Economics & Cryptography — A Once Impossible Marriage

If you’ve been reading Forbes, Business Insider, CNBC, the June 19th edition of Businessweek, and everything trending, then you’ve probably heard of the peculiar 3-letter abbreviation that magically raises $35 M within 30 seconds [1].

ICO, it stands for Instantaneous Capital Overjoy… just kidding, it actually is short for Initial Coin Offering (often referred to as a Token Launch), and it’s arguably beginning to disrupt the Capital Raising Industry (Venture Capital, Crowdfunding, etc) [2][3]

Cryptoeconomics is not only the fabric that underlies this ICO phenomena, but is the reason decentralized P2P (peer-to-peer) networks/protocols such as Bitcoin and Ethereum exist. In fact, Cryptoeconomics practically came into light at the exact moment Bitcoin did.

Before Bitcoin, decentralized P2P systems operated without an economic incentive and therefore never really were able to remain decentralized (the internet for example). In fact, before Bitcoin was invented, a decentralized, stateless, trust-less, independently verifiable, digital cash system was practically impossible — and still oddly remains theoretically impossible (Bitcoin is a probabilistic solution to The Byzantine Generals Problem, which is not a theoretically valid solution — but who cares, it works in practice) [4].

Upon exploring the realm of Cryptocurrencies you’ll start to notice two similar yet distinct terms pop up: DApp Coins and Protocol Tokens. Protocol tokens provide the financial incentives needed to fuel a cryptoeconomic protocol (Ether for Ethereum protocol, Bitcoin for the Bitcoin protocol, etc). A DApp (like an Iphone App) Coin is most comparable to a share of a company; they’re are sold to investors to raise money with the hopes that the DApp will provide real value and therefore be reflected by an increase in the coin’s price. But before you go on and invest in a coin, know that is quite different from investing in a traditional security.

Let’s pause for moment and just realize how much of a game changer tokens are. Prior to tokens, the only way to make money off of a protocol was by creating and selling the software that implemented it. Oftentimes, the inventors of these protocols weren’t the people who did that…so if they financially benefited at all, it was likely very little. With tokens, that all changes, inventors can monetize their tokens directly by selling their tokens for hard cash or by using those tokens to purchase goods in places like Arnhembitcoinstad (BitCoin City, Germany) — or could purchase goods on Overstock, buy tickets to see the Sacramento Kings, or even possibly donate to the UN.

More Interesting Ideas

  • A token’s price fluctuates 24/7 in a global market and has a price immediately upon its sale, unlike equity which can take years to liquidate.
  • Token launches can occur anywhere in the world, going to places like Silicon Valley or Wall Street to get financing is becoming less important, arguably.
  • Tokens allow anybody to invest!
  • Token holdersare in control of their own tokens, there are no intermediaries other than the trust-less network of nodes

For a more in depth understanding of Blockchains, Cryptocurrencies, etc., I strongly suggest reading Blockchain at Berkeley’s latest Medium Post and watching the plethora of Youtube videos.

[1] https://techcrunch.com/2017/06/01/brave-ico-35-million-30-seconds-brendan-eich/

[2] https://www.americanbanker.com/news/why-this-venture-capitalist-wants-to-make-traditional-vc-obsolete

[3] https://hbr.org/2017/03/what-initial-coin-offerings-are-and-why-vc-firms-care

[4] https://news.ycombinator.com/item?id=6911785