Unlocking Token Value: An Introduction to Value Capture Theory

Decoding Token Economies with Value Capture Theory

At Valueverse, we’re redefining how the world understands token economies. Our founders, Vasily Sumanov and Jean-Luc Desmarais, created Value Capture Theory (VCT), a demand-side framework that uncovers the intrinsic value of tokens through user coordination, cutting through the irrational noise of crypto markets.

While supply-side factors like token allocation are predetermined and known, the demand side (token utility) is much less understood by market participants. It remains unpredictable, influenced by market forces, protocol developments, and users’ motivations. Protocols can only induce demand, not control it, making it far more challenging to predict than supply. Unlike traditional frameworks mired in technical details or legal jargon, VCT highlights the economic functions of tokens and their influence on a token’s actual value, beyond speculative swings. The superiority of the demand-side consideration over the far more common supply-side (after all, the questions of tokenomics are often taken as questions of allocation) should also be argued here. The key point of the theory is that the value of the token, whatever speculative appreciation or depreciation it might have undergone, is ultimately derived from its underlying economic agent coordination mechanism, which we describe. That particular thing was not realised anywhere before our theory, even if some value considerations were made by several authors. This can be inferred (at least, most of this) from the text, but it is the main idea of our theory and is worth emphasising.

Thus, VCT serves as the schematic revealing how they drive value. In this article, we introduce a pioneering three-tiered approach of Origins of Value (OoVs), Value Capturing Mechanisms (VCMs), and Value Capturing Implementation Patterns (VCIPs), contrasting it with historical methods. Through real-world examples like USDC and Velodrome’s VELO, we’ll demonstrate how VCT clarifies token functions.

Why Value Capture Theory Matters

Demand-Side Utility

What makes a token valuable and worth holding beyond growth of its market price or related expectations? At Valueverse, we’ve pioneered the Value Capture Theory (VCT) to reveal how tokens capture intrinsic value through user coordination of the agents in these complex crypto-economic systems.

The theory focuses on the demand side because assessing a token’s demand by the market remains challenging. Unlike the supply policy of a token, demand cannot simply be pre-programmed with an allocation chart and distribution schedule. Demand can only be induced, which can be thought of as creating a magnet to attract a potential user to buy and hold the token. These “magnets” can be considered the token's origination of value; atomic components will be introduced later in the article. For now, we will introduce the token value function, which attempts to explain the demand for the token through utility, and can be seen as a higher-level concept.

Token Value Function

The token value function measures a token’s net utility of holding by balancing benefits (general utility) against costs. Utility reflects the value users derive from a token’s economic roles, with Q capturing benefits like payments or voting rights (driven by price p, token quantity x, network state s, and holding time t) and L accounting for risks like staking losses or necessity to perform certain actions (run a node, provide liquidity, etc) to activate a certain part of a token's utility. Tokens connect individual Origins of Value (OoVs), which generate gains or losses, through dependencies and conditionalities, making system-desirable behaviours, often economically unattractive to agents, viable. Cashflows and other incentives embedded in OoVs align individual actions with network goals, encouraging rational users to engage in activities they might otherwise avoid. For Ethereum’s ETH, Q includes the ability to interact with dApps through transactions (Value Transfer) and earn staking rewards, along with a passive fee burn mechanic (Future Cashflow), while L covers slashing risks, and the conditional actions required by the user to run a node. Slashing risk reflects a cryptoeconomic security of the network.

Tokens are engines powering networks, and VCT functions as the diagnostic framework, like analyzing the components and workings of an engine.

The Three-Tiered Blueprint

Three-Tiered Value Capture Model

VCT’s power lies in its three-tiered structure, a framework designed to dissect how tokens capture value. Origins of Value (OoVs), like Value Transfer, Future Cashflow, or Governance, are the core components of a token’s utility, akin to an engine’s parts, gears or pistons. Value Capturing Mechanisms (VCMs) assemble these parts into functional blueprints, like a transmission or fuel injector, defining how value is manifested and harnessed. Value Capturing Implementation Patterns (VCIPs) are the actual engines, built from VCM blueprints and realized through specific mathematical models, code, and technical architectures, delivering unique designs and technology stacks despite shared system goals. From parts to engines, this layered approach empowers token engineers to craft precise systems, investors to evaluate true worth, and protocols to ensure that the desired user behaviours align with the incentives. The Value Capture Theory framework maps these layers clearly, facilitating intelligent and thoughtful tokenomics design through a logical approach.

Beyond Technical and Legal Lenses

While technical and legal frameworks fixate on a token’s specs or regulatory status, VCT focuses on economic roles, offering a more straightforward path to value-driven tokenomics. Technical classifications, like Oliveira’s framework of Technical, Functional, Governance, and Purpose parameters, emphasize traits like fungibility but overlook how tokens power networks Its inconsistent Purpose parameters fail to structure tokens’ economic value systematically. Legal frameworks, such as MiCA’s utility token category, prioritize compliance over utility, missing the gears of user coordination.MiCA’s classifications, like access-control tokens, are designed for regulatory oversight rather than examining economic value, thus overlooking broader economic functions.

Tokens in Action

Circle’s USDC

Let’s see The Value Capture Theory in action with USDC, a centralized stablecoin pegged to the US dollar, managed by Circle Internet Financial Limited. USDC is a great starting point for applying the framework since its Representation Origin of Value mirrors the USD’s value, aligning directly with its primary Value Capturing Mechanism (VCM), also named Representation.

Value Capturing Mechanisms: USDC

The token is characterized by its ability to hold a stable market value and is crucial in DeFi, operating across blockchains like Ethereum, Solana, and Avalanche. Most tokens, however, have multiple origins and mechanisms, creating deeper, more complex interactions we’ll explore later.

USDC 30 Day Peg Differential

Circle’s issuance and redemption process, paired with peg maintenance, defines this VCM. USDC is issued via smart contracts while guaranteeing one-to-one redeemability, though it is limited to accredited providers with fees. The Value Capturing Implementation Pattern (VCIP) reflects Circle’s smart contracts, with issuance, burning, and blacklisting functions, forming a centralized architecture on multiple blockchains. Like a well-tuned engine, USDC, through the Representation VCM, captures value through its non-volatile nature.

Let’s see The Value Capture Theory in action with USDC, a centralized stablecoin pegged to the US dollar, managed by Circle Internet Financial Limited. USDC is a great starting point for applying the framework since its Representation Origin of Value mirrors the USD’s value, aligning directly with its primary Value Capturing Mechanism (VCM), also named Representation.

The token is characterized by its ability to hold a stable market value and is crucial in DeFi, operating across blockchains like Ethereum, Solana, and Avalanche. Most tokens, however, have multiple origins and mechanisms, creating deeper, more complex interactions we’ll explore later.

Circle’s issuance and redemption process, paired with peg maintenance, defines this VCM. USDC is issued via smart contracts while guaranteeing one-to-one redeemability, though it is limited to accredited providers with fees. The Value Capturing Implementation Pattern (VCIP) reflects Circle’s smart contracts, with issuance, burning, and blacklisting functions, forming a centralized architecture on multiple blockchains. Like a well-tuned engine, USDC, through the Representation VCM, captures value through its non-volatile nature.

Velodrome (VELO)

veVELO Total Value Locked

Building on USDC’s simplicity, Velodrome’s VELO token showcases the complexity of the Value Capture Theory through a vote-escrow system on Optimism. The VELO holder locks tokens for up to four years, converting them into veVELO to activate multiple Origins of Value:

1. Risk Exposure from the lock-up’s opportunity cost and potential depreciation if VELO’s price drops,
2. Future Cashflow through trading fees, pool incentives, and weekly rebases,
3. Conditional Action via epoch-based voting, and
4. Governance over emission distribution to liquidity pools and the value derived thereof.

Value Capturing Mechanisms: VELO

These origins of value form the Vesting Token Value Capturing Mechanism, composed of two Future Cashflows; both conditioned on the Risk Exposure, and one is also conditioned on the Conditional Action of voting, balancing passive financial benefits (rebases) with voting-derived rewards. Two sub-VCMs emerge: a Governance Token for active voting benefits and a Yield-Bearing Staking Token for passive rebases. Composed of the two VCMs described above, the vesting token operates through two pathways. Users convert VELO to veVELO through locking, unlocking passive rebases for the long-term holder (first pathway) and active voting or delegation to capture fees, incentives, and governance influence (second pathway), creating a market for voting power. The Value Capturing Implementation Pattern uses smart contracts deployed on Optimism in a structured flow: the voting escrow contract (veVELO) locks VELO into veVELO, the Voter contract enables weekly votes to direct emissions, the Gauge Factory creates gauges and interacts with the Rewards Pools generated by the Rewards Factory to distribute fees and bribes, while the Minter mints new VELO and the Distributor allocates rebases to the veVELO holder. Firing on all cylinders, VELO’s Vesting Token VCM captures value by coordinating the token holder to direct incentives to optimal liquidity pools, drawing in liquidity providers. This reduces slippage and enhances trading efficiency, encouraging more trading activity to boost trading fee generation for the protocol’s financial health, while rebases penalize non-participation through indirect dilution.

Wrapping Up

From Theory to Impact

We’ve explored how The Value Capture Theory redefines tokenomics by focusing on economic roles, offering a clear lens for understanding value. With its token value function, the demand-side framework quantifies what drives a token’s worth, as seen with ETH’s balance of transaction utility and staking risks. Our three-tiered structure of OoVs, VCMs, and VCIPs provides a blueprint for dissecting token value, empowering precise design and evaluation. By contrasting VCT with technical and legal frameworks, we’ve shown its edge in addressing user coordination over specs or compliance. Through USDC, we saw how VCT simplifies stablecoin analysis with a single Representation mechanism, comprising just one OoV, yet its necessity in ensuring DeFi’s reliability cannot be overstated. VELO’s complex Vesting Token VCM highlighted VCT’s depth, coordinating incentives to optimize liquidity pools while balancing active and passive rewards. In an industry plagued by speculative hype and poorly designed tokens, VCT offers a path to sustainable ecosystems by prioritizing intrinsic value and user alignment, paving the way for more robust token economies.

Your Journey with Value Capture Theory

This article marks the first in a series dedicated to educating our community on The Value Capture Theory. This tool empowers token engineers to design with clarity, investors to assess true worth, and protocols to align incentives effectively. We’re committed to exploring how VCT can transform tokenomics for diverse audiences, from developers to enthusiasts. What questions do you have about tokenomics, VCT’s framework, or demand-side considerations? Are there specific projects or topics you'd like us to cover, like a particular token’s design or a tokenomics challenge? Drop a comment on our X account! Join us at Valueverse to share your insights and help shape future discussions. Together, we can build a future where value drives token economies.

Disclaimer: The content of this document is provided for informational, educational, or discussion purposes only and does not purport to be complete or definitive. It should not be considered as financial, investment or legal advice. While every effort has been made to ensure accuracy and completeness, the author does not guarantee that it is free from errors or omissions and may update, revise, or retract information without prior notice. Readers are advised to consult the most recent version for the latest details and to be aware of the inherent risks of cryptocurrency and blockchain technologies. The author does not make guarantees or representations regarding any discussed tokens or projects and shall not be liable for any direct, indirect, or consequential damages arising from the use or reliance on this content. Mention of any project, token, or protocol does not constitute an endorsement. By accessing this document, readers waive all claims against the author.

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