#1 - Mental Models for Understanding Crypto Tokens

Chris Dixon from a16z in a conversation with Nick Tomaino from 1 confirmation, editor of The Control

In this edition, we featured a conversation between a16z’s Chris Dixon and Nick Tomaino, the founder of early-stage crypto venture fund 1 confirmation, editor of The Control, and former BD at Coinbase.

TL; DL (Too Long; Didn't Listen)

It is very likely we are in a boom part of a cycle and while we are very excited in the technological prospects of the cryptocurrency, I think it's very likely the prices have gotten ahead of actual progress” - Chris Dixon

Sometimes I get worried that this new incentive of having a token almost works too well and it's kind of creating a splintered development efforts. - Chris Dixon

“This year, there's actually way more value created by Forks than ICOs” - Nick Tomaino

“A lot of people are still skeptical on proof of stake and don't think it can be pulled off but I think proof of stake is going to be an important catalyst for a broader adoption and interest in blockchain.” - Nick Tomaino

“One takeaway from coinbase is that you need a great team but you also need a fantastic product timing.” - Nick Tomaino

Topics covered:

  • Mental models for understanding tokens and what may give them long-term value; to the role of stable coins in the ecosystem; on scaling issues, on-chain and off-chain protocols, forks, and categories of tokens, tokenizations in both traditional assets and new asset classes.

  • The things that he is most excited about in the Crypto world and shared the categories he uses in differentiating attractive investments from unattractive investments.


Insights:

Two types of tokens:

  • Usage Tokens - also called a medium of exchange token or a utility token. It is basically a token where ownership is required to use some digital service.

  • Work Tokens - it is a token where ownership gives token holders the right to contribute some type of work to a decentralized organization.

Why would you want to pay to do work?

  • It's because you'd want to own a token, a stake that give you the right to do work in the future. e.g. if Facebook were a crypto protocol, a work token may give you an ability to vote on how the news feed algorithm works.

  • At some point, if Facebook is helping to determine who wins an election, having some say in that algorithm could be valuable.

What is the most interesting work token?

  • The most interesting work token will be when Ethereum switches from proof of work to proof of stake.

What is traditional security assets tokenization?

  • It is like taking a piece of real estate or something that traditionally had value and creating a digital token that lets you trade it. It is not actually a part of the Crypto currency in some way, it's a kind of regulatory workaround or process.

Does Nick think that the tokenization has gone too far?

  • Yes, the tokenization has gone too far in some way. There are some people who shouldn't be doing tokens that are doing it anyway.

  • Nick is not sure on how it would play out in the long run but gave caution to people who are looking into investing in tokens to think a lot whether the token can have a long term value or not.

What is a decentralized exchange?                   

  • Decentralized exchange facilitates trust-less exchange of assets. It is a more secure way because you don't have to give a third party access to your funds which is more prone to hacking.

Why can't we solve problems in the broader landscape today

  • It is because there are a lot of core components that are still missing, such as:

  • Decentralized stable coin - a core piece of middle-ware that's missing in the ecosystem.

  • Identity - there hasn't been an identity-based protocol that has gained a lot of traction yet.

What is a stable coin & Forks?

  • Stable coin - It is a coin that has the volatility characteristics of a dollar combined with a decentralization characteristics of a Bitcoin or Ethereum.

  • Forking - is a very powerful mechanism and it's a new concept where if you don't like how a project is being run, you can copy the project but not just the code but you can also copy all the data from the code.

What is the thing that Nick is most excited about in the crypto world?

  • The idea of solving the scalability problems is very important, and it is going to manifest itself in many directions.

  • Whatever blockchain we're using has to be capable of processing hundreds of thousands of transactions.

  • Right now, Ethereum can process roughly fifteen thousand while Bitcoin can process about seven thousand transactions per second.

What is a horizontal solution?

  • Something like Cosmos which is trying to create some framework for new coins to be created or even port over existing ledgers.

Proof of stake as a catalyst for blockchain adoption?

  • Proof of stake solves a number of problems, and one of them is the electricity cost.

What characteristics does Nick look for between attractive investments and unattractive investments?

There are four characteristics to evaluate in every project:

  • Team

  • Product

  • Community

  • Token Mechanics

Nick's view on governance?

  • In the early days of a project, governance is less important right now.

  • Governance is really important once a project reaches a certain scale. i.e. Ethereum from a decision making perspective is pretty centralized right now. That's actually been a great thing for Ethereum as it allows the project to move fast and break things.

Link to the Episode:

a16z Mental models tokens Crypto trends


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