IF NOT BITCOIN, THEN WHAT? (PART 3): CRYPTO TOKENSFebruary 2015
In this third part of our blog series on the exchange of value in the blockchain ecosystem we explore custom cryptographic tokens.
What are tokens? Some examples from the physical world include subway tokens, vending machine coins and the plastic coins that are used in some clubs to pay for drinks. All of these are physical tokens of value, to be used for a specific service offered by a company or a group of companies. To put it in other words, they represent a promise of the issuer to deliver a service to the holder. Hence for the holder of a token, they have only as much value as they put in the backer of the token.
Cryptographic tokens are like this, but with all the benefits associated with cryptocurrencies:
- The cost to issue and accept tokens is almost zero.
- They are impossible to counterfeit.
- They can be transferred digitally all over the world on cryptographic ledgers.
- No centralized party is required for their administration, and in some cases, their issuance.
- They are programmable: they can be directly transacted with by software.
All cryptocurrencies like Bitcoin and “altcoins” can be considered cryptographic tokens of value. In this post I’m considering only the subset of tokens that are meant to be used for a specific purpose, either backed by the issuer or by concensus of the holders, including:
- Custom tokens on the Ripple, Stellar and Hyperledger
- Assets on Counterparty and Omni
- Colored coins on the Bitcoin network
The problem with altcoins: no limits
Essentially, every cryptocurrency is a generalized crypto-token. Many people are inspired to create an altcoin with a specific purpose. And because it’s so easy to create an altcoin, many people do, in great amounts. There is (or was, with the speed these new cryptocoins come and go it’s hard to keep up) a TeaCoin, CoffeeCoin, CasinoCoin, PizzaCoin, BeerCoin and the list goes on and on. There are new national currencies like the Deutsche e-Mark, the Dutch e-Gulden and the infamous AuroraCoin supposedly created as a new currency for Iceland.
While in theory the idea of a cryptocurrency limited to a specific purpose is sympathetic and in many cases benevolent and idealistic, the limitlessness of a cryptocurrency in this case is its achilles heel. A specific purpose is a limit: this coin should only be used to pay for coffee (and not for garden supplies), and this other one only within the borders of Germany (and not in France). But a decentralized cryptocurrency has no limits in terms of geography and what you exchange it for, with whom.
Because of this, the sad fact is that the only thing that altcoins are very succesful at in an economic sense are pump-and-dump schemes. Either these are set up deliberately from the very creation of the coin by its malevolent creators, or by market manipulators profiting from the weaknesses of a benevolent altcoin initiative. Because anyone can hype the value of a specific token and the supply is limitless, hopeful investors get scammed every single time. This makes it very hard for consumers, entrepreneurs and investors living in the real world to take cryptocurrencies seriously for use in any type of commerce, even though they have some amazing and unprecedented characteristics.
Alternative tokens are a reality
Meanwhile, in the real (non-crypto) world, alternative forms of value exchange are being created and used, without any pumping and dumping. Some examples beyond the obvious ones like subway tokens and vending machine coins:
Time banks are on the rise. With the premise of “an hour for an hour”, members of a local community can help each other with what they’re best at. Bob does an hour of gardening for Alice, Carol does an hour of web development for Bob. Although these initiatives will have challenges of their own in terms of supply and demand, there are many successful examples, coming with additional benefits like increased social cohesion and sustainability.
Qoin does research and development around community currencies. They have successfully launched the Bristol Pound and the Brixton Pound. In these communities, consumers are incentivized to spend the local currency at a wide array of stores that accepts it. The Mayor of Bristol even receives his full salary in Bristol Pounds.
Successful crypto tokens
If blockchains, and more generally cryptoledgers, have great benefits, how could these benefits be successfully applied in new forms of value exchange? And how could the blockchain ecosystem benefit from the insights of successful non-crypto token exchange systems?
A distinctive property of a succesful custom token of value is that it’s not universal. Why have there never been worldwide pump-and-dump schemes with New York City subway tokens, where they were traded for $1, $10, $100? Because it’s clear what the token represents: each token is valid for one ride on the subway, to be delivered by the New York City subway system. It couldn’t be used to take a ride on the St Petersburg Metro, nor could one take a hundred metro tokens and pay for a bus ride from Mexico to Alaska.
A successful cryptographic token therefore requires a combination of the “sky-is-the-limit” possibilities of decentralized cryptocurrencies and down-to-earth limits that are set and respected by its issuers and holders. It requires trust, but a lot less trust than required by centralized value exchange systems. Ideally cryptographic tokens reduce the amount of trust required in transacting to only the parties involved, taking out any risk of middle men or centralized administrations being malevolent or flawed. And using escrows or smart contracts, even the required trust in the counterparty can be significantly reduced when transacting in a crypto token.
New forms of value exchange
How could value exchange benefit from cryptographic tokens? Some ideas.
Billing for time
A lot of work is billed by hourly rate. From lawyers to freelance software professionals to car mechanics, we pay for their services in fiat currency by the hour. And strictly speaking, every employee on a 40-hour contract sells their time by the hour to their employer. A lot of effort goes into administering and securing this. Why wouldn’t each of these issue a custom cryptographic token representing an hour of their own time, and sell it? Ripple developer Steven Zeiler has done exactly that using a custom token on the Ripple network. Although it appears he has not transacted a lot of Zeilermarks yet, the idea is compelling.
The price of the hours of the individual could be paid for in whatever form of compensation the buyer and seller form an agreement on, which includes fiat currency, but also timebanking or (digital representations of) grams of gold. The price is settled by the market; if the individual offers better services, their hours will be in higher demand and the price can rise.
The idea can be extended to time billing within and between businesses. A common current practice is that Carol works at ConsultCo for a fixed monthly salary, and ConsultCo sells her services to TopCorp by the hour for a hefty fee. ConsultCo administers this time using a centralized, proprietary software system. Accountants inspect this system yearly and report about it. Why wouldn’t Carol issue CarolCoins representing one hour of her time and sell them to ConsultCo? Or sell them directly to TopCorp, possibly with a fee to ConsultCo for providing the facilities of her work environment? What is the role of ConsultCo anyway?
National and local tax systems require a complex, expensive and in some cases corrupt system of politics, administration and collection. Individuals and corporations obliged to pay them try to avoid paying them, legally or illegally. Yet ideally they serve a high purpose: the common good. We all like a clean city with a good sewer system and well-maintained streets. Yet when it’s time for the yearly tax report, many people feel the Euros, Sterling and Dollars they pay don’t directly contribute to that common good, but disappear either in the pockets of corrupt politicians or are spent on things they never see the results of.
Because cryptographic tokens are programmable, we can give them special properties. A crypto version of the Bristol Pound could contain an automatic tax percentage. Open, decentralized VAT. Say 1% of each transaction of the local currency automatically goes to a local government fund. The local government uses this fund to pay for projects in the interest of the common good. Because the tax is percentual, everyone contributes in proportion to what they can afford. Because the funds are on a decentralized ledger, everyone has insight in the amounts and what they are spent on. An open, incorruptible voting system to decide which projects to spend the funds on could be introduced in the form of a distributed app. Call me an unrealistic idealist, but I can see things like this change the perception of taxes from a “necessary evil” to an “investment in a better world around me”.
Update: after publication the Brixton Pound let us know that they already have a similar scheme in place:
@blockstarsio re your article, FYI 1.5% of each B£ transaction already goes into the #brixtonfund which is used for local projects
— Brixton Pound (@brixtonpound) February 20, 2015
Monetizing decentralized services
Blockchain technology has spurred innovation from decentralized currency to “decentralized everything”. That’s great, in many respects. All DApps are open source, their execution incorruptible. However, the builders of these apps can’t live from air and bitcoin tips. Crowd funding and VC investments offer partial solutions to bootstrap a company and its technologies, but at a certain point some form of revenue model shall have to be introduced. Custom cryptographic tokens can play an important role here.
Traditional thought patterns might lead us to try solving the problem of how to pay for the service of a distributed app in US Dollars, and get this amount distributed to its developers in a fair way. With digital representations of fiat currency we might come a long way, but is that even the problem we should be solving?
From a tokenization perspective, a distributed app or DAO could issue its own tokens of value to offer its specific services. The token is sold by the developer of the DApp, for whatever compensation they deem fit. Users of the DApp are willing to pay a market price for this token in proportion to the quality of the service. The developer has an incentive to keep developing the DApp in order to improve its usefulness and as such maintain the value of the token.
Now were a competing business to launch an improved copy of this DApp, they would have to issue their own unique token. Because the original creator already has an established user base holding tokens and data, there is a barrier of entry. If the competitor has nothing more to offer over the original, i.e. they haven’t developed anything significant over the original DApp, the market will not buy their token even if it’s cheaper.
In summary: “steal my code, buy my token, good luck issuing your own”.
Evolving revenue paradigms
Radically new possibilities require new paradigms. The fact that anyone can issue and transact with a unique, incorruptible token of value that can be transferred all over the world in seconds is such a possibility. The paradigm of exchanging fiat currency for services and goods is so deeply ingrained in all systems of commerce, government and investing, that our thinking patterns allow for not much else. But it hasn’t always been this way, and it won’t be this way forever.
To some extent, all forms of “promised value” are an opportunity for a specific cryptographic token. And a lot of what we do in our daily lives consists of some kind of value exchange and the trust around it, be it formally when buying a coffee, or informally delivering a project report to our manager. Cryptographic tokens offer new and arguably better ways of exchanging value, and they require new ways of thinking and organizing to successfully apply them.
As we evolve toward a decentralised future there will be a transition period. We need ways to deal with the reality of today (how do we pay our bills?) as well as free thinking and idealism to get there. Businesses will have to re-evaluate their purpose, revenue model and form of organization. Individuals will have to re-evalute their perception of money, getting paid for their services and paying for those of others and saving up for later. Whether we’ll see a little or a lot of cryptographic tokens in our daily lives, it will be exciting for sure.
Are cryptographic tokens useful? Will they play an important role in the blockchain ecosystem? We’d love to hear your thoughts in the comments, or tweet us on @OVioHQ.