Why OpenBazaar Token Doesn’t Exist

If you’re even remotely interested in the world of cryptocurrencies, then you’re aware of a relatively recent phenomenon called ICOs (also called token sales). These ICOs happen when developers of a project announce their intention to create a new coin / token and then allow the public to purchase it. Recent ICOs have been making headlines for raising tens of millions of dollars in only hours or even minutes.

Many projects that focus on building the infrastructure for a decentralized internet have launched, or are launching, their own tokens. IPFS will use Filecoin. Blockstack announced they will use a token. Storj recently had an ICO. All these projects claim to need a new token in order for their products to function properly.

OpenBazaar is also focused on building a decentralized application, so why is there no OpenBazaar Token?

There are multiple reasons why we haven’t issued a token and this post is meant to explain them. These reasons aren’t necessarily set in stone; we are continually re-evaluating whether or not a token makes sense given the rapidly changing cryptocurrency landscape.

1. OpenBazaar Doesn’t Need a Token to Work

The first reason is the most compelling: We don’t need a token in order for OpenBazaar to work as intended in its current design.

OpenBazaar is a protocol and network for decentralized trade. People download software to their own computer or mobile phone and directly connect with other people running the same software, and they then engage in trade without any middleman involved. The OpenBazaar network has existed since April 2016 with hundreds of thousands of downloads and users in countries all over the world engaging in trade with each other using Bitcoin.

It’s not immediately clear how an OpenBazaar Token improves on this process.

It’s true that Bitcoin fees are very high right now, which causes problems for a marketplace built on Bitcoin. We hope that fees will return to a reasonable level in the near future, but if not then the solution is to allow users to pay in other widely-used cryptocurrencies, not create a new one.

It’s possible that there might be a unique way a token could provide utility to OpenBazaar users even though it’s not necessary for the core functionality of the application. We welcome such ideas, but haven’t yet heard any compelling ones.

2. Tokens are a New and Unproven Model

With ICOs and token sales quickly garnering huge attention — and investment — it’s easy to forget that they are a relatively new phenomenon. This is particularly true for token sales on Ethereum.

It’s clear that they are able to gain interest from investors, but that’s where the clarity ends. There are many areas of uncertainty about how these projects will manage and utilize these tokens moving forward, and how the token holders will behave as well.

I’m sure that some — perhaps many — investors in these tokens are true believers in the underlying projects themselves. However, it’s obvious that a substantial proportion of investors are speculating on the tokens. During a period of “good times” the speculation on the tokens benefits the token creators, and right now it seems hard to argue against the massive raises these projects have accumulated.

Anyone who has been involved in the cryptocurrency market — or any financial market — knows that the “good times” don’t last forever.

When speculators choose to take their gains from a token and cash out, there needs to be a buyer available. If there is genuine demand for the underlying project and people want the token in order to use the network, then there’s no problem. However, if most of the demand has come from speculators instead, then at some point there will be no further speculators available, and there is the risk of token holders attempting to exit en masse, rapidly driving the price of the token down.

The ever-present threat of people selling their tokens could be considered a positive pressure on the project developers to deliver on their promises. Unfortunately it’s not always clear that the incentives of the project leaders and those of the token speculators are always aligned. Speculators may act similarly to public shareholders in companies, pressuring the executives in the company to make decisions based on short-term profits instead of what is best for the company long-term.

Since OpenBazaar started in 2014, we’ve had an engaged community of people all over the world who believe in decentralization and free trade. We’re certain that issuing an OpenBazaar Token would increase the size of those interested in the project, but we fear that it would also change the composition of the community from people who agree with our core ideals to a group of people who want to see a return on their investment. We don’t want to make decisions based on what would be best for the price of our token, but instead focus on how we can make trade free for the world.

3. A Token could Increase the Barriers to Entry

OpenBazaar is all about lowering the barriers to trade for everyone. All you need is an internet connection, a computer, and Bitcoin to engage in trade with anyone else in the world, at no cost.

Introducing a token could increase the barriers to entry into the OpenBazaar ecosystem.

We want permissionless, frictionless trade to always be possible on our network. OpenBazaar currently relies on the most widely used cryptocurrency in existence — Bitcoin — and we are building the 2.0 version of the software so users can choose to use other popular cryptocurrencies as well.

The on-ramps into Bitcoin are well-established, as are the wallets to store and spend them. This isn’t true for new coins and tokens. Only knowledgeable cryptocurrency users are able to purchase these tokens and use them. Forcing users into a new token ecosystem reduces the possible number of people the platform can reach.

As mentioned in #1, it’s possible to issue a token that isn’t necessary to use the network, but thus far we haven’t heard any compelling ideas.

4. Tokens Sales are a Regulatory Unknown

There is still significant uncertainty how governments will regulate ICOs / token sales.

If they choose to take a lax approach, the token creators may have little to fear. But if they choose to apply strict regulations instead, the regulatory compliance costs could soon become unbearable, especially if the technology itself needed to change in order to fully comply.

Also, scrutiny from agencies doesn’t only apply to token sales moving forward, but can apply to sales that have already occurred. This creates a situation where there is a “Sword of Damocles” hanging over these projects until regulatory guidance is issued.

Not all token creators are just crossing their fingers and hoping for the best. The Protocol Labs team joined with AngelList to launch CoinList, a platform to launch tokens which attempts to comply with know-your-customer (KYC) regulations and generally assure the tokens are issued in a manner compliant with relevant rules. This may work well for some tokens, but compliance comes at the cost of exclusivity. Only accredited investors have access to the initial sale, creating huge barriers to entry. Accredited investors are more likely to be interested in speculation than using the tokens, emphasizing the potential problems raised in #2 above.

Conditions for Token Issuance

It’s possible that an OpenBazaar Token may be issued at some point, but it would only happen if the following conditions were met:

1. A new token is needed to provide utility to OpenBazaar users that cannot be provided by Bitcoin or any existing token.
2. The token sale would be an opportunity to distribute tokens to users of OpenBazaar who believe in decentralization and free trade and are not solely focused on speculation.
3. The token would not increase the barriers to entry into the OpenBazaar network.
4. If government agencies issued strict regulatory guidelines it wouldn’t significantly disrupt the OpenBazaar ecosystem due to a reliance on the token.

These conditions may or may not be able to ever be satisfied but OpenBazaar is open-source and we love to hear feedback on our ideas. If you believe an OpenBazaar Token is good idea (or not), please let us know why. Join our Slack or message us on Twitter.

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Originally published at blog.openbazaar.org on June 16, 2017.