Disclaimer: this is not legal advice.
Many tokens issued for blockchain projects are worthless. Insufficient value capture mechanisms, haphazard go to market strategies and complicated onboarding processes plague the blockchain ecosystem. The immaturity of the technology ecosystem and a lack of cultural motivations to adopt decentralized technologies are primary drivers. The latest round of speculation on tokens and cryptocurrencies has ended, without crossing the chasm into mainstream adoption of decentralized applications and services. For most projects, there was no onboarding, no users, no earnings and absolutely nothing to hold capital or active users within their token economy.
So what happened?
My overarching thesis is not mutually exclusive to other theses brought forward by the community.
There’s no mainstream utility value in blockchain networks today.
Nobody cares about:
- Secure peer to peer transactions, messaging, voice or video
- Trust-less, provably fair computation
- Privacy and censorship resistance
What? I thought you were a proponent of these networks. I am. I’m sorry to break it to all my blockchain and crypto friends… I’m not the target audience you need to convince. For mass adoption, we need mainstream utility. We need soccer moms, environmental activists and plumbers with a burning desire to become sovereign individuals and share the blockchain and cryptocurrency community’s desire for control, privacy and autonomy online. We must impose it through a revolution of internet architecture with the burden not placed on the user, but on the corporations who once sought to control our online lives.
However right now, most of the well off west doesn’t care about this movement. Why not?
Meaningful Utility
Blockchain and cryptocurrency utility value such as peer to peer applications and cross-border, private, censorship resistant transactions doesn’t matter to affluent members of developed nations. The only thing that makes sense to someone living in a developed country where they feel free is the investment ability to hedge against their own potentially deflationary fiat currency. Otherwise, switching costs, cognitive overhead and lack of tools make it hard for most users from developed nations to consider leaving traditional applications and forms of payment. Most people don’t have a burning privacy concern or hyper-inflation worry, yet.
Blockchain networks and cryptocurrencies absolutely have true utility benefits and solve a lot of problems with the internet and society. But they come at a cost and it’s just not sexy right now. A cost benefit analysis of adopting the technology doesn’t add up. The switching costs are too high for something that’s not a major issue right now. Few people need privacy and censorship resistance, yet, as Andreas M. Antonopoulos has pointed out several times.
Don’t kill the messenger, even if you’d like to kill Facebook Messenger.
What about disintermediation, data slavery and efficiency gains?
Excellent issues blockchain technology can help solve, when people care enough. These are still trumped by the following issues:
- Poor UX
- Cumbersome capital and technical onboarding (fiat and keys)
- People… don’t… care!
Are you starting to see a pattern? Most projects that started in developed countries sold narratives that solved first world problems. There were simply not enough people who cared about these problems. The projects could not onboard users and sustain a usage demand of their network. This led to a poor ratio of utility to speculative value. Again the underlying theme: there isn’t a cultural movement toward privacy, censorship resistant assets and blockchain utility from first world participants that outpaces the greed and speculation on tokens and cryptocurrencies.
If we want mass adoption of this technology, we’re going to need to go beyond speculation, designing systems that create a burning desire in culture to protect privacy, offer censorship resistance and provide true ownership. Otherwise we’re left selling money for nothing narratives that led to the recent speculative bubble and will become the basis for more. Cryptocurrency surges to record highs, everyone rushes in looking for meaningful ways to use their new riches, there aren’t enough use cases and eventually, people get bored and head for the exit.
Speculative Narratives
Understanding the past is probably a good way to spark discussion about how we intend to build the future as a community. Without further ado, let’s unpack the speculation on blockchain projects to date and see if we can a) design better incentives and b) connect these incentives to true utility that appeals to everyone.
If westerners are purchasing tokens and cryptocurrencies with no real intent to use features or interact the network and it’s users, what are they up to? They are speculating on future value and network effects, like a venture capitalist. Early stage businesses, startups, sell narratives to initial investors all the time. What are the stories being told and sold by blockchain projects issuing tokens?
- Token Appreciation
- Commodity Theses
- Governance
These are not specific token models like payment, work, utility or security tokens. They are broad speculative narratives and not mutually exclusive. The cryptoasset and token model taxonomy is still evolving. For a deeper insight, a great report was recently released by Crypto Compare, the, “Cryptoasset Taxonomy Report”.
Private property investment thesis.
1. Token Appreciation
During the ICO boom of 2017 this was the dominant thesis for “getting in early” on a crypto or token powered network. Projects attempted to pair finite supply Austrian economics with Silicon Valley startup network effects. This painted an incredibly sexy picture of increasing demand with a finite supply. Meaning, the underlying asset, trading freely, is increasing in price against stable currencies like the USD.
Interesting right? However, as we’ve seen several times in Silicon Valley, business to business and end-user consumer applications have fickle audiences. Users often have low switching costs, sloshing from app to app (Snap/Slack) with only a few mainstay social networks and business applications comprising a bulk of the market. “Network effect” is not a solid Go to Market (GTM) strategy in the same way that “cool technology” is not a business plan.
The “fat protocol thesis” is an exciting one. The fat protocol thesis looks at the existence of a cryptoasset that powers a shared data layer and applications that build on top of it. With users free to move from application to application, a bulk of the value should accrue in the cryptoasset rather than in the application. However, short sighted investors overlooked several blockchain project teams’ GTM abilities, which led to a missing crucial ingredient for the fat protocol thesis to work, usage. The networks must have value passing through the protocol in order for there to be any capture. No sales, no users, no network effect, no value. As stated above, most users simply don’t have cultural or practical motivations to adopt these cumbersome peer to peer applications today.
Additionally, a finite supply token model with a pre-mine is a lazy bootstrapping of what is otherwise a Bitcoin style network where only time and work can prove true value. Additionally, Bitcoin still possesses a massive carrot to incentivize adoption: the rest of the 21 million bitcoins have yet to be released. Stark contrast to projects that dumped all of their tokens onto markets through their token sale with no additionally mining incentive rewards to stake, work and participate in the network. That’s just bad economics. Those naive designs put projects at the mercy of speculative demand and completely eschewed mechanisms necessary to satisfy that crucial ingredient of the fat protocol thesis. Usage.
Everyone gets tokens! What could go wrong?
2. Commodity Theses
The gold rush! Money for nothing... Perhaps a little work. In the past few years blockchain projects have promised a few different types of investment in utility networks. You could buy into an initial coin offering and essentially, HODL and win big. Invest in some hardware, stake some coins and participate in some “work”. If the network actually takes off, you’ll do just fine. Here’s how some slightly improved models sold their story and made millions.
Store of Value
It’s extremely difficult to criticize Bitcoin as “sound money”. The reason: Bitcoin is based on math. If you like the properties of pseudo-anonymity, censorship resistance and cross-border payments you’ll have utility. Bitcoin has a finite supply and diminishing returns for miners. It’s actually quite elegant. With no pre-mine and staying mathematically rigid and true to original values, Bitcoin earns the right to be a store of value for those who believe in it. The more people believe in a finite supply store of value, the more it should theoretically be worth. The Bitcoin network should continue to provide the same level of secure, censorship resistant, transfer and and store of value long after the last bitcoins are mined. Nice.
Staking Tokens
Networks like Quantum and Ethereum allow those who HODL to also perform work and share the revenues of the network. A decentralized enterprise that maintains a network and even application state. One obtains tokens, bonds themselves as a node on the network, provides some computational power for the automated work that secures the network and helps to achieve decentralized consensus on the future database state. Users pay fees to the network in order to update the database and nodes earn a portion of those fees for their work. Even developers from developed nations may want to create unstoppable applications. Cool.
Work Tokens
Tokens can represent a form of work other than securing a network or updating application state. Examples range from Proof of Space Time in Chia or Filecoin, proving files have been stored and available for a certain amout of time, to something more ephemeral such as the curation of information and social signalling in a shared Token Curated Registry (TCR). While the Proof of Space Time networks have yet to blossom, several attempts have been made at TCRs with none of them achieving any breakout success to date.
Not to sound pessimistic about the token engineering domain, it’s one of the most exciting fields in mechanism design right now. Beyond the security of a blockchain network, can we design social consensus mechanisms that are decentralized, Sybil resistant and peer to peer. Quantifying useful goods, social services and cultural participation would lead to a wildly successful token economy. Nation state economies sustain themselves by producing goods, services and culture, exporting this to the world. An online tribe on a borderless decentralized network could have a GDP denominated by a cryptocurrency that is the sum total of decentralized applications and services. Through mechanisms of trade and global finance, online nation states could form around social consensus. We could also see the opposite. Interesting.
Intellectual Property Tokens
IP tokens are a class of token that don’t seem to exist yet. These tokens offer exclusive access or rights to intellectual property. While Spotify and Netflix may claim to have re-defined the music and movie industry, systemic problems of brand and IP management are rampant and persist. Peer to peer networks of artists and fans sounds wildly optimistic and far-fetched. But if we start with leveraging existing infrastructure like the legal system, things become easier. The only question is: can we make it simple enough for artists and fans to care?
Licenses to use music today must be obtained through 1–1 conversations with labels and managers. These are long processes, involving intermediaries or platform fees if you go the stock music route. Selling a licence for background music in a YouTube video should be a simple peer to peer transaction. The same networks can work for connecting artists with fans for everything from streaming to tickets to merchandise. Committing valuable IP to a network and adding smart contracts for licensing, usage, collecting, limited use and other market mechanisms can produce valuable results. Possibly.
Collectibles and Game Tokens
These tokens are often of the Non-Fungible variety (NFT) but don’t have to be. Players could sell in game gold, and that same gold could become valuable across a number of different games. However, this isn’t as easy as it seems. There are several projects out there experimenting with these mechanisms. This is related to creating cultural movements around the technology itself. When a brand is “brand new” it can be difficult to foster die-hard fans from scratch.
Blockchain community and a love hate relationship with Cryptokitties
With no legacy brand value, Cryptokitties asked users to fall in love with strange new pets they had never met before. The masses don’t care about true digital ownership. Therefore, there is no mainstream utility value of the Kittyverse. We have existing mechanisms if a game studio behaves badly, we stop playing; stop paying for the right to play online; or sue them as is the case with the $28k USD sword from Lineage. Instead, there may be lawsuits based on the Nifty License going the other way, blockchain company to user. These developments have the blockchain community fuming.
With no mainstream demand to own censorship resistant integers… Cryptokitties may have the best UX in the biz, but remains a difficult to access videogame with no pre-existing brand value to leverage. Hello Pokemon!
3. Governance
Governance combines utility and investment. It doesn’t require blockchain technology. Many forms of governance have flaws that are currently not solved by blockchain; e.g. corporate governance already exists with legacy infrastructure to support it. Is it perfect? No. Is there a blockchain solution? Uncertain.
The stock market was designed to allow companies to raise capital for large projects. Allowing the public to invest allowed individuals to benefit from the economic value creation of those projects. Shareholders were given rights to vote, govern and control those companies. As shareholders ballooned to the millions and investors lost interest in governance, the governance model deteriorated. Shareholder votes occur infrequently today and typically only when something goes wrong, i.e. used as big sticks to police board members and executives. The market is comprised of millions of companies each with potentially millions of shareholders, making the transaction costs of voting and governance incredibly high.
There’s an interesting link between utility and investment, but investment nonetheless. The Howey Test, a 4 clause test to see if a contract is an investment, states an investment exists if, “any profit comes from the efforts of a promoter or third party”. Therefore, even if you vote, others are voting as well. If the governance leads to binding decisions that lead to profits. You’re holding a security. Therefore, governance alone is not sufficient utility to keep the securities commission at bay.
It should be noted that the Howey Test also has a “trap door” based on it’s common law origin (open to judicial case law interpretation and precedent) that states, “there is an expectation of profits from the investment”. The question regarding exception would be… according to who?
A simpler version of the Howey Test for a blockchain network, which is a commonly owned enterprise, could be:
Someone purchases a token expecting profits based on work performed by others.
Not another token model masquerading as a utility.
Conclusion
Is there such thing as money for nothing? Sure. But you have to be in the right place at the right time. Most of the token projects from 2017 are in either a) hot water as securities, or b) worthless. Thus the sun is setting on a number of 2017 vintage projects, naively based on a finite supply of tokens, zero GTM strategy and poor economics.
These token projects attempted to start their own borderless, censorship resistant economies. A cool idea, if anybody cared. I’ve pointed out that all true utility value of blockchain and cryptocurrency such as privacy, censorship resistance and disintermediation have less mainstream appeal than the switching costs and learning curves of adopting these networks and applications. Poor UX, high friction onboarding and culturally insignificant messaging of these projects is to blame. We haven’t seen a ratio of utility and speculative value or signal to noise, this high since the dot com era; and this won’t be the last time for blockchain and cryptocurrency.
Shout Out
Some projects are regressing into a legacy securities model, letting tokens represent equity in a company or paying dividends to attract further speculation. To see more late stage effects and actions taken by token projects, see Gregory Rocco’s post titled “Futility Tokens”, which sums up issues facing projects, along with creative exit strategies.
Silver lining?
If we can create borderless online networks where users are rewarded for content, growth and uptime… Content drives traffic and traffic converts to attention; attention can be monetized through advertising, training AI, membership fees and so on. Connect the reward schedule with the real world utility value of the network using a cryptocurrency and watch as appreciation in real dollar terms rises. You might have a shot at building a healthy online economy. I’ve grossly oversimplified this design, but stay tuned, there are smart people working on these problems.
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Thanks Sam, Eli, Scott, Jason Civalleri, Bryan Sandoval