4 min read

How the smartest people imagined tokens

A year ago, I took notes on how the smartest people wrote and thought about tokens.

If your faith in tokens wavers, read this to understand what tokens can be. Different people below have different thoughts on how tokens will play out and what they will look like, but one thing is true: tokens will be an important part of the future.

This is in no particular order.

Olaf + Chris Dixon: Podcast - April 2017

  • Tokens are meant for open-source protocols. Only the protocol layer
  • Companies are built on top of open protocols
  • Currently, open-source developers are forced to go beg for money
  • Capitalism is brought into protocol development + open source
  • Creators make lots of money
  • Same economic incentives as a startup
  • Olaf believes token holders = equity holders in the protocol
  • Network effects compound; gain wealth from user base growing
  • RSS lost the battle to Facebook/Twitter: closed beat open, largely bc money
  • Imagine if Linux had a token, one of the best investments in history
  • Trust no one; no need to trust anyone
  • Swarm intelligence will create things that we’ve never imagined. The biggest products are things we’ve never imagined

Balajis - May 2017

  • Tokens are possible because of years of work in infrastructure
  • Tokens are like API keys; they are not like equity
  • This redemption value gives tokens inherent utility
  • Tradeable API keys with more interesting dynamics
  • Tokens can be used to fundraise for both traditional companies or open source projects; they can be an alternative to equity-based financing
  • A way to fund previously unfindable infrastructure
  • Will decentralize the process of funding technology
  • Enable new business model: better-than-free
  • Tokens are a non-dilutive alternative to traditional financing
  • They aren’t equity because they have a clear use case
  • Stats
  •  Greater than 100x improvement in people who can buy vs. classic equity
  •  Greater than 1000x improvement in time to liquidity
  •  Greater than 20-25x improvement in buyers because of international affairs and the cross-border nature of crypto
  • Token launch drastically differs from an equity sale because of the API key analogy; tokenized equity is a very different story
  • Casual investing becomes popular because there will be so many tokens
  • Developers > executives for this

Fred Wilson - June 2017

  • ICO and VC are two independent things
  • ICO’s main purpose: monetize product or service

Joel Monegro [2] - August 2016

  • The feedback loop is important
  • Token appreciates —> draws In early speculators —> developers and entrepreneurs —> devs entrepreneurs become invested in its success —> devs entrepreneurs build products around the protocol
  • Note  1: the feedback loop is all speculation
  • Good bc speculation is often the engine of technological adoption
  • Links to a few resources on how speculation has pushed technology forward
  • Note 2: At the end of the loop, applications will help token
  • New users drawn to protocol -> increase demand for token -> pushes the price up —> attracts new entrepreneurs/devs/investors and repeat forever
  • Conclusion: the market capitalization of the protocol always grows faster than the combined value of the applications built on top since the success of the application layer drives further speculation at the protocol layer
  • Cost structures of a protocol vs. company are very different (a network going from $20b to $90b is very different than a business going from $10m to $500m)

No idea - dead

  • Not fat applications or fat protocols independently of each other
  • Value is captured for subjective work at the application layer and objective work at the protocol layer. The application layer fees are part of the total transaction amount.
  • Example: Party A sends some value to Party B, Party C is an optional participant offering some subjective service to make the transfer go smoother, and Party D is at the protocol layer doing the objective work that A, B, and C all depend on.
  • Party A spends some amount (consumer of content or coffee)
  • Party B gets the lion’s share of it (creator of content or coffee)
  • Party C gets a fee if it helped move things along efficiently (content platform or LN channel)
  • Party D gets a fee for ensuring the whole system is running (bitcoin miner or bitcoin miner)

Continuations - July 2016

  • The more integrations for TCP/IP / HTTP, the harder it was for researchers/non-profits to contribute
  • Focus on protocols
  • Create protocol -> create value for itself by retaining protocol
  • Natural limit on how much wealth can be retained
  • If too much is retained by the creator, there is a large incentive for others to replicate it
  • Protocols will be adopted to what the people want (democratic)

Brand Burninham - June 2015

  • There is no way for a central authority to leverage network effect market power to extract rents from the participants

Jake Brukhman - July 2016

  • The larger point is that for decentralized applications, there are not one but two investment opportunities: the speculative value of platform crypto assets which tend to appreciate with network utilization and general success of the network, and the upside of the parent company business model embodied in private equity investments.

Nick Tomaino - May 2017

  • Tokens enhance incentives via increased ownership
  • Role of Tokens in a DAO
  • Usage tokens: required to use a service (hard to do if the entire stack is crypto)
  • Ethereum
  • Work tokens: a token that gives users the right to contribute work to a DAO in exchange for tokens
  • Augur, Maker
  • Tokens are the product not a funding mechanism
  • Beliefs
  • Tokens should not be issued before actual products exist
  • Issuing tokens only work for certain entrepreneurs (technically oriented)
  • Issuing tokens only works for certain products (network-based Internet products)

Chris Dixon - June 2017

  • Tokens enable two things:
  • Creation of decentralized networks combining the best of open, proprietary networks
  • New ways to incentivize open network participants, users, developers, service providers, etc.
  • The problem is that networks tend only to become useful when they reach a critical mass of users
  • Tokens are a way to help individuals who don’t have equity and give them value
  • Jai’s note: Tokens are not focusing on networks anymore it seems like
  • Tokens are a tool to align incentives among network participants

Naval - undated

  • New business model for open-source software
  • Allocate scarce resources using a scarce token. Users need the token to use the network. Owners of the resources get paid in the token. Pre-mine gets to keep a non-threatening amount.
  • Naval equates this to equity
  • Defined by: Give network operators the ability to collect new tokens in proportion to their contribution
  • Helped by: Route a small percentage of transactions to a foundation
  • Ends in: network usage increases, equity, and revenue increases