Investing in Tokens and Decentralized Business Models


Historically new Internet Protocols have been free to use. This era is over. Internet protocols provide the fundamental infrastructure for every online app we use in our daily life. When using the email services of Gmail and Hotmail, the hidden protocol underneath, SMTP (Simple Mail Transfer Protocol) provides the railways making it possible for us to communicate with each other. SMTP makes it possible to build email services on an open, common foundation.

Up until now when talking about online business models, the subject has been the apps and services build on top of these open and free-to-use protocols. The apps and businesses would capture most of the value created, while the protocols enabling them, would catch a fraction or nothing of this value. This is why Joel Monégro from Union Square Ventures named these old-generation internet-based protocols “Thin-protocols”.

Fat-protocols, also termed by Monégro, refers to the new generation of decentralized protocols, the first and most secure being Bitcoin. These new public protocols are enabled by the Blockchain. A distributed public accounting ledger tracking ownership on the protocol, first seen implemented on Bitcoin. These new protocols led by bitcoin, is open source and anyone can build apps on top of them. Just like with the old protocols. The difference is that with fat-protocols, most of the value is captured by the protocol layer, not the app layer.

This turns the online business landscape on its head. Money is moving from the app layer to the protocol layer. Creators and early backers of successful internet protocols are now making money.

The new blockchain based protocols comes with native tokens or crypto currencies used for settlement of ownership on the blockchain. Ownership of these native assets is therefore necessary to use the protocol. In the Bitcoin network, the native asset is simply called “bitcoin”. You must own bitcoins to send value over the Bitcoin network.

This is how these new protocols captures value. If the protocol becomes widely used, the demand for the native asset will increase as well, rewarding the developers and early adopters. The economic incentives of development and business are shifting to favor fat-protocols instead of private closed source companies. You can look at public protocols as the railways of the internet. Blockchain based protocols are new railways taking you places you couldn’t go before. To use these railways, you must pay. To pay you must own the native cryptocurrency/token.

How can these Blockchain based protocols be leveraged to build new business models? Let’s explore.

Token Models: From Public Protocols to Businesses

Token models offers different levels of decentralization. Tokens are assets with ownership settled via blockchain based protocols. The token itself, issued as credits on public/private keys pairs on the blockchain, have the characteristics of censorships resistance and decentralization this technology brings. However, what this token represents can vary. Some tokens are merely private keys representing ownership in a protocol yet to be launched. Some represents special rights in otherwise normally functioning companies, in the same way as the Bitcoin protocol token represents the right to use the Bitcoin network.

The decentralization of critical internet infrastructure is the most promising aspect of this technology (at least in the authors opinion). Calling Bitcoin a token in line with the long tail of tokens is almost an insult. The architecture, decentralization and ecosystem of bitcoin is a lot more secure and developed than most other tokens. This shows from the experience of Blockstack in its work on a decentralized DNS, the BNS or Blockchain Naming System. Blockstack migrated to bitcoin from the protocol token Namecoin, due to the lack of security and stability on the Namecoin network. They concluded that the superior security and stability of the Bitcoin Blockchain was vital for the development of their decentralized internet.

Tokens build into centrally controlled or closed source platforms, obviously carry a larger degree of 3rdparty risk than tokens representing ownership in open source blockchain based protocols. The former is centrally controlled while the latter has no central governing entity (the decentralization of blockchain based protocols vary greatly as well).

Bitcoin was built to overcome the problem of trusted 3rdparties. It grew organically while its founder Mr. Nakamoto kept his head down. In contrast to this, the token landscape is filled with projects ranging from promising to being outright scams. Strict due diligence and skepticism in this space is vital. Many of these token-based projects is directly in opposition to the philosophical values of decentralization bitcoin is based on. That doesn’t necessarily mean that they have no value and that one should stay away from them all. It means that as trust is placed in a 3rdparties, you’ll need to do your diligence.

Even while some of these projects, with their new features seems promising, there’s always the possibility that they could be implemented on top of bitcoin as 2ndlayer solutions, possible without tokens. This could destroy the investing case of many of these new tokens and protocols. I discussed the antifragility and optionality of bitcoin and fat-protocols here.

Types of Tokens

As a start, tokens can be grouped into two categories: 1stand 2ndlayer tokens. Bitcoin was the first token/ cryptocurrency, launched in 2009. Bitcoin is a 1stlayer token. The 1stlayer token is the native currency of a blockchain based fat-protocol in which fee’s from sending transactions on that blockchain is paid. The supply of these tokens is mathematically controlled through the process of mining (Bitcoin/POW) and other consensus mechanisms.

Baliji’s Srinivasan, CEO of bitcoin startup, mentions three different kinds of 1stlayer tokens:

  1. Tokens based on new chains and forked code: Zcash, Litecoin, Dogecoin. This is a token native to a new blockchain that comes from forked code. Code from another blockchain, modified or added to. Zcash for example is a fork of bitcoin modified to include zero knowledge proofs for added privacy.

Most of these Blockchains with their native 1stlayer tokens allow for the creation and transfer of 2ndlayer tokens. These tokens can represent a number of things as described above. The supply of these tokens generally isn’t controlled by mining and are often announced by the founders before the token sale or distribution. Here are the different types of 2ndlayer tokens issued on top of existing Blockchains:

  1. Tokens for application specific protocols: These are protocols build for specific applications. The goal of most of these projects, while often centrally managed in the beginning, is to evolve into public open source projects, governed by community stakeholders: Basic Attention Token, Civic.

The Virtualchain + token: I can’t fit the coming Blockstack token into any of the other categories, so I’ll give it its own. A 3rdtype of token is born with the coming Blockstack token. The Blockstack token is mined at the Virtual Blockchain layer. Blockstacks Virtualchain sits on top of the secure underlying Bitcoin Blockchain. The virtual chain adds functionality needed to create Blockstack’s decentralized internet. Blockstack is blockchain agnostic, meaning that it can migrate to another underlying Blockchain without affecting the state of its own Virtual Chain or its tokens. Blockstack is independent of any underlying Blockchain.

Types of Decentralized Business Models

The birth of Bitcoin and the following long tail of tokens, made possible a new kind of business model. The “Decentralized Business Model” or the “Better-Than-Free Business Model” coined by Balaji Srinivasan.

The tokens discussed above can be grouped in to two main categories of decentralized business models. What separated the two is the level of decentralization: 1. Decentralized Business Models with no/low dependence on trusted 3rdparties and 2. Decentralized Business Models with some dependence on trusted 3rdparties:

1. Decentralized Business Models with no/low dependence on trusted 3rd Parties: Is the token a native part of an open source blockchain based protocol? Generally, these protocols have the goal of decentralizing internet infrastructure and the applications that run on it. They’re open source and the owners of the project and its business model are the token holders. The goal of the token/protocol is to be a self-sustaining system without any trusted 3rd parties. Without any central point of failure.

Bitcoin, the original cryptocurrency is the prime example of this. Bitcoin is shaping up the protocol for digital value transfer and store-of-value on the internet. Another example of a token with decentralization characteristics, is the 1stlayer token Litecoin. This token was launched as a new chain based on Bitcoins code. The consensus around ownership is attained via mining(POW) like in Bitcoin. There is no trusted 3rdparties.

Again, the levels of decentralization in these open source projects varies. Protocol development often starts out centralized, with goals of becoming decentralized. This is typical of 2ndlayer tokens.

An example of a protocol (with yet to come token) starting out centralized with goals of decentralization, is Blockstack. This a project with the mission of building a decentralized internet. Blockstack recently announced the integration of a token to decentralize development and governing of the project. Until this happens, Blockstack the company is in control of the project. With the token integration, token holders will be voting on upgrades and hereby deciding the future of the protocol. Another example of a token with goals of decentralization is Civic. Here is the founder Vinny Lingham announcing his plans for Civic:

Again these are promises. For now buying tokens like this requires you to trust the people in control of the project.

2. Decentralized Business Models with some dependence on trusted 3rdparties: Is the token a native part of a closed source privately owned platform? This business model is leveraging the technology of Bitcoin, Ethereum and other blockchain based protocols. While the token is transferable via the ethereum/bitcoin blockchain and tradable on exchanges, they’re build into centrally controlled platforms and as such require trust in 3rd parties. The token itself as credit issued on Blockchain based private/public key pairs does not require trust, but the platform in which it is built in does. What good is the token if the centrally controlled platform is closed or the token removed from the platform? While the infrastructure and application in which the token will serve, is owned by company shareholders, the token ownership often represents the right to use certain features in the application. This has value also. As the token can be freely traded on exchanges it could rise in value with increased demand from use of the application. Hence the term “Better-than-free” business model. Users are rewarded for participation. An example of this is the token (yet to distributed) by the company 21 is a social network rewarding users with tokens for signup, verification and performing certain tasks.

The decentralization of these protocols is a huge topic in itself. Again, Balaji Srinivasan is on top if this. He recently wrote the article “Quantifying Decentralization” and gave a talk at Blockstack Summit 2017 about using the Lorentz Curve, the Gini Coefficient and the Nakamoto Coefficient to calculate the levels of decentralization in Fat-Protocols. This is a topic for another post.

General Characteristics of Decentralized Business Models

For the purpose of discussing the characteristics of decentralized business models, let’s assume that the token is not a scam with no native use in the core protocol. The framework used is derived from the book “Business Model Generation”. One of the main characteristics of the Decentralized Business Model is how it incentivizes all relevant stakeholders. How it aligns the interest of all stakeholders towards the success of the project.


In Decentralized Business Models, the term “Stakeholders” might be more appropriate than “Key Partners”. Stakeholders are clearly defined by token ownership. The commitment of Key Partners can be secured and incentivized by token ownership. A merger of the Partnership and Costumer building blocks is also observed, as costumers become co-owners.

Founding and Funding Decentralized: Tokens can launch in any country and the core developer team does not need to go to Silicon Valley or other tech hubs for funding. It all goes down online through token sales. Likewise, the team can be spread across the world.

Little VC Advantage: Like Balaji puts it “Token buyers will be to investors what bloggers/tweeters are to journalists”. Funding of protocols/businesses through token sales even the playing field between VCs and amateurs / individuals with few professional connections. VCs won’t have the same advantage of deal flow as they’re used to. In most cases the token sales are open to everyone equally, with a few exceptions here and there. These protocols are mostly open source. The team and community communicate online in open channels, making relevant information evenly accessible.

Low Friction on Participation -> Better Stakeholders: Light regulation and worldwide availability minimizes friction on participation for relevant parties worldwide. Al else being equal, the protocols are more likely than its business/equity counterparts to attract the right stakeholders and talent.

Token Economic Ecosystem: The token serves as the native currency in the app/protocol itself. Contributors to projects are often paid in this token as well. This incentivizes contribution by co-ownership. Users of the app/protocol are co-owners as well. They are motivated to use the protocol and bring in their peers. One can look at it this way: Early adopters are paid for their attention. They’re paid for bootstrapping a new network. This can create powerful network effects.

The Economic Ecosystem of Tokens is what’s called Reflexive in Economics/ Social Theory. A theory pioneered in economics by George Soros in his book The Alchemy of Finance. Reflexivity is a bidirectional relationship between cause and effect. Cause and effect influence each other. Prices influence fundamentals and the new set of fundamentals then goes on to influence prices again.

The theory of Reflexivity can help describe the Economic Ecosystem of Tokens: Early stakeholders are incentivized to contribute by token ownership, token income. The better fundamentals coming from development and adoption creates expectations. The price of the token increases on the expectations which in turn attracts new stakeholders as the token receives attention. These new stakeholders are incentivized to contribute and use. Early stakeholders profit from the increase in token price and reinvest parts of their tokens in development/apps. These newly created fundamentals create expectations — you get the idea.

Aligning Network Participant Interest: As VC Chris Dixon mentions, proprietary networks create great competition within network ecosystems. Actors fight to get a bigger piece of the profit pie. In fat-protocols friction among actors are removed as they are incentivized to work together, growing the protocol, increasing the value of the token that they all own.


Eliminating the Bootstrap Problem: Traditional networks didn’t have any utility until a certain number of users were on the network. Fat-protocols and token networks adds financial utility and application utility comes later with adopters. Users are incentivized to adopt the network by co-ownership. The financial utility is greater than the application utility in the beginning. Being an early adopter is rewarded. As more users onboard, the token will appreciate in value and the application utility outpaces the financial utility as a mean to onboard users.


If you’ve picked the right ones, the token plays a central role in Blockchain based protocols likely to become critical internet infrastructure. Token ownership is required for “access”. Holding the token generates no revenue and profit is made in the form token value accretion from increased demand as users onboard.

Tokens as profit model in open source Decentralized Business Models: Why is backing open source projects with no revenue suddenly interesting? Because if the project is successful, a rise in the demand of the native token will follow, landing the early backers a profit. As mentioned this requires the token to have a central use-case in the protocol.

>1000x Time to liquidity: As Balaji mentions, tokens offer” time to liquidity” of >1000x faster than normal equity. Tokens are often available for trade just after the token sale. Just after the funding of the project. This is attractive to investors and stakeholders as the short time to liquidity faster reinvestment.

>100x buyers: The token buyer base is 100x bigger than for US startup equity. Tokens can be sold to everyone in the US. This represents an >30x increase in buyers. In America tokens are not regulated by 1934 act as equity, as most tokens are unlikely to pass The Howey Test. Tokens are sold Internationally over the internet representing >20–25x increase in buyers from the US population.

Cost Structure:

Funding Development: Developers can be paid in tokens to incentivize long term commitment. Their earnings depend on the success of the protocol. This could require the tokens paid in wages to be locked/illiquid for x amount of time. Costs varies with number of core developers contributing. Teams are spread across the world, often using their own equipment. Many of the early 1stlayer tokens as Bitcoin and Litecoin saw few if any developers paid. They worked out of interest or philosophical reasons and the economic incentive they had from a stake in the system.



  • Trust bootstrapping via the Bitcoin/ Ethereum Blockchain.

Stakeholder Communication: Project website/blogs, Reddit, Twitter, Forums, chats as Telegram and Slack. Typically, there’s no barriers to entry. Key project team-members are generally available to the community.

Main VP:

Value propositions varies from project to project, but the common VP for tokens is this:

  • No or limited trusted 3rdparties: Direct ownership. Tokens resides on public/private key pairs on (mostly) secure blockchains. Own the private key and you own the property -> custody with no trusted 3rd parties.

As an ending remark, check this out: Satoshi Nakamoto and Hal Finney discussing “App Coins” or tokens in 2010.

I was inspired to write this post by the work of: Naval Ravikant, Balaji Srinivasan, Fred Erhsam, Joel Monégro, Muneeb Ali, Metastable, Andreas Antonopoulos and of course the legendary Satoshi Nakamoto. Go follow these guys on Twitter.

Originally published at on September 29, 2017.

truth-seeking, freedom-loving, bitcoin-amazed