Will stablecoins break the token flywheel?

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Crypto has grown into a Kafkaesque maze of meta-bets: Bitcoin is the reserve asset of the internet, and if it can do that, then Ethereum must be the World Computer. 

But if Ethereum can’t scale to be the World Computer all by itself, then perhaps Solana, Avalanche or some other layer-1 will be the global settlement layer for computation instead.

That settlement layer will need apps. Lots of them. Great for the fat app thesis — the investment logic that suggests “most of the value to be found in crypto today is to be found in apps.” 

And if those fat apps have tokens, then hoo boy! — Imagine the value accrual. Especially for those apps that thrive in crypto’s hyperactive attention economy.

What if the apps are so successful that they overload their settlement layers, thereby proving that those blockchains can’t scale, either? Or maybe their devs, validators or other ecosystem participants are not aligned with the apps themselves. What then?

Fun with flywheels

Odds are you’ll then love the appchain thesis. It has everything good about the fat app thesis, with the added benefit of a very special property: ongoing utility for network participants. Tokens can be dished out as rewards (read: payment) to the people and companies keeping the network online. 

And those people need to stake their tokens (and not sell them) to receive more of those rewards — reducing downward pressure on the token’s price and maybe attracting new users (and holders) along the way. The token is an integral part of that flywheel.

Something that Empire host Santiago Roel Santos said on today’s podcast got me thinking about all of this. The topic of Polymarket’s trajectory had come up, and Santi recounted that he had participated in the ICO for the original blockchain-powered prediction market, Augur, which coincidentally occurred 10 years ago this week. 

Augur had a brief moment around early 2018 but never enjoyed the same kind of cultural inertia as Polymarket — a fact that hung in the air as the opportunity came for ParaFi to invest.

“It’s a classic example for anyone that’s interested in investing in technology. And like, you could have sat there and said, ‘Hey, Augur’s not successful, so this is definitely not gonna be successful,” Santi told Yano and Dragonfly’s Rob Hadick.

“The reality is, it pays to re-underwrite the thesis under new circumstances. And yeah, you can laugh, sitting there all day long, ‘This time’s gonna be different.’ But credibly, Augur didn’t work for a number of reasons that we can talk about here. My main diagnosis is that you didn’t have a stablecoin. And if you can’t settle the bet on a stablecoin, it’s just really noisy.”

Santi outlined a scenario where someone bets 30 ETH, and the price of ETH suddenly crashes 80% while the bet is still in play. “It hurts to be right and then lose money,” Santi said. Polymarket fixed this by allowing bets to settle natively in USDC.

Sounds like a stablecoin thesis to me. Hadick expanded on Santi’s point. “Stablecoins are the enabler of other types of financial markets and financial ecosystems onchain,” he said. Without stablecoins, it’s much harder to “do financial activity in any real way over any long period of time onchain,” because of the FX risk. 

And if free-flowing stablecoins are the crucial infrastructure layer that has so far been missing from the crypto economy, then it’s not just the prediction-market thesis that needs re-underwriting. It’s practically every other vertical in the space: NFTs, gaming, you name it.

Santi said: “[A quote has] just stuck with me forever, which is ‘Anytime you remove friction from a system, it unlocks non-linear consumer behavior.’ The internet, e-commerce, and then stablecoins, [which] I think are primitive from e-commerce to gaming to everything in the middle. It’s just explosive, and I think we’re just scratching the surface of what is gonna be possible here.”

But if bitcoin is the reserve asset of the internet, and stablecoins are the unit of account of the crypto economy — sprawling with social, finance and gaming platforms, exchanges, prediction markets, launchpads and apps we’re yet to even dreamed of — then what about the tokens issued by all the apps? What do they do? What would Polymarket’s token do, if it launched one tomorrow?

We’re about to get a new wave of tokens that might start with MetaMask and OpenSea, two of the most well-known and well-used apps in crypto history.

In cycles past, those tokens could reasonably double as a payment bridge within the app itself. We used to call these “utility tokens,” but if what Santi and Rob are saying is true, then stablecoins have rendered those well and truly redundant. 

Governance has always been the fallback value prop for tokens that don’t really have a reason to exist other than as a conduit for capital (itself a function that has historically rubbed securities regulators the wrong way). The governance token thesis has so far not been overly compelling, and it’s worth unpacking that debate further in another email.

The most obvious function for these tokens will be to reward anyone who has used either app to any meaningful degree. Validators and stakers get paid tokens to secure a layer-1, so why wouldn’t users get paid to drive early adoption on an app? 

One problem: Airdrops and token rewards accrue value to the user, not the token. The token becomes the product, and in a crypto economy dominated by stablecoins, such a flywheel quickly runs out of steam.

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