Author: Guest Author
Compiled by: TechFlow
This opinion piece was written by Diario, co-founder and COO of NFT Price Floor.
Hard power vs. soft power
Most analyses of why Layer 1 (L1) blockchains are superior to other blockchains and are ideal investments usually focus on the technical aspects. These analyses often describe innovative and groundbreaking technical features that are believed to solve all the problems and challenges that public blockchains have faced since their inception.
While technology is critical and continued improvements and discoveries in consensus design, cryptography, and distributed systems engineering (hard power) are essential in order for this technology to benefit everyone around the world, it is important to remember that blockchain is more than just technology.
In reality, blockchains rely on the trust (and attention) of a community, rooted in shared values, culture, and, in the best case, a universally accessible spirit. They offer everyone the opportunity to participate in an open, optimistic history that is both recorded in the block and agreed upon by the community. This is what we call the soft power of blockchains.
From: 0xDesigner
Blockchain is the ultimate coordination tool, the ultimate ledger for humanity to record its digital existence and history. Blockchain is technology, but it is much more than technology. If you judge them based on technical criteria alone, only evaluate their technical features and ignore their soft power, you will miss the bigger picture.
On History, Writing and Accounting
As Yuval Noah Harari explains in Sapiens: A Brief History of Humankind, humans came to dominate the world because they were able to cooperate in large groups, thanks to our unique ability to believe stories that existed purely in our imaginations.
Those stories based on a common belief system, those cultural products that record different aspects of human existence, when they are combined and recorded, form history.
So how do we record history? By writing it down.
So on the one hand, we can define history as the sum of shared stories about which the human community has a consensus on their importance and validity. On the other hand, history and writing are closely linked, because there can be no real history without a system of recording.
One more piece of the puzzle. The world's earliest writing, cuneiform, has its roots in an ancient accounting system that used clay tokens to track goods, such as livestock and grain, in early agricultural societies. Originally, these tokens represented various commodities, with different shapes representing different items or quantities, such as a cone representing a small amount of barley.
Around 3500 BC, as cities emerged and economies became more complex, the variety of tokens expanded to around 300 different shapes to cover a wider range of goods produced in urban areas. Interestingly, the final impetus for the development of writing came from Mesopotamian society’s shared belief in an afterlife.
History, shared beliefs, record systems, accounting mechanisms, tokens… do these concepts sound familiar to you, Anonymous?
Money and Monetary Nature as Shared Beliefs
According to Harari, humans’ ability to coordinate on a large scale stems from our unique ability to believe in things that exist purely in the imagination, such as gods, states, currencies, and laws.
In other words, vast cooperative systems like religions, trade networks, and political institutions are the result of our uniquely human capacity for fiction.
In this framework, money relies on shared beliefs insofar as it exists as a system of mutual trust. Viewed from this perspective, Harari’s argument is directly tied to the subjective theory of value, which states that the value of any good is determined not by its inherent properties, nor by the cumulative value of the components or labor required to produce or manufacture it, but rather by the person or entity that buys or sells the item.
Based on this concept, the value of an item can rise significantly from the time of its creation because it becomes more valuable or attractive in certain cultural contexts. Many factors can influence this change, such as age, personal sentiment, rarity, etc. In short, it’s cultural relevance.
But why does all this matter?
The Subjective Theory of Value (STV) helps us understand all the stores of value that have been adopted throughout human history, such as salt, livestock, shells, gold, and crypto assets like Bitcoin and Ethereum.
However, only by understanding Harari’s argument about the crucial role that shared faith has played in human history can we truly comprehend the full power of STV and how it works.
Like human history, successful currencies and stores of value are not only the product of an initial shared belief, they are networked products that require constant attention!
Some would say, no money, no fun. In the case of blockchains, you better make sure your favorite L1 has a store of value as a native asset before you claim it’s superior to the rest. If it’s not good money, it won’t have good economic security. It’s a given.
How do you ensure that your native asset truly becomes a store of value and not just a flash in the pan?
The answer lies in history and cultural vitality.
Blockchain as a digital historical ledger
Remember, public blockchains like Ethereum and Bitcoin are shared, decentralized, immutable, and censorship-resistant ledgers used to record transactions and track assets.
In other words, once information is recorded on the blockchain, it is difficult to change or delete. This feature is particularly important when preserving historical records because it ensures the authenticity of the files or transactions on the chain.
We highly appreciate this ingenious system for managing transactions and balances trustlessly. But what about the actual recorded history? Isn’t that just as important as the underlying technology?
In my opinion, absolutely.
Ethereum’s native asset, ETH, derives its value from its cryptoeconomic properties according to the rules set by the protocol. However, as we have already pointed out, all this would be meaningless without a loyal and large community that sees the value of using the network and storing wealth in the native asset.
The community's shared belief in the value of the network has resulted in a rich economic history recorded on the Ethereum blockchain as a public ledger. It is this rich history and the community's shared culture that form a positive feedback loop that continually strengthens the value of ETH.
History is nothing but the sum of shared stories that are significant to a community and for which there is social consensus. In the case of blockchains, their history reflects the social and economic relationships between the members of their community.
These relationships should be measured not only quantitatively but also qualitatively as a reflection of the culture behind them:
Is it fair to compare the creation of CryptoPunks and the secondary effects it brought (leading to the development of an entire industry) to the release of a low-investment NFT collectible (leading to a temporary frenzy)?
Can we compare the impact of Uniswap and other 0 to 1 DeFi breakthroughs to simpler 1 to N protocols that offer incremental improvements (and sometimes seem like just an excuse to sell tokens)?
So while it can be argued that all L1s have their own history recorded in blocks, unfortunately not all blockchain histories are created equal, nor are their impacts on their respective native assets (particularly their ability to accrue value and become a store of value in the long term).
Zoom in
The value of an L1 as a coordination tool and decentralized ledger lies in the ability to build economies and multiple communities on top of it. However, not all blockchains are created equal. Properties such as decentralization, censorship resistance, and trustlessness start out as technical features but eventually evolve into core values (belief systems/shared narratives) that bring communities together.
Without a strong belief in these values and ethos, and without a vibrant and creative community that chooses the blockchain as the home of the project and the repository of its wealth, it is impossible to develop a rich and lasting history. This shared history attracts new members and helps the network grow. It is this history that provides the intangible but vital support for the asset: the trust and continued attention of the community.
Take Ethereum as an example: Imagine what would have happened to its value if Vitalik hadn’t launched Ethereum through an ICO and established a foundation to manage it? What if he hadn’t implemented the proof-of-work phase to prevent excessive token concentration? What if he hadn’t acted honestly and didn’t prioritize the best interests of the network? What if Ethereum hadn’t been chosen as the primary platform by Larva Labs, Hayden Adams, and many other founders?
Ethereum's community and history will be completely different. Technology is not the main issue, as it is upgradeable, even if challenged by technical debt. However, history is irreplaceable, irreplaceable, and indelible. Only through a rich and lasting history can the native assets of a blockchain truly gain a premium!
