Valuing ICP

The Internet Computer is a “world computer” created by weaving together the compute capacity of independent data centers across the world. Conceptually, it can be thought of as a highly secure edge cloud platform that isn’t controlled by a singular company. But does that mean that the Internet Computer’s native token (ICP) should be valued against the market capitalization of edge cloud (or even cloud) companies? If not, how should we value it?

ICP has three major functions. First, it is used to pay for compute power on the Internet Computer. Second, it is used to vote on changes to the Internet Computer. And third, it is used to buy things that are sold on the Internet Computer. These three have equivalents in traditional markets that can help provide frameworks for valuation: (1) energy commodities, (2) equities, and (3) money.

ICP as Energy Commodity.

Software on the Internet Computer cannot run unless it has been charged with “cycles”—a so-called stable coin that is pegged to a bundle of currencies. Cycles can be created only by “burning” ICP. This necessarily means that ICP must be burned to pay for compute power on the Internet Computer. The cost of compute is stable in terms of cycles: that means that as the price of ICP goes up, less ICP is needed to perform a specific amount of computation; as the price of ICP goes down, more ICP is needed to perform that amount of computation.

New ICP is created in either of two ways. First, new ICP is created and given to investors who lock their ICP and vote on proposals. Second, new ICP is created and given to the people who operate the various computers that comprise the Internet Computer. The amount of ICP that is given to voters is effectively pre-determined; the amount of ICP that is given to computer operators is based on the expected cost (in terms of a bundle of currencies) of operation.

When you look at ICP in that light, it begins to look quite similar to energy commodities like oil or coal. Coal and oil are both mined (the same way that computers comprising the Internet Computer “mine” new tokens) and burned to power other things (the same way ICP is burned to pay for computation). Interestingly, energy commodities are rarely thought about in terms of “market capitalization” of the commodity. Instead, energy commodity traders focus entirely on supply and demand. Specifically, demand is a function of demand for the end products that commodity is used for (i.e., demand for electricity, or demand for vehicle travel). In the case of ICP, that is demand for computation. And supply is a function of new supply that is created (i.e., new coal that is mined each year, or new oil that is extracted from the earth). In the case of ICP, that is the rewards to computers that comprise the network and to voters.

ICP as Equity.

ICP holders can lock their tokens in so-called neurons to submit or vote on proposals, which will automatically be implemented by the network if approved by voters. Voters earn ICP for participating in the network’s governance.

In the United States, a company’s equity (i.e., stock) provides two primary rights: (1) the right to vote on the composition of the company’s board of directors, and (2) the right to receive any dividends the company gives. The right to vote on the board’s composition is valuable insofar as the board is in charge of selecting the company’s executives, approving the company’s budgets, and approving distributions to shareholders.  Based on these two primary rights, equities are typically valued based on the future discounted cash flow of a given company—which is the money that is available to be distributed to shareholders.

The Internet Computer doesn’t have any free cash flow that can be distributed to ICP holders. Thus it cannot be valued the way equities are valued. That said, equities are nonetheless instructive. Fast-growing but unprofitable tech companies are often valued at a remarkable premium because investors believe that if the company hits escape velocity and secures a monopoly, it will be able to raise prices indiscriminately—which will be passed on to shareholders. Investors can look at the Internet Computer in similar light: once the Internet Computer has hit escape velocity, ICP holders can tinker with the economics of the system for their benefit. For example, the Internet Computer is currently designed such that if each “subnet”—i.e., a portion of the entire network—were running at near full capacity, the amount of ICP burned to pay for computation would equal the amount of ICP minted by the computers comprising the network. It is possible that a decade from now ICP holders could slightly change the dynamics such that more ICP is burned than minted: reducing the total supply of ICP and thereby increasing its price.

ICP as Money.

ICP can also be used as a currency to pay for goods. Currently, ICP is the only currency that art patrons can use to purchase NFTs on the Internet Computer. Early next year it will also be the only currency that investors can use to participate in auctions for tokens that control various applications on the Internet Computer. It is unclear whether ICP will remain the currency of choice once “stable coins”—i.e., coins pegged to a currency like the dollar—start being used on the Internet Computer, but it is possible that demand for goods on the Internet Computer could thereby increase demand for ICP in general. The increased demand, however, will likely be canceled out by increasing supply if merchants who sell their goods for ICP then in turn sell their ICP for a stable currency.

Putting it Together.  

At its core, ICP can be thought of as an energy commodity akin to oil or coal. This means that the value of ICP will depend on demand for computation on the Internet Computer and supply of ICP created by (1) the computers that provide compute power to the network, and (2) the voting rewards given to ICP holders. But unlike energy commodities, ICP holders are able to tweak slightly the supply/demand of ICP to increase its price. This ability to extract value from the network in the future makes ICP an investment: thereby increasing demand for ICP beyond just current demand for compute. Moreover, the ability to purchase goods or tokens on the Internet Computer using ICP also increases its demand. 

This doesn't provide an exact dollar value we can give to ICP if the network takes off. But it does provide a general framework: it is an energy commodity that can be designed to increase in price each year if the Internet Computer is heavily used.