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Don't Fight Current Intermediaries with Blockchain Products, Circumvent Them Instead

I hear a lot of talk from blockchain companies and projects saying that they want to replace intermediaries. 

However, the dream of the blockchain is not just disintermediation. It is about creating new models and value chains where old intermediaries don’t even play in. 

Why go head-to-head against established players, if you can completely circumvent them and not even have to deal with them. Let them become a footnote in your model. 

Take DeFi (decentralized finance) as an example. It is a totally new system that is completely native to the blockchain and cryptocurrencies. It has no existing equivalency in the current financial system. Yes, it is tiny in comparison with the global financial system, but native businesses typically start very small, because their starting position is zero users. DeFi players are re-inventing financial products and instruments with a crypto-based infrastructure, and that’s very innovative.

Non-fungible assets and apps based on peer-to-peer networks are other segments that have native-based trajectories, and I’d like to see these evolve further with more users.

I’m not saying that replacing current intermediaries in existing systems is not an interesting goal for blockchain projects and applications. It is part of a segment that will grow as well. 

But I’m also very interested in new systems that are native, organic, original and start with nothing typically. These are generally more foundational projects that target a whole industry.

You can almost take every industry, and re-imagine it with a blockchain-based infrastructure. For example, in real estate, imagine if new homes ownerships could only be registered on the blockchain, and that a new jurisdictional system gets developed to support transactions that occur thereafter. Sadly, current laws haven’t crossed over into blockchain-based legal constructs, which means that value chains cannot be implemented end-to-end yet because we still need to interface with the current world where most of the friction remains. Hopefully, that will be developed over time.

If we can move (crypto-based) money around the world in less than 10 mins, there is hope that we can (and should) make thousands of processes more efficient as well.

The underlying infrastructure base of trust is already here. We just need to build more services on top of it.


6 Blockchain-based Innovations…or Loopholes?

There is no shortage of innovation in the blockchain sector. Technological innovations were the starting points, led by developers. Now, we are seeing entrepreneurial innovations, led by creative entrepreneurs and financiers who are applying the technology in ways not thought of before.

In this post, I’m highlighting 6 applied innovations in blockchain or token models, many of which border on being loopholes that are currently flying under the regulatory radars.

1) Create Your Own Currency

Traditionally, only governments created sovereign currencies. With the blockchain, anyone can design a currency by giving it a special purpose. Using Ethereum, a developer can create a new currency (now called token) in a few lines of code. The good part is that this has fueled billions of capital to fund startups and projects who created trillions of tokens, but this has also simultaneously lowered the quality bar on what gets funded.

2) Say the Smart Contract Issued the Tokens

Since typical regulatory frameworks prohibit companies from raising money from the public without substantial disclosures and due filing processes, one loophole is to structure the public ICO such that- technically, it is the smart contract that is the issuing party. This means that token buyers aren’t sending their money to an entity, but rather to a piece of software that holds it, and returns the equivalent number of tokens. Regulators are still scratching their heads around how to subpoena or arrest a blockchain smart contract.

3) Foundation Controls the Tokens

A common practice is to create a non-profit “foundation” that actually administers the receipt and use of the tokens, but then commissions another entity to develop the technology. There could be a variety of relationships between the foundation and the developer entity, and sometimes the foundation is created before, and sometimes after the ICO. Foundations offer a layer of legal protection, but the fog hasn’t completely lifted on them, and there are no standards for foundation structuring.

4) Adopt a Virtual Jurisdiction

The virtuality of the online world is now taken to the legal level. Traditionally, companies are created within the jurisdictions they are typically conceived from. Of course, we’ve had Delaware-type entities and Cayman-based funds as the precedent for choosing remote jurisdictions. With the blockchain, the leading new alternative jurisdictions are Switzerland (Zug), Gibraltar, Malta, Cayman and a handful of others. All you need is a local lawyer in that jurisdiction to get this done.

5) Air Dropping, Not ICOing

As I’ve described in an earlier post (Utility vs. Security Tokens: Why Not Both?), companies are now air dropping tokens (e.g. 20% of total distribution), while keeping a significant percentage as reserves (e.g. 60-80%). Then, they wait until the token starts trading upwards (assuming there is some speculative hype or real usage that drive it). At that point, they start selling their reserve tokens into the public markets to fill their treasury. In essence, it’s like getting the effects of an ICO without raising money from anyone, and flying under the suspicious radars of regulators.

6) Trade-Driven Mining

This practice is being popularized by new exchanges (Binance, Huobi, KuCoin), and it is well described in this article by Mohamed Fouda (How Asian Exchanges And Investors Are Making Huge Profits Through Trade-Driven Mining). As the author explains, the exchange token is distributed to users based on their trading volume, in essence subsidizing the transaction fee. By distributing their native token, the exchanges also drive the demand and price up, and they make their profits from the token appreciation in the market. In addition, to further tighten the supply/demand equation (which drives the token price even more up), some of them (e.g. Binance, KuCoin) are buying back and burning a significant number of their tokens from up to 10-20% of their profits, each quarter. This is the most machiavellian scheme I have ever seen in this space.

In my opinion, all of the above schemes equate to legal, or financial engineering prowess, and are less about product innovation. You can implement any of the above and still fail if you haven’t been able to develop a real product with substantial traction.

In the case of the trade-driven mining example, the scheme looks like a perpetual bribe for usage, almost like loyalty points that appreciate in value, so it is very attractive to users. Luckily for these exchanges, they do have a product that works.

Generically, one could extrapolate that model into any usage-driven token reward for any product, blockchain or not. Wouldn’t be nice if Apple had given you a token for every product you bought from them, and let that token appreciate in relation to their stock price? If that was the case, you would have received a x22 bump on that token price since the first iPhone was introduced, 12 years ago. Even with a less extreme case of appreciation, let’s take United Airlines whose stock appreciated x3 in the past 5 years. Anyone would have loved a 3x bump on their MileagePlus points, no? If a new credible and safe airline appeared on the scene tomorrow, with a fly-based mining reward scheme that is linked to their token appreciation, I’m sure it will instantly get filled with travellers.

That said, the jury is still out on the longevity of these practices. Entrepreneurs are always 3 to 4 steps ahead of regulators.


My 2018 New Year's Resolution: Let's Revisit the Blockchain's Fundamentals

2018 ImageI wrote this article as part of the 2017 year-end review series that I’m co-editing with Pete Rizzo, editor-in-chief at CoinDesk. In light of the fact that a majority of blockchain projects may not necessarily need the blockchain, I felt it would be important to re-visit, re-learn, and re-fresh our memories on what the blockchain is about. In the midst of a new wave of euphoria and interest in cryptocurrencies, it’s all the more important that we remain clear on what the fuss is about. Sure, rising cryptocurrency prices have given the field a flurry of mainstream headlines, resulting in higher consumer awareness and visibility. Undoubtedly, the cascading effect has attracted more participants, from eager speculators, to curious software developers, to novice users. However, our emphasis should remain on how we apply the fundamental innovations of blockchain technology. As we enter 2018, it is clear to me that this key narrative has been lost on many, and as a New Year’s resolution, I believe we should all be reminded of it. When something as new and fundamental as the blockchain comes along, the initial reaction is to quickly apply its elements to what we currently see, as an overlay of the old. But this approach only gets us so far in terms of reaping the fruit of innovation. We need to create new things, and not just tinker with the old. As an analogy, the web’s first phase (web 1.0 era) consisted of plastering information on the web, and saw the development of early versions of e-commerce. But there was no social web, because we didn’t figure out the web’s two-way read-write capabilities until later. The fundamental Web 2.0 innovation was about empowering users to add web value by being content publishers themselves. With many token-based ICOs and other blockchain initiatives, it looks like we are copying what we already see instead of inventing what we don’t discern yet. [Ref: On Tokens 1.0 vs. Tokens 2.0 and Fundamental Blockchain Innovations] Against that backdrop, let us re-visit the blockchain’s fundamental innovations and be reminded that it is only by applying them that we will uncover the next versions of applications and protocols that will truly usher us into a crypto-based economy. When you encounter blockchain implementations, technologies, applications, ICOs and projects, ask yourself if one or several of the following six fundamental outcomes are seriously being tackled:

1) Replacing Intermediaries and counterparties

That is a sine qua non condition for blockchain technology. The original intent of bitcoin (which started this revolution) was to use the blockchain to validate the finality of transactions without counterparty involvement or intermediaries that relay (and delay) transactions. That is the essence of the trust network. You must ask how the blockchain is being used to fulfill this function, in lieu of synchronizing databases via intermediary players. For example, one target application area is decentralized assets trading, where the initial order is relayed and settled on the blockchain directly, without exchanges.

2) Native assets liquidity

Thanks to CryptoKitties, native assets on the blockchain are getting a memorable poster child. Consider the fact that cryptocurrency itself is the first native asset of the blockchain. But any digital asset with a unique ownership component can – and will – be traded on the blockchain. Of course, the first candidates are assets that already have a digital form, but think about also applying fractional ownerships to hard assets, and giving them instant liquidity. Global asset liquidity is going to get a boost, as much of the world’s non-liquid assets will have a chance to trade on the blockchain.

3) Proofs of X

If the blockchain represents the version of the truth, we need to be able to go somewhere and check that truth. I would like to start seeing easy-to-use portals and capabilities that query blockchains for business answers, just like Etherscan and Blockchain (the company) allow us to query them for technical transactions details and respective history about the ethereum and bitcoin blockchain. Did this particular event take place at this specific time, and between what parties? Who owned this asset on this given date? When did we learn about this event? There are so many examples waiting to become the next “Googling” equivalent for the blockchain.

4) Letting the blockchain enact consequences

Smart contracts are the execution instigators for blockchain logic. Their outcome is to enact the result of certain programmable conditions, and we are gradually learning to gain their confidence by giving them more autonomy. Blockchains should be able send funds, reward users, transfer ownerships, accept votes, release rights or do whatever smart contracts program them to do. Of course, mistakes and poor implementations can lead to bad consequences, but that also comes with this new territory. So, this part comes a degree of caution that we need to fully test and start by taking initial steps with, before endowing greater enactment responsibilities to the blockchain.

5) Peer-to-peer infrastructures

Another key tenet of blockchains is the peer-to-peer infrastructure underlying its operations. As a starting point for setting up a blockchain network, computer servers represent this peer-to-peer infrastructure, but we should not forget they can include anyone with a smartphone or a personal computer. Sometimes, this infrastructure features just people as users, and sometimes it consists of servers and people. Regardless, it is a slice of the innovation side of the blockchain that deals with its deployment in ways that weren’t possible before. A blockchain with limited P2P infrastructure will have limited impact on its participants.

6) Network effects at the protocol levels

Horizontal or vertical protocols are the next fabric upon which many blockchain applications will depend on. This might be the equivalent of the web standards we are used to, like HTTP, HTML, URLs, CSS, XML, etc. Standards enable the proliferation of usage, because of the knowledge network effects around them. We need to see more network effects applied to blockchain technology, where every additional user adds value to the rest of the network. With that backdrop of capabilities in mind, you can apply “acid test” questions for blockchain implementations you encounter. Answering at least one of them in the affirmative, then expanding on a further description of exactly how it is being done, is a necessary condition that would point you towards where blockchain innovation is in the works.
  1. What intermediaries or counterparties are you replacing?
  2. What tradable native assets are you creating or recording?
  3. What are the consequences that the blockchain is empowered to automatically act upon?
  4. What peer-to-peer infrastructure are you relying on?
  5. How are you achieving network effects at the blockchain level?
  6. What added value does every new user provide for the rest of network?
Two years ago, crypto-engineers were rushing (and gushing) to the market, with their immature technology. Today, the trend is reversed. While most blockchain developers and researchers have hunkered down trying to perfect their technology, business people are the ones rushing to the market with immature business models. We must ask whether any blockchain project is leading us to unchartered levels of true innovation, or diverting us into a meandering path of distraction. Many short-sighted blockchain projects start via an intention to place some record on a blockchain ledger. That task is becoming easier, but it is only a starting point, and that is certainly not enough. Inventing the future on the blockchain is hard, but if you diligently endeavor to apply the fundamental innovations of blockchain technology, you might land on some breakthroughs.  ]]>

Tokenomics – A Business Guide to Token Usage, Utility and Value

Token EconomyDespite the incredible amount of attention and material written about cryptocurrency tokens, there hasn’t been a good mainstream definition of what they are. In the technical realm of the blockchain, the concept of a cryptocurrency token is well understood. It represents a programmable currency unit that is bolted to a blockchain, and is part of smart contract logic in the context of a specific software application. But in the non-technical arena, what is a token, really?

A token is just another term for a type of privately issued currency. Traditionally, sovereign governments issued currency and set its terms and governance; in essence directing how our economy works with money as the exchange medium for value. With the blockchain, we now have new types organizations (and soon, more of the existing type) who are issuing their own currency in the form of digital money as cryptocurrency, and they are setting their own terms and rules around its operations, in essence creating new self-sustainable mini-economies.

What was the purview of governments is now in the hands of the many.

In the business realm, we can define the token as:

A unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.

The Achilles heel of token-based models will be how they are concocted to interact with the business model that underlies them. However, much of the attention has been on designing ICO’s to optimize for cryptoeconomics, a term that has come to describe the mechanics and specifics of token distribution, according to a given sale and ownership structure.

Going forward, the token usage relationships will be far more important than the design of its underlying cryptoeconomics. As this article aptly points out, there is no perfect token sale structure. You can precisely engineer an ICO and that will get you to launch it properly, but then you still need to deliver a viable business model for the long term.

In early 2015, I explained (yes, it was quite early) token usages in the context of a Distributed Autonomous Organization Operational Framework, and I summarized a few usage models including the rights, rewards and work models that are being practiced now. Much of what I wrote then applies today, even more so, especially this part:

“The key objective of a DAO is value creation or production, and to make that happen, there needs to be a specific linkage between user actions and the resulting effects of those actions on the overall value to the organization.” 

“Usage without value linkage is a waste and will result in a failure backlash. A new DAO is like a startup. It requires a product/market fit, business model realization and a lot of users/customers.”

The utility role of the token is a primary consideration in the success of the models that intend to exploit their powers. Tokens are multi-purpose instruments, and we are beginning to see more clarity in how they are being applied.

After analyzing dozens of past and upcoming ICOs, I have come up with the following comprehensive categorization for the role, features and purpose of tokens. This should help prospective and existing ICO-based companies to hone-in and focus their efforts on what will matter for their future success.

The framework I’m proposing has 3 tenets for the token utility:

Role  –  Features  –  Purpose

Token Usage and Value Model by William Mougayar

Each role has a key purpose, as depicted in the below chart.

Guide to Crypto Tokens Usage and Value by William Mougayar

The Right

Owning a token bestows a right that results in product usage, a governance action, a given contribution, voting, or plain access to the product or market. In some cases, tokens will grant real ownership, even if most organizations are trying to avoid passing the Howey Test by skirting around the ownership aspect. For examples, look at Numerai, DigixDAO, FirstBlood and Tezos.

The Value Exchange

The token is also an atomic unit of value exchange inside a particular market or app, resulting in the creation of a transactional economy between buyers and sellers. This consists of features that allow users to earn value and to spend it on services that are internal to the inherent ecosystem. They can earn it by doing active work (real work and actions), or passive work (e.g. sharing data). The creation of such an internal economy is arguably one of the most important outcomes, and one that must be sustained over time. For examples, look at Steemit, Kik, Tezos, and Augur.

The Toll

Just like paying a toll to use a freeway, the token can be the pay-per-use rail for getting on the blockchain infrastructure or for using the product. This also ensures that users have skin in the game. It can include running smart contracts to perform a specific function, paying for a security deposit, or plain usage fees in the form of transaction fees or other metered metric. For examples, look at Gnosis, Augur, Melonport, Tezos, Dfinity, Ethereum, and Bitcoin.

The Function

The token can also be used as a lever to enrich the user experience, including basic actions like joining a network, or connecting with users. It can also be used as an incentive, if it is given in return to begin usage or for on-boarding. For examples, look at Dfinity, Steemit, Civic, and Brave.

The Currency

The token is a very efficient payment method and transaction engine of choice. This is key for enabling frictionless transactions inside these closed environments. For the first time, companies can be their own payment processors without the cumbersome or costly aspects of traditional financial settlement options. Tokens offer a much lower barrier for processing end-to-end transactions inside a given market.

The Earnings

An equitable redistribution of the resulting increased value is part of what blockchain-based models can enable. Whether it is profit sharing, benefits sharing or other benefits (such as from inflation), sharing the upside with all the stakeholders is expected.

Assessing the Token Utility

When evaluating a given token-based organization, the more boxes that can be ticked pertaining to the role of the token, the better it would be. The role of tokens is like nails that encroach on your business model. You want more than a single one to hold it firmly in place, and keep it defensible and sustainable.

This is where entrepreneurs creativity has been shining, as they invent and create the many ways that a token can be put to use, at the operational level, i.e. as the rubber meets the road. It’s really about innovation at the token level.

If the token usage is obscure, not well explained, or not defensible, there is weakness in that model.

I’m not sure that app coins vs. protocol coins are the right way to segment these tokens. It doesn’t provide added clarity to an already obscure and new practice.

Here is a proposed set of questions to ask. If you are an ICO-based organization, give yourself 1 point for each yes answer, totalling a maximum of 20 points:

  1. Is the token tied to a product usage, i.e. does it give the user exclusive access to it, or provide interaction rights to the product?
  2. Does the token grant a governance action, like voting on a consensus related or other decision-making factor?
  3. Does the token enable the user to contribute to a value-adding action for the network or market that is being built?
  4. Does the token grant an ownership of sorts, whether it is real or a proxy to a value?
  5. Does the token result in a monetizable reward based on an action by the user (active work)?
  6. Does the token grant the user a value based on sharing or disclosing some data about them (passive work)?
  7. Is buying something part of the business model?
  8. Is selling something part of the business model?
  9. Can users create a new product or service?
  10. Is the token required to run a smart contract or to fund an oracle? (an oracle is a source of information or data that other a smart contract can use)
  11. Is the token required as a security deposit to secure some aspect of the blockchain’s operation?
  12. Is the token (or a derivative of it, like a stable coin or gas unit) used to pay for some usage?
  13. Is the token required to join a network or other related entity?
  14. Does the token enable a real connection between users?
  15. Is the token given away or offered at a discount, as an incentive to encourage product trial or usage?
  16. Is the token your principal payment unit, essentially functioning as an internal currency?
  17. Is the token (or derivative of it) the principal accounting unit for all internal transactions?
  18. Does your blockchain autonomously distribute profits to token holders?
  19. Does your blockchain autonomously distribute other benefits to token holders?
  20. Is there a related benefit to your users, resulting from built-in currency inflation?

Keep in mind that even if a company ticks the above list with a high score, they still need to execute on it. So, this list is more necessary than sufficient, for success.

All ICO-based companies are encouraged to review their token usage. The more usage scenarios they can check, the more resilient their Token-to-Market fit might be.


Token Summit: Adding 9 New Speakers and NYU Stern Venue Location

Tisch Hall Paulson Auditorium NYUSince the launch of the Token Summit we have received close to 50 speaker requests. It has been very hard to select the few remaining spots in an otherwise tight agenda.

Today, Nick Tomaino and I are announcing the second set of stellar speakers, adding to the already strong line-up of speakers and panelists.
Below are the new speakers that we have added to the roster of who’s who in the token/cryptocurrency space, from around the world.
I’m very excited and pleased to have them at the Token Summit, to share their unique experiences and participate in the discussions.
  • Thomas Linder, Partner at MME; go-to lawyer for several Swiss-based foundations and decentralized protocol-driven organizations.
  • Joey Krug, co-founder Augur; building a decentralized prediction market, and completed one of the first Ethereum-based crowdsale.
  • Juan Benet, founder of Protocol Labs and inventor of IPFS and Filecoin;  expected to roll out a new token to power its file storage and distribution protocol.
  • Julian Zawistowski, co-founder of Golem; one of the most successful recent ICOs building a next generation if computational resources.
  • Richard Craib, co-founder of Numerai

    ; issued 1 million Numeraire crypto-tokens to incentivize the construction of their artificial intelligence hedge fund.

  • Alex Sunnarborg, research analyst at CoinDesk; founder of Lawnmower and creator of the Lawnmower Index.

  • Stephan Karpischek, co- founder

    and CEO of Etherisc

    ; working on tokenizing risk insurance.

  • Chris Padovano, Decentralized Legal; involved on the legal side of token sales.
  • Aleksandr Bulkin, co-founder of CoinFund; active analyst in the token space.
For venue location, I am also very pleased to announce that the event will be held at the prestigious NYU Paulson Auditorim, 40 W. 4th Street, New York. The Paulson Auditorium is a beautiful theatre-style venue that can accommodate up to 470 seated participants (just in case we reach that level). It is part of the NYU School of Business. We have more speaker announcements coming up, in addition to key sponsorships that will be revealed soon. Also, we are adding Saul Hudson to the organizing team to help with pre-event media relationships. Saul is a 20-year Reuters veteran, most recently as their General Manager for the Americas.
I’m super excited about how this event is shaping up. Given the interest received, speaker faculty assembled, and support given, we are gearing up to deliver a unique experience that will dive into this important subject like never before. The only aspect that I’m not satisfied with is the number of women speakers. We only have two confirmed, but are working hard to increase that number.

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