factors: token economics and network utility.

Token economics blends economic principles, incentive structures, and governance mechanisms to regulate the supply, demand, distribution, and decision-making process of tokens. This developing field is the intersection of economics, game theory, computer science, and political economy, and aims to create sustainable ecosystems that balance and align stakeholder interests. In other words, they are the digital embodiment of Douglas North’s efficient economic organizations.

Network utility, on the other hand, represents the real-world application, adoption, and value creation of a project.

Together, token economics and network utility form the basis for assessing the long-term fundamental value of a project. By evaluating the economic design, governance structure, and digital utility of a token, investors can make more informed decisions about which companies or protocols have the potential to drive lasting change and create sustainable value.

● Governance value: All token value flows downstream from the governance structure. Token ownership gives holders decision-making power to guide the future of the ecosystem and its smart contract framework.

● Consensus participation value: Token ownership gives holders the right to earn fees and rewards by actively participating in the network (e.g., staking).

● Utility value: Token value is derived from use cases in the ecosystem, such as accessing services, paying fees, or as a means of exchange. Particularly relevant to base-layer blockchain tokens.

● Network value: The value created by the growth and adoption of the ecosystem, measured in user activity, transaction volume, and overall market sentiment, applicable to all token types.

‍By evaluating tokens against these core value drivers, investors can gain a more complete understanding of a project’s potential and make more informed decisions about which tokens to support and hold long-term.

As the blockchain and decentralized application space continues to evolve, new token models and value drivers will emerge, requiring a multidisciplinary team to evaluate and navigate this space. This includes experts in blockchain technology, economics, game theory, computer science, hardware design, and political economy.

For our part, Blockchain Capital invests in digital assets for their utility, rights, and governance, not for speculation. As investors, we can shape the future of the decentralized ecosystem by supporting projects that embody these principles, drive positive change, and create long-term value. Through engagement and adaptability, we aim to help build a more inclusive, transparent, and equitable economic future powered by tokens.