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Three Ways to Err about Crypto-Tokens

Recently, I gave a lecture to a group of enthusiastic crypto-investors in Indore, in the center of the city. ;India. A gentleman, who was particularly competent, stood up to make some comments. "You see, I think most other cryptos have no value, in the end it's all about Bitcoin and maybe Ethereum." In many ways, what's happening now is like dot com rush The ratings are everywhere.So what I'm looking for is what you can actually do with the token – does it fulfill any real value like Fliecoin and StorJ. "

This gentleman covered a lot of ground quickly, so we need to analyze his comments carefully. To begin with, it looks like it's talking about tokens in terms similar to the cash trust – most national currencies are useless for international trade, only a few are valuable reserves: the US dollar , the euro and maybe the dollar pound. But then it pivots immediately and talks about chips as a form of equity, even if the sparkling and insubstantial kind, which crashed in the wake of the DotCom bubble. Finally, he talks about two examples of utility chips that are paid when users share their computing power or storage space with a network. Tokens are a particular transaction unit for a given platform, product, or service and can be considered a proxy for them. It's a lot of metaphors to mix in a brief exchange!

There is a lot of focus on cryptographic assets this year, as more than 900 alternative coins or tokens have been launched and have accumulated some $ 75 billion in capitalization. Vitalik Buterin now says that he did not imagine that so many people would attempt to build new parts using the ERC protocol 20 which became a part of the Ethereum platform that he designed. But as it became so simple and so simple for so many people to design and launch a new token that would work immediately on the Ethereum Blockchain, a kind of Cambrian explosion of alternative coins took place. There is a lot of confusion and uncertainty about how to think about crypto-tokens, about their regulatory status and what they are good at.

As we see in the comments made by the gentleman of Indore, Tokens have properties or dimensions related to the currency, stocks and products. Let's look at these distinct aspects in order.

1. As a motto

Of course, Bitcoin is the same paradigm here and it's always called a coin. And even though Ethereum describes itself as a "global computer" with much more sophistication and utilities compared to Bitcoin, it is also widely spread, widely traded and has enjoyed a steadily increasing value over to the fiduciary money. In recent years there has been a profusion of alternative tokens claiming that they are actually currencies: Monero, Zcash, Dash, Litecoin. And there would be many more in the future

What is worth noting here, is that the new chips affirm their intention to behave like currencies or not, the fact that they are widely owned, widely traded and easily valued. -as. There can therefore be no formal distinction between crypto-currencies and other classes of tokens that do not behave as well

But how are crypto-tokens not like fiduciary currencies that we have already known? There is one strange thing: despite the widespread adoption of Bitcoin and Ethereum, none is still a favorite unit of account. This remains in fiat, especially in the US dollar. It is a sense in which the so-called crypto-currencies can rather behave as a financial instrument whose value may vary over time or a secondary national currency valued against the dollar. We should note that although Bitcoin and Ethereum have both done very well over the last year, from an ether-centric point of view, Bitcoin has become much cheaper than before. Once we have started to see things this way, we will be better placed to believe that at least some tokens are actually currencies.

2. As the promise of a new product-business

If Bitcoin and its early peers offered it primarily as a form of digital currency, new decentralized applications and the organizations that built them started to create utility chips and sell them in advance of their product and system being built. The ERC 20 protocols on Ethereum modeled this process and allowed anyone to quickly and easily release a new set of chips and then collect money against this game.

The token can be widely used and traded for other chips. In this way, a token is similar to a Kickstarter campaign, which can generate revenue from early users before the new wallet, power cycle or single multifunctional tool is manufactured

. deposit of dollars that so many enthusiasts have put on the Tesla Model 3 several quarters: Elon took your money early and now uses it to build your new car. As discussed above, however, you have the right to go out and sell this deposit to someone else quickly and easily because of the greater fungibility of the token.

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Adam Ludwin recently argued that tokens should be considered new asset class that allows decentralized applications and that decentralized applications have their central utility in resistance to censorship. Although Ludwin is essentially right in pointing out that tokens have so far been used to finance decentralized applications and that this could be a classic and novel use, they can now be used in many other innovative and spin-off applications. We must therefore soften Ludwin's views on two fronts: decentralization as an absolute and the type of value unlocked by decentralization. A quick view of the existing symbolic horizon reveals highly centralized tokens like Ripple, which are run by private companies. Centralization and decentralization are therefore not absolute binary states, but rather ideal types at the polar extremes, while most existing Blockchain applications are somewhere in the middle. Secondly, there are many reasons for creating decentralized applications that may not be related to censorship resistance but to the redistribution of trust within existing networks. For example, the energy, content and agricultural supply chains, all of which are easily identifiable.

Richard Kastelein recently mentioned the success of ICO's EMovieVenture, a future film club. It is a semi-decentralized project focused on movie tickets focused on feedback, without a true decentralized application or many software developers to incite. Whatever one may think of this particular case, its success suggests that there is no business model or vertical sector immune to tokenization. Tokenization has now jumped the shark – it's a form of social and financial behavior that is allowed by Blockchain originally applied to cryptotechnology applications, but it is now abroad as a means of futures trading for new businesses.

Even if, from the point of view of rational investment in viable, credible and symbolic ecosystems such as StorJ and Filecoin, this should be the most attractive for investors. There will of course be many other types of product ideas, including those related to celebrity, entertainment and lifestyle. If a Beyoncé token arrives in the near future, I would not suggest that you restrain yourself from its ICO just because it does not build a truly decentralized application.

3. As securities or assets securitized

According to a recent decision of the United States Securities and Exchange Commission, the purchase of crypto-tokens may be considered a security s && It is in accordance with the Howey test:

  1. There is an investment of money
  2. There is an expectation of the profits from the investment
  3. ]

  4. The investment of money is in a joint venture
  5. Any profit comes from the efforts of a promoter or a third

This has led to a global wringing-round, as crypto-tokens proponents have bent over backwards to solemnly claim that their tokens in no way represent titles according to this definition. Despite such anathema to the very concept of security, we must admit that all tokens have a security dimension, whether or not they conform to the Howey test above. Think of a platform like Ethereum: it's a vehicle for investing in hundreds of ERC 20 chips that are all third-party effort. Many buyers have a clear expectation of gain. It is a joint venture, though distributed.

More and more complex forms of tokens are being designed and issued, including for example asset-backed chips that are now issued by Smartlands. New, more complex token models may resemble fixed income securities, debentures, funds of funds and even quasi-debt securities. Despite the current decision, people will want to do things with tokens that will repeatedly run up against existing regulations, which will likely need to be updated to follow contemporary and emerging practice.

A different way of looking at chips as equity is from the point of view of the individuals issuing the token: organizations or groups of individuals may choose to issue tokens and to collect fiduciary money, as much as they would do it with fairness. The issue of tokens has capitalization effects similar to those of equity for those who issue it. And in case there is no company associated with the token, then there will be only the token to link the interests of the different people associated with the given project. Here, the token looks like a form of equity, in terms of proportionality and common interest for people otherwise disconnected from each other. Tokens that are expressly related to the valuation and performance of other tokens are clearly securities and will have no purpose other than to be subject to existing securities regulation

Metaphor is the thing

Benjamin Lee Whorf famously describes the use of "spun limestone" to isolate wood-fired distillation plants. Factory managers were amazed to see the material catch fire after a few weeks of use through a complex chemical process that produced flammable vapors of acetone and which caused many fires in the area. 39; plants. Whorf's diagnosis was that plant planners could not calculate that this material was flammable because of its name and touch, which was like a stone – that common sense informed by linguistic ideologies dictated does not burn normally not. The terms you use therefore have consequences for the thoughts that come to your mind.

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If you mainly see crypto-tokens as currency, you will be interested in their capitalization, circulation and adoption. You might also come to believe that there will be only one winner who will take everything and become the standard of reference for all other currencies. This view could easily lead to Bitcoin maximalism or Ether chauvinism, and it could also be wrong.

If you see tokens as successors of the corporation's fairness model, you may well imagine that many flowers will bloom. However, the power laws will make some tokens much more efficient than the average, and many chips will not end up for any denomination, crypto or fiat.

If you look at the chips as a kind of product license or as a way to advance the salary for future goods or services, you might be wondering what everyone is talking about. Because early sales and loyalty points are neither new nor deeply disruptive of existing venture capital financing arrangements.

From each point of view, you will mainly see one aspect of the token to the detriment of others. The most difficult truth is that a crypto-token is in varying degrees depending on the specific design and application of each particular token. We must resist our reflex of thinking and speaking using the categories of the past, but rather appreciate the ways in which these three dimensions blend together to create the irruptive power of this new thing.

Tokens of a Guy

So, if the chips are not exactly currency or deposit receipts or equity, what are their positive attributes? What exactly do they allow us to do and why are they useful, if not always valuable?

1. Hi-res fongibility

Once listed on an exchange, a token may be exchanged for another token at a publicly available exchange rate with little transactional friction. It can not be done with employee share ownership plans, with advisory equity or with any other type of corporate paper, promissory notes or other existing instruments associated with the construction of a company. A new company. This has many benefits for early founders, counselors and early adopters, but can also have serious disadvantages, which will become evident when new country offices, such as Tezos, face public scrutiny without recourse venture capital companies.

All of this means that unlike fairness, tokens are fungible and that also to fractional fractions or degrees of resolution. This high resolution is actually a beneficial attribute in itself. Consider that many beginning counselors will not work with a start-up company at less than two percent equity. This is simply not worth it because the time and effort spent tracking their many investments will not allow them to consider, for example, 0.5% of what appears to be about to become a 10 million business of dollars.

But consider the fictitious case of a $ 5 million increase in the ICO's "Coineum". where the million coins will be worth $ 10 million. Imagine that you are offered 50,000 coins with a face value of $ 150,000. Be it behavioral economics or current or old-fashioned greed, you might have more trouble saying no. By making the value in terms as fine and fungible as fiduciary money; tokens appear to be more attractive to investors.

2. Algorithmic genesis

One of the most interesting aspects of Bitcoin, which has not been emulated by any of the ERC 20 tokens launched off Ethereum is its continued operation and its slow progressive entry into circulation. There could be a number of innovative ways to approach this aspect of Bitcoin monetary policy based on the operational parameters of microeconomics being designed. An interesting model is that of Steem, whose chips are generated at a fixed rate of one block every three seconds, and which are then distributed to different parts of the system on the basis of an algorithm designed to reinforce the whole ecosystem

Simon de la Rouvière recently declared officially that the ICOs may themselves be an anachronism or a metaphor smuggled out in an older way, and that the self-generation of a community can be viewed as a continuous and open process. . This means that unlike equity holdings, which can be of a fixed proportion, the distribution of symbolic assets can be elastic over time, dynamically responding to size, volume, frequency, and other operational parameters. microeconomics.

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3. Self-Empowered Liquidity

James Kilroe recently explained that new coins are continually being created by the founders because they can be better compensated by a new platform rather than by the gradual improvement of an existing room. Although it does not seem very different from existing companies where the incentives to overturn an existing division are often much weaker than building a new company, the way that this can be achieved in tokens differs slightly from equity.

For a long time, it has been common practice to allocate capital to the founders and the first employees of a technological enterprise that still needs to be built through its core team. Some advisors and angel investors may also earn or buy shares on favorable terms. But it is rare that the first users and participants of a future community or microeconomics are also compensated. Starting from the metaphor of mining at Bitcoin, crypto-tokens now draw the distinction between stock allocations and premium-bird discounts or cash back for the first customers on a platform. While the incentive of the first members of the company seems perfectly legitimate for everyone, some investors are often reluctant to use their money to "buy" customers and guarantee the dumping of products. There seems to be a different set of cognitive heuristics for how to spend your own fictitious assets (equity) compared to other people's money (high capital).

Consider another fictional case, the development of an engine of decentralized provenance for the artistic community. To build it, you can cash and distribute coins to all stakeholders, including artists, collectors, dealers and galleries. You could give them more pieces to update their transactions and collectively establish the provenance of all the works in your Dapp. Finally, these costs are covered by the owners and buyers of works of art who pay into the system to access collectively created provenance data. It's a tough job for Christie's or Sotheby's to do this work centrally, but a lot easier for the decentralized communities to do it, provided that all are prompted appropriately. This microeconomy could never exist if it did not authorize the creation of its own piece alongside the rules of its use through its Dapp.

The founders' ability to compensate key members of the emerging decentralized community in Tokens Balaji Srinivasan and Naval Ravikant described "better than free" economic models. "Better than free" has a ring of "perpetual motion machine" about it. It seems somehow flawed and ultimately counterintuitive that such a thing could ever work other than as a Ponzi scheme. We could better talk about it as a mechanism of self-authorization to induce the creation of a microeconomy, which is really what all the chips allow or ultimately implement. What is equity for a company, it's a microeconomics.

Although the gentleman from Indore was not wrong to look for meaningful and useful application areas for end users, this is not the case. ;full story. Equally important in the early stages of a symbolic project is the means by which the token will be distributed widely and equitably among the key stakeholders needed to make the project viable. These are no longer just the founders and main employees of the ecosystem, but more and more other influencers, content creators, data refreshers, freelancers taking advantage of the platform and other ad participants. hoc of the ecosystem.

A Sufi Qawwali celebrates all existence as a result of Allah looking in a mirror and then disengaging himself. This is a good metaphor for the genesis of a microeconomy like any other, and it is better to start with the self-authorization of a founding network with itself, its close partners and its wider ecosystem. This is the process that tokens now allow, in some cases alongside traditional equity structures and in other cases without them.

Train your mind to this new openness and permeability between the boundaries of your business and its broader ecosystem. Now think of this new fusion as a microeconomy. Use your token to encourage and thereby coordinate the interests of its stakeholders together.

Aditya Dev Sood is a founding partner of the Startereum Accelerator Program, which builds a new generation of projects and symbolized communities.