Skin-in-the-Game Coins

Non-worthless utility tokens: truly rare, mythical, beasts if there ever were.

Unsurprisingly, I’ve had a lot of people email and DM me regarding one of my 95 theses in particular: my belief that almost all utility tokens will trend towards zero because there is no need to actually hold them for any length of time.

I should clarify that statement, because it might help people understand which utility tokens merely correct by 90% vs. dropping all the way down to nothing longer term.

I call the ones that are merely 10–100x overvalued “Skin-in-the-Game” coins.

This is one category (with three sub-classes) where a lot of sustainable value will be created in the coming years. They aren’t quite currencies and they aren’t quite securities, but they do (or at least, could) serve a valuable purpose: to secure the value of some scarce information network resource. Skin-in the-Game coins require more than mere passive currency staking. They require some commitment of another scarce information resource as well, whether from a computer or a human.

I put Skin-in-the-Game coins into three buckets: 1) “securitized” computing resources, 2) “proof-of-human-work” systems, 3) and token-curated registries.

1) The first is perhaps the easiest to grok. One of the easiest ways to reduce velocity of a staking token would be to reward the provable commitment of tech resources (bandwidth, storage, compute, etc.) This is the “Airbnb of computing resources” model. Rather than renting out your second bedroom to physical guests, you are selling them the excess resources that you have already paid for.

Concepts like Filecoin’s “proof-of replication” and “proof-of-spacetime” may not yet be ready for primetime, but they make intuitive sense when you think of them as serving the purpose of a decentralized Airbnb: verify that any booked room (storage space) is filled by the people who actually paid for it, and ensure the host has not overbooked the inn or given your room to someone else.

Early examples of securitized computing resource systems are projects like Filecoin, Sia, Storj, Golem, Orchid, etc. There will be others, of course, but even these blue chips are all insanely expensive. Even if their ambitious tech ultimately works, many are getting close to overshooting their addressable market size from day 1.

2) Then there’s what I call “proof-of-human-work” systems. Usually these protocols contain some combination of 1) requests for proposals, 2) bounties in return for high-quality work, 3) application fees by the worker, and 4) incentives for reviewers to carefully assess and reward or reject work completed. These systems are all about destroying “the firm” as an organizing entity that allocates resources in order to accomplish certain goals.

The future of work looks trippy, and decentralizing companies and the nature of work is one of those moonshot “sovereign individual” trends I believe in pretty strongly.

Well-designed blockchain-based protocols will reduce agency costs to the point that most companies in the information economy will ultimately disintegrate and we’ll instead be left with interwoven projects that are driven by well-incentivized volunteers. We’re just starting to see *very* early experimentation here.

The DAO and the ICO boom have showcased early, bastardized versions of a company-less future. Today, groups of high-profile investors/advisors/developers coalesce around different hot new projects and propel them forward initially, then move on to the next thing. They rarely stick around for a four year vest / one year cliff in a single project. That creates a new set of problems (who’s going to actually do the ongoing work), but it also shows you what the future will probably look like.

In short, broader information economy work will look a lot like Hollywood. (But hopefully, less rapey.) Precious star directors, actors, and specialists will coalesce around a given project, do their thing, then bounce.

If someone wants to create a sequel or dub the blockbuster in another language, it’s all good. They’ll need to organize a similar (if lower-caliber) group to pull it off. There may or may not be code copyrights to worry about.

[TBI Note: want to read up more on the evolution of Hollywood production. Book recommendations there are welcome!]

Why can’t you do that with bitcoin or ether or the winning crypto-currency? Well, you have to buy the thesis that economic and human skin in the game matters, and that the maintainers / curators of these systems will be able to monetize their reputations, networks, and eye for talent, just like Hollywood producers (and Silicon Valley investors) do today.

The concept of “reputation mining” is fascinating, and someone will get it to work. Some early projects to read up on in this realm are Rootcore, Colony, Numeraire, Zeppelin, OSCoin, etc. All are taking slightly different tacks to the same destination.

Colony aims to create self-organizing micro-firms for specific projects. Rootcore and Numeraire are essentially running open tournaments where high-quality contributors earn bounties. Zeppelin and OSCoin are working on open-source protocol upgradeability.

You can probably value some of these things like insurance products, so they do have inherent value. For example, if the Zeppelin library is used by some other valuable distributed application on ethereum, it stands to reason that those Dapp developers should hold Zeppelin “insurance coins” that give them power to vote on whether to reject or accept proposals to the underlying Zeppelin libraries, which — for their protocol’s safety — simply cannot be corrupted.

The counterbalance is that this also means there’s probably a ceiling on the value of Zeppelin’s token. Zeppelin’s network token shouldn’t cost more than 1–2% of the aggregate protocol value that its libraries are “insuring.”

Imperfect analogies, of course, but you get the gist.

3) Then, last but not least, there are token-curated registries, which require a specific kind of proof-of-human-work that I think merits its own subclass.

TCR’s are simple and elegant: if there’s a list you want to be on and you think you deserve to be on that list, you might be willing to pay some amount of money to apply — either a one time fee or recurring credentialing “dues.”

I would pay to apply to a list of the top crypto investors if the other top names were actually listed there, because that would be a valuable signaling tool if I were to be accepted! And you could probably form interesting syndicates more easily out of such a group. For instance, an entrepreneur might be able to look at the TCR and organize a more logical and less political/relationship-intensive group during a fundraise.

But I would NOT pay to apply to a list where there’s that “everyone gets a trophy” bullshit going on. I’d rather pay a larger application fee and get rejected from a valuable TCR, then waste a smaller amount of money and be accepted to a Buzzfeedy “Who’s Who” list.

You can see how this could be a pretty killer innovation for exclusive events or online communities, or just simple brand points like digital Michelin stars or Verisign checkmarks.

Curated correctly, some TCRs will have inherent value that is worth securing, and which would attract engaged curators who could put skin in the game to challenge crappy applicants. As with the “proof-of-human-work” coins, you want to hold TCR tokens if you want the right to earn money as a curator, which you could do well if you had a reputation for calling things both ways, and unapologetically weeding out bullshit.

(You can see why I like these so much.)

Mike Goldin from ConsenSys, who co-led the AdChain project (first to use the TCR design, I believe) elaborates on the concept eloquently:

“Humans have a penchant for list-making and lists appear commonly: shopping lists, lists of “good” colleges, lists of America’s most wanted criminals, and many more. Most lists can be abstractly classified as either whitelists or blacklists, and in both cases the contents of a list uniformly satisfy some criteria (things I need to cook, colleges whose graduates on average exit debt within 10 years, individuals with FBI bounties over $100,000).

Useful lists are curated. Often by a single individual in the case of a grocery list, and perhaps by a committee in the case of a top-colleges list. A top-colleges list which may be appended by anybody quickly becomes an all-colleges list and ceases to be useful, since any college president obviously would desire for their college to appear on such a list.

A token-curated registry uses an intrinsic token to assign curation rights proportional to the relative token weight of entities holding the token. So long as there are parties which would desire to be curated into a given list, a market can exist in which the incentives of rational, self-interested token holders are aligned towards curating a list of high quality. Token-curated registries are decentrally-curated lists with intrinsic economic incentives for token holders to curate the list’s contents judiciously.”

I’m not sure about many other early TCR’s that are under development, but I would encourage people to follow Mike and Simon de la Rouviere, who are at the bleeding edge of this particular concept.

[TBI Note: If you are working on a token-curated registry and looking for seed investors, please ping me on twitter or email at (By the way, can you f*cking believe someone else had twobitidiot@gmail taken way back in 2013? Blows my mind.) I’m a TCR token buyer at reasonable early stage valuations.]

Are there other non-inherently worthless “utility tokens”? Probably. But my bet is that these look more like securities by another name, and will ultimately wind down or “convert” to a crypto-security in the future.

I am extremely unlikely to change my mind about the state of crypto valuations, but I am always interested in hearing other perspectives regarding the inherent value (or lack thereof) of utility token models.

For now, I’m going to keep monitoring the Skin-in-the-Game utility tokens because they require valuable, non-financial resources in order to function.


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