Applied Token Economics: Frequently Asked Questions
What are crypto tokens and how exactly can they help my business operations?
How can a wheel help you move? It depends. It might need to be placed inside a crawler if you run a heavy tractor. It might need to be equipped with observation cabins if you run an amusement park.
Tokens can facilitate payments. Tokens can do tagging: set someone the balance 1 “good person token” and his account will automatically receive donations. Tokens can enable access: one can rent a jetpack from you on a hot day only if the sum of “health”, “risk tolerance”, and “social reach” token balances exceeds a specific minimum.
Generally, tokenisation is the process of substituting sensitive data elements with non-sensitive equivalents that can be operated anywhere outside of original data custody domains.
Each of us uses tokens on a daily basis, without thinking about it twice: invoices, keys, tickets, bonds, receipts, reservations, bills, browser certificates, and cookies, etc. Tokens provide access, control, and an exchange of value. They represent rights and obligations and can also be programmable physical actuators.
Even physical tokens can be very witty. A great example is specially-coloured plastic bags for waste that are sold through a county at a significant premium compared to ordinary bags. Trash in such bags can be left anywhere and the municipal services will remove it, freeing people from being tied to schedules for local garbage pickup. Now imagine how much more creativity digital tokens will allow!
All tokens have an issuer and a substrate — the carrier media. Tokens vary in technical parameters such as transferability, fungibility, supply, and flow model. They represent things and do things, but they are not things in and of themselves.
Tokens on blockchains or other distributed digital substrates are known as crypto tokens. Crypto tokens may be very inexpensive to maintain, yet they are very secure. Soon, with the emergence of decentralised ownerless exchanges, for many operations, costs may literally become zero.
What is the big picture? When the Internet came into existence, it was perceived as communication enhancement but what is this blockchain thing all about?
It is not exactly clear yet. We generally invest our efforts into the idea that whatever direction the development of the technology and its adoption by businesses takes, few sub-paradigms will be resistant to pivot points and standard wars.
Namely, we bet on the inevitable ubiquitous usage of tokens to transfer value, signals, and eventually, more complex entities we don’t use today yet — conditional, “smart” transactions.
We also expect that compatibility — a comparative ease to exchange any two tokens in the world or coordinate in some business sense — will play an important role.
Will our investment tokens eventually be considered securities?
Only if you intend to do so. In many cases, this may be a reasonable thing to do.
We suppose this entire narrative is confusing. For a decent business, registering its securities issuance with authorities is not an issue. It’s a complex product that cannot be sold without guidance, as consumers have zero chance to crunch sufficient information by themselves.
If your business wants to sell some sort of investment tokens instead of traditional securities, it doesn’t change the essence of the deal: the sale should be properly supervised, the rules should be clear.
We believe that tokens are not securities, tokens are not commodities, tokens are not currencies; they are what they are — tokens, and their sale must be regulated. So when that happens, it happens. There’s nothing wrong about it.
The bad thing is that token scams are so successful because they exploit this fake affinity to securities.
On one hand, liquidity provision tools (exchanges) play an important role. In their essence, most ICOs simply channel the wealth from late buyers to early buyers which makes them a sort of Ponzi schemes. First they deploy “pre-sales”, price discounts, “cups” (maximum to be sold with amount actually sold being unverifiable), artificial scarcity (one time emission only), limited time offer (one month long event), etc. Participants then help to create hype through their social channels for free because they need “to pump the coin”, so they can sell with profit once it “hits exchanges”. As tokens distributed during the ICO change hands on exchanges, organisers have less and less people to feel direct responsibility to.
On another hand, amazingly, regulators play in favour of scammers too. Their “are tokens security?” narrative puts the two very different phenomena on the same scene and actually helps to legitimise the fraudulent practice of ICOs in the public’s’ eyes. Scammers pretend to “be concerned about potential violation of securities regulations”. However, that is a huge untapped honour because what they commit is an ordinary crime of running a Ponzi scheme, not a “noble act of an innovative crypto-anarchist to fail registering a security with ruthless government”.
When we do the token-based modernisation, will our business be affected by the instability of major assets such as BTC and the rate of exchange of our own tokens?
We don’t believe it will; investments inflow will be affected, of course, but operations are safe.
We do not recommend to use tokens that represent “internal system currency”, which are by far the most popular right now. The original idea behind them was that if someone wants to use such a closed system, he must obtain tokens on the open market. Since there’s a limited number of such tokens, each new portion of demand raises the price of tokens and, therefore, the value of the system.
On top of all the normal risks, should we expect a team, in their spare time, to successfully compete against Bitcoin & the USD as a currency, but with limited utility? Involuntary buyers hardly become loyal. They experience nothing but inconvenience. Prices are perceived as unstable. The entry barrier might be quite substantial. Tokens change hands rapidly: after using the system, people tend to immediately get rid of them. It is similar to a poorly convertible currency of a third world country with ultra-strong protectionists politics — eventually, the global market finds ways around them and their goods, leaving them to degrade.
Should my company run an ICO?
You need to be very careful with that. Even decent projects often misuse the instrument of ICO, conducting things in ways, counterintuitive to entrepreneurs.
The ultimate goal should be to maximise the valuation of the projects, i.e. its token market capitalisation. Maximising investments during the ICO may actually contradict that goal.
There are more problems with ICOs.
TOKENS PRIMARILY DESIGNED FOR AN ICO (ONE TIME EVENT) ARE LIKELY TO HARM YOUR BUSINESS.
POORLY DESIGNED ICO WILL KILL YOUR BUSINESS.
Operational and investment purposes are not easy to align. If you force it, as a result, the operational side suffers most. If you face a one-time-only, limited-duration sales event, you can’t really avoid protecting the interests of speculators in the first place, right? ICO-oriented token models engender poor end-user experiences, unclear routes to value capture, technical lock-in, regulatory uncertainty and have speculator-driven instead of builder-driven communities.
This is a great misconception that ICO should be a one-time event. Your project does not need all the money it will ever need NOW! An overfunded team is not a good generator of ideas and any decent work in general. There are ways to structure the economics of your tokens so that you get all the needed funds without putting your business and your investors at risk. A token that is maximum-valued at ICO will only go down in price once it hits an exchange. This causes many problems further on. The last thing you want is people losing money on your token from day one. The whole point of ICOs is to make your investors make money together with you, and build momentum!
What about security tokens? Should my company consider issuing them? What does it take? What are the benefits?
Most sane investors want the “real thing”, of course, so it’s becoming a popular sub-sector of the blockchain-based assets market. People try to tokenize securities in all kinds of ways according to their own understanding of the word since there’s no official definition. People try to replace stocks, bonds, real estate certificates… everything. People try to “put” anything of value “on the blockchain”, expecting improved efficiency, liquidity, and transparency.
Importantly, asset-backed tokens shouldn’t be limited to some blockchain-related ideas. Tokens could prove to be a better way of doing business on Wall Street itself, which suffers from an overabundance of third parties and inefficient systems.
Crypto exchanges have legal difficulties to list security tokens so we shouldn’t expect the liquidity premium advantage very soon. Eventually, there should be liquidity venues popping up for equity tokens but they will not be as easy to setup as a normal crypto token exchange, regulatory speaking.
So, it’s definitely worth watching attentively.
Platforms and entire stacks of technology come and go. What are the chances we will be stuck to technology no one uses or supports?
Of course, this is a real threat, but we are here to protect you from exactly that. There’s a lot of blockchain nonsense you may see in mass media that may mislead you when it comes to choosing a suitable platform.
Baloney meets you at the very enculturation with the topic: while Bitcoin is an amazing complex social engineering phenomenon, blockchain is merely an append-only log. Blockchain cannot “solve” or revolutionise anything, as many people claim. Only a new “game” design and the business psychology it creates may change things.
Further along the way, there are a lot of misleading buzzwords. For example, smart contracts are neither better contracts nor contracts at all; they are bots and their programming is not necessarily about economics, value, or asset transfer.
We generally disagree with the notion that all decentralised software should run on one of the few humongous shared networks. We are afraid it is creating misaligned incentives and poor one-size-fits-all architectural choices for users and developers alike. The base economic layer of such networks is designed for value capture and wrongfully forces itself into user experience. A truly democratic decentralised ecosystem should probably be comprised of a large number of small networks, each running their own application.
How much more valuable will my company become through modernisation with tokens?
An exact quote can only be estimated after thorough evaluation. But there are several drivers for the increase in value: unlocking business potentials that would otherwise not have been accessible in an economic way without tokens; access to non-dilutive crowdfunding; better overall company visibility in the market as a first mover.
In the world of blockchain, value capturing — not value creation — becomes the main challenge. A company may create a lot of value for the world but it may be capturing only a small part of it for itself.
Chances are, there’ll be a lot of value created for your project and you won’t have to pay for it. General expectations of accelerating the adoption of the technology and an abundance of free-to-use platforms are certainly great things; however, competition here works in a different way — one in which your old habits might be not applicable.
One of the fundamental facts about the incumbent business environment is that people are constantly lying about the businesses they are in. This is part of the competition and even part of the culture. Everything, down to fundamentals such as core revenue sources, logic of business model, and the degree of monopoly are often miscommunicated. In the sector, this type of attitude becomes very hard to convey; there are radically fewer chances to hide or distort things.
Is this really the right moment to start investing into modernisation? What if such attempts are premature, considering the state of technology?
We are certain: now is the time.
Remember, banks were slow and skeptical — even as it is, they never really caught up with the Internet. In the 90s, many people simply assumed “my business is not about communications” and went on as if nothing had changed.
Will our company have to decentralise? Doesn’t it mean some or complete loss of control in the end? Why would we want to do that? Is issuing a token a must to proceed?
No, we don’t advocate for decentralisation for the sake of decentralisation. To “decentralise something” is a legit purpose, but only for things that are worth becoming public domains and that will succeed in doing so. For example, it is easy to see why a file storage or credit rating should have a publicly run “ownerless” alternative to corporate and government; however, most decentralisation claims are clearly ridiculous.
For most applications, decentralisation of an entire system is not a necessity. In many cases, decentralisation attempts lead to inferior system quality. When we consider some specific business modules, it may be better to host them on open decentralised platforms, for reasons of compatibility, low costs, and convenience.
It is not your business that needs to be decentralised. It is not your company that has to become a distributed “fog” organisation run by some sort of voting tokens. Rather, it’s your industry sector — it will become more decentralised than it is now. The trend has been already set and it is going to happen, whether you want it or not.
Decentralisation often turns out to be disorganisation. Standards are important, even in an environment where compatible-by-nature tokens dominate. Without obvious governance, invisible powers will emerge and take over governing roles. That is why we believe that joining the right alliances is a very important step in the modernisation process.
As fas as token issuance is concerned, some applications need a token, some don’t. A new token isn’t needed if there’s no natural utility for it. For example, a native token is not needed for payments, in most cases. If the use of the token within the proposed system is easily interchangeable with existing recognised assets, then it is not needed.
How much effort does modernisation require?
From our experience, some quick wins can usually be realised in as short as three months. Tokenizations that go to the core of your business naturally take a very cautious and coordinated approach, and as a result, may take anywhere from 6 months to one year.
What kind of company can qualify? Is this sort of modernisation good for anyone? If we are a startup willing to get funding through selling tokens, can you help us?
Most businesses can benefit from this sort of modernisation. Since we are interested to be paid in equity, we prefer to deal with already operational businesses.