Broken value creation chain: the value leakage of the securities pass agreement

Creating, accumulating and exchanging value through agreements is one of the most important attributes of an encryption ecosystem. From fat protocols to thin protocols, the dynamics of encrypted networks are concentrated on the transferability of values ​​between different parties, and these dynamics also permeate components at higher levels, such as DApps. It can be said that the securities pass is the first blockchain agreement that bypasses the value creation structure of the public chain . In the current generation of securities pass solutions, the value captured by the protocol layer is little or no, which creates more and more friction with the underlying blockchain. The author likes to call this dysfunctional dynamics the Value Leaking protocol, which is one of the biggest survival challenges facing the securities clearing ecosystem.


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Joel Monegro's fat protocol theory became one of the pioneering papers on the first generation of blockchain applications. The author does not agree with many of the premise of the fat protocol theory, but also acknowledges that in the blockchain application, the protocol layer will accumulate some form of value. The use of "some form of value" is because the author believes that the idea that the lower protocol layer will get the most value is very doubtful and technically and economically flawed. From this perspective, different protocol layers that implement DApp will capture value in different but related ways. For example, the value created in the transfer of utility tokens has some relevance to the value captured by the ERC20 protocol, and the ERC20 protocol itself has some relevance to the value created by the Ethereum network.


Extending the value creation idea of ​​the fat agreement theory to the scope of the securities certificate will produce a very strange picture. The current securities pass is based on a compliance agreement based on the ERC20 standard. However, the current securities pass protocol ecosystem does not provide any native mechanism to capture the value created in the higher layers of the stack or to transfer the value to the blockchain protocol in the lower layers. In a strange value leakage dynamic, the value created by a securities pass application (such as a market or an exchange) leaks through the securities pass protocol layer to the lower layer of the stack (the Ethereum protocol layer). In this sense, the securities pass agreement breaks the value creation chain of the traditional DApp.


Agreement for leaking value

So far, you may be wondering what effect the securities pass agreement does not capture any value. After all, Internet protocols that build so many software architectures don't accumulate any form of value. However, the biggest difference between the Internet and public blockchain applications is that the latter relies on the tier1 protocol that requires currency exchange to run. In other words, if TCPIP has its own digital currency, can you imagine how different the Internet architecture will be compared to now? A public blockchain application like Securities Pass is not only a technical architecture but also a value creation system. Building a value creation model on a broken value chain is a very difficult task.

Imagine an economy in which the level of the stock market is out of touch with the underlying monetary system. Trading dynamics will be out of touch with economic currencies such as inflation, deflation, and currency devaluation. Can you imagine?

In addition, the broken value chain in the securities pass solution will bring some very real challenges.

Misplaced value creation incentive

The most obvious challenge of value disclosure agreements is that they create a complete misalignment between economic incentives in the tier1 network (Ethernet) and higher levels of security. As networks such as Ethereum continue to grow, any monetary policy of the network will directly affect the securities pass. In an ideal ecosystem, the securities pass protocol layer should be able to adjust the impact to some extent.

No incentive to build a securities pass agreement

Without a value creation model, the incentives to establish and grow securities pass agreements and networks are very small, not even. The success of the Ethereum-based agreement is a clear result of the incentive model, which fits well with the fundamental value creations in the Ethereum network.

Inflation – the huge impact of deflation

The value disclosure protocol makes higher-level securities pass applications vulnerable to the underlying blockchain network inflation and deflationary dynamics. To make matters worse, this vulnerability is covered by the protocol layer, so there is no clear way to plan. If the cost of Gas increases, it will have an impact on the securities exchange's business, but the entire interaction is hidden behind the securities pass agreement.

Vulnerable to architectural changes

It's hard to imagine what impact a schema change (such as Plasma or sharding) will have in a securities pass application. However, it is certain that any impact on value creation or exchange will be directly reflected in the securities pass application, as the intermediate agreement has no control. Securities Pass DApps are susceptible to the architectural layers that they do not interact directly with.

Worse as the network grows

The value disclosure agreement will get worse as the surrounding environment grows. Under this circumstance, with the growth of the Ethereum network and the securities pass ecosystem, the value creation model of the securities pass will become more challenging. Given that Ethereum's growth rate is an order of magnitude faster than the securities pass, the challenge is even more severe.

Repairing the value disclosure agreement of the securities pass

The issue of value disclosure does not seem to have a solution that works immediately. However, the author wants to come up with some basic ideas that may help you think:

1) Integrate the securities pass agreement with the existing Ethereum Tier2 protocol : Integrating the securities pass protocol into other tier 2 protocols with a clear value creation model can help mitigate some of the value leakage dynamics.

2) Introducing incentives into the Securities Clearing Agreement : Obviously, if the Securities Clearing Agreement finds a way to introduce a clear incentive mechanism, it will help create a value model at that level.

3) Building value through the open source community : Open source technology has developed a complete manual that creates value in a form that does not directly correspond to the underlying stack. Building a strong community around a securities pass agreement may be another form of value creation.

4) Build a different network : The most significant form of value creation for securities passes is to create a completely different network without relying on the monetary system of the underlying blockchain. This kind of thinking has both risks and technical challenges, but it can generate huge dividends.

Providing a clear mechanism for creating and accumulating value remains one of the biggest challenges facing the current generation of securities clearing platforms. Without this mechanism, the entire securities pass ecosystem will be increasingly susceptible to the dynamics of the underlying network currency.