The Token Powered Structural Rubix Cube

If you’re looking to work on a project that is open, that benefits from community participation and network effects, and that facilitates decentralization, then you may be considering using the crypto token model. Issuing a token aids in funding the project, incentivizing users to participate and contribute from day one, and securing the project so that people have a hard time cheating or gaming the system. Since this model is so new, and potentially disruptive from a technology perspective, finance perspective, and governance perspective, you have some tough decisions to make up front about how the structure the entity and strategy around bringing your project to market. You have decisions to make on three fronts:

How do I raise money for my project? Raise traditionally from institutions, raise from the community via a token sale, or both?

How do I structure the entity that works on this project? Not for profit foundation (or even more extreme no entity at all), traditional corporation, or both?

Do I plan to form a revenue generating business or product on top of this project? Just work on the protocol and let others build on top, work on protocol then find services opportunities on top, go out the gate with the killer product alongside the underlying protocol.

The Token Powered Structural Rubix Cube

On one end of the spectrum you see the most benign combination: Foundation x Crowd Raise x Protocol Development Only. The Ethereum Foundation is a good example of this approach in action, and it works as a result of a wide token distribution with a lot of interested parties, a platform and ecosystem vision that makes it easy for people to get involved and add value to the project, and the core contributors motivated and incentivized by either the big philosophical mission of the project and potential upside in early token holdings. Generally, most people participating are aligned.

On the other end of the spectrum you see the most aggressive combination: Traditional Corporation + Foundation x Institutional Raise followed by Crowd Raise x Go To Market With The Killer Product And Platform. Note that the word “aggressive” does not equal “bad”. This setup can be the fastest moving, and the product brought to market can bring real benefit to users on day one, therefore fueling demand for the underlying token. Essentially, you can demonstrate and drive demand, which will accelerate the eventual open contributions from the rest of the ecosystem.

I don’t believe we’ve seen any companies who have gone full bore on this strategy yet, as the early venture funded companies in the space haven’t yet launched tokens, but I could see some companies evolving to get to this point. For example, if OpenBazaar were to go the token route (which they’ve been vocally against), then their combination of product + services, separate entities for the protocol development + product on top, and traditional + crowd distribution would put them in this camp. I’m not sure to what degree SteemIt’s early investment was institutional, but they certainly came to market with the supporting product for their blockchain, and I’d imagine it will be important for them in the future to separate out platform/protocol development from product/business development.

These three dimensions of consideration with three options each actually lead to 27 different potential combinations of structural strategy and governance. Some may be unlikely, such as a foundation taking institutional money, however most configurations are possible and lead to vastly different ways to run a project and do product development.

I think the most impactful decision amongst these vectors is the decision of whether to bring the project to market along with what you believe to be the initial killer product. The platform will be strongest if you choose not to do this, and instead put your energy into keeping the platform generic and flexible enough for the ecosystem to support many different use cases, as we see with the example of Ethereum. But at the same time, you risk a slow momentum build in the early days, and it could be awhile before your platform is impactful to the mainstream. On the other hand Augur, for example, has been putting a ton of work into the front end application that users will use upon launch to interact with their platform, and Steemit clearly came to market with the central destination for all their users to engage and form a community around their platform as well. This product support from day one can be the main driver of demand for the token, even though in the future the visions support a full ecosystem of applications built by the community that facilitate lots of different services.

The dimension with the most unknowns at this early moment is the institutional + crowd combination of fundraising. The reason I say there are unknowns is because it’s not yet clear how institutional investors can account for tokens that are held either by the companies on their behalf, by the companies on their general balance sheet, or by the institutions themselves (if they’re even allowed to do this in their charters and legal entities). In the extreme case, how does a professional investor feel about a company that plans to make zero revenue, and will solely fund itself (and possibly pay dividends) via appreciation on the token holdings. ZCash is an interesting case here, as they have investment, work only on the protocol level, but distributed their token to the crowd without a sale. Institutional approaches will get figured out in the coming years, and could lead to whole new models of investing. In the meantime, I think the most important thing is strong alignment on expectations up front between investors and project, so that there is no confusion later on. More and more investors are starting to think about this model, which is great, since professional investors can be great partners who help your business across many different stages.

In summary, all models come with different advantages and drawbacks, but all can work depending on what you want to accomplish with your project. Think hard up front about what your goals are, and then choose the structural combination that you think will allow your open project to best achieve its long term purpose.