The Next Stage in ICOs: The Community Token Economy

September 2017

Outlier Ventures, after 3 months of deep research, is pleased to share with you it’s vision for the next stage of the token economy: The Community Token Economy which can be downloaded for free from our website.

Since the inception of Bitcoin in 2009 a growing global community has emerged taking many of its underlying technologies and principles and applying them beyond a simple ‘Internet of Money’ to a wider range of industries and use-cases. This community has broadly referred to itself as ‘the blockchain community’, even though in many cases there were technically no chains of blocks involved.

In large part these startups were financed conventionally through VC money and set out to build a mix of proprietary and open source technologies with conventional ‘rent seeking’ or software consulting business models around them. During that phase, most people – including those trying to build the businesses – felt a silent unease about trying to apply Web 2.0 thinking to what was clearly a new paradigm. Most importantly, trying to build sustainable moats with defensible IP on what was in essence an open-source movement.

The question ‘what is blockchain’s killer app?’ haunted everyone, including my own VC firm Outlier Ventures. It wasn’t until the early part of this year (2017) when the principle that all startups could, although not necessarily should, issue their own tokens through what is commonly referred to as an ICO (Initial Coin Offering, aping IPOs) became more widely accepted by the community.

This has seen a flurry of experimentation in token design and growing commentary exploring how this could fundamentally change the market dynamics of industries where tokens become the predominant form of financing. Whilst it is still early days it looks like one of the, if not THE, killer app for blockchain is the ability in and of itself for open source projects to tokenise value. This killer application has already begun to break out of the ‘blockchain’ echo chamber and go mainstream.

The critical innovation is that now a development team anywhere in the world can issue a unique and cryptographically secure digital token to underpin value within the protocol or application layer of a new financial system. Furthermore they can, if they so wish, directly hard code the rules and economic principles they would like to see in the system to incentivise or disincentivise certain behaviours.

This token financialises value directly and allows for liquid secondary markets of exchange. This value can be fractionalised to allow any level of participation down to the smallest of micro-transactions. In principle anyone, anywhere, can participate in these new digital economies before, during, or after they have been created; allowing all parties to have a stake in their success through a form of decentralised ownership.

This is a truly revolutionary moment which turns decades of financing technological innovation on its head. But it is not without its problems..

The rush to ICO

In the first half of 2017, financing projects by selling cryptographic tokens or ICOs went mainstream. So much so that for the blockchain sector it surpassed VC funding.

Just as the blockchain community has quickly pivoted to the token model, so too are startups from across both the wider deep tech and general startup ecosystem. Where network effect is critical for success, open sourcing preferable and upfront capital requirement high, tokenisation seems the obvious way for teams to finance the initiative without diluting control of their businesses, which may sit alongside an offering.

The amount of capital being raised through token sales breaks new records every week. At the time of writing (17th August 2017) the record is Filecoin which raised nearly $250 million, but by the time many of you read this it will likely already have been broken by the next big thing. This is causing many to label the phenomena a bubble causing an even greater rush to cash in before it pops. Furthermore, whilst we don’t necessarily think it is preferable we expect any startup that can issue a token to attempt do so. This will not just be limited to very early seed stage startups but also those that would otherwise have done an A,B,C or D Round.

This rush to ICO continues to hurt the quality of offerings. To date the large majority of ICOs have been poorly designed and executed in terms of readiness, team, product, governance, technical, compliance and commercials. And in many cases we are already seeing duplication between projects. However most importantly to us, the majority of ICOs fail to acknowledge that creating a token is more than funding a startup; it is creating a new digital economy. Few have given much thought to how they want that new economy to behave and be sustained.

That’s why at Outlier Ventures we have created a dedicated and growing team focused on ‘Crypto-economics’, a combination of cryptography, computer networks and game theory used to secure systems and realise a set of economic incentives or disincentives establishing a formal partnership with Imperial College London’s Economics and Computer Science Departments.

Over the last few months this function has worked closely with our in-house research function and team of analysts to conduct deep research into the tokens market to form an opinion about how we feel it could be improved and ultimately made more sustainable. We have come to the conclusion, in many instances, greater collaboration is required early on both within and across communities to reduce redundancy, increase chances of network effect and better design these shared digital economies.

Introducing ‘The Community Token Economy’

The result of this research is an indepth whitepaper we are making publicly available which proposes a framework that capatalises on an emerging trend in the market we have termed ‘The Community Token Economy’.

This document is intended to stimulate a debate within the broader community about how we can best ensure this exciting mix of technical innovations can create a more sustainable startup ecosystem space for us to realise an increasingly decentralised, open and therefore equitable Web for society.

We look forward to sharing this journey with you and welcome your feedback.

If you would like to make any recommendations please do get in touch on @OVioHQ or email contact@outlierventures.io