Thoughts on Tokens Part II

Balaji Srinivasan and Naval Ravikant published this earlier today and though I agree with their thoughts on Bitcoin and cryptocurrencies, I feel it paints a much too optimistic picture on appcoins.

One of the many things Bitcoin offers is global, frictionless peer-to-peer transfer of value between individuals anywhere on the planet. In a world where we are used to transferring national fiat currencies within national economies and having to convert to make international transfers of value this is genuinely transformational.

I would say Bitcoin is a cryptocurrency rather than a token but I can go along with cryptocurrency being a subset of “tokens”. What Bitcoin isn’t is an appcoin or a ERC20 token. Bitcoin is a currency and payment system. It doesn’t care how it is used and where it is used as long as you have an internet connection. It enlarges the space in which a specific currency can be used from a national economy to a global economy (and all of cyberspace).

However, appcoins (or ERC20 tokens) are tokens used within an application. To enter and use this application, you must have a specific token that has been created to solve a particular problem within that application. This reduces the space in which it can be used from the Ethereum VM to a specific Ethereum application. I am not aware of any app specific problems that couldn’t also be solved using Bitcoin or Ether.

They do allow you to raise vast amounts of money (at least for now). Another argument I have heard is that they create aligned incentives for users or help the app creators build a network effect that is a notoriously difficult problem.

I suspect time will show this argument to be flawed. I have no doubt that an established company like Amazon (or Facebook) could issue their own token and their users would happily sit on an investment in Amazon.

However, a startup issuing an appcoin not only has to convince future users to use the app, they also have to convince future users to invest in that app by buying the appcoin. Early cryptocurrencies and altcoins are notoriously volatile and prone to pump and dumps because anyone with a moderately sized holding can manipulate the price of the asset by buying and selling at opportune times.

Imagine being an early user of Facebook back in 2004 and having to constantly monitor the Facebook appcoin price in case you lost money. Or buying sufficient Facebook appcoin to be able to use the app in the first place. Rather than it being a fun experimental playground to interact with college friends, it becomes a monetary investment. Even if you loved the software, if the appcoin price was crashing or you thought the appcoin was overpriced would you still use the software in the same way?

Many applications (e.g. Facebook, Instagram, Snapchat) chose to completely ignore monetization in the early days of building a user base. They focused on building software that delighted their users and didn’t want to complicate the user experience by bringing monetary gain/loss into the equation.

How physical tokens work in the physical economy (e.g. toll bridges, fairgrounds) is that you only buy what you need at the exact time you require them. To sit on a stash of fairground tokens requires an assumption that the fairground will still be running a year from now and that the tokens they accept won’t change. It also requires you to assess the commercial and technical competence of the fairground owners with very little publicly available information.

Conventional companies that issue publicly traded stock in Initial Public Offerings (IPOs) do it late in their life cycle. This is partly to avoid the public scrutiny, short term price fluctuations and distraction from the primary goal of building great software and onboarding users. Today, many mature software companies are choosing to not IPO at all which makes these ICOs at the beginning of a startup’s life cycle even more bemusing.

It is possible ICOs could replace IPOs in the long term. But replace startup seed funding? Startups are already fiendishly difficult. Add enriching the founders before they’ve built anything, the distraction of a publicly tradeable asset from the very beginning and early users having to navigate the shark infested waters of token pump and dumps. You’ve just made them an order of magnitude more difficult.

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