assets

An "asset" is any tool that transfers ownership of value across time and space.

For something to be an asset, it needs to meet at least three basic conditions:

1. Limited supply

2. Durability

3. Social consensus that things can be used to represent value

Most fiat currencies, stocks, bonds, and real estate satisfy these conditions to varying degrees in various ways and are therefore counted as assets.

Many fungible and non-fungible crypto tokens can also count as assets, depending on how well they meet these three conditions.

Condition 3 is critical - assets require some type of social agreement to be valuable. Social agreements may or may not be based on emphasizing the utility of the asset (we'll talk about abt in a few seconds, increasingly it's not).

At the end of the day, these social agreements are memes—our collective truth or delusion, depending on your perspective.

Take stock. A key social agreement underpinning share prices is (roughly):

Share price × total share capital = company value

Stock price valuation models all attempt to estimate the right hand side of this equation - using discounted cash flows, asset and liability calculations, network effect estimates...

Few people stop to consider the fact that the equation is actually a myth, a meme.

In the past, when companies still paid dividends, this equation was even more true, because if a company did well, it delivered tangible benefits to shareholders in the form of more profits as dividend payments.

Example - Amazon

Incidentally, the decoupling of corporate performance and shareholder interests is especially important for tech companies. The dividend payout ratio of listed IT companies is <15%. A company like Amazon has never paid a dime in its roughly 30 years of existence.

If you own 1 share of AMZN, you don't get any utility directly from Amazon Growth. Whether the company is profitable or not has nothing to do with your income. Your shared company "ownership" lives in name only.

You say, but that's because growth companies are better off reinvesting their earnings for more growth. The benefit to shareholders will come from higher share prices.

certainly. But that doesn't negate the fact that when Amazon is doing well, the real reason for AMZN's price hike is b/c we're all buying this collective meme:

Share price × total share capital = company value

Even the conditions under which this equation holds have become increasingly tenuous for companies like Amazon.

In other words, a new generation of public companies is actively violating collective illusions about stock valuations while exploiting the same illusions.

In other words, what you get from AMZN stock is not from the company, but entirely from other mkt players who bought the same valuation meme and are therefore willing to pay more from you when the company is doing well buy stocks.

Your stock price wouldn't have risen if it weren't for this meme, even though it's getting more and more out of touch with reality.

Imagine another situation where instead of pretending that the stock provides "ownership" of the company, we have an index reflecting Amazon's growth for people to bet on (the indices actually already exist).

This is no different from sports betting or horse racing betting. Except your opponent is not someone who bets on other horses in the same race, but a future buyer and seller of the same stock.

Any gains you may gain come from other mkt participants who either bet in the opposite direction or are willing to bet a higher price than you in the hope that the index will rise more so they can also sell at a higher price .

It is easy to see that the rules for such indexing are completely arbitrary. However, as long as players all embrace the same meme, it will work as well as any growth stock.

Why is this important to you as an investor?

(By the way, so far? I write about investing, macro and human potential.)

B/c It's always useful to know the nature of the game you're playing, so you can see how the rules of the game might change in different situations, rather than blindly following common sense i.e. big memes without a mind.

Take useless “governance tokens” in DeFi as an example. Those don't even pretend to be ownership shares and don't offer any income or dividends. People often joke about them, but the price is not zero. Why?

B/c They inherit the same social protocol as growth stocks, but have no real benefit to shareholders. As long as mkt participants all agree to the arbitrary meme of "token price x total supply = protocol value", the token will behave like a stock.

As before, in what is essentially a horse game, your earnings come from other mkt participants, not the economic value generated by the protocol itself.

So when you bet on a governance token that has no utility, you are implicitly betting that our collective valuation meme will persist, even if it has little basis in reality.

Powerful memes, whether based in reality or not, can indeed last a long time and serve a useful function of maintaining social (or market) order. I can't see anything wrong.

Many communities around the world still believe that God is an angry old man who will not let any wrongdoing go unpunished, but who still loves you in some way. You might question the authenticity of this meme. But you can't deny that it holds many societies together very well.

Nonetheless, it seems reasonable to assume that valuation memes with some basis in reality tend to be more durable than those without.

If the "token price x total supply = value of the protocol" relationship is to become stronger than the fiction of the collective imagination, developers really should be doing something to create a positive connection, by the way the left and right side equations.

It can take the form of profit sharing with token holders, similar to a dividend, but it doesn't have to be. In fact, the easiest way might be to compile an emissions/flaring schedule that reflects the progress of the project.

Choose a relevant protocol KPI (Key Performance Indicator) - e.g. TVL, total txns processed, total relays performed, depending on the application - choose a measurement frequency and tie it to the available token supply.

Any lie or fiction is stronger and more enduring when it contains an element of truth. Asset valuation memes are no exception.

refer to

Is Asset Price Valuation a Meme