If you buy the native coin of major blockchain expecting to then own a slice of the chain's economic activity or governance rights, much like what you get when you buy a stock, you're probably going to be wrong, but you're never going to be alone.
Realizing that gap exists without fully understanding it can feel like a reason to immediately sell a slew of popular cryptocurrencies, including ones that are actually worth buying, like XRP (XRP 2.86%), Ethereum (ETH 4.56%), and Solana (SOL 3.71%). So if you're not buying ownership or specific economic rights, what are you buying anyways? Let's take a closer look.
Image source: Getty Images.
The big mental mistake investors keep making
The uncomfortable truth is that most blockchains don't route most of the economic value being generated on their chains to coinholders in direct way, like paying a dividend.
Many decentralized applications (dApps) charge fees denominated in their own tokens, in stablecoins, or in a bunch of other ways that do not reliably translate into sustained buying pressure for the native coin, meaning that investors in that coin are not necessarily exposed to upside.
CRYPTO: ETH
Key Data Points
You can see the mismatch by looking at pretty much any set of figures describing decentralized finance (DeFi). For example, on Jan. 16, Ethereum generated $316,815 in chain fees during the prior 24 hours, and about $15.3 million in app fees. Solana looks even more fee-productive at the chain level, with about $1 million in chain fees, and about $12.1 million in application fees in the same period. If you hold those coins, you don't ever get paid even a sliver of all those fees, and at least for now, there's no general expectation of that ever changing.
So if your investment thesis was that high levels of on-chain activity will automatically become high returns for tokenholder, you're missing a value capture mechanism in there, and the evidence does not reliably support the thesis. But don't jump to sell these assets just yet. These cryptocurrencies behave less like equity, and more like a unique blend of commodities, platform toll tokens, and monetary assets. And that means there's another way for investors to win.
CRYPTO: SOL
Key Data Points
How returns actually work
These cryptocurrencies can still pay investors through four mechanisms in particular: Supply contraction, staking rewards, working capital demand from institutional users, and a monetary premium if a chain becomes a default venue for a given type of financial or smart contract activity.
Ethereum is the easiest place to see how these alternative mechanisms of value capture work in practice. Each transaction on the chain has a base fee that gets burned. Burning alone doesn't look like a dividend, because nobody gets to retain it, but it's still a mechanism that can, over time and in aggregate, raise each remaining coin's claim on the network's future usefulness by shrinking the supply outstanding.
Pair that with staking, which is the process of locking up coins to help secure the network in exchange for a decent yield, and you get a second return stream wherein holders can choose to earn rewards on their investment rather than simply sit on it.
Solana's mechanics are quite similar. In plain English, that means Solana can reward stakers, while still reducing supply via burns.
CRYPTO: XRP
Key Data Points
XRP's approach is a bit different. The XRP Ledger's (XRPL) transaction costs are designed to be destroyed rather than paid to validators, so it can't be staked for a yield, and furthermore, the amount of XRP destroyed with each on-chain action is small, even when considered in aggregate over a long period of time.
The lesser-known mechanism is that the XRPL requires reserves, meaning users must hold a minimum amount of XRP to fund accounts and certain objects on the ledger. Reserves thus create structural holding demand, which itself is likely to increase if XRPL usage grows over time.
So are the obscured links between economic activity and coin value a deal breaker? Not at all, as long as you understand where your returns are supposed to come from and how they work.
