Over the last few quarters, we’ve watched entrepreneurs shift their fundraising focus from token-based protocols to the relative safety of equity-capitalized, cash-flow extracting businesses. Within crypto, if 2017 deal-flow was 75% token-based, 25% equity-based, then 2019 has been the inverse, and the token-based deals are continuing to slow .
Long run, we expect there to be thousands of equity-capitalized businesses making use of each successful protocol, which means there will be more companies than protocols, and the noted inversion of deal-flow is rational. Furthermore, we should expect a reversion to the psychological safety of what’s known in a time of heightened risk aversion.
That said, just as people in 2017 regretted their 2014/2015/2016 decision to abandon bitcoin for blockchain, many people in 2021 will regret their 2018/2019/2020 decision to abandon tokens for equity. Especially if they had a good idea but faltered due to the bearishness of the climate. This will apply to both entrepreneurs and investors, and the regret will harden conviction behind tokens over the long run.
Regret won’t come because launching or investing in a successful token-based protocol is easy . Candidly, launching a protocol has a greater chance of failure than launching a company, because the playbooks of protocols are being written as we speak. But the feeling of lost opportunity will arise when the protocols that become successful dwarf the scale of most companies, and people realize that many successful models were hidden in plain sight in 2018/2019/2020. When this happens, there will be a strong sense of FOMO, which is likely to bring another (better-regulated) token-boom in the middle-stage of the next bull market .
Frenzied booms tend to happen in the middle of crypto’s bull markets due to the combination of 1) influxes of new people 2) availability bias 3) hasty expected value (EV) calculations, where EV = Probability x Reward.
When new entrepreneurs and investors enter crypto in a bull market, it appears like everyone doing the “new thing” is making tons of money. They overweight the probability of the new thing succeeding (availability bias) and combine it with the large rewards they’re witnessing. Huge expected value!
But when the bear market comes calling, these new entrants watch in despair as the probability of their “new thing(s)” succeeding plummet (the vast majority of new things will fail), and asset values fall off a cliff. Low expected value.
As the bear market drags on, new entrants’ availability bias switches to the much deeper mental-grooves of things they’ve seen work over long periods of time. Given crypto’s only been around for 10 years, these tend to be non-crypto native models. The path to success for proven models appears clearer to them, and while the reward may not be as astronomical, it could still be pretty good, and so the majority of new entrants set down a path that represents a reversion to the mean.
Given bull markets tend to at least double the number of participants in crypto, there are more “new people” involved at the end of a bull market than there were “old people” at the beginning — to put it bluntly, the noobs outnumber the OGs.
If the new people revert to what’s known, it swings the majority of activity in that direction, which is what we saw with “blockchain not bitcoin” in 2015, and what we’re seeing with “equities not tokens” in 2019. Meanwhile, the smaller group of committed OGs that have thought about the “new thing” for a long time will carry on with conviction because they’ve been through these cycles before, which has hardened their availability bias towards crypto-native models and weighted their EV calculations in the direction of the “new thing.”
Coming back to today, people have been shaken from the token-dream because the idea has lost social momentum, is undergoing its first availability hardening, and 95% of the tokens in the market don’t work. I’ll come back to the social momentum and availability hardening in a moment, but want to first underscore that many people were pointing out in 2017 that 95% of ICOs launching were opportunistic junk, and so we shouldn’t be surprised in 2019 when it turns out that 95% of the tokens in the market are indeed junk and don’t work.
But don’t let the tokens that aren’t working, and never were going to work, distract you from the tokens that were thought through thoroughly from inception and are showing signs of working. Roughly, I’d say there are less than 50 tokens with real utility in existence, placing us at < 2.5% of the tokens listed on CoinMarketCap; but 50 still provides plenty of inspiration to study and learn from.
Now to the social momentum and availability hardening of ideas in crypto. As crazy as it was, 2017 represented the mainstream birth of the idea of a token for each network. Yes, seeds of the idea were laid for years prior, but it was in 2017 that the concept blossomed to a scale where it consumed society, albeit briefly.
As Nouriel put it, “It is clear by now that Bitcoin and other cryptocurrencies represent the mother of all bubbles, which explains why literally every human being I met between Thanksgiving and Christmas of 2017 asked me first if they should buy them.” No, the mainstream didn’t grasp all the nuances and ramifications, and nor did most entrepreneurs or investors (maybe none of us did), but at the very least, many became aware.
Post the 2017 idea-frenzy and brief social momentum, we now find ourselves in 2019 where the concept of a token for each network is going through its first serious bear market. Tokens have lost momentum, they’re no longer cool, and if anything, the first reaction is one of skepticism. And so useful implementations of tokens are being proven right now, but to far less fanfare than 2017. The doubters have stopped paying attention, the haters have mistakenly equated depression with defeat.
But the token models that get through this bear market, and then inflect in the proximate bull market, will thereby be hardened when they reach their 2nd bear market. The process is akin to what bitcoin went through in 2014 and 2015, after its first mainstream bubble of 2013. In 2014 and 2015, bitcoin wasn’t taken for granted as something that was destined to survive in the way I see it characterized now. Instead, it was severely doubted.
But bitcoin is now taken for granted precisely because of the battle-testing it went through in 2014 and 2015 (not to mention the wild times before the mainstream was watching). Regardless of whether people stayed committed to bitcoin in 2014/2015 or jumped to blockchain-land, they all then watched what bitcoin did in 2017. The availability bias shifted strongly towards probability of bitcoin succeeding, the indelibility of the impression weighted by the money that was made or lost.
Committed bitcoin entrepreneurs have learned to avoid the mistake of defecting when they should be building; committed investors have learned to not divest when they should invest. While other token-based protocols have ridden a little on bitcoin’s pioneering coattails, they still have a doubt trail to trod before conviction in the underlying ideas becomes hardened (in particular, the non-PoW tokens).
So where does that leave us now? As this bear market persists, we can expect a continued shift in focus towards cash-flow extracting, equity-capitalized businesses, as teams quietly sideline plans for a token (if they ever had one). For many teams, dreams of a token won’t die entirely, they’ll instead be placed on backburners as they watch to see what cryptonetworks are gaining traction , and what cryptoeconomic models are being put to use .
When the next bull market arrives, the token-models that are providing real utility  are likely to go through another parabolic frenzy, with the fodder of speculation around radical innovation turbocharged by early-liquidity and a continued long-bias in the cryptomarkets.
There will be another rush of opportunistic and poorly-thought-through launches as people scramble to make up for lost time. While capital will be plentiful again, it will be a bad time to be an entrepreneur or investor trying to do thoughtful work in the space. Quality entrepreneurs will get lost in the noise or raise too much money, which will haunt them later. Quality investors will get drunk on their own kool-aid or become jaded with the behavior they’re witnessing.
But in the following bear market, builders and investors won’t forget the lesson. Availability biases will have been hardened in favor of tokens, and there will be more competition around building and funding protocols, which is good for crypto. But in my opinion, if you have the conviction, 2019 will have been the best time to be a token builder or buyer.
 Token-based deals can start out as an equity investment, aligning early-investors and developers for a period in what we call a placeholder development company (Joel will write about this more soon). But if the intent is ultimately to give investors a claim on tokens (as opposed to cash-flows), I still consider such an equity-structuring to be a token-based deal, placing it in the 25% minority of 2019.
 In fact, many teams and investors currently regret their 2017-token-decisions if they were made rashly and for opportunistic reasons.
 I disagree with many of my beloved crypto friends that say, “alts are never coming back.” To the contrary, I think 2017 was likely the warm-up.
 Those that have already launched a cryptoasset will continue to iterate on their models. Most will fail, some will work, and those that work everyone will learn from. Relatively few, on a comparable basis, will attempt to launch tokens in this bear market, but by-and-large the attempts will be more thoughtful. One variable contributing to fewer, but more thoughtful token-launches, is that capital’s harder to come by for a token team right now. Investors are asking tougher questions given the heightened perceived risk of funding protocols, leading to a more robust selection process.
 In the future we will see more cryptonetworks that closely follow the cryptoeconomic-playbook of other already-successful networks that are provisioning similar, but still different, services. To some extent, this pattern of behavior has happened already, first with proof-of-work, more recently with (delegated)-proof-of-stake. But thus far the strokes of imitation have been much rougher than the granularity that I think we can expect in the future.
For example, I expect the provisioning of most “compute commodities” to end up with very similar cryptoeconomic models, where there will be a capital asset model to coordinate supply-siders to bond their assets to provision the service (and ensure castigation should they misbehave), with rewards doled out according to some function from there. Sure, the functions will vary, as will the supply-inflation and deflation rates, but the basic principles will be taken for granted in a way that we almost can’t fathom now. There will be best practices, as opposed to best guesses.
 What will real utility look like? It will be cryptonetworks that take in capital and labor as inputs and spit out a novel-yet-useful service, or a service on par with that which a company already provides, but at a fraction of the cost. If the service is novel — such as the censorship-resistant digital gold that bitcoin has become — then it will get a pass on the cost-efficiency front (for now). If the service is undifferentiated from what an equity-capitalized business already produces, then the cryptonetwork will have to offer it an order-of-magnitude cheaper to get people to definitively make the switch (note that undifferentiated means the service is just as reliable, easy-to-use, interoperable, etc).
This is not to say every service will thrive when provisioned by a cryptonetwork. Only the services that thrive off decentralization, be it for cost, trust, or performance reasons, will survive over the long run. Many other services will continue to be better provisioned under an equity-model, not to mention the many companies that will build viable businesses by amalgamating and candy-coating the underyling services provided by cryptonetworks.