How to avoid useless tokens
An interview with Andrew Gough — founder of Microwork.
What’s the difference between useful and useless tokens?
There’s a difference between having a token and having a token sale. You can have a token for a huge number of things, but that doesn’t mean you should ascribe a price to it and have a giant ICO. Tokens are meant to be useful. They’re meant to simplify, not add extra layers of complexity.
For me, tokens should be used for things that ether can’t do and skies the limit with use cases for that. People like Auger are predicting the future with tokens, and for as long as a token is simplifying things, reducing costs and decentralising the process I think they can be a very good idea.
Yet a lot of the tokens that we see emerging are essentially useless. They are designed to add extra layers of complexity and risk for the sole purpose of fundraising a project. It’s being used almost like the next era of Kickstarter which allows teams to raise money without even having a product.
This bubble is going to pop, and I hope that will represent the end of ICOs that don’t have a useful token model.
“I think we’re forgetting that a token doesn’t have to be worth money, but instead it should be a way of recording things on this beautifully decentralised network.”
How should tokens be used?
On our Microwork platform we have a trained team of workers whose jobs mostly consist of creating, annotating and labelling data in order to train artificial intelligence. Tokens could be a very useful tool on our platform, but we wouldn’t need an ICO to be able to achieve it. For example, one use of our platform is to gather reviews. Imagine if every review you completed was given a score afterwards. Your score could then be tokenised and become part of your reputation on the Microwork platform. The more tokens you get, the more reputation you get.
And the thing is, you can’t sell a token like that. It’s not transferrable. If I want to give you reputation, I don’t want you to sell your reputation to somebody else. It’s just something that you’re given and the token’s journey ends with you. This type of token serves a purpose and represents the value that you’ve brought to the network.
Everybody is desperate to make money with the token sales. The company behind the token wants to make money, the people buying tokens want to get rich, but it’s all just a bubble.
There are no get-rich quick schemes without scamming people. You need to give value to get wealthy. The only way to truly get wealthy through tokens and the blockchain is to give value to the network. Essentially that’s what the blockchain is, right? A decentralised network of data. The more you contribute to the network, the more value you have provided.
Yet reputation tokens can also be financially rewarding. Your reputation could be the multiplier for how much you get paid. The more you’ve given to the platform, the more value you’ve provided to it. In this scenario, the higher your reputation is the more you earn. It would be a meritocracy in the truest sense.
Instead what we’re seeing is value being given to these essentially arbitrary tokens which hold no real intrinsic value.
Who are the real winners of ICOs?
Many of the first investors in ICOs can get up to 30–40% discounts. They often hold their tokens for only a day, then sell it for a huge profit. By this point the initial investors are happy — they’ve made some easy money, the company has raised the money it wanted, and the tokens continue to be held by a group of token holders in a small and volatile market that’s unpredictable and easily manipulatable.
By this point all the real money, i.e. the ether traded for the token in the ICO, has been taken out of the equation by the business and the initial investors and all that’s left is a token without any definite value. This token is like a chocolate coin, valuable but only under certain conditions. If the market drops, or if the room temperature rises in the case of the chocolate coin, then the token is worthless.
Who’s going to get hurt from this bubble?
Right now we’re already used to seeing the big 10-figure valuations for companies that are nothing more than an idea. But the difference is that the venture capitalists making investments actually have the money to take risks with. ICOs have become a way for companies to raise a lot of cash for ideas, but since the barrier for entry is just so low, it’s the man-on-the-street who’s now able to invest. As great as this sounds in theory, the man-on-the-street is often investing money he can’t afford to lose in an emotionally-driven, desperate attempt to get rich and ‘not miss out’.
“If a venture capitalist makes a bad investment decision, it’s just a bad day in the office. If the man-on-the-street makes a bad investment it’s quite literally his entire livelihood that’s up for stake.”
What should I consider before buying into a token sale?
There’s no simple answer to this. You need to do your due-diligence. You need to examine the white paper. And you need to ask the sensible questions: does the token need to exist? Does it have a real utility that can’t be done with ether? Even if it has that, is there a big enough market for it? Is it worth investing in?
You also have to look at the team. Does the team have any track record of building a company? Or are they just developers and marketers who have banded together?
Even after taking all these factors into account, there’s still a lot of risk. It’s so easy to spread propaganda nowadays. There’s almost a formula for successful ICOs now which means it’s becoming harder and harder to distinguish between something that’s decent and something that’s really risky or shady.
My advice would be not to invest in tokens at all but just invest in ether. That’s the constant behind most of these token sales, and will be one of the few survivors when the bubble finally bursts.
How should a business responsibly use the blockchain?
We need to think of alternatives for these ICOs. Some of the ideas going to ICO are great, but the ICO itself isn’t necessary. The question businesses are facing is ‘how can we get the money to implement our idea?’ Even with good intentions and great ideas, teams can be seduced by this easy ICO where giant capital gains can be raised from just a few weeks of heavy marketing.
The alternative, and in my opinion the correct way, is to actually build a business! Get some sort of validation for your idea and get a customer or two. This is how you show you have value. An investor will invest in you if you have a good idea, you’ve got some validation, and there’s a big enough market.
When will you have a token sale?
When I decide to raise money for Microwork, it will be a security token. It will be smart token where every token-holder will get some control of the company just like with traditional shares. Everybody will be able to vote and it will be like a democratic organisation. It’ll be the traditional business method of shares but using the blockchain. Right now, tokens don’t represent shares in companies, yet they can and they will. Polymath are currently working on bridging this gap between financial securities and the blockchain and we’re ready for when they do.
At Microwork we want to do it the proper way. We want to seek validation from our customers, build a product and go through the hard slog of building a company. These are the companies that investors should invest in. The blockchain democratises investment and allows the man-on-the-street to be involved. But we need to be responsible and teach them how to be investors. Otherwise there are going to be a lot of casualties.
Andrew Gough is founder of Microwork, a company that’s training machine intelligence with humans in the loop.