Reverse ICOs: Part 3
Stability, Partnerships, and Community
It’s been just over a year since I published Reverse ICOs: Part 1 — the week before I joined Outlier Ventures. A lot has changed in VC, crypto, and with SoundCloud since then, and the possibility of moving forward with a Reverse ICO is closer than ever. The main problems still stand — the music industry’s revenue models are broken, the short-tail of music releases is commoditised by a few tech giants who’s revenue models drive echo chambers and have weak social experiences. Following Reverse ICOs: Part 2, we continue to explore cryptoeconomically engineered solutions for such platforms to run securely and sustainably.
Stability
We can claim that for a very early-stage cryptoasset on public markets, the four price drivers are Total Addressable Market (TAM), Market Penetration (MP), Token Supply (TS) and Token Velocity (TV). The formula we use to determine the Utility Value (UV) of a cryptoasset is as follows:
We can stabilise Token Supply through a process of quantitative easing and tightening, based on whether the number of active users is decreasing or increasing. Utility often leads to lower velocity, however, supply is traditionally managed by a central bank.
The token market is volatile, which is a problem for utility tokens because their prices need to be stable to have utility, otherwise, we’d use them purely to speculate. If a token performed similarly to a mature currency, it would be useful enough to exchange within this ecosystem. Enter: The Stablecoin.
A ‘Stablecoin’ is a ‘cryptoasset that maintains a stable value against a target price (e.g. USD)’. These assets could offer the best of privacy, stability, scalability, and decentralisation (more here). Moreover, a stakeholder can exchange in their own currency, significantly reducing the barrier to entry.
This could work well, but we need another token that reflects the value of the protocol and gives all stakeholders voting rights, while payment remains stable. Furthermore, investors would be a direct network stakeholder. Enter: The Equity Token.
An ‘Equity Token’ is a ‘stock offered by any startup where individual investors or companies are given part ownership of the Blockchain and voting rights over the Blockchain.’ Investors would be paid out depending on the platform’s market performance, but the trouble is that they are not using the service itself.
The Reverse ICO process has to include a liquidation event whereby equity ownership is transferred from investors to the platform’s stakeholders. This will likely result in some kind of ‘multi-token’ design. Furthermore, the more users stay on the platform, the more equity tokens they should earn.
With this model, the short-term volatility of the SoundCloud token only affects the potential short-term financial gain, which a multi-token design could incentivise against. SoundCloud itself could deliver multiple token issuances at higher prices as the platform’s utility value increases.
Partnerships
What makes SoundCloud different from services including Apple Music and Spotify is that it is a creator-first platform. SoundCloud has three key stakeholder groups— platform (the company), people (the creators and consumers), and partners (parties that neither create nor consume).
If they could start afresh, they probably wouldn’t charge consumers to listen to music at all. The platform would focus only on the long-tail, as a derivatives platform — allowing creators to share their remixes and mashups of existing songs.
However, as consumers, we want to listen to the long-tail and the short-tail through one service that blends the best of both. To do so, we need a way to incentivise labels to participate in the ecosystem. Enter: The Revenue-Share Token.
Let’s use tZERO, the digital ledger platform for capital markets, as an example:
The tZERO token (TZRO) is an ERC-20 compliant token or equivalent that will be offered as a security to qualified investors in accordance with US and other laws.
The tZERO token will pay 10% of adjusted gross revenue to token holders on a quarterly basis, subject to board approval and the conditions outlined in the offering memorandum.
Let’s say that SoundCloud partners with Universal Music. There is a clear opportunity for all stakeholders: creators have a much larger set of tracks to sample, consumers can listen to more songs, Universal Music has new earning potential, and if conducted well, SoundCloud increases its utility.
If Universal Music withdrew its songs from the platform now, all stakeholders would be negatively affected. The label needs to realise earnings to cover its operational costs. Through a partnership, the platform could allocate a percentage of its earnings to Universal Music.
This revenue-share token could offer Universal Music a share of the revenue that SoundCloud earns from the periodic sale of its tokens, and the percentage earnings could be variable rather than fixed — perhaps in direct proportion to the network utility that the label provides.
These tokens are all still very nascent technologies and developing them separately is already a challenge, so aligning them in a ‘multi-token model’ will be even more so. We still need to reward creators and consumers for sticking with the platform long-term and incentivise against flipping.
Community
The crux of this process is that we are moving from a shareholder-centric model to a stakeholder-centric model. To do so, we have to incentivise shareholders to sell their shares. SoundCloud could faciliate a purchase offer at a premium with lock-up, between the investors and stakeholders.
This way, tokens cannot be bought or sold while stakeholders adapt to the new system, all without disruption to the service. After this, the company could sell its tokens to the public markets. However, we still need a way to incentivise stakeholders not to do so all at once. Enter: The Discount Token.
A ‘Discount Token’ is a digital asset pioneered by Scott Nelson, Aleksandr Bulkin, and Michael Zargham, to incentivise long-term engagement in a token ecosystem. Here is the definition of a ‘Discount Token’ as defined in the Sweetbridge “Discount Token Whitepaper”:
In brief, discount tokens are digital assets that give their holders a limited right to receive discounts on purchases of products or services from an organization — a company, a coop, or a blockchain network.
Unlike gift cards, discount tokens are not invalidated when used (“burned” in blockchain parlance), but remain in possession of the holders. The specific size of the discount that each token realizes for its owner is designed to grow in step with the overall utilization of the network.
In this scenario, SoundCloud uses discount tokens to incentivise stakeholder behaviour. To raise capital, the platform could sell its shares; some of its stakeholders may be looking to buy the equity tokens, or at least for it to accrue in value.
SoundCloud could offer these stakeholders a discount token which grants them a bonus on the equity they buy. That is, on a $10,000 purchase on a 20% discount at $100 per token, the purchaser would be granted 125 tokens rather than 100, worth $12,500 — a sweetener on the deal.
At this point, we know that a four-token model could underpin the cryptoeconomics of this system (not dissimilar from Steem), but we still need to understand how they all should work in tandem. Furthermore, we will have to think about the system’s voting mechanism.
On a corporate governance level, we need to know whether there will exist a SoundCloud company and a foundation, or just one of the two. Furthermore, we are working with digital rights management and so smart contracts will undoubtedly play an important role here.
Whichever way you look at it there’s still a lot to work on, and I am set to continue to explore the field — aiming to post an update every three months. In particular, I will look to generalise this process and apply it to fields including messaging, blogging, social media and even recruitment. I will also look into how developers can build on top of these tokenised platforms as the field of ‘Protocol M&A’ opens up. Special thanks must go to Artur Safaryan, Aleksandr Bulkin, and Arek Wylegalski for insightful conversations over the past few months!
As a disclaimer, this piece is purely written is a personal capacity and does not represent the views of Outlier Ventures. Furthermore, any analysis of tokens or token sales does not constitute investment advice or an endorsement from Outlier Ventures.
