Beyond Speculation: How Can Crypto Provide Real World Value?
Crypto has come a long way since the inception of Bitcoin following the 2008 Global Financial Crisis. There are now thousands of cryptocurrency projects backed by hundreds of billions in funding from organizations all over the world.
There are real tools, applications, and networks being developed that are taking key strides towards realizing a digital, distributed financial system secured by blockchain technology.
This is a marvelous show of progress. However, it would be disingenuous to not keep a skeptical eye on the development of the blockchain economy.
While real progress has been achieved, crypto falls notoriously short of providing real world value that should garner any form of true global adoption.
Let me explain.
Speculation Drives Value in Crypto
The first major point of emphasis — speculation drives crypto.
The 2021 bull market was defined by speculation as billions in value were poured into the blockchain economy from all angles, much of which was led by venture capital gobbling up large shares in key projects.
While, yes, investments are needed to facilitate growth, ultimately there is no reason for the average person in the world to actively get into crypto beyond just speculating on future coin values.
Remember — the core philosophy behind the creation of the very first blockchain network, Bitcoin, was to provide an entirely separate, alternative financial ecosystem that citizens of the world could switch to in times of egregious actions on the part of powerful traditional financial institutions.
Consider this post from February 2009 from Satoshi Nakamoto that outlines the motivations behind the development of Bitcoin:
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts
- Satoshi Nakamoto
This is simply not being solved on a broad scale.
The Domination of Fiat in Blockchain
A secondary point to be made here is that there is zero separation between financial systems. In many ways, Nakamoto’s vision has yet to be realized.
The only “conflicts” between traditional and blockchain institutions seems to be a misunderstanding of the adoption trend that is happening right now.
The USD is by and large the single most important asset within the blockchain economy right now as USD-backed stablecoins have been responsible for settling trillions in volume. Following the collapse of Terra Luna, there are few decentralized stablecoin players left. Even MakerDAO’s DAI stablecoin is backed by a large amount of USDC.
This lack of separation means that, once again, crypto is not solving anything meaningful for people. There is no reason for the average household to switch to a crypto-based financial system.
Instead, what is happening is the absolutely explosive global growth of CBDCs as they will not negatively impact the user experience of everyday individuals (not on the surface, let’s put any fears of authoritarianism aside for a second).
Meanwhile, in crypto, those that are more technologically savvy and have a good understanding of financial principles can benefit from yield chasing activities using stablecoins. Otherwise, crypto is massively volatile.
This leads into the core focus of this paper — stable purchasing power is the number one issue crypto needs to solve.
Solving a Real Problem: Stable Purchasing Power
Trust in centralized entities was a key factor in the eventual creation of Bitcoin (and other cryptocurrencies). The second one is related to purchasing power. Every form of money in modern times has failed to provide stable purchasing power to its users.
This is especially true of modern fiat currencies that have free-floating values subject to inflation erosion over time. Consider the purchasing power of a USD as it was even just a few decades ago until today.
Fears of hyper-inflation and the destruction of purchasing power plague many nations around the world since the 2020 Global Pandemic.
Now, it is important to emphasize that just focusing on inflation misses the other half of this coin- deflation. This is why it is important to focus on purchasing power specifically.
Stablecoins do not offer a refuge from this — because they are literally just digital fiat.
Bitcoin and other cryptocurrencies are wildly speculative due to their extreme volatility. They are terrible for securing stable purchasing power, a key quality to be considered viable money.
Until 2023, zero solutions existed that could effectively advance a solution to the problem of purchasing power degradation. Enter AMPL — SPOT.
How SPOT Advances the Concept of Money
The release of the SPOT token this year has finally put a viable solution to purchasing power degradation on the market. The SPOT protocol consists of a set of smart contracts that produces a decentralized store-of-value (SoV) in the SPOT token.
SPOT is a freely redeemable, non-custodial, claim on a basket of on-chain collateral that works to maintain a stable value. This works by automating roll-overs of the collateral as a form of “refresh” to ensure that there is always appropriate collateral to ensure stable purchasing power in the asset.
SPOT is backed by AMPL tranches. For this article, I won’t get into the specifics of this just yet. All that really needs to be understood here is the basic mechanics of the AMPL token. AMPL provides a stable unit of account through a process called rebasing. Rebasing means volatility is moved from price to supply, allowing the protocol to adjust its supply based on demand.
Price versus supply volatility can be visualized below:
AMPL passes down inflation-resistance to the SPOT token through its price target of a 2019 USD adjusted for inflation. The AMPL protocol does not use pegs, collateral, feedback loops, or any other artificial mechanics. Thus, it provides a base collateral that is immutable, unbreakable, and permissionless.
SPOT is the first on-chain decentralized money that actually provides stable purchasing power to the holder. It can wind down to zero users without bailouts and it is bank-run resistant — meaning that there is always enough collateral to back each SPOT token. This is due to the automated collateral roll-over mechanic hinted to above.
Looking Forward
This is the first installment of a series of articles that will provide a more in-depth look into why SPOT was created, how it works, its potential use cases (both on and off-chain), and case studies on the usage of SPOT.
In my next article, I will go into depth about the mechanics behind the SPOT token, explaining why it ultimately advances the concept of money and provides a real world solution to a problem previously left unsolved.
