Decred: An Investment Thesis
By: Wally Hansen
Tags: Cryptocurrency, Blockchain, Decred, Bitcoin

Thesis

Thesis 1: Market Opportunity

Fundamentally secure cryptocurrencies focused on providing a store of value use case offer the potential for global, state-free money. Bitcoin, the largest and most mature cryptocurrency in the world, is often viewed as digital gold, with the potential to capture massive network value as a store of value currency. At today’s prices ($1,415 per ounce of gold), circulating gold (~190,000 metric tons) has a valuation of over $8.5 trillion, an often-cited target for the cryptocurrency market’s store of value potential. However, the digital gold framing is likely overly narrow and understates the opportunity. Creating global, state-free money that gains adoption supersedes a digital version of gold in breadth and use cases, expanding the addressable market dramatically.

Gold is recognized as a global store of value because of its ‘sound money’ characteristics: it is durable, fungible, verifiable, relatively scarce, and has an established history showcasing these characteristics. It has, historically, proven to be an unmitigated success in retaining value relative to its competition (fiat). However, as a store of value, gold is almost entirely inferior to fundamentally-sound cryptocurrencies (e.g., Bitcoin, Decred), except that it has been around longer. Gold is not only inferior in several characteristics which it has historically shined at (durable, fungible, verifiable, scarce) but cannot even compete on several others which it has forever lacked (portable, divisible, censorship-resistant).

The addressable market for cryptocurrencies as digital gold is much larger than the $8.5 trillion number mentioned above. However, the expansionary market characteristics are much easier to understand if you aren’t privileged enough to be living in a country or region using a reasonably stable fiat currency. While citizens of the U.S. or EU rarely feel the need to hedge their savings against the effects of inflation, most of the remaining world not only lacks this luxury, they suffer because of it: the very people who want or need to escape their local fiat currency cannot. Citizens of these countries (Venezuela, Argentina, Iran, Turkey, Indonesia) do not have regulated access to securitized gold. However, fundamentally sound cryptocurrencies is inherently permissionless — to participate in these crypto-networks, someone only needs a smartphone (available for less than $25) and an internet connection (slow, sporadic, and unreliable is sufficient). Considering that the world’s five most stable and sought-after currencies — USD, EUR, CHF, GBP, and JPY — represent only 1 billion of the almost 8 billion people in the world, today’s gold market likely caters to no more than 20–25% of the world’s population. As the remaining 6 billion-plus people realize the option to store their wealth in money controlled by code rather than government, the likeliest scenario is that they will choose to do so, dramatically expanding the digital gold market.

Additionally, it has been reported that over $30 trillion of wealth is stored in offshore bank accounts of the world’s elite with the explicit intention of hiding assets from governments. Since cryptocurrencies cannot be seized by governments, this is another market segment ripe for disruption. However, given the nascence of the industry, the movement of assets from offshore bank accounts into crypto will happen over a sustained period of time, if significantly at all.

As difficult as it is to comprehend how there exists an opportunity this large that is still this nascent, it is equally difficult to overstate the size of the opportunity. Almost $100 trillion of value is stored in fiat today, with another $30 trillion-plus housed in offshore bank accounts. For the first time in modern human history, people will have the choice of storing their wealth in state-free, seizure-resistant money as opposed to their local fiat currency. The digital gold market has the potential to be tens of trillions in size.

The digital store of value market is unlikely to be winner-take-all, at least for the foreseeable future. More likely, at least in a more intermediate time frame of the next several decades, there will be several winners in the store of value market, with those 3–5 blockchains following a power-law probability distribution, allowing for multiple ‘winners’ from today’s standing. If the market expansionary characteristics outlined above prove true, the largest digital store of value blockchains will likely be magnitudes larger than several trillion apiece.

Bitcoin is Decred’s biggest competitor in that sense; however, Bitcoin does not have to fail for Decred to succeed. In fact, the blockchains that have the best probability of taking market share from Bitcoin are ones that will offer differentiating characteristics. Decred effectively differentiates itself from Bitcoin in several significant ways, notably on security and governance, and has the potential to do so on privacy. With that said, it is best to view Bitcoin and Decred as complimentary — while they will eventually compete for market share in the store of value domain, each blockchain’s strengths offer a hedge to the other’s perceived weaknesses.

Even if the digital store of value market is dominated by a single non-Decred player, carving out several percentage points of market share would make Decred massively valuable. Assuming a market the size of the current market capitalization of gold (which is likely the low case for the long-term digital store of value market), Decred taking 2.5% market share implies a market capitalization of ~$200 billion (vs. ~$250 million today). A $1,000 investment today would be worth $350,000 or more, excluding potential staking rewards. This is an oversimplified mathematical approach to valuing one addressable market for Decred. However, because of its potential for universal application, Decred’s total addressable market is likely much bigger than that of a typical store of value, as digital assets should create a market expansionary effect.

Thesis 2: Security

One of the core innovations brought forward by Bitcoin was the creation of a digital currency that, through its distributed and trustless proof of work consensus mechanism, was both incredibly difficult for bad actors to hack or counterfeit (given both the financial resources and time needed to accomplish) and easy for good actors to verify. Other cryptocurrencies have been built using a proof of stake consensus mechanism that replaces miners with stakeholders with the benefit of environmental relief from less mining power needed and greater transactional efficiency. Regardless of the consensus mechanism in place, security of a cryptocurrency is its most important feature.

While proof of work is difficult to fool because of the time and physical resources (computing power) it takes, proof of stake incentivizes bad actors to act in their best interest by requiring them to stake their holdings to attack the system (which would lead to loss of value in the event of a successful attack).

Proof of work has shown that translating real world capital and operating expense to the digital arena creates secure protection — bad actors must commit tangible, heavy resources to attack it. Proof of work also benefits from geographic distribution. Interestingly, this will push people to find areas of cheap(er) electricity, making it unlikely that a single geographic market dominates the value creation (as has been seen in California and early stage technology). However, the security afforded by proof of work has the disadvantage of often leading to centralized industrial miners and challenging governance models. Proof of stake places the responsibility of security and governance in the hands of the stakeholders. This allows for a more distributed network but is plagued by concerns around fair distribution and concentrated wealth. What proof of stake solves for in governance, it can give back by way of unfair distribution and increased inflation.

Each consensus mechanism has its advantages, but on their own they require compromise — a trade-off between mining costs and the level of trust required of other participants on the blockchain. Decred’s hybrid consensus mechanism accentuates the strengths and minimizes the weaknesses of each on its own.

For Decred, proof of work contributes to blockchain security through block time-stamping. Proof of stake voting provides an additional security layer, as stakeholders’ ability to invalidate blocks allows for oversight of the mining process, discouraging secret-and-empty mining, as well as enforcement of network consensus rules. Together, they provide a security blanket for the Decred blockchain that is unmatched at its scale.

The most popular vulnerability for cryptocurrencies is the likelihood of a double-spend (51%) attack. To successfully double-spend attack the Bitcoin blockchain, an attacker would need 51% of the hashing power on the network; similarly, for proof of stake cryptocurrencies, an attacker would need 51% of the circulating tokens. However, because of Decred’s hybridization, any attacker looking to successfully complete a double-spend attack on the Decred blockchain would need a significant combination of the network’s hashing power and circulating DCR. Each side of its consensus mechanism is working well: Decred’s proof of work hashrate is near its all-time high (increasing the amount of resources needed for a successful attack) and nearly 50% of all circulating DCR is currently locked in proof of stake.

Comparing the Costs of a Double-Spend Attack. [Medium contributor “Fiach_Dubh” covered a very similar analysis in this piece here which helped guide several part of this analysis and does a good job of putting the strength of Decred’s security model into perspective.]

Using prices as of the end of August 2019 (~$9,500/Bitcoin), an effective double-spend attack on the Bitcoin blockchain would cost more than $1.5 billion when considering: the attacker would need to acquire at minimum the same number of ASICs (~$1,000 each) that are already in circulation (of which there are an estimated ~5 million already running when including older models); the infrastructure costs needed to house the mining operation; daily electricity consumption costs; and required maintenance costs. Not only would this require a multi-billion dollar investment, it would require consuming more electricity annually than that consumed by the entire country of Morocco. Bitcoin’s security is arguably the greatest aspect of its blockchain, and is what makes Bitcoin truly special. Security in money is a prerequisite for any new currency.

While Bitcoin is incredibly secure and has proven itself so for over ten years, a similar attack on Decred is more complicated to complete, as attackers would need to acquire a significant portion of the hashing power as well as a significant portion of DCR in circulation. The graph below highlights this; the table below brings a detailed calculation to the cost of having to attack multiple vectors (mining and staking).

Though $75–150 million is a substantial but not insurmountable total, it is important to remember the hidden costs associated with both vectors of a potential attack that make a successful attack incredibly unlikely and nearly-impossible financially. On the mining side: cost of the mining equipment, cost of the land/infrastructure to run the mining equipment, and cost of electricity. On the staking side: more than half of all DCR is currently staked and time-locked for an average of ~28 days, making it incredibly difficult to acquire large amounts of DCR on the open market. (For example, the entire volume of DCR traded on exchanges today is typically ~40,000 DCR, or roughly ~0.3% of total supply). Assuming zero hidden costs, the most feasible scenario to successfully complete a double-spend attack on Decred (10x current hashrate and 22% of all staked DCR) would cost ~$140 million. The cheapest scenario (1.0x current hashrate and 50% of all staked DCR) is far less feasible as it would require obtaining 25%+ of all DCR in circulation (~$60 million minimum cost, requiring the attacker to buy every DCR traded on exchanges daily for the next 2–3 months without affecting price movement) in addition to significant mining resources. The likeliest scenario — costing ~$140 million, largely in mining equipment costs — represents 52% of Decred’s market capitalization.

For comparison, successfully launching a double-spend attack on Bitcoin would take more than $1.5 billion in mining costs, a cost which represents 0.9% of Bitcoin’s market capitalization.

It is true that Bitcoin is (much) more expensive to attack on an absolute basis. Bitcoin’s most impressive advantage relative to all other digital assets is its scale and track record — having reached $250 billion-plus in market cap (currently at ~$170 billion) and having already proven itself secure through ten years of attempted attacks, Bitcoin is clearly positioned as the most secure blockchain today and will likely be viewed so for the foreseeable future. However, Decred is uniquely positioned to challenge that pole position for security far earlier in its life cycle and adoption curve given its layered PoW/PoS security system. On an apples-to-apples basis, Decred is more than 50x more secure than Bitcoin (cost to attack represents 52% of its market cap vs. 0.9% for Bitcoin), with its hybrid protocol deterring double-spend attacks by creating a costlier threshold via the requirement of hashpower and staking.

Thesis 3: Governance

One of Decred’s most well-known features — based on the core principle that autonomy and adaptability are necessary for sustained, long-term fairness and adoption — is the community-based governance integrated into its blockchain. To participate in the network’s governance, users must time-lock DCR to purchase tickets, which can then be used to vote on validating blocks, consensus rule changes, and/or proposals in Politeia, Decred’s web-based platform where the community can submit, discuss, and vote on proposals. Validation of blocks and voting on consensus rule changes occurs on-chain. Voting on high-level issues, such as how to spend Treasury funds, occurs off-chain in Politeia. No project has a longer history of functional on-chain governance.

Block Validation (On-Chain). As mentioned above, the Decred ecosystem does not use solely the ‘1 CPU = 1 vote’ seen in proof of work protocols nor the ‘1 token = 1 vote’ found in pure proof of stake protocols. Transactions on the Decred network are instead validated through the hybrid system shown in detail below. Proof of work miners generate blocks that a randomly selected set of proof of stake validators must validate before the block is added to the main chain. If the lock is not approved by all five randomly chosen proof of stake validators (the selection is done by a Poisson distribution), the miner reward is reduced proportionally. (Blocks failing to gain at least three votes are orphaned.) Participation in the PoS process is voluntary through a ticket system.

Decred’s ticket system is integrated with the project’s proof of stake consensus layer. DCR holders who wish to participate in the proof of stake validation and governance process must stake DCR to receive ‘tickets’, which exist as a non-tradable crypto asset on the Decred network. The opportunity costs in generating tickets is dynamic, varying according to market demand for DCR and Decred’s stake difficulty algorithm. There is a target ticket pool size of 40,960 tickets available on the Decred network, designed such that a ticket will be chosen for block validation within 28 days on average, with tickets available for selection 256 blocks after purchase (~21 hours) and any one ticket carrying a 99.5% probability of being chosen before it expires. If a ticket is called to vote, the DCR locked in that ticket is unlocked and returned to the purchaser’s wallet, along with the staking reward if the ticket successfully voted. Tickets expire if not selected for block validation after 40,960 blocks (~4 months); staked DCR is refunded once the ticket expires. The block validation responsibility given to these tickets provides a check against malicious proof of work miner behavior (e.g., mining empty blocks) and forms the basis for Decred’s fork resistance.

There is a limit to the number of tickets available for purchase each block (20), with preference given to tickets with higher transaction fees in the event of a demand surplus. Decred has successfully gamified the ticket-purchase process, creating active community members out of those who buy tickets as these individuals or groups feel empowered to vote and contribute to the blockchain’s social development.

Consensus Rule Voting (On-Chain). The consensus rules are a set of rules which every full node participating in the Decred network must enforce when considering the validity of blocks and transactions. It is essential that every node on the network uses exactly the same set of consensus rules. Nodes attempting to use consensus rules that differ from the majority of the network will not be able to properly validate blocks, and will eventually end up operating on their own separate network.

Unlike almost all other cryptocurrencies, Decred has a built-in upgrade mechanism which allows consensus rules to be changed across the entire network in a coordinated fashion. This enables the rules to be changed predictably and without fracturing the network, and allows proof of stake voters to exercise sovereignty over whether or not to accept the proposed changes. Any change to the consensus rules must follow the process below.

(1) Decred Change Proposal (DCP): Design document describing potential protocol- or consensus-level changes to Decred.

(2) New Node Software: New node software which implements the proposed consensus rule changes must be developed and released, and must include all code necessary to enforce existing consensus rules as well as the new code implementing the change specified in the DCP.

(3) Network Upgrade: Proof of work miners and proof of stake voters must upgrade their software to the new version before voting on activation of the new rules can begin (once the software upgrade is complete, the vote is scheduled to begin on the first block of the next rule change interval).

The proof of work upgrade is considered complete once 95% of the latest 1,000 blocks are mined with the latest version.

The proof of stake upgrade is considered complete once 75% of the votes in a complete stake version interval are cast using the latest version.

(4) Voting: Each proof of stake ticket which is called to vote during this interval will include votebits which indicate whether the ticket holder wishes to accept or reject the new rules, or if they wish to abstain from voting. (If ticket holders do not explicitly set their voting preference, the default setting is to abstain.) Every vote has a quorum requirement of 10%. This means that at least 10% of all votes cast must be non-abstain for the result to be considered valid.

(5) Rule Activation: If the quorum requirement is met and more than 75% of the votes are in favor of activating the new consensus rules, then a “lock-in” period begins. This is a fixed period of 8,064 blocks (~4 weeks). During this period, all participants in the Decred network must upgrade their software to the latest version. All full nodes participating in the network will automatically activate the new rules on the first block after this period, so any nodes still running the old software will no longer be able to participate.

The nature of Decred’s on-chain governance model solves for a number of issues that have surfaced for other high-profile cryptocurrencies looking. The staking mechanism is designed to discourage users with only short-term interests in the network from participating in consensus and governance, as short-term speculators and day-traders of DCR will not be able to participate without making their holdings illiquid. Two relevant and tangible examples of this are centralized exchanges and large token holders. A centralized exchange that holds a large amount of DCR could only leverage that to influence voting and governance if it was willing to lock up its DCR for several weeks, if not longer. For an exchange that allows users to immediately withdraw deposited DCR, this is likely untenable. Similarly, the ability of large token holders to influence the network by acquiring many tickets is limited, since the ticket price dynamically adjusts according to demand and only twenty (20) tickets can be purchased each block (~5 minutes). A significant DCR holder would face a rapidly increasing marginal cost to acquire a large supply of tickets over a short time frame. Furthermore, the built-in “maturation” period for each ticket of 256 blocks (~21 hours) reduces the potential for a rapid attack on the network.

Decred’s consensus process also reduces the prevalence of hard forks through long-range attacks. In pure proof of work networks, attackers can secretly mine dozens of blocks in advance, eventually convincing the network that their chain is the uncontested version. However, Decred wallets do not permit ticket holders voting on blocks that are further than five blocks behind the latest. Even if a parallel chain had the requisite amount of hashpower, it could not cause a hard fork or block re-organizing of more than five blocks, since each block must be approved by ticket holders. The avoidance of hard forks helps Decred retain a cohesive community and limits the potential for brand reduction, preserving the network effects that have developed to date and would continue to grow exponentially if Decred’s valuation rises. It also helps highlight the blockchain’s solution to governance issues, a function of Decred that is currently being massively undervalued by the broader crypto market.

Dash is likely Decred’s closest competitor when looking at other blockchains that incorporate on-chain governance capabilities. While Dash is a strong project, Decred is simply more elegant, more democratic, and more accessible. Dash requires 1,000 DASH coins to run a master node, a requirement that is prohibitively costly for most of society: at ~$90 per DASH, acquiring one master node would cost almost $100,000, a price that skyrockets during bull markets (DASH reached a price of more than $1,000 per coin in late-2017), effectively removing fair democratic capability from the blockchain’s governance model.

While Decred ticket prices have become slightly expensive (as of August 2019, one ticket cost ~130 DCR, which at ~$23 per DCR amounts to ~$3,000), at least to the average person, they offer a far more affordable path to governance participation than Dash. It is important to recognize that there needs to be a balance between cost and stakeholders having enough financial commitment to feel accountable for their voting decisions. Strong governance demands accountability as much as it does accessibility, and Decred’s framework provides the backbone for a necessarily balanced governance structure.

Decred developers are in the process of implementing a ticket-split proposal that would allow users to pool funds to purchase tickets. Each user that participates in a split ticket would receive their proportional share of the potential staking rewards, with voting rights for consensus rule voting assigned pseudo-random to a single participant and the largest participant in each pool receiving Politeia voter rights. Even for DCR holders who have enough DCR to purchase an entire ticket, ticket-splitting will likely be popular as it allows users to split their DCR over many partial tickets and receive staking rewards and the unlocking of their DCR gradually as those tickets are randomly selected, rather than locking up 100+ DCR for up to four months.

Additionally, Dash’s hybrid consensus mechanism (PoW/PoS, similar to Decred) splits mining and staking rewards evenly (45% of each block’s reward to miners and 45% of each block’s reward to stakeholders), introducing the potential for large Dash holders (especially those who have been around since the beginning) to maintain their “control” of the voting network in perpetuity as their influence over the total number of circulating Dash can remain constant through staking. Conversely, because miners receive twice the block reward as stakeholders (60% to 30%), large stakeholders of Decred will forever see their influence diluted if they never mine blocks or buy more DCR through exchanges, increasing the network’s decentralization.

Politeia (Off-Chain). Politeia is a GUI+ backend system developed by the Decred developers to allow stakeholders to submit and vote on contributor proposals. Anyone may submit a proposal, and all data on Politeia (proposals, comments, upvotes/downvotes) is periodically anchored into the Decred blockchain, enabling users to cryptographically prove if censorship has occurred. In this way, Politeia is built around the idea of transparent censorship. Users cannot be silently censored.

Politeia’s history has proven effective, as proposals that were likely to damage the long-term value of Decred have been quickly rejected while thoughtful, value-accretive proposals have produced wide-ranging and forward-pushing dialogue around the future of Decred. The growth and adoption of Politeia may also lead to compelling partnerships or product strategies — a key path for Decred to differentiate itself from other general purpose cryptocurrencies and develop compelling use cases that may not appear necessary today.

Lastly, a full redesign will be launching soon. The redesign will clean up the user interface and make it consistent with the Decred branding.

Censorship Model. One of the core features of sound money, as detailed in the following section, is that it must be censorship-resistant, i.e., difficult or impossible for an external party to deny use or remove ownership from its owner involuntarily. Given the importance of strong governance to Decred’s long-term value proposition, a thoughtful censorship model is also important for the project’s social component. Politeia, the home of off-chain voting proposals and discussion about Decred’s future development, has its own censorship tool, which is described in detail below, per the Decred Documentation.

Censorship is a necessary tool for administrators for several reasons. For one, Politeia cannot host illegal content. For another, because the fee to submit a proposal is relatively low (0.1 DCR), there is a risk the system could be flooded with spam proposals that waste the time and attention of stakeholders.

It is critical to note that Politeia is based on the concept of transparent censorship.

A limitation observed with other platforms such as Reddit, is that moderators can censor silently. This can lead to situations where content is censored because it goes against the preferred narrative of the moderators. In these cases, it is often the users’ word against that of the moderators’. In Politeia, admins can censor content, but can only do so transparently. If a user’s submission is censored, they can cryptographically prove that the censorship occurred. If admins censor a proposal, they must also provide a reason, which is viewable to the user. When a user registers, a cryptographic identity (public/private key pair) is created. This cryptographic identity is then used to create a “censorship record” for each user submission (proposal, comment, comment upvote/downvote). If a user’s submission is censored, they can use this censorship record to cryptographically prove their submission was censored, the time it was submitted, and the exact form of the submission. If a user’s proposal is censored, it will not appear publicly on Politeia, but will still be visible to the user and admins. The censored proposal will still appear on the user’s “Your Proposals” page, along with the reason the proposal was censored. If a user feels they have been unjustly censored, they are free to show their provably censored proposal to the community at large and build support for their proposal. Proposals can be resubmitted at any time. Users are responsible for hosting any censored content if they wish to share it externally.

This idea of transparent censorship for the social aspect of Decred is a thoughtful (and socially innovative) solution to a nuanced problem facing every social platform that wants to provide its users with the feature of free speech. Allowing all comments and proposals without moderation will undoubtedly hinder the efficiency with which Decred can develop (one of the strengths of its governance platform, especially relative to Bitcoin) and provide ample opportunity for legal and moral issues to arise. However, we have already seen the impact of what silent moderation has done to platforms such as Reddit and Twitter: they become echo chambers for their users, and obstruct the opportunity for constructive dialogue that can stimulate innovative ideas for development. Decred does not want to censor controversial opinions or proposals for the wrong reasons.

In this way, Decred is taking a best-effort approach to both solve for the removal of inappropriate use of free speech while allowing individuals cryptographically-secure proof that they have been censored, allowing them to bring their argument for why they may have been censored unjustly to the broader Decred community. Instead of hiding or running away from the consequences of censorship, Decred has ensured that no network participants — from community members to administrators — will be able to hide behind their actions without justification.

Thesis 4a: Sound Money

The Decred project is relatively new having launched in 2016 and comes from the same roots and aspirations as Bitcoin to achieve sound money in an unsound world. Sound money is a form of money that is scarce, programmable, and censorship resistant (outside the control of a governing body). It is money that has purchasing power determined solely by the intrinsic value attributed to it from the markets. Whereas easy money (fiat) can have its supply expanded by central banks and the governments who govern them, sound money is hard and resilient against having its value inflated away over time.

Any digital asset, or physical asset for that matter, that has ambitions of being a good store of value needs to have certain attributes for both functional and competitive reasons.

Durable. The good must not be perishable or easily destroyed. If your wealth was stored in apples, you likely wouldn’t be wealthy for very long.

Decred checks this box rather easily, as its existence as a digitally-native asset (via DCR) through code makes it highly-durable and resistant to weather, physical attacks, seizure, etc. Additionally, the Decred blockchain has proven itself secure since launching in 2016, and its hybrid PoW/PoS consensus mechanism makes the prospects of a successful attack on it incredibly difficult. This will only strengthen with time and scale, giving it the potential to display the type of anti-fragility needed out of a store of value good.

Portable. The good must be easy to transport and store, making it possible to secure it against loss or theft and allowing it to facilitate long-distance trade.

As a digital asset, DCR is extremely portable, as it is possible to send/trade from one end of the world to the other in a matter of minutes.

Fungible. The good should be interchangeable with another of equal quality. Without fungibility, the coincidence of wants problem remains unsolved.

In Decred, fungibility refers to the truth that all DCR have the same value, regardless of who owns them or what their history yet.

Verifiable. The good must be easy to quickly identify and verify as authentic. Easy verification increases the confidence of its recipient in trade and increases the likelihood a trade will be completed.

On the Decred blockchain, transactions are verified by network nodes through cryptography and recorded on the blockchain’s public distributed ledger. Every transaction can be verified by anyone accessing the network, and this is often done within seconds/minutes of submitting a transaction to the blockchain.

Divisible. The good must be easy to subdivide. This attribute has become more important over time, as trade within society has grown immeasurably over thousands of years and the quantities exchanged have become smaller and more precise.

One DCR can be divided down to eight decimal places. Therefore, 0.00000001 DCR is the smallest amount that can be handled in a transaction as currently constructed. For those wondering, it would require 1 DCR to cost $100,000,000 in USD for 0.00000001 DCR to equal one cent; this assumes all DCR are in circulation.

Scarce. A monetary good must have “unforgeable costliness,” meaning it must not be abundant or easy to either obtain or produce in quantity. This is perhaps the most important attribute of a store of value, and certainly so when competing against the other options in the market today (e.g., the USD Dollar).

Decred has been programmed to only ever produce 21,000,000 DCR, making it scarce and, if demand increases, an asset that taps into the innate human desire to collect what is rare. This is also the core characteristic that distinguishes Decred from fiat currency, specifically fiat whose issuance is controlled by a central bank or governing body. Programmed scarcity guarantees that stakeholders of Decred can easily understand exactly how their purchasing power has and will change over time. Additionally, with over 50% of all circulating DCR supply locked up, Decred has introduced a new level of scarcity: by making it both more difficult to acquire circulating DCR and more difficult to acquire tickets for governance participation. As of August 2019, the price of a single ticket surpassed 130 DCR, up ~33% since the beginning of 2019 and ~45% year-over-year.

Established History. The longer a good is perceived to have been valuable by society, the greater its appeal as a store of value. A long-established store of value will be hard to displace by a new upstart except if the upstart has a significant advantage in many of the other attributes outlined above.

This is where Decred struggles, though through no fault of its own. While the cryptocurrency market in general is very nascent, Bitcoin has established itself as a legitimate contender for dominating the digital store of value market by surviving ten-plus years of usage and attacks without compromise. If Decred exists for 20+ years, there will be near-universal confidence that it will be available forever, much as people believe the Internet is a permanent feature of the modern world.

Censorship-resistant. The importance of this attribute has emerged in today’s digitally-driven and pervasively surveilled society, and it is unlikely that any store of value asset of the future will reach its full potential without succeeding here. Censorship-resistance doesn’t necessarily mean guaranteed privacy — instead it is more important that it creates difficulty for an external party, such as a corporation or state power, to prevent the owner of the good from keeping and using it. Unsurprisingly, this attribute has been one of the biggest drivers of cryptocurrency adoption in countries governed by regimes trying to enforce capital controls or outlaw various forms of peaceful trade.

As long as the private keys to a Decred address remain secure (private), Decred is fully censorship-resistant.

Predictable Inflation and Reliable Issuance. Decred also provides predictable inflation through reliable issuance through code. This is important for a number of reasons, most notably because it allows its users to retain and track its pricing power over time. Though gold has its flaws (see portability and divisibility), it has retained almost all of its purchasing power (in USD) versus the US Dollar over the last 100+ years. Decred takes this one step further, providing tangible proof of its historical and expected future inflation and issuance (through its underlying code), something that even gold (which has largely offset the loss of purchasing power of the US Dollar by being a naturally occurring, relatively rare metallic chemical element) cannot produce — the amount of circulating and not-yet-mined gold is based on assumptions and rounding errors, not uncompromising math.

Decred’s issuance follows a similar schedule as Bitcoin, with the largest differences in mining protocol outlined below, followed by the schedule of issuance comparison for the two projects. This comparison is not meant to represent a competitive view, rather it should be used to provide reference for Decred’s issuance from that of the most well-known cryptocurrency of today.

There are an average of 144 Bitcoin blocks per day (target of 10 minutes per block).

There are an average of 288 Decred blocks per day (target of 5 minutes per block).

The Decred values below are the max possible, though in reality these values will be slightly lower because missed votes reduce proof of stake subsidy and stakeholders can strip a block’s proof of work subsidy for misbehaving miners, which in turn reduces the total possible supply. Similarly, there have already been very public examples of large amounts of Bitcoin lost forever, resulting in it being unlikely that more than 17 to 18 million bitcoin will ever truly be in circulation.

Decred’s subsidy generation algorithm is designed to be smoother than Bitcoin’s, reducing by ~1% every three weeks as opposed to having huge halving events every ~four years.

Programmability. Programmability is not an attribute of historical store of value assets. However, it should not be difficult to believe that it is one that will grow to have immense value as the world continues its transition to a digitally-native state. As the pace of change and innovation in the world continues to increase, so will society’s need to remain adaptable in how it interacts, transacts, and governs. Decred offers the strength of programmability (reliable issuance) and adaptability (potential for rule changes without fracturing the network). Protocols must evolve or they risk becoming obsolete, and Decred is designed to adapt when needed.

Thesis 4b: Valuing Sound Money

One attribute of sound money is a high stock-to-flow ratio. That is, the amount of something already in circulation is much greater than the amount of that something that can be injected into the circulation over any given period. The scarcity of gold combined with the immense time and effort necessary to mine it has meant the annual increase in gold supply from mining has consistently fallen to below 2% over time. This attribute has made gold the store of value of choice throughout millennia, having existed as a means of value in virtually every civilized economy since the Romans in one form or another.

As can be seen in the numbers above and the graphic below showing Bitcoin’s historical stock-to-flow ratio, Bitcoin and Decred follow in gold’s footsteps in their high stock-to-flow ratio, with both carrying the potential to “outperform” gold in this method of analysis. Following Bitcoin’s next halving, which will come in mid-2020, the annual increase in bitcoin supply will fall to less than 2% of the amount already in circulation, putting its stock-to-flow ratio on par with gold’s. Decred is still 8–10 years from the time at which its annual increase will be less than 2% of circulating supply.

Decred is actually holding an even larger monetary premium for a longer period of time than Bitcoin did it its early years, as detailed by Twitter user Checkmate (@_Checkmatey_) in this analysis.

Thesis 5: Staking

Staking has three primary functions: (1) holding proof of work miners in check and providing additional security to the network; (2) rewarding stakeholders for validating the miners’ work; and it (3) allows Decred holders to maintain network position versus dilution from the network’s issuance of new DCR minted every three weeks.

Decred holders participate in proof of stake voting by time-locking (staking) funds in exchange for tickets. Tickets confer voting rights, and ticket voting determines:

Consensus rule changes (on-chain)

Validation of proof of work miners’ work

Treasury project funding (dev work, communications, events, research, etc.)

Policy (Constitutional amendments, procedures, standards, etc.)

The time-locking mechanism ensures that voters have “skin in the game,” and the proof of stake portion of the block reward incentivizes staking and active participation in the governance model. Additionally, Decred holders receiving DCR via the proof of stake portion of the block reward are simultaneously protecting their holdings from dilution — staking drops the expected annual dilution rate for a DCR holder to ~5.5%. (Dilution in this case represents the percentage one owns of total circulating DCR.)

As discussed above in Security, the staking of Decred also enhances the network’s resistance to double-spend (51%) attacks.

Decred’s proof of stake mechanism has seen continued progress, which can be tangibly tracked through both staking participation and participation in its governance system. As of today, more than 50% of all circulating DCR is being staked, highlighting the community’s long-term commitment to Decred. Additionally, Decred has a relatively high on-chain voter turnout, unlike most blockchain governance systems. Decred’s proof of stake algorithm change (DCP002 and DCP003) from early 2018 saw a nearly 87% participation rate. Even more impressive, those votes saw more than 14% of wallet addresses participate, dwarfing the turnout seen from other high-profile proof of stake networks (0x, Aragon, and MakerDAO all had less than 1% of wallets participate in various stakeholder votes), per the great work done by Roy Learner. For a traditional comparison, the average voter turnout for presidential elections in the United States is 50–55% while the average corporate voter turnout in the U.S. typically hovers around 75%, per Gallup.

Decred’s results for off-chain voting are also strong, with Politeia proposals receiving 30%+ voter turnout across all approved and rejected proposals. Most interesting is that proposals requesting more funding have a higher turnout — this activity is not surprising, but is a healthy sign that Decred’s skin in the game system is working.

One other under-discussed but important note about Decred’s proof of stake system is that it is easy and intuitive to use. Many cryptocurrencies that allow staking are challenging to use, either due to UI/UX or wallet requirements that invite friction. Decred’s system — from buying a ticket to reading proposals and voting on Politeia to checking the status of a staked ticket — is simple and straightforward to navigate. Behind a strong, committed community, the lack of friction at this step of the process is the most critical component to building a staking experience with potential for mass adoption.

For DCR holders, there are two methods currently available for staking. The first is to run an independent Decred network node. While those running independent nodes pay no fees on their staking rewards, they individually own the risk of missed votes — if a wallet with a ticket is not online when its ticket is randomly selected, that ticket (and its holder) will lose the staking rewards and that opportunity to participate in Decred’s blockchain governance. (Ticker holders can still vote on funding allocations made through Politeia, however.) The second option for staking DCR is to delegate ticket(s) to staking pools, which provide protection against missed votes, typically charging a fee of 1–5% that is taken out of the ticket’s staking reward (if the ticket is called to vote). These staking pools have the necessary resources to maintain consistently running nodes, with many of the staking pool providers having track records of missing less than 0.2% of potential votes. As of August 2019, more than half of all tickets are held by pools (~51%).

Thesis 6: Sustainability (Self-Funding)

As outlined in the History section earlier, one of the core issues the founding team of Decred had when working on Bitcoin was the lack of a formal payment structure for developers. To ensure that developers could maintain the Bitcoin protocol, outside entities, most notably Blockstream and MIT Media Lab, began funding core developers by hiring them as salaried employees. Unsurprisingly, this created, at best, the perception of a conflict of interest, as the needs of a private venture-backed company (Blockstream) could potentially influence Bitcoin’s core development. In an effort to avoid this, Decred was designed with a network treasury that could autonomously and sustainably fund its development over time. This is secured in its consensus mechanism, which delivers 10% of every block reward to what will soon be a decentralized autonomous entity-controlled treasury, allowing developers to apply for new development funding.

Today, the Treasury is centrally controlled by Decred Holdings Group LLC, a corporate entity which owns the keys to the multi-sig treasury address. The payment process for contractors today is straightforward: once a prospective contractor is approved, they may submit monthly invoices of their work to be reviewed by treasury auditors. Contractors are free to work on initiatives laid out in approved Politeia approvals or create their own statements of work for the stakeholders to vote on.

Over time, and something that has already been expressed by Decred’s founding team, the developers plan to transition control of the keys to Decred’s stakeholders through a decentralized autonomous entity (DAE) that has complete autonomy over what gets funded via smart contracts. For all of its innovation, this may be the single most important aspect of the Decred project to track going forward. The transition to a DAE-controlled treasury is not only innovative, it is a necessity for Decred to become truly decentralized (and, in this author’s opinion, what is needed for the project to reach its full potential). The motivation behind this transition is clear: stakeholders deserve sovereignty over how the funds of the treasury are spent and it removes security issues (tampering, hacking, theft) associated with having a central entity control the treasury’s private keys (and thus, its funds).

If the price of DCR grows over time, the funds available to Decred stakeholders will grow as well, arming the community with tens or hundreds of millions of dollars that can be used to fund new developments and recruit developer talent. In this way, Decred can become the first truly meaningful and most well-capitalized decentralized organization in the world. See below for visuals showing how the Treasury balance has grown over time and how every month but one has been a balance additive since the blockchain’s inception even while funding its significant development roadmap to-date.

(Thought exercise for the optimists: ten years from today, the Decred Treasury will likely have well in excess of 1,000,000 DCR, a combination of the ~635,000 held today and an additional ~750,000 that will be added through the subsidy, with the understanding that a portion of the Treasury’s ‘earnings’ will be paid out to developers and contractors for work over that time. If one DCR is worth $100, the Treasury will be sitting on ~$100 million; if one DCR is worth $1,000, the Treasury’s balance will likely exceed more than $1 billion.)

Thesis 7: Community

After spending some time following the conversations and culture of Decred’s broader community — from developers to miners to stakeholders — it became evident that it is one of the most committed and candid communities among the larger crypto networks. Many active participants display a sincere commitment to the network, sharing ideas, feedback, and proposals constructively and with the blockchain’s long-term value at heart. While this is more of a qualitative assessment, I implore anybody interested in observing the community’s interactions to spend time in both the social media platforms the community uses (Matrix, Discord, Slack) and on Politeia.

To attempt a quantitative assessment of the community’s long-term commitment to the community, consider this: the standard daily ticket volume that Decred ranges from 600–800 tickets, roughly equivalent to 80,000–110,000 DCR and ~$2 million per day at August 2019 prices. Daily volume for the last year has generally ranged from $1–1.5 million. To see daily ticket volume — actively locking up your value in a network for a month on average and potentially as long as four months — outpacing daily traded volume speaks to the long-term mindset of Decred’s stakeholders, as well as the potential for value appreciation if and once the project develops greater liquidity and access to a wider range of retail and institutional-grade capital.

Developer activity is also strong, as Decred has 73 repositories (“repos”) on GitHub. Activity on the core ‘dcrd’ repo has been consistent over the last year-plus (through a broader crypto bear market), with at least a few commits every week.

Lastly, the Decred team and community exudes a level of professionalism seen in few lower market cap projects. Decred offers a clear, transparent block explorer to track the blockchain’s metrics, the Treasury, and the voting progress on various governance issues, as well as GUI wallet (Decrediton) that is easy to navigate, understand, and operate within (e.g., send/receive transactions, viewing proposals, voting, buying tickets), crucial to a network’s ability to adopt users. While many projects have block explorers that are difficult to understand, make access to analyzable network health metrics difficult to find, and ask users to use complex wallet structures, Decred largely eliminates that friction. The result is a crypto network that is as usable as it is foundationally strong, a welcome sight for those interested in the project.