Scenic View, by Barry Blankenship

1. The only ways to grow

Businesses finance growth in two ways: (1) selling equity and (2) taking debt. Development efforts can also scale with (3) open source contributions, forms of altruism, donations or grants.

Crypto-land is young, and has spawned organisations that defy traditional business models. It’s not uncommon for these to be uncertain about how to capture the value they’ve been creating. Hence, there’s a lot of confusion among the 3 growth-financing methods above.

Tokens are frequently mistaken for equity. In legal nature, they resemble donation receipts. In practice, they market-behave as fragile debt.

Below, I argue that the industry has been trading long-term efficiency for short-term leverage when it comes to capitalisation means— the ways teams finance themselves. That crypto-networks funded by venture-backed tokens are faded to eternal incentive misbalance. That crypto-infrastructure and crypto-assets should be thought separately, and that there are, even without any asset issuance, plenty of options for those who either want to invest in or build any of them.

2. The token conundrum

Token issuance should serve as means to bootstrap a network.

Take Satoshi’s example. By design, bitcoin has to survive without block rewards (finite supply). Issuance is a means to put new units of the native asset in circulation, and to add to the income of contributors who make up a network capable of transacting such assets. When all BTC are out there, the network is bootstrapped, and should function without inflation.

Bitcoin 101.

A premise tokenized networks build upon is that there may be more efficient (in achieving their own goals) ways to distribute equity in order to properly bootstrap.

Satoshi chose a zero pre-mine PoW distribution, and a couple channels on which to spread the early bitcoin software. Ethereum chose to pre-mine what today is ~8% of its supply among a hundred or so contributors, and to pre-sell five times that to ~10.000 bitcoin holders around the globe. Livepeer invented the MerkleMine, and did “a gradual airdrop” with a higher, though phasing down, barrier of entrance.

Between the maximalist requirement of “a zero pre-mine” and the more loosely defined notion of “a fair launch”, there’s a range of approaches to experiment with.

2.1. On economical foundations of token engineering

The very notion of “fairness” may give the goosebumps to those Austrian-inclined. Worth remembering, in the 19th century, many economists in Europe were both libertarian and egalitarian, and it was quite common to appreciate markets while maintaining skepticism toward the excesses of private property. As Vitalik puts it, “contra doctrinaire libertarians, freedom is a high-dimensional design space”.

One of the assumptions of political economy is that “failure of assets to be reallocated to their most efficient uses is a major drag on aggregate productivity”. It is quite accepted that excessive ownership leads to market inefficiencies in certain assets (see “The Gridlock Economy”), and research suggests mechanism design that stimulates “allocation efficiency” can drive up the value of a given asset type in 5–10% (Posner & Weyl, 2017, p. 87) — even in the absence of a central enforcing agent.

But that’s only one axis of the economic design space — optimising for “allocation efficiency”: roughly speaking, ensuring assets are distributed enough so they get to the hands of those who’ll produce the most value with them — rather than be oligopolistically held. Another important dimension is “investment efficiency”: making sure assets are yielding enough benefit for those who hold them, so that they keep holding it.

The delicate balance of “allocative efficiency” is widely discussed. It’s not the case with the subtleties of “investment efficiency”.

Visualising “investment efficiency” VS “allocative efficiency” with examples of different high-level types of assets.

“Investment efficiency”, in Satoshi’s plan, translated mostly into a deflationary policy —if you believe the currency, just buy and hold, waiting for its “time value rate of return”. It was obviously a very risky investment to bet on bitcoin early on, and Satoshi himself risked spending some years of his life for nothing. For other coins, mitigating risk involves raising capital for development, which adds complexity to the “investment efficiency” dimension.

Is there such a thing as “the optimal” asset distribution strategy?

In the design of crypto-economic networks, mixing early capital investors with miners makes for heterogeneous groups of stakeholders. Investment efficiency will mean different things to each of them, since the “productivity” of the asset they’re buying vary — not only according to market factors or timing, but according to someone’s arbitrary decision (think discounts). The consequence is fragmented incentives:

investors want token prices high; ‘miners’ want an equilibrium point that maximises demand and profitability; users want low prices and cheaper network services. This misalignment has been dubbed the token conundrum.

Most existing tokens suffer from the token conundrum. They end up clearly inducing friction and clashing the interests of involved agents, instead of aligning incentives.

No venture-backed coin has consistently remained on the top 10 (by most indexes), for more than a handful of years in a row.

Tokens largely serve the purpose of fundraising (or, worse, justifying a fundraise). “Fundraising” is easily mistaken for what “bootstrapping” originally meant, here, facilitating the spread of irrationality.

It shouldn’t be impossible to create a fairer asset distribution scheme other than the one Satoshi deployed (or simply different, yet fair and functional). Skeptics entertain the possibility that the first successful cryptocurrency implementation just may not be the most successful, in a variety of aspects. But there’s no empirical example to look at, nor to design after, yet.

2.2. On existing tokens

It’s no secret that the vast majority of tokens out there are meaningless means of payment — be it a result of laziness, or technical obstacles. ETH itself is a payment token, in the end of the day (ETH are not technically needed to fund transactions). One simply can’t tie its market success to its intrinsic economic properties. The rise of ether is mostly a social phenomenon, that no more than ~10.000 people (ICO investors), and likely a couple of funds, foresaw.

“Don’t bother with the messed incentives! We’re still building infrastructure…” — Jacek Dylag on Unsplash

Scroll down the top 10 on CoinMarketCap yourself, and try to find a single token whose value stems from its economic properties, or that appreciates in price as its usage goes up. You won’t. The reason there’s no accurate NVT analysis for coins other than BTC is not the lack of trial, but simply the absence of consistent patterns to be found, yet.

Don’t get me wrong: there’s technical breakthroughs happening on a daily basis in peer to peer networking, distributed transcoding, fault-tolerant storage, privacy-preserving computation and many other really important fields. But we should be able to distinguish between the value of these pieces of infrastructure, and the value of the assets that orbit them. Bitcoin is asset and infrastructure very closely interwoven. That’s the ideal. But it’s not the default. Such cases are extremely rare.

PoS is an ongoing R&D project. Token valuation methodologies are experimental exercises. Tokenvestments are hypothesis-driven, not thesis-driven.

The thing is that stores-of-value, non-fungible tokens and many types of crypto-assets don’t objectively converge. They are markets based on participant sentiment that don’t have a future objective outcome. Stock markets, for example, go from voting machines and converge to weighing machines via quarterly results, cash flow metrics, market share variation, etc.

Photo by asoggetti on Unsplash

Tokens (and bitcoin!) are different. People mistakenly assume all markets must have a day of reckoning, where bets touch an objective outcome. This is no longer the case. In “governance markets”, one wins by predicting what the crowd will think, before others do. A trader closes his position when he thinks sentiment might change. These are markets in psychology, empathy and cultural awareness. Potentially powerful tools to govern the commons, but not a perfect fit for the average investor toolkit.

3. Notes on “post-tokenland”

Sentiment markets steer onto the direction their participants are believing in. Note how many narratives about narratives have been floating around, in cryptoland? That’s a sign people are questioning their core beliefs.

“Crossing the street to a new narrative, in cryptoland”. JJ Ying on Unsplash

These periods are fruitful because they revive fundamental issues.

The one we’re interested here is: wouldn’t it be better for all, long-term, if we could weaken the imperative of issuing an own token?

The past year has seen a blind run for lower-level protocols that could justify the issuance of an underlying asset. Which different sets of incentives can lead to more teams working on scalability for existing platforms, and less “novel solutions for problems that don’t exist yet”? How can we coordinate better as a community, compounding more progress, and overlapping less efforts across undifferentiated token-backed products?

There’s been a lot of proposals for issuing tokens in supposedly “fairer ways”. — dCOs, ITOs, DAICOs, STOs, FACTS, SAFTEs and whatsoever. In common, these all share the view of asset issuance as a starting point. Again: which are the ways to weaken the imperative of issuing your own token?

Figures are subjective guesses. Point is: what signalling could move us from yellow to green, getting good projects a better “average funding”, having more people working on existing infrastructure, and less useless tokens (worthy ones will keep surging)?

4. How does one make money with no token?

To thrive as an entity, generate venture-scale returns and justify large deployments of capital (of the kind that changes things globally), options in the space most likely are:

  • (1) To issue a token (discussed above).
  • (2) To build a service on top of Bitcoin, Ethereum, or any other existing platform and reap profit (includes exchanges, commerce facilitators, mining operations, SaaS platforms, relayers, non-custodial businesses, and other categories some people are misleadingly calling “dApps”).
  • (3) To sell equity. This can be camouflaged on top of (1), which is legally blurry; it can be linked to (2), which is traditional; or one can simply assume lack of clarity around value capture or revenue model and postpone sustainability, like most internet startups do in early stages.

Tokens (1) have become a standard throughout 2016–17. Traditional equity (2) has been of course a popular choice of entrepreneurs all along. But selling standard equity without present profits (3) is a path - though common at large - that I’ve been witnessing gain steep adoption only lately “in crypto”.

Avoiding a token upfront cuts ties with underlying technology, leaving room for experimentation (finding the right tech for the problem at hand) and energy for nailing core competencies (finding the right competitive advantage). It allows for the unbiased R&D needed to extend and integrate common infrastructure, while ensuring a given organisation is focused in long-term sustainability, even if value capture is not determined yet.

Dharma and DY/DX are examples of protocols that took this path. MyCrypto, Textile and Balance are wallet-oriented businesses that seem to be doing the same. Balance has also been coordinating grants to fuel some of its OS efforts, a tactic that should get adoption as it accelerates progress for a given entity’s roadmap and leaves concrete groundwork for the community.

5. Institutional self-destruction

More than 119.000 ERC-20 tokens have been deployed to main net. I estimate the Ethereum development community has anything between 50k and 100k developers — anything between 0.25% and 0.5% of the world’s dev. workforce (14.000 Ethereum-related repositories, or 0.02% of all 67 M repos in Github — discounting for the tech’s recency, I think we’re still being a bit generous in this estimate).

In short, we can pretty confidently assume there’s more than 1 live token per developer in Ethereum.

Behind many of these, there’s pure experimentation. Behind a lot of others, there’s organisations. What happens when they collectively realise having built upon fundamental economic flaws, or face a wave of legal existential threats?

The path to self-destruction is a growing topic. Decentralisation has ironically been defined as the crucial tenet for judging cryptocurrencies, in a jurisdictional plot that threatens all but the truly autonomous networks (of those we know there are really few out there).

Aragon’s movement to split a for-profit off the their Foundation, and to decentralise control over its war chest, is inevitably going to become more common, in more or less radical flavours. DigiPulse is de-tokenizing its service later this year. Melon is proposing token unification as a means to avoid, in its ecosystem, an overabundance of assets.

6. Why…?

Photo by Marat Gilyadzinov on Unsplash

In 2017–18, a lot of money has shifted from the hands of first-mover investors to those of high-profile projects. We now have some of the best financed open source efforts in history, and correspondingly big “ecosystem funds”. Less bitcoin for ICOs, more bitcoin for high-quality OS work.

Communities are questioning “what are really their commons?”, and how should they be properly funded. Post-tokenism is one of the possible horizons.

Market diligence is reaching higher levels of strictness. Economic frankenstokens are being uncovered and scrutinised. Investing is being reshaped as a practice, and skilled “pure playing” may soon become the only true source of alpha, in a shift that undermines the very spirit of capital in traditional network financing (have we realised yet that Satoshi made the greatest investment of all, with zero capital in advance and billions of dollars in unrealised profit?).

There are wonderful periods in which certain activities briefly become nearly cost-free. Human generosity can overrule economics when scarcity is eliminated. Unfortunately, Moloch lords over us most of the time. These periods are brief because human beings are wired for survival. What happens, in most cases, is that the instinct to dominate resources only leads to the cost-free aspect to be exploited.

This is how the free love ethos leads to pornography. The chemically free your mind movement leads to massive drug addiction. Free expression online leads to the destruction of objective media. FOSS leads to “software eats the world”. Programmable monetary policies lead to pump’n’dump currency-printing schemes.

Self-vigilance is the only real alternative to mass-surveillance. Decentralisation is not a costless utopia, but a sacrifice. Conscience is not an achievement, but a constant effort in questioning and unlearning.


Decentralising video and putting revenue in control of content producers.

Thanks to Jelle Gerbrandy

Felipe Gaúcho Pereira

Written by

Partner @ Paradigma Capital; co-founder @ Paratii



Decentralising video and putting revenue in control of content producers.

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