NEO and GAS — Exploring the Price Difference

26.06.2018

A NEO mine - extracting GAS deep under the mountains. How much would you buy a functional mine for, given that you are fairly sure about the amount of GAS in there? Ok. Now imagine the mine and the output are both digital (but scarce on a decentralized blockchain). Valuation suddenly becomes a lot trickier.

Note: This is a personal opinion piece, not a rating.

When researching NEO just recently, I kind of ran in to a two-token blockchain for the first time. Parts of the NEO community seem to land in the conclusion that NEO ought to be higher valued than GAS because it 'produces' the latter for its owner. That is way too simplistic and I explain why below. NEO is worth around 30 dollars these days, while GAS is worth only 10 dollars. What price difference is justified?

The NEO token indeed entitles the owner to a continuous stream of newly minted GAS. 100M NEO exists today, some being locked up a bit longer until the NEO Foundation may do with them as they see fit. GAS however started with no supply whatsoever, and is instead continuously released/minted over the course of 22 years until it reaches its maximum supply of 100M tokens. At time of writing, only about 17M GAS have been released (some of which seems to be vested as well). Although NEO fans don't really like the comparison due to some perceived regulatory threat, GAS can practically be compared to a continuous dividend to NEO holders. Other than producing GAS, NEO tokens also carry voting rights on who controls the important Consensus Nodes - the full nodes that verify transactions and build blocks. So NEO tokens give their owners influence over how the NEO blockchain operates, meaning they can elect node owners that with a super-majority can tune chain parameters to their liking. GAS on the other hand is just 'fuel' on the NEO blockchain, and while the regular transaction fees seems to be zero right now (applicable when transferring NEO or GAS), a considerable amount of GAS are still needed when conducting other operations on the chain, like deploying smart contracts.

So how do we price NEO and GAS then? First, let's go through how not to price it:

  • GAS is not really more scarce than NEO just because most of its supply is not yet minted/released. Although 22 years is a relatively long period of time, it is also actually a quite apt time period to use when considering what really ought to be the relevant supply metric. If some amount of GAS were to be released a hundred years from now, that would not be relevant to include when establishing current market cap. But to only count the circulating supply would be highly misleading as well due to the relatively high GAS inflation (over 80M still to be released). I have always deemed it appropriate to consider supply that is already on the market, and supply that is hitting the market within the next 10-20 years. Such metric produces a conservative number when calculating cryptocurrency market capitalization. So in this sense, GAS and NEO are almost equally scarce.
  • NEO is not more scarce than GAS. I saw a ridiculous argument stating that NEO was ultra scarce - more so than Bitcoin - because of its hard coded lot size of 1. NEO can only be transferred between public addresses in increments of 1. GAS on the other hand is much more divisible, but that does not make its supply virtually unlimited. Digital scarcity is a complicated matter, but lot sizes have nothing to do with it.
  • NEO is not inherently much more valuable just because it produces GAS. It does not derive its value only from 'GAS dividends' either. Let's take a hypothetical scenario in which GAS have the exact same properties as NEO (in reality it has no voting right properties, leading to a subordinate position of power). Even at the time of the genesis block where no GAS yet existed but all NEO did, a GAS price lower than half of that of NEO's would in that scenario be undervalued, considering that minting all GAS would impose only a 100% 'inflation' on NEO and not 200% that such price differens would imply. A fairer GAS price in that case would be half of that of NEO. So buying NEO today (not caring about voting rights) just because it produces the weaker GAS token makes little sense as the GAS price is one third of NEO and thus a quite low dividend. The only counterargument I can think of is if the NEO blockchain really goes mainstream and is used by thousands of businesses that all pay GAS to publish smart contracts. Then, and only then, would a 1:3 GAS/NEO price ratio make more sense as NEO holders due to the recycling mechanism are getting even more GAS than what was initially estimated.

What we actually can say with certainty though is that both NEO and GAS must both have value or neither will, as they are worthless without each other. An extremely cheap NEO would cause the integrity of the network to fail, as anyone could buy up enough tokens to control all Consensus Nodes, essentially making the blockchain worthless. Similarly, a near-zero valuation of GAS could cause someone to buy up most GAS, making on-chain activity for others almost impossible, which long term would lead to falling NEO and GAS prices due to falling on-chain activity.

So we can obviously conclude that both NEO and GAS must have value for the blockchain to succeed. It then seems far fetched that NEO holders in the future would use their voting rights to destroy the value proposition of GAS, for example by increasing maximum GAS supply. Not only would such a policy create GAS inflation, infuriating GAS owners, but it would also make no sense as GAS used to deploy virtual assets or other smart contracts immediately are transferred back to a supply pool that pro-rata continuously re-distribute GAS to NEO holders. They would sabotage a steady income stream, unless they simply mitigated the GAS token altogether and went for an ETH-like one-token structure, which seems extreme. So I see a very low probability for large NEO holders to adjust the GAS supply, but since they theoretically actually have such power, GAS ought to be valued somewhat lower than NEO. The counter-argument that GAS usage (due to on-chain activity) offsets this as demand for GAS pushes the price up is not convincing. Any such demand can only affect the price in a minor way; the value of NEO and GAS is derived not from classic 'usage demand' (think apples and bananas) but from the demand of storing value on a secure chain (think gold) with known and predictable supply.

So I conclude that GAS seems somewhat undervalued compared to NEO. The cause is probably mainly social factors like a general focus (and marketing) of NEO instead of the more boring GAS token. People also like the feeling of owning something that has an in-built dividend function, even if the very dividend is created from thin air and derives its value from the same sources as the dividend producing asset itself.