Leveraging Store-Of-Value Chains For Liquidity Is A Clever Trick That Should Be Used On All "Technology-Based" Cryptocurrencies

Introduction

Asset-based and technology-based cryptocurrencies are categories Hive account@taskmaster4450 likes to divide cryptocurrencies into. What he means by the former are cryptocurrencies purely designed to function as money (stores of value, units of accounting and mediums of exchange). By the latter he means those cryptocurrencies that are native to chains that are designed to do a lot of other things. He has mentioned Ethereum and Hive as examples such chains.

I like to categorize cryptocurrencies based on how they emphasize each of the three functions of money. They're all money because every single public and permissionless blockchain needs a native currency for the simple reason that maintaining consensus and paying for the infrastructure has to be done using a currency native to the chain. Otherwise the locus of control will be off-chain.

The value of Bitcoin is backed up by massive infrastructure

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That which of the three basic functions of money a cryptocurrency emphasizes depends crucially on its consensus mechanism. It is no coincidence that the most valuable cryptocurrency is Bitcoin. That is not solely the result of its first mover advantage but the fact that it uses Proof-of-Work as its consensus mechanism and that is has such massive mining power securing the network and a high degree of decentralization. Bitcoin was conceived as permissionless and decentralized electronic cash but that its miners have such a huge combined hashing power makes it secure to do extremely high value transactions on it, which makes it ideally suited to be a stored of value. In that sense, the intrinsic value of Bitcoin is the difficulty of mining it. Bitcoin's value is backed up by its infrastructure. The downside of that is, of course, that it will be useless for small transactions and as purely a currency.

DPoS less suitable for a store-of-value chain

Any chain that uses, say, Proof-of-Stake or Delegated-Proof-of-Stake consensus mechanisms will be less secure because the latter will always be secured by a limited number of humans. That is the fundamental reason why it is much harder for a DPoS chain to become a store of value. DPoS will always suffer from a relative lack of security making such a chain less suitable for storing the largest value.

Cross-chain interoperability to the rescue

There is a way to work around this limitation. Cross-chain interoperability makes it possible for tokens stored on a DPoS chain to rely partially on the higher security afforded by a PoW chain to support the token values. I'm talking about wrapped tokens such as wLEO on Ethereum. The basic idea is creating an ERC-20 token on Ethereum to represent LEO on that chain by pegging the original LEO token and wLEO to each other using smart contracts on Ethereum and a centralized bot (for the time being) on Hive.

Ethereum is no pure store-of-value chain but it has a very high market cap and the ERC-20 token market has very large liquidity. It is the highest value chain that has the capability to provide liquidity for tokens on other chains through cross-chain bridges. It is wasteful for Hive to pass up the opportunity to use the DAO to provide the funds for market making for wrapped HIVE on Ethereum. There is risk involved in becoming a liquidity provider and the best way to compensate for it would be to use the DAO. And any Hive Engine token should follow LEO's example. That alone could boost the market cap of HIVE because all the tokens have HIVE as their trading pair on Hive Engine.