Web 2.0What if (almost) everything we are seeing today with token projects were merely part of the first generation, and will bear only little fruit compared to what the second generation might bring?

This isn’t a far-fetched scenario from reality.

Truth is,- many ICOs projects have lost the meaning of the token function, in favor of the crowd-funding carrot.

Web 1.0 vs. Web 2.0 Analogy

When the web came along in 1993, and we were entering its first phases of applications development, we certainly didn’t see nor were able to implement everything that we are benefiting from today. That was in part due to early technical limitations, and in part to the naturally required evolution for progressing from basic to advanced usages based on experience and learnings. In essence, you can’t get from ground zero to the summit in one straight shot, but rather via a series of gradual ascents from one level to another.

When something new comes along, we typically try to emulate the old ways before we invent new ways that we didn’t know of before. For the Web, the native uses of the Internet turned out to be two-way channels where users produced the work (as opposed to broadcast channels that were most of the Web 1.0 era). So, it took until 2002-2005 for most entrepreneurs to understand that and to build apps that took advantage of it.

With many token projects, it looks like we are copying what we already see versus inventing what we don’t discern yet. Sadly, for several token projects, there is more token and less blockchain. There is more currency, and less tokens that represent utilitarian work. There is less organic relationships between blockchain functionality and token capability, and there is more hyperbolic claims about these linkages than substantively demonstrable capabilities.

If you hear of a project that is going to “do X on the blockchain”, and it looks like anything another startup or company is doing, you need to ask what the role of the token is in relation to the blockchain capabilities. And you need to ask: what would happen without the token? Why do you need a blockchain? What is the blockchain enabling that could not be possible before?

These observations are based on my insights into the market activity, complemented by the recent flurry of projects that are landing in my Inbox, some of which are being frenetically funded with little scrutiny. The token itself is not the innovation, and we tend to forget that.

Many token projects are proposing to use the blockchain’s currency feature as a linchpin, but that is a very limited use case, in the grand scheme of blockchain capabilities. Internal cryptocurrencies are good, but they only target value transfer efficiencies. Efficiency improvements are useful, but where is the magic?

The ICO was novel in its multiple currency creation, via the ERC20 standard, which is merely about that. But we are not doing so well in terms of implementing more creative usages for a token.

Revisiting Blockchain Fundamental Innovations

Let’s revisit the fundamental blockchain innovations. Bitcoin gave us native mining, basically a way to boot-up a blockchain out of connecting computers together, and it gave us a blockchain that rewards work and workers. The Ethereum ICO was innovative in that it popularized the concept of paying for running business finance logic (smart contracts) on top of the blockchain, and it gave us the promise of a universal, general-purpose software development framework for creating decentralized applications, ones that don’t rely on a spoke-and-wheel, top-down, command-and-control or counterparty-heavy governance scenarios.

Today, I feel we are in a lull of Token 1.0 bottom, where we are “doing tokens” with a loose interpretation on blockchain capabilities. 

Not only is Token 1.0 attracting the wrong types of projects, it is also attracting the wrong types of people who see opportunistic gains from spinning a currency, raising from the crowd and promising the moon, with little accountability to be held against.

We must ask what is the role of the blockchain, and sometimes, it is not that obvious.

When Bitcoin and Ethereum were in their infancy, their success was not assured, while still full of uncertainty. But that is the nature of how great innovations occur. It is when things are not so obvious that they can get the most interesting later.

How do we get out of this rut?

First and foremost, we must revisit and apply the basic innovations of the blockchain. Then we need to assess token functionality critically, without over-engineering the token capabilities.

Remember that token functionality is a hypothesis that remains to be proven in the market.

So, what are the basic and fundamental innovations that must be reflected in a token usage?

For one, it is about the removal or disappearance of a counterparty (or intermediary) who is no longer needed for the successful completion of a given transaction or interaction. For example, blockchains are really good for automatically executing the consequences of certain actions, conditions, logic or whatever “state” comes their way.

Second, it is about using the token as a reward for a type of work that is provided, whether it is computational or human work. This is also called incentive, but that word has been misused as a carrot for enticing users to try something, and that is not the same as a genuine work reward. The blockchain can be a good rewards engine for automatically dispensing tokens to those who do the work, as evidenced by Bitcoin, Ethereum and Steemit who function that way.

Third, blockchains can help us get to decentralization in a given process or organizational construct, whether it is along an architectural, political, logical or technical dimension. However, decentralization for the sake of decentralization is not the goal. Decentralization must bring with it given features such as increased security, better decision-making, co-operative sharing of benefits, fault-tolerance in network resiliency, or other ones where there is a visible outcome improvement to the non-decentralized way.

Finally, blockchains hold the promise of decentralized organizational governance, a theme that continues to percolate in blockchain circles as a sort of nirvana end-state. Decentralized governance is an ambitious goal and comes with various degrees of feasibility, but it can only be achieved gradually, and not suddenly. Here too, the 1.0 models will most probably fall short or fail, especially if they attempt to airdrop DAO-like beliefs on their communities. Decentralized autonomy is a step-wise function that we get to gradually, and we still have much to learn about implementing it.

I recently started to use the contrast Native vs. Grafted to depict a simple classification of token roles. If the token is native to the blockchain, app or protocol, it means that the blockchain, decentralized protocol or application cannot function without it. In contrast, grafting functionality later is more tricky. Not only the resulting outcome may or may not be that innovative or useful, the chances for success will certainly be lower because it will be harder to achieve sustainable user engagement when users don’t have “blockchain skin” in the game.

For example, the Rarepepe project (despite its racist roots) is a good example of a truly native blockchain application across many dimensions: with Rarepepe, the assets can only be issued on the blockchain and they are linked to specific tokens; the Rarepepe token supply is limited, creating a scarcity; Rarepepe collections cannot be faked or copied, but they can be transferable peer-to-peer; and authenticity is inspected by trusted parties (Rarepepe scientists) that function like trusted decentralized nodes.

We need to challenge ourselves to create Token 2.0 projects. Token 2.0 will be achieved in part via a return to applying more creatively the fundamental features of a blockchain, and in part by erasing the mediocre Token 1.0 projects that are currently polluting the environment.

We need to put the blockchain back into the equation, and not the token.

If the token is a propeller head, its impact must be felt like a rocket. Make sure it is not looking like a set of rowing oars.

Note: We will discuss Tokens 2.0 vs. Tokens 1.0 at the upcoming Token Summit in San Francisco, December 5th. You can register here.

[Thanks to Vitalik Buterin for inspiration (during our panel chat at ETHWaterloo), and Fred Wilson for reviewing a draft and beefing-up the Web 1.0/2.0 analogy.]