In the late 1990s, the .com bubble was in full swing. A company that had no relationship with the internet could add a .com or an internet prefix in its name and see the stock jump. A good example of this is e.Digital Corporation (EDIG). It changed its name from Norris Communications to e.Digital in January 1999 when the stock was trading at $0.06 per share. Subsequently the stock price rose dramatically to $2.91 per share on December 31, 1999 and then to a high of $24.50 on January 24, 2000.
The parallels between the .com bubble and the new blockchain craze are evident with the January announcement that Kodak would be launching an ICO. This immediately led to a 44% increase in stock price.
Of course if readers take the time to read the entire press release they will note that this is actually a partnership between Kodak and a company called Wenn Digital. A Google search for ‘Wenn Digital’ only pulled up press releases of the deal with Kodak. It is unclear how Kodak is involved in this deal except for having its name associated with a blockchain based token. Despite the red flags over this deal, it only portends a trend towards the tokenization of existing businesses. Businesses everywhere naturally want to increase their stock prices. In this age of blockchain mania, a good way to do this is to tokenize an existing part of the business.
What is Tokenization?
Tokenization is the task of taking an existing business and introducing an internal currency (better known as a ‘token’) to support business activity. The tokens will be built on top on an existing blockchain platform such as Ethereum or Neo.
Beyond the obvious stock jump effect mentioned earlier, there are compelling reasons to add a token to a business.
Unlike international SWIFT money transfers, tokens can be transferred globally between two parties at low costs and high speed. Smart Contracts can eliminate paper and make transfers of value fair and easy.
Smart Contracts also make transfers of value trustless. No notary or lawyer needs to be involved in transactions between two parties when a Smart Contract enables trustless transactions.
One of the most compelling reasons to tokenize a company involves value creation. The value of existing companies is driven by equity. A company is valued using a traditional metric such as a discounted cashflow. This valuation is then applied to value an entire company. All the value of shares in a company should combine to equal the company’s total value. With the advent of the blockchain, there is a new for founders to extract value from a business via tokens and ICOs to sell tokens.
If a company removes its revenue generating activities from the traditional financial system and puts them onto a blockchain platform with an internal currency, there is an additional store of value that they can profit from: the token.
The implications of this are staggering. Essentially every business that can support an internal currency can enrich its founders and users in a new way. Founders will now not just be getting equity in their company, but will also be receiving token awards. As tokens can increase in value based on demand and because supply is fixed, this is an extremely attractive business model for businesses to adopt.
Case Study: Props by Younow
Props recently held an ICO which was heavily oversubscribed. I wrote a review on cryptocoin.news of the company and was impressed with their offering. Props offers a good template for how an existing business can transform their model to integrate tokens.
Existing Business: Younow
The current business is called Younow and is a live-streaming platform. Users can set up their own live streams and make them available to the public.
New Business: Props
Props is the name for the token that will be used on Younow. The Props token is used to reward content creators. It serves as a ‘status’ token, and unlocks functionality depending on how many are held by a given user. There are five use cases for the token:
· Premium Experiences: PROPS will unlock premium experiences or ‘gameplay advantages. Some features may be exclusive to token holders and require premium access using PROPS.
· Status Signalling: Indicates the elevated status of PROPS holders.
· Influence and Curation: Influence is a function of economic power. PROPS holders may promote use cases and content they like and vote on platform-wide rules and guidelines.
· Compensation: Tokens will be used to compensate platform contributors (e.g. content contributors, curators, developers etc.). PROPS tokens are rewarded to users who are calculated as contributing the most to the platform.
· Content Promotion: Users of all types can use PROPS to promote or elevate their own content.
While some platforms reward large content contributors for their work, contributors enjoy only a fraction of the financial value they collectively create. The large companies end up controlling content distribution and contributor income and often end up cannibalizing their earnings with their own content and product offerings. Meanwhile, developers wishing to create new experiences and digital media distribution channels face an uphill battle against overwhelming network effects and economies of scale.
Using the cases studies above, we can develop a framework for how to tokenize an existing business.
Define Current Business Model
In order to tokenize an existing business, it is critical that the current way the business operates is defined and recorded. This means fully understanding how the current business works and where revenue is being generated. Because tokens represent a means of payment, defining payment touchpoints is critical.
Define Tokenized Business Model
Once the existing business model has been defined and payment touchpoints identified, the process of designing the tokenized business can begin. The goal of tokenization should be a lower cost business model that can also possibly raise capital. Not only should costs be lower to the business, but also to those that use the service being tokenized (e.g. consumers).
There are many questions that need to be asked here, but the principal ones are as follows:
1. How can I incentivize people to use my token? This question is important because using tokens may be hassle for people that are new to crypto. They may have to download a new app, possibly learn about keys and hold a new kind of currency. These are all extra things that people may not want to do.
2. How can I incentivize people to hold my token? Maintaining a low token velocity is important otherwise there is no real potential for token price increase. Investors in an ICO will look for potential price increases as a key matric in an investment decision, so incentives to hold a token are important.
3. Should I decentralize my business? The blockchain makes possible a decentralized business model. A token makes a decentralized business model possible, but a centralized business can also benefit from tokenization. This is a very challenging question because the decentralized business model has not been proven. Governing an organization by code has the advantage of eliminating bureaucracy, but has the disadvantage of a loss of flexibility.
Once the decision has been made about how to tokenize the business, planning for how to integrate the tokens begins. The most critical question here is whether the business will have an ICO. For some companies the answer will be ‘no’. The benefits of adopting an existing token are still strong enough to justify tokenization without an ICO.
Besides the ICO, there are planning considerations. One of the biggest items is technology development. Integrating a token within an existing business may be time-consuming and disruptive. It is critical that a detailed plan with a timeline and multiple releases is designed.
The final phase occurs when the business is ready to formally launch the new business model. The scope of the launch depends on how large the project is. For a smaller business, it may be possible to do everything at once. However, a large business may choose to launch tokenized parts of their business in different phases. During the launch period, existing clients may need to be helped transition to the new model. Marketing may be required here to inform users of the benefits of using the token.
The influence and impact of blockchain technology on business is just getting started. We have seen an increasing number of ICOs conducted by existing businesses (Kik, Telegram) and one that are planned (Kakao). I predict that a trickle will soon become a torrent as crypto matures.