Crypto Gold Rush: Introducing a New Class of Blockchain-based Tokens

The advent of decentralized peer-to-peer protocols like Bitcoin have radically changed the way people around the world transact with one another. The next wave of blockchain innovations crashing into the scene is delivered in the form of application tokens, or application-layer coins, known as “Appcoins,” being built on top of network protocols (Layer 1) like Bitcoin and Ethereum. This trend of tokenizing-all-the-thing gets even more interesting as economic incentivization is baked into said tokens to drive desired behaviors, deter bad behavior, and direct economic activity.

Interestingly, this coupling between incentives and crypto-tokens stands to change the human protocol itself — the very way in which transpersonal interactions are made will be modified as financial incentives are introduced into the mix.

That said, blockchains and their inherent behavior-manipulating mechanisms can do as much harm as they can do good. The Internet opened the floodgates to information while simultaneously enabling mass surveillance and cyber-offense. Just as well, the blockchain is opening the gates of economic prosperity for a global citizenry while simultaneously enabling worldwide identification and tracking of every single transaction back to its coinbase (source). Gleaning from the good that came out of the Internet, however, humanity is still better off with than without.

“These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation. The technology for this revolution — and it surely will be both a social and economic revolution — has existed in theory for the past decade.”

— Timothy C. May, The Crypto Anarchist Manifesto

The technology Timothy May alluded to is now a fully formed idea implemented as a cryptographically-secured blockchain, a shared ledger maintained by a decentralized network of peers without the need for third-party trust. Personally, it is in this technology which disintermediates the middlemen and how it can affect the average person that I find compelling. It is the desire for fairness in distribution and self-sovereign control over property that fuels my commitment to this movement. However, the idealist will not make her vision a reality without first meeting the pragmatist’s requirements. We’ve a long ways to go.

In Crossing the Chasm, Geoffrey A. Moore pointed out a veritable chasm in the Technology Adoption Lifecycle that every nascent technology must cross in order to become a mainstream globally-adopted product.

In the early days of the World Wide Web, the Innovators — the researchers, technologists and scientists — were laying the foundations for Web 1.0, specifying protocol standards like HTTP, Transmission Control and Internet Protocols (TCP/IP) and building Domain Name Systems (DNS) infrastructure.

It wasn’t until the web became commercialized for the first time with Internet access through ISPs and the introduction of web browsers did it become accessible to the highly technical Early Adopter.

Web 2.0, enabled by social networking sites, wikis, search engines and more, only materialized and penetrated the mainstream consciousness some three decades later when the Internet, in its seamless, well-connected, interoperable form, crossed the veritable chasm to mass adoption.

Fast forward to 2009, post-Global Financial Crisis, cypherpunks and crypto-anarchists — many of which were made crypto-billionnaires — welcomed the birth of Bitcoin. Those cryptographers, hackers and privacy advocates — cryptocurrency’s Innovators—began building upon, optimizing, and layering over the Bitcoin Protocol.

Today, at the cusp of Web 3.0, enabled by ubiquitous connectivity (mobile Internet access), distributed computing (cloud), open-source software platforms (GitHub), portable identity, and now distributed data stores (blockchain technology), we are enabled to enter the next generation of the Internet.

But we stand yet at the edge of the chasm for blockchain technology, with two outcomes in sight: the first is a freefall into the chasm; the second, more likely outcome, is we build the bridge to the Early Majority by way of scaling Bitcoin to accommodate 10 billion users and launching production-ready Layer 2 protocols (e.g. Lightning Network).

The market capitalization of Bitcoin is $38 billion as of 19 July 2017. This puts Bitcoin in the same category as Morgan Stanley and Oracle in terms of market cap. Yet the number of unique and active users of cryptocurrency wallets across the entire cryptocurrency industry, according to a recent study conducted by the Cambridge Center for Alternative Finance, is estimated to be between 2.9 and 5.8 million.

Fred Ehrsam, previous co-founder of Coinbase, estimates that Ethereum, which has higher throughput than Bitcoin, is about “250x off being able to run a 10m user app and 25,000x off being able to run Facebook on chain.”

Indicative of blockchain technology moving past the Early Adopters stage of the Technology Adoption Lifecycle, bank executives, hedge fund managers, and CEO-types—the Visionaries—are capturing this technology through Initial Coin Offerings, or ICOs. Everyone wants in on the crypto gold rush.

As venture capital investment in blockchain startups plateaued then subsequently declined, Initial Coin Offerings (ICOs) skyrocketed. Entrepreneurs from various fields of study are are turning towards blockchains in hopes of tokenizing their business models and applications.

Brock Pierce, the man who invented the ICO model, claimed in an interview with me that ICOs will destroy venture capital.

“I think all the big VCs are done. The role isn’t there anymore. What’s happened is if you think about how this industry works, generally — for blockchain and VC in general — we invest in milestone-based financing deals, pre-seed, seeds, As, Bs, Cs, Ds, Es, and when something eventually gets really big, we take it public. In the near future that’s over. What’ll happen is there will be pre-seeds and seeds, maybe an A, and everybody goes public after series A or B or C stage on a blockchain. And I think IPOs are dead. I mean, NASDAQ and the New York Stock Exchange as we know it are going out of business — they may buy something and evolve into a new brand, but their current model is done — they were built for a world of paper. Think about it; the current stock markets are local. Our market is global. When you can do a global offering or a local offering, forget where the markets are today, think in the future. Which is better?”

The draw of global participation in tandem with modern marketing dynamics — dramatically shortened times to market, agile production runs, and fast, liquid money — is potent to those entrepreneurs with their fingers on the pulse of the future. With it attracts the good, the bad, and the downright scams.

Like the phishing scams back in the AOL days, ICO scams today are running rampant across the still maturing blockchain sector. OmiseGO (OMG) held a token sale for private investors. In response to overwhelming demand, phishers spammed all the Ethereum chat channels in Slack, Internet Relay Chat (IRC), Telegram, and WeChat groups with a public OMG “pre-sale” page preying on the early birds.

Another project, while technically not a scam, was a straight plagiarized version of the Lightning Network. A project called Cryptographically-secure Off-chain Multi-asset Instant Transaction (COMIT) Network took direct segments of the latter’s white paper and copied explainers and diagrams from Bitcoin Magazine’s three-part series that preceded the sham COMIT Network.

To enter this ICO market unscathed, investors must necessarily have a high degree of knowledge in the space. But this is not the reality. The reality is, token distributors are minting new coins into existence at a pace faster than buyers in the market can learn about them. Speculation drives prices up, fear-of-missing-out takes hold, people buy in later at the top, the market corrects as market makers dump inflated coins onto naive traders, then dumb money is left holding the bag.

“The role of good people is the vanguard of tomorrow…..To developers: serve your community.”

— Amir Taaki, The libbitcoin Manifesto

“The decentralized payments space (incl. blockchain, smart contracts) is much like the development of the early internet as a platform. A ton of companies poppued up in the early days of the internet, much like the gold rush we’re seeing now in cryptocurrency. Many of those companies no longer exist, although some did survive the dot-com implosion such as the Yahoos, AOLs, etc. these companies were actively contributing to the infrastructure that makes up the internet, heping define what we now take for granted as ‘the Internet.’

I think of cryptocurrencies, tokens and blockchain companies all as these initial internet companies. A decade from now, many of them won’t exist. Bitcoin or Ethereum may be relics of the past, and all of these companies creating ICO tokens likely won’t be around. All of these things are simply contributing back to that protocol-level infrastructure, defining what ‘payments’ will look like way into the future just like early internet companies helped define the ‘Internet.’ The organizations that will survive in the long term will be the Yahoos who are heavily committed to improving the underlying technology and not just their own implementation of it. But as with internet companies, they’ll eventually face their Snapchat successors.

The good news is that the internet is still around and has evolved considerably since it was first conceived — that’s what matters. Invest in people committed to evolving the underlying technology, not the transient coins, tokens or companies simply looking to make a buck out of this gold rush.” — Jackson Palmer, Dogecoin creator

The lowest and most common tier of ICOs are those in their ideation phase and have no product to speak of. The next tier of ICOs have some product, connection or value-add in place and are just seeking to “coinify.” The final and rarest tier in the ICO market has a live product already in operation before a token sale (e.g. Ethereum).

With ICOs raising over $1 billion in aggregate over its short lifespan, uncertainties over legality and the definition of “security” are called into question. To navigate US securities law and a cryptocurrency market that’s evolving considerably quicker than lawmakers can regulate, SuperBloom is imposing a self-regulating framework with an SEC-compliant token fund that’s open to global investors but only accredited investors if they reside in the United States.

“I think that the $20 million funds — the Chris Saccas, the LOWERCASE, the Baselines — those are great, and if you look at the data of venture, the big funds don’t deliver returns anyway. All the returns in venture, if you look at all the historical data, is on these subscale $5, $10, $20, $50 million funds. Those groups will stay around. The big guys will evolve into hedge funds because we don’t need $2 billion venture funds anymore; they’re going to be extinct, there’s no role for them in the future.” — Brock Pierce, Partner at Blockchain Capital

“Lastly lets approach the world as artists, and bring creativity to our work. The world is diverse, colourful and vibrant. Humans are not meant to live in little boxes and grey concrete jungles. Live art and be creative. Your work is art. Good art makes people think and feel.”

— Amir Taaki, The libbitcoin Manifesto

I write simplified explainations about hard technical concepts. Prev Tendermint. I cover blockchain interop and Web 3.0 ideas.