In a talk at Stanford, Peter Thiel called value capture the “most important, yet least understood” aspect of business.
Value is captured by a business by taking profit. Value captured is the percentage of a product’s total value taken as profit.
In his book Zero to One, Thiel describes the problem of inadequate value capture.
Examples of inadequate value capture include a business selling widgets valued at $10 for $5 (undercharging), or another business selling a widget for $10 which costs them $5.
A business may have inadequate value capture because either it doesn’t charge enough, or costs incurred are too great a percentage of revenue.
In both cases, less value is captured than is created, and at a certain point, inadequate value capture leaves a business economically unviable.
Similarly, inadequate tokenomic value capture allows price to stagnate with adoption and leaves a blockchain vulnerable to economic exploits.
Value capture in tokenomics
Tokens and cryptocurrencies miss opportunities to capture value when they are either not used in ways that raise their price floors, or used in insufficient quantities.
Cryptocurrencies primarily derive value proportional to their use as a medium of exchange (see How to Value Cryptocurrency).
So, a currency that is used to pay fees in a protocol is valuable proportional to the value of fees paid. If such a currency is only used for fees, it is only as valuable as the total amount paid in fees.
Inadequate tokenomic value capture becomes a security problem when a blockchain’s native asset (e.g. Ethereum’s ETH) is used exclusively for paying fees when that chain is securing other valuable assets.
For more on blockchains’ economic security:
Valuing cryptocurrencies is much different than valuing companies, but the concept is the same – inadequate value capture dampens the value proposition of a business; ditto for a token or cryptocurrency.
Why value capture matters
Without adequate value capture, cryptocurrencies and tokens are vulnerable to massive price crashes, and if the tokenomics of a blockchain’s native asset is not considered by developers of token protocols, those protocols may incentivize economic exploits through perverse incentives.
When a token’s value capture and other tokenomic components are properly considered, a token’s price increases steadily with its use in applications, and it strengthens the blockchain network on which it’s built.
If you or a project you know need help designing a protocol or would like input on your project’s tokenomics, reach out to us for a free consult.