Does a Cryptotoken Sale Make Sense for my Open-Source Project?
Since Albert Wenger’s recent blog post, there’s been lots of discussion about crypto tokens and excitement about their ability to incentivize open-source developers to create and maintain protocols. I wanted to shine some light on this approach in the context of how open-source devs have been incentivized historically, focusing on both why a cryptotoken issuance may make sense for some and why it might not make sense for others who are served well by existing business models.
How open-source protocols have been funded historically
At Runa, we’ve funded a number of devs that have created and maintained thriving open-source protocols and built businesses around them (and we’re actively funding more).
Nginx is open-source server software that over 30% of websites on the internet uses. We were the first money into NGINX Software, Inc. the company that commercialized that project. When we invested, Nginx creator Igor Sysoev was a brilliant dev that didn’t have any experience running a business. We helped Igor and team put together a business strategy, hire a sales and operations team, and grow the business. Now, Nginx is a thriving company with millions of dollars in revenue and a growing suite of products. The company monetizes by providing professional services as well as premium products including a load-balancer that has been widely adopted by many of its open-source users.
MySQL is open-source database software widely used by enterprises and developers globally. We were also early investors in MySQL creator Monty and the team that founded MariaDB Inc., the company that provides professional services and products that enhance the MySQL experience for customers. MariaDB also sells an enterprise license, which many of their large customers prefer to use over the open-source version. Similar to Nginx, they’ve had lots of success with their business model and are now generating millions in revenue from hundreds of customers around the world.
Both these projects have succeeded by raising venture funding and monetizing by charging for value-added services around the protocol. There’s been many other open-source projects that have worked similarly at even bigger scale: RedHat, Hortonworks, and MongoDB immediately come to mind. That begs the questions “Does it really make sense for open-source entrepreneurs to issue crypto-tokens?”
A crypto token can be a good approach for some
For the devs behind the projects above, the crypto token approach would not have made sense. These protocols were widely used by businesses and there were very clear ways to make money from their business customers.
While the crypto-token approach may not make sense for some, there are 3 clear reasons why a crypto-token approach likely makes sense for your open-source project. If all 3 of these apply, then a crypto token sale may be for you:
- You’re launching a protocol primarily for consumers and need a hook — Crypto-token based products benefit from the network ownership effect. The network ownership effect describes a network where the value of the users ownership increases in addition to the utility of the product when new users join. The secret weapon for Bitcoin has always been the passionate user base, which is a product of the network ownership effect. If you have a consumer-focused protocol that would benefit from wildly passionate early adopters, a crypto-token issuance probably makes sense for you. When users are also owners, they act more like sales people than customers and this can be hugely valuable to long-term success.
- You’re in digital currencies for the long-haul — Crypto-token raises are long processes that require an in-depth understanding of cryptoeconomics and patience. Crypto-tokens can be launched on a new blockchain (e.g. Steem) or on top of an existing blockchain (e.g. Storj). The tokens are generally required to use the protocol, so public key infrastructure must be embedded into the protocol in some way. This is a complicated endeavor that requires deep interest in digital currencies (at least for now, until the tools to make it easier are built).
- You want to focus solely on the protocol — Some would rather have their heads buried in the weeds of the code and the community rather than spending time trying to scale a business team and sell a product.
Overall, I’m excited about the ability for crypto tokens to incentivize devs to build protocols and think they make sense for devs who want to build for consumers and need a hook while not dealing with the traditional processes required to build a company. This approach has worked great for Bitcoin and Ethereum and there are a number of others that will follow.
I also think that for many devs, the traditional way to create and maintain a protocol will continue to work well. We’re not likely to live in a world where crypto tokens are the funding mechanism for all open-source protocols , but rather a world where both types of open-source funding mechanisms exist and thrive. And it’s important for devs to think deeply about whether or not a crypto token sale really makes sense.