Cross-chain investment opportunities and three pool model analysis

As the saying goes: The train is ringing, the gold is two thousand, it is very suitable for use in the cross-chain. If there is a similar sentence, there is another sentence: to get rich, first repair the road. Cross-chain is the road and railway between blockchains. By connecting many existing public chains and a large number of application chains that are coming soon, cross-chain technology is expected to release the innovation potential of decentralized applications, and to realize the vision of Web3. An important step. For the technical innovations of cross-chain and the implications for decentralized applications, see the "Polkadot Architecture Analysis" and "Translating DApp Innovation Potentials" .

This article is not a project evaluation, but an introduction to the investment analysis framework. The framework can be used for investment analysis of PoS blockchains including cross-link hubs. I and my investment fund, Random Capital, belong to the value investment group. The investment practices adopted include fundamental analysis, timing and risk control. This article focuses on the part of the valuation in the fundamental analysis, combined with the cross-chain core projects – Polkadot and Cosmos for example analysis. Please note: The content of this article does not constitute any investment advice. Before entering the topic, let's first understand the concept of network effects.

Network effect

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Network effect refers to the mechanism by which the utility of a product or service increases as the user grows. Both the Internet platform and the encryption protocol economy must have significant network effects. Or conversely, there is no need for network effects, or trading activities with very weak network effects, and there is no need to implement encryption protocols.

Many of the products and services we use every day have network effects, such as mobile phones, WeChat, Taobao, Alipay, and Bitcoin. The more users there are, the more useful or better the products and services become. The most famous quantitative formula for network effects is Metcalfe's law, that is, the network value is proportional to the square of the number of users. As shown in the figure above, the more users there are, the more possible communication connections between users, and the greater the value of the network to users. There is only one connection between two users, four users have six possible connections, and eight users have 28 possible connections. Use n for the number of users, the communication network value is proportional to n*(n-1), and when n is large enough, n*(n-1) is approximately equal to the square of n. Network effect growth is early and slow, and begins to accelerate when it reaches a certain size. This slow-to-fast turning point is generally referred to as a critical size or tipping point. The key to driving the growth of network effects is to try to break through the critical dimensions.

According to Metcalfe's law, inferences about network merging can be obtained. The two networks, the number of users are N and M, respectively, and the value of the larger network formed by their combination (or full interoperability) is proportional to the square of N+M. This is the value of cross-chain technology, forming a blockchain network that is trusted to create a huge network effect. The booming cross-chain ecosystem will eventually make the blockchain that does not access the interoperability network marginalized or even difficult to survive. The other side of network merging is network fragmentation, such as blockchain forks or disconnections from cross-link hubs. The two networks after the fork or disconnection have a lower sum of values ​​than the original large network.

Cross-chain protocol architecture

The cross-chain protocol architecture is shown in the figure above. At the bottom is cross-chain protocols such as Polkadot, Cosmos and IRISNet, all of which are cross-chain protocol projects. The main network of these projects, the Polkadot Relay, Cosmos and IRISNet Hub, is a blockchain that implements cross-chain switching. This article is collectively referred to as a cross-link hub. On top of the cross-chain protocol is the middleware protocol, which provides valuable services for applications, such as cross-chain smart contract platform Edgeware, decentralized predictor Chainlink and so on. The top layer is the application protocol, also known as the decentralized application DApp. In the blockchain domain, application protocols and decentralized applications have the same meaning. The so-called decentralization application is a set of transaction rules implemented using cryptography. This set of trading rules defines a market for digital products or services that have the advantage of transaction costs, can aggregate trading activities, and establish network effects. In order to distinguish from the non-specific free market, the market defined by the encryption protocol is sometimes referred to as the encryption economy, and the encryption protocol can be regarded as the law of the encryption economy.

Application protocols can rely directly on cross-chain protocols or one or more middleware protocols. There are many application protocols, such as Bitcoin, which appear before the cross-chain protocol, and then need to connect to the cross-link hub through the gateway protocol. For example, ChainX is a cross-chain asset gateway, currently supports BTC, and will support other application protocols to access Polkadot in the future. . Therefore, cross-chain ecological projects can be divided into four categories: cross-chain hubs, middleware, gateways and applications. So which type of project has the biggest investment opportunities?

Fat agreement

USV partner Joel Monegro proposed the fat agreement theory in 2016. The theory holds that the main value of the Internet has been captured by the application layer, resulting in Internet giants such as Google, Facebook, Amazon, and Alibaba. The underlying tcp/ip, http, html and other basic protocols have no capture value, and their inventors and investors have not made any money. But in the blockchain era, the situation will be reversed, the application layer, that is, DApp will only capture a small part of the value, most of the value will condense in the lower protocol layer, that is, the basic network will have a huge market value. Joel made two reasons at the time: First, Internet companies gained a huge competitive advantage by monopolizing data, thus capturing the main network value. The data on the blockchain is open, and both old and new applications are equally accessible, so there is no moat. Secondly, with the development of DApp, the users and popularity of the smart contract platform will increase, which will attract more people to invest in the underlying network certification. So the market value of the agreement itself always grows faster than the value of the application portfolio. By 2018, blockchain investment researchers have basically reached a consensus: the most basic and important function of the public trust agreement is to maintain network security. For example, Ethereum has issued a large number of encrypted assets and runs many Defi applications. The security of these assets and applications depends on the Ethereum Foundation Agreement. If the price of ETH is too low, the mine will be shut down in a large range, and the security of the network will decrease. The application of ecological prosperity requires a solid foundational agreement. The blockchain protocol architecture can be regarded as a tree, the tree grows in a leafy shape, and the root system of the tree must be more developed.

But please note that the fat agreement does not mean that the application layer has no good investment opportunities. The market value of basic network certification can rise from several hundred billion to several trillions, a hundred times higher. The market value of the certificate of the application agreement can rise from tens of millions to billions, which is also 100 times. So you can have good investment opportunities. And the future of cross-chain application agreements is full of flowers, and good investment opportunities will emerge in an endless stream.

Investors can have both fish and bear's paw. At the beginning of next year, Polkadot's main online line, Cosmos IBC (cross-chain trading agreement) was launched, and the blockchain cross-chain era was officially opened. This year's cross-chain concept has been hot in the capital market. The valuation of Polkadot private equity has reached 1.2 billion US dollars. Some people think that when the main online line, Polkadot will directly drop to the top ten market value. I only dare to say that the chain is very hot, I dare not say overheating, because the investment is expected. Cross-chaining may create huge added value, giving investors unlimited imagination. Although at least half a year after the cross-linking, the middleware protocol and gateway protocol have begun to "run". ChainX and Edgeware's lockdrop are extremely hot, and Chainlink is all the way to the top 20 of the market value ranking. It is recommended that in the future, we will focus on cross-chain hub projects and middleware and gateway projects that take into account the cross-chain concept. The large-scale landing of cross-chain applications should not be earlier than 2021. Of course, cross-chain applications are also likely to "grab", and you can start focusing on cross-chain applications next year.

In summary, the cross-chain hub is the largest cross-chain ecosystem, and it is also the first investment opportunity. More importantly, the development of the cross-link hub determines the development of the entire ecology. Therefore, paying attention to cross-chain investment, we must first pay attention to the core cross-chain hub project and its certificate. This article will also focus on the analysis of cross-chain hub projects.

Cross-chain hub business model

To access inter-chain hubs to achieve interoperable blockchains, Polkadot is called a parallel chain, and Cosmos is called a partition chain. I think these two words are similar. In this article, they are collectively called parallel chains. Although the implementation technology of the cross-link hub is very complicated, its business model is not complicated at all. Railway hubs, highway hubs, aviation hubs, and communication hubs support the flow of goods, personnel, information, and funds, and collect tolls, airport usage fees, and transfer fees. The cross-chain hub is almost exactly the same, supporting the blockchain transaction flow and charging cross-chain transaction fees. So the fundamentals of a cross-chain hub are the number of parallel chains, the volume of transactions across the chain (activity), and the average transaction cost of cross-chain transactions.

There are four uses for the cross-link hub's native certificate: 1.Staking, that is, the running node provides the outbound service, maintains the system security, and obtains the Staking income; 2. Participates in the governance, and the voting weight is proportional to the number of certificates held; 3. Participate in the slot auction, the person with the largest number of pledge certificates obtains the right to use the slot; 4. Pay the cross-chain transaction fee.

Type of asset

Before doing a fundamental analysis of cross-chain hubs, it is important to figure out what types of assets they belong to. There are many ways to classify assets. This article uses the classification of productive assets and non-productive assets. First of all, all assets, whether productive or non-productive, represent a certain amount of value and are scarce and can be directly or indirectly converted into other assets. Productive assets directly participate in social production, creating new value, and the owners of assets participate in the distribution of new values. Therefore, productive assets usually contain cash flow, a more general expression is a value stream, and a productive asset is actually capital capital. Non-productive assets are used for consumption, consumption, or exchange, and are not directly involved in social production, nor can they obtain value streams.

Stocks and bonds are productive assets, and the value they represent is invested in social production. The owner of the asset can participate in the distribution, that is, to receive dividends or interest. The property can be rented, rented, or used for consumption. Therefore, the property is a productive asset and a non-productive asset. Commodities (such as oil, copper, soybeans, etc.), precious metals (gold and silver, etc.) and cash are not directly involved in production, mainly for consumption, consumption or exchange. Some readers may ask: What is a bank deposit? Bank deposits are productive assets. In fact, they are bonds. Depositors lend money to banks. Banks lend money to participate in social production. Part of the loan interest is paid to depositors.

What type of asset is the encryption pass? PoW Chain Pass is clearly a non-productive asset, such as BTC, ETH, etc. There is no interest in holding BTC/ETH. In many countries, including the United States and China, the legal status of Bitcoin is commodities. I often say that to understand the value source and development law of Bitcoin, we must study it as a currency. So is Bitcoin a commodity or a currency? If you understand Hayek’s monetary concept, you know that goods and currencies are not mutually exclusive. It is said that bitcoin is a currency, and that bitcoin is a very monetary commodity and is equivalent. The certificate of the PoS chain has become different, including the Cosmos Pass ATOM and the Polkadot Pass DOT, which are discussed in this article. They take profit to become productive assets (capital); they can also participate in Staking for payment. Exchange, in this case the certificate is a non-productive asset (commodity/currency). It can be rented like a property or you can live on your own. Therefore, for ATOM and DOT, it is necessary to analyze separately according to whether or not to participate in Staking, because the valuation methods of capital and currency are very different.

Three pool valuation model

The three-pool valuation model is that there are three connected reservoirs in the PoS chain. The three pools are the capital pool, the cash pool and the speculative pool. Within the capital pool is the certificate of participation in Staking. The certifier and the principal (long-term investors) obtain the proceeds through Staking, and Staking is the long-term value storage means of the holder. The cash pool is a pass that is stored in the user's wallet and is used to auction slots or pay cross-chain transaction fees. A speculative pool is a pass that a speculator holds for low buys and sells highs, usually with an exchange address. For price speculators, like oil, garlic, mung beans, tulips, kaffir, and Pu'er tea, the certificate is a commodity that can be used for speculation. Encrypted certificates are the most suitable products for speculation, and their supply is not flexible (not growing with demand), can be permanently stored, can be divided, and can be programmed. It can transfer goods worldwide easily and quickly, and transaction costs are extremely low. The favor of party speculators.

The pass is priced in the speculative pool through market games. The capital pool, the cash pool and the speculative pool are connected to each other and share the same same pass price. Some readers may have discovered that PoS Pass is much like real estate, with both use value (payment/residence), investment value (Staking/rental) and speculative value. Many properties are not rented or involuntarily, just for appreciation. This part of the property is on the edge of the transaction and directly determines the price of the real estate market. However, the speculative phenomenon and price fluctuations of the encryption pass are even more serious than real estate, because the proportion of speculative pools is too high. PoW Pass has no capital pool, only cash pools and speculative pools. The pass for many blockchain projects, including all mainline unlisted projects, only speculative pools. The cash pool and the capital pool do not exist or are small, and the price depends entirely on the market game, and the reflexive effect has skyrocketed. If the PoS chain has a high Staking ratio (large capital pool) and the transactions on the chain are active, the pass is often used for payment (the cash pool is large) and speculative price perturbations can be partially neutralized. That is to say, speculators raise the price of the pass, and long-term holders and users of the certificate will sell part of the pass; otherwise, when the market sentiment is pessimistic, the price of the currency will fall sharply, and the capital pool and cash pool can absorb some of the certificates. Price provides support.

The PoS Pass has both capital and currency attributes and needs to be analyzed separately. This idea comes from the famous cryptocurrency analyst, Placeholder Fund Partner Chris Burniske. On April 26, 2019, he published the blog "Value Capture and Quantification: Cryptocapital vs Cryptocommodities," "On Value Capture and Valuation: Encrypted Capital and Encrypted Commodities," which elaborated on this line of thought. The Orange Book translated the article, and interested students can find it. Since last October, I have defined and used the dual pool model and taught it in the CAVI Encrypted Currency Investment class. Inspired by Chris' new research, I expanded the dual pool model into a three-pool model. So far, I think the Sanchi model is the most advanced PoS certificate valuation model. This paper will then study the intrinsic dynamics of the three pools in combination with the business model of the cross-link hub.

Macro analysis of cash pool

 

First introduce the macro analysis method of the cash pool – Fisher exchange equation. The Fisher exchange equation is a classic formula of economics on commodity exchange. MV = PQ, where M is the amount of money, V is the velocity of money, P is the average price level of the commodity, and Q is the total amount of the commodity. The right side of the equation, P*Q, is the total transaction amount over a period of time. On the left side, M is the amount of money in the economy. V is the average number of transfers of the money over a period of time. M*V is also the total transaction amount for a period of time. For example, in an economy, there is a 10 billion yuan transaction within one year, and the economy has issued a total of 1 billion yuan of currency. On average, all currencies have changed hands 10 times in a year, that is, V equals 10. The Fisher exchange equation is an axiom and does not require proof. Because both sides of this equation are the total amount of commodity transactions over a period of time, only the right side of the commodity, the left side is the currency, can be said to be synonymous, this equation is always true.

When used for cryptocurrency, the Fisher's equation M is the cryptocurrency circulation market value; V is the currency circulation speed; P is the commodity price supplied by the blockchain economy; Q is the number of commodities traded by the economy. The purpose of using the Fisher equation is to value the cryptocurrency. Where is the price of the cryptocurrency? Of course not P, P is the price of the commodity. The price of the currency is included in the M variable, and M is the market value of the cryptocurrency. It is equal to the unit price of the cryptocurrency multiplied by the tradable currency, the PC represents the cryptocurrency unit price, and the CS represents the cryptocurrency flux. Then the Fisher equation becomes PC*CS*V = P*Q. Then P*Q is equal to the total amount of commodity exchange over a period of time, that is, GDP, with GDP representing P*Q, and the equation becomes PC*CS*V = GDP. The variable to be calculated is the cryptocurrency unit price PC, so PC = GDP / (CS * V). So far, the Fisher equation has been transformed into a form that the valuation model can be used directly. That is, the cryptocurrency price is equal to the product of GDP divided by the tradable currency circulation and the circulation speed.

After the Fei Xue formula is deformed, its significance for the study of the fundamentals of the encryption pass is very clear. Assuming V is constant, GDP growth can increase the demand for money without changing the price of money, or push up the price of money if the liquidity does not change. This is consistent with the investor's intuition, that is, the blockchain must be grounded, must be useful, and the pass is valuable. Moreover, the more economic activities in which the pass is the currency, the greater the amount, the more practical the currency price will be. For cross-branched hubchain chains, the scenario of encrypting passes as currency is to pay for cross-chain transaction fees. Therefore, the greater the cross-chain trading volume, the higher the average transaction fee, and the greater the demand for the pass. The increase in demand for cash pools will absorb more passes, which will indirectly push up the price of the currency.

One thing to note is that the slot auctions of Polkadot and Cosmos do not use DOT/ATOM to buy sockets, but pledge DOT/ATOM leases. The actual cost of the buyer is DOT/ATOM's interest loss. The transaction of renting a slot can be incorporated into the Fisher formula, but it is cumbersome. A more concise approach is to subtract the current squander (not Staking) pass from the total amount of circulation.

 

Micro analysis of cash pool

In the previous section, Fisher's consensus was used to analyze the macro cash pool demand. In the process, the currency circulation velocity V was regarded as a constant. In the actual case, V is changing, although the change is slower. To analyze V, only from the micro level. In contrast to the PoS pass, it is assumed that there are only two assets in an economy, one is cash, and the other is a bond that can be realized at face value, fixed interest, and interest on a daily basis. If consumers don't hold cash on a daily basis, but only use bonds to exchange them when they need to use cash, the merchants buy bonds as soon as they get cash, then V approaches infinity and the demand for money will approach infinity. But this is unlikely to happen, because the exchange of cash with bonds has transaction costs, such as handling fees, and requires the consumer to operate, spending time and effort. So how much cash is the consumer willing to hold? The Baumol-Tobin model is designed to answer this question.

The basic idea of ​​the Baumol-Tobin model is that consumers hold cash in a dilemma. The more cash you hold, the more interest you lose; if you keep only a small amount of cash, you have to bear the transaction costs of converting bonds into cash in order to meet your daily consumption needs. Thus, the problem of maintaining cash stocks translates into the problem of how to minimize the sum of the two types of costs, interest income loss and transaction costs.

In order to facilitate everyone's understanding, we calculate the simplest case and then say the formula. Suppose a consumer consumes 1 dollar a day. He can use the bonds to exchange the cash needed for the whole year on the first day of the year, which is 365 yuan, which will be spent by the end of the year. The average cash he held this year was 365/2, equal to 182.5 yuan. If the bond's annual interest rate is 10%, then the consumer's interest income due to cash losses is 182.5*10% = 18.25 yuan. Assume that each time you convert from a bond to cash, the exchange cost is $2. Then the transaction cost + interest loss 18.2+2 = 20.25 yuan. If he exchanges cash for each year at the beginning of the year and the middle of the year, each time he converts 182.5 yuan, his interest loss is 182.5 divided by 2 times the interest rate of 10% = 9.125 yuan. But he exchanged two cash and needed to pay twice the transaction cost, which is 4 yuan. At this time, the total cost of cash held by consumers is 9.125+4=13.125, which saves more than 7 yuan. So is it a small number of conversations? No, if consumers choose to exchange 10 times, the interest loss is really less, but it costs 20 yuan for the transaction fee, which is obviously not optimal. The method to find the optimal solution is the Baumol-Tobin model.

The formula is shown above, where MD is the optimal cash holding, T0 consumption total, b is the conversion cost, and i is the interest rate. The problem just used is calculated by formula, T0=365, b=2, i=10%, and MD=60 is calculated. That is, consumers exchange 120 yuan in cash each time, and then use it to change, and an average of 60 yuan in cash is optimal.

The micro-analysis of the cash pool concluded that the more users use cross-chain transactions, the higher the cross-chain transaction fee per person, the higher the exchange cost of the pass, the lower the Staking interest rate, the higher the currency balance held by each person, the cash pool It is bigger. The two variables that need to be noted are the exchange rate b and the interest rate i of Staking. In order to allow users to hold a certain amount of cash, without having to worry too much about depreciation, Staking's interest rate should not be too high. However, the opposite requirement is that in order to protect network security and increase the proportion of Staking, it is necessary to set a relatively high Staking rate. The best of both worlds is the approach taken by Polkadot, which provides a high rate of return when the Staking ratio is too low, and reduces the rate of return after the Staking ratio is high enough to ensure system safety.

The exchange cost b includes not only the handling fee for redemption. Before the digital age, the cost of redemption was mainly the cost of the exchange operation to and from the bank. In the cryptocurrency market, redemption can be done in an instant, and the handling fee is very low. For the redemption of the pass from Staking, the system can set a lock-in period to increase the exchange cost (ie the loss of interest during the lock period). However, the user can choose to hold another cryptocurrency (such as BTC) and redeem the PoS pass only when needed, which is beyond the control of the system. Therefore, if the PoS pass cannot be preserved for a long period of time, it will be extremely difficult to maintain the cash pool in the future where the exchange of exchanges is extremely low.

Capital pool analysis

The primary purpose of the PoS capital pool is to ensure network security. In theory, a malicious verifier can control the network by mastering more than 33% of Staking. But in fact, because modern PoS has a mechanism for random grouping of certifiers and random assignment of blocks, the cost of the attack is much higher than the theoretical value. For a network with a very dispersed currency, buying a considerable percentage of the certificate requires a very high cost. According to Ethereum researcher Justin Drake, Ethereum 2.0 requires only 30% pledge, which is enough to maintain system security. The cost of the entire system for safe payment, that is, the certifier's income, safety cost = total market value * inflation rate + cross-chain transaction fee. Starting from the principle of economics, under the premise of ensuring system security, the lower the cost, the better, that is, the lower the inflation rate, the better.

Specifically analyze the capital pool of ATOM and DOT certificates. Both the Cosmos and Polkadot teams claim that the project's pass is not intended to be a currency. In their view, the biggest value of ATOM and DOT is to maintain network security and become a credential for governance. Therefore, they choose to set a higher inflation rate to increase the Staking ratio. As mentioned earlier, the attack cost of these two chains is directly proportional to the market value of Staking. Cosmos has been on the line for half a year. At present, the Staking ratio is as high as 87%, the yield is 10.5%, and the inflation rate is 7.24%. The active Validator is probably more than 150. On average, each Validator can get 180 ATOMs per month, at the current price, which is $900 per month. The operating cost of the node is estimated to be around $200 per month.

The Polkadot main network has not yet been launched, and the project side has designed a curve for the Staking yield as a function of Staking, as shown on the right side of the figure above. At the beginning of the main online line, when the Staking ratio is very low, such as 10%-20%, the network is not safe enough. At this time, the Staking yield is extremely high, reaching 30%-40% per year, stimulating the DOT holder Staking or commissioning. When the pledge ratio reaches 50%, the Staking yield is 20%, and the corresponding overall inflation rate is 10%. The project side believes that the Staking ratio is more than 50%, and the network is safe enough. Therefore, the Staking ratio continues to increase, and the yield and inflation rate decline rapidly, eventually converge to 2.5%. Taking into account the status and popularity of Polkadot, and other PoS chains, I estimate that after half a year of Polkadot's main online line, the Staking ratio will be close to 60%, the corresponding yield is 8%, and the inflation rate is slightly below 5%.

Net income of the capital pool = Staking income – node operating cost + pass price increase. If the net income of the capital pool is deducted from the risk premium, it can exceed the risk-free rate of the legal currency, which is a reasonable investment. The biggest variable is the pass price. As will be mentioned later, the price of the pass is determined by the market game in the speculative pool and follows the law of reflexivity. In short, the skyrocketing currency price is the norm. Once the price of the pass has plummeted, even the extremely high Staking yield may not cover the node's operating costs, causing the node to exit and the network to enter the death spiral. In order to avoid such a situation, I believe that the PoS economic system should provide indirect anchoring of the pass price and the legal currency. Currently, major PoS projects, including Cosmos and Polkadot, do not have price anchors. These projects have not experienced the bear market in the cryptocurrency market, and whether the economic system design can undergo the test of the bear market can only be seen.

The PoS chain native pass is also a certificate of governance. Although the process and rules of governance are different, some only give Staking a pass for voting, and the verifier can vote for it; some give voting rights to all holders, and each vote is similar to a referendum. But it is undeniable that governance is valuable. Because governance is the influence of the direction of the encryption protocol. Long-term service providers and service users who rely on cross-link hubs can purchase a pass to obtain governance rights in order to protect their rights and interests from protocol changes. On the other hand, groups that have the majority of governance rights can push the agreement to develop in a direction that benefits its own interests. But in the field of encryption protocols, excessive selfishness is not a good strategy. If the dominant participant tries to harm others, it will eventually lead to a fork in the agreement. According to Metcalfe's law, the evenly splitting fork will lose a lot of network effects, which is to harm others. In April 2018, Phil Bonello proposed a method for quantitatively estimating governance rights based on the network effect loss of the fork, which I do not agree with. Similar to Bitcoin and the Ethereum mining pool, which do not attempt to have more than half of the computing power, I don't think rational PoS certifiers will attempt to have more than half of the certificates. Therefore, in order to avoid bifurcation to obtain more than half of the pass, it is logically untenable. On the contrary, monopoly governance will lead to forks, because other parties also need to protect their own interests.

The latest quantitative study of governance rights was completed in April 2019 by Jake Brukhman and CoinFund. The focus is on the decisiveness of the governance power, that is, the probability that a certain weight of voting rights will have a decisive influence on the voting result. If someone has 50% of voting rights, they can decide 100% of the voting results. If the pass is held by four people on average, 25% per person, the probability that each person's voting rights determine the voting result is 37.5%. If the system has 25 people with equal currency, the probability that each person's voting rights will determine the voting result is about 5%. The conclusion is that the small amount of voting rights is very decisive, almost zero, and decisively increases with the voting rights exponentially. It can be seen that in the case of dispersing the currency, the value of the governance power is basically zero and can be ignored in the valuation.

Although the above discussion concludes that the CSI valuation does not consider governance rights, the inference is very important. That is, as long as the encryption economy develops for a long time, the holders of the currency will inevitably form a kind of voting alliance, because the decisive (ie, value) index of the governance power of the alliance will grow, and the participants of the alliance will benefit from it (the value of governance will increase), which is related to social politics. The reason for the emergence of the alliance is similar. If the alliance is inevitable, then the mechanism design should guide the two sides (or parties) with conflicting interests to form a well-balanced alliance and achieve a game equilibrium. Preventing one party from being alone and fishing, the encryption protocol cannot be maintained for a long time.

In summary, the capital pool's certificate is first to ensure the safety of the blockchain. From the perspective of economic principles, the safety cost should be minimized under the premise of ensuring safety. The core pool of demand for the pass is not the interest rate and governance rights, but the expectation of long-term preservation and appreciation.

Speculative pool analysis

The analysis of the speculative pool must first be clear. The analysis of the speculative pool in this paper is not to predict the short-term price trend, which is the goal of technical analysis. The dynamics of the value investment analysis speculative pool is to see the long-term law of the operation of the encrypted pass price. This helps us to choose the right long-term investment strategy and obtain highly certain investment returns.

A statistical analysis of the historical data of the encrypted asset price reveals that the price trend is highly positively correlated among the mainstream varieties within the encrypted asset. In 2018, the top 200 cryptocurrencies with a market value of more than 75% were more than 75%. Therefore, the driving force for the price increase/fall of the speculative pool does not come from the encryption pass itself, but from the entire cryptocurrency market. For a particular encryption protocol economy, the price fluctuation of the speculative pool can be considered an external input.

The long-term price movement of cryptocurrencies can be seen as a superposition of price fluctuations caused by basic trends and reflexivity. As shown in the price chart of Bitcoin as shown above, in the index price coordinate system, the long-term price trend of BTC continues to rise, and the actual currency price fluctuates around the long-term trend. Reflexivity is a theory about the deviation of asset prices from equilibrium and a self-enhancement (positive feedback) of price trends. In the crypto-asset market, the reversal of the bear market and the bull market have risen a lot, and bears and cattle will continue for a long time. Why is the price fluctuation of crypto assets showing reflexivity? It is not discussed in depth.

In the face of price reflexivity, long-term investors can have two options. The first is very simple and effective. It is to ignore the fluctuations and only earn the basic trend of the money, that is, the long-term coins. Most investors who make a lot of money in the cryptocurrency market are using the strategy of using the currency. The second type is very difficult but very tempting, that is, predicting reflexivity, and the big band is high and low. This involves very complicated and difficult trading timing methods and is beyond the scope of this article. Regardless of the strategy, the basic condition for long-term investment success is that cryptocurrencies have an upward trend. This is the problem to be solved by fundamental analysis, and the long-term basic trend is independent of the speculative pool, determined by the cash pool and the capital pool. This has created a very interesting situation. The speculative pool directly determines the price of the currency. If you make a short-term investment, you can focus only on the speculative pool, and only the external factors that change the supply pool and the cash pool. But for long-term investment, speculative pools become less important.

Polkadot vs Cosmos

This summary is a comprehensive comparison of Cosmos and Polkadot from the perspective of investors. The first is the expansion method. The Polkadot network topology is a tree shape, and the tree root is a relay chain, which can connect multiple parallel chains. Due to the limited number of parallel chains that the relay chain can access, in order to continue to expand, Polkadot will support relay cascading. That is, the primary relay accesses the root relay, and the secondary relay accesses the primary relay. The Cosmos network topology is an acyclic graph with multiple Hub interconnects, each Hub connecting multiple partition chains. There are no technical differences between the two extension methods, and I even think that multiple Hub interconnections are more flexible. But from an investment perspective, according to the fat protocol principle, Polkadot's entire ecosystem is built on the Polkadot main network (root relay), so the growth of all applications will promote DOT value-added. The Cosmos Ecology will have multiple equal Hubs in the future, and the current Cosmos Hub and IRIS Hub are just the first two. The benefits of ecological development are distributed among multiple juxtaposed Hubs. Polkadot's extension is more conducive to value capture.

Cosmos and Polkadot are very different in the security model. There is no shared security between the Cosmos Hub and the partition chain. The previous analysis of the relationship between capital pool and blockchain security. DOT's capital pool securely endorses the relay and the parallel chains of access, and captures greater value accordingly. Therefore, from an investment perspective, sharing security is better than not sharing security.

Cosmos's cross-chain is based on relatively simple and mature sidechain technology, but can only support cross-chain transfer of asset passes. Polkadot has the blessing of wasm technology, which can pass executable code (STF and SPREE) on the chain to achieve cross-chaining of any message (ie transaction type). For example, cross-chain oracles, cross-chain data storage, cross-chain smart contract calls and other complex interoperability can only be achieved on Polkadot, which is undoubtedly the most significant advantage of Polkadot.

There are advantages and disadvantages in everything. Sharing security, while contributing to value capture, also increases the degree of coupling between the cross-link hub and the parallel chain. Accessing cross-chain hubs will change the consensus process of parallel chains, involving complex work, which is very difficult. In contrast, partitioning into Cosmos Hub does not require changing its own consensus process, and access is much less difficult.

From a governance perspective, Polkadot provides a more advanced chain management technology, but its governance structure lacks a governance agent with responsibility, power and benefit. It is expected that Polkadot's governance structure will be very low if it is not changed. In contrast, Cosmos's governance structure is more reasonable. Effective governance can drive the rapid evolution of encryption protocols and avoid community fragmentation. For the principles and best practices of cryptographic protocol governance, see "Improving the Encryption Protocol Governance."

Polkadot and Cosmos bring a new approach to DApp development, the development of blockchains for specific applications. The tool provided by Cosmos is the Cosmos SDK, which currently supports Go language development. Polkadot's tool for the application chain is Substrate, which currently supports Rust language development. Substrate is a more complete application chain development framework. In comparison, the Cosmos SDK is thinner. It mainly provides core modules such as Tendermint consensus engine and IBC link communication protocol. Most superstructures need to be developed by themselves. The Cosmos SDK also has an advantage. The popularity of the Go language is much higher than that of the Rust language. It is also easier to get started. However, the Rust language is extremely good, especially suitable for the development of blockchain systems with high performance and security requirements, so this vote is still voted for Polkadot.

Investment analysis summary

Trend investors believe that market games determine asset prices, and value investments believe that value determines the long-term direction of market games. Some readers may ask, why should we study the so-called value that affects prices for a long time and indirectly, instead of studying the market game that directly determines prices? The reason is that there have been a large number of studies showing that trying to study market games to predict prices is futile and cannot obtain long-term market-wide returns. The Sanchi model reflects the basic idea of ​​value investing. The trading in the speculative pool directly determines the price of the pass, but the long-term basis for pricing is the absorption capacity (ie demand) of the capital pool and the cash pool for the pass.

The valuation model is a refinement of common sense and experience. Compared to common sense and experience, valuation models are a clearer, more systematic framework for thinking. The Sanchichi model is the thinking framework for value investors to evaluate PoS certification. It tells us that the most important fundamental indicator of a cross-link hub is GDP growth. Cross-chain hub GDP = cross-chain trading volume * average transaction fee. The higher the growth rate of GDP, the better. In order to make the long-term basic trend of the currency price upward, the cash pool should be able to absorb the general certificate of the capital pool, that is, the certificate that the certifier bought for the operating cost. Polkadot and Cosmos are ecological warfare, and the number and activity of parallel chains determine success or failure. The focus of the ecological war is to compete for developers, including concept communication, technical training, tool support, etc., that is, to comprehensively reduce the threshold of innovation in parallel chain projects. The number of access parallel chains and cross-chain trading activity determine the GDP of the cross-link hub.

In addition to the absolute valuation method, relative valuation methods can also be used, such as the P/E P/E ratio commonly used in the stock market, which is the relative valuation. Compared with the absolute valuation, the relative valuation method does not need to make predictions, and based on the existing data, it can provide information with investment reference value. But relative valuations can be established and depend on the effectiveness of the market. In an efficient market, assets of the same type and quality should be comparable in valuation. If there is a difference in valuation levels, it means arbitrage opportunities. The crypto-asset market has only a 10-year history, and it can be said that a baby is a very inefficient market. In such a market environment, the valuation level of horizontally compared encrypted assets is of little significance. A more meaningful approach is to compare the valuation levels at different points in time for an asset. A more accurate statement is to do a ratio study on cryptographic assets, that is, to determine a certain ratio to reflect the changing trend of the crypto-asset valuation level, which is compared with the past using crypto assets. This also requires encrypted assets to have a long history, so most of them are researching bitcoin. Compared to Bitcoin, the history of the PoS chain is too short and the relative valuation indicators are invalid. Relative valuation indicators can be derived from the Sanchi model: market current rate = market capitalization/user wallet address market value, which is the ratio of market capitalization to cash pool market value. The cash pool market value can be obtained by subtracting the Staking market value (capital pool) from the market value of the circulation and then subtracting the market value of the exchange wallet address (speculative pool). The market rate is very similar to the P/E ratio, which reflects the relative price of the PoS pass. It is believed that after 5 to 10 years, the market rate will become an important investment indicator for PoS.

The Sanchi model is a quantitative valuation model. Based on the estimation of parameters such as future GDP, Staking interest rate, and pass amount, the future utility value of the certificate can be calculated, and then discounted based on the risk return rate that the investor considers reasonable. The whole calculation process is cumbersome, and this article does not elaborate. Because the process of thinking about valuation is much more important than the final result. The future is uncertain, and the input to any valuation model comes from predictions, so it is impossible to be completely accurate, so the results of the valuation are not likely to be accurate. Charlie Munger said: "Some of the worst business decisions I have seen are based on detailed analysis. Advanced mathematics is the illusion of precision. They do this in business schools because they have to do something. Buffett often Talking about the discounted cash flow method to estimate the stock value, but I have never seen Buffett take the calculator to calculate the stock value.” I hope readers understand the true meaning of the valuation, and the need to know the vagueness is far better than the precise mistake. And the vagueness is right enough to support outstanding investment.

Quote a sentence as the end of the article – "All models are wrong, but some are useful.". All models are wrong, but some models are useful. Why do all models are wrong, because models are always oversimplified compared to the real world. For example, the Bowmore-Tobin model cannot quantify human inertia. In the real world, many people know that it is possible to obtain a higher rate of return with a little operation, or to save money or balance money. The real capital market is a chaotic, high-dimensional, non-linear system. It is impossible for any model to fully depict even a small part of the real capital market. But some models are useful because they help investors learn more effectively and think more effectively. But certainly must be aware of the limitations of the model. Of course, whether it is a novice or a veteran, learning valuation models, understanding the research methods of professional investors, and honing their investment thinking are all necessary tasks.

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