#4 - Why Crypto Tokens Matter?

A Conversation that is worth every second: Chris Dixon, Partner @a16z, and Fred Ehrsam, previously co-founder @Coinbase

Action-packed weekend meet-ups with many projects in Singapore after HK #Token2049. Happy to see more projects are coming to this part of the world [East], opening up offices, and building communities.

Golem (https://golem.network) - Martin Köppelman (CEO & Founder) | QJ Wang (Asia Lead) - MakerDAO (https://makerdao.com/) | Michael Oved (Co-Founder) - AirSwap (https://www.airswap.io/) | KC Chng (CEO & Founder) - Digix (https://digix.global) | Mance and Edgar - Hashgraph and Swirlds (https://www.hederahashgraph.com)


In this edition, we go back to one of my favorite a16z Podcast Episodes on Tokens - “Why Crypto Tokens Matter” [Link] between Chris Dixon, partner at Andreessen Horowitz, and Fred Ehrsam, previously co-founder of Coinbase. Highly Recommended - it is worth every second.

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

  • From incentives, developer communities, and protocols

  • New models of governance and experiments

  • tradeoffs between centralized and decentralized systems

  • ICOs: legitimate vs. red flags How could we value tokens?

The keyword - Incentives. It’s a testament to the power of getting incentive structures right that someone pseudonymously dropping a 9-page whitepaper onto the internet led to a $70 billion cryptocurrency, a whole ecosystem of companies and users, and the largest supercomputer network in the world. Then again… isn’t that how innovation happens?

“What the smartest people do on the weekends now is what everyone else will be doing during the week in 10 years.” [cdixon blogpost]

The key to the growth of networks is the rate at which experiments are being conducted and the level of developer activity.

99% of networks fail in the “bootstrap” phase (think about Airbnb, Facebook and similar business models) - The ones that succeed do so through sheer force of will and money

Not legitimate ICOs: providing rent-seeking tokens, eliminating the middle man, raising money for another centralized system, and those that release a white paper that is really just a marketing brochure including no tangible protocol. 

Promising ICOs: already have active code running, have an existing team to write code, and match the stage of the industry. 

Insights:

Token economies

  • Cryptocurrencies are opening up new possibilities and opportunities by embedding economics into the internet. 

    • Crypto tokens are embedding economics into the internet

    • Credit card payments and sites like Amazon are “indirect” economics because they are ways to purchase goods and services using the internet to conduct the transaction

    • Crypto tokens provide a way to parcel out the actual building blocks of the internet to be sold for ownership that is a global database resource

2 Models of protocols creation & Developer communities

  • In the past, #1 non-profits designed (e.g. MIT) the core protocols of the internet and #2 protocols created by the Government, and these protocols have not been developed much further since then

  • Years later, these protocols have been thrown away (e.g. SSL for link encryption)

  • Now, we are seeing that developers want a new way to do things, rather than in the highly centralized systems like Facebook. 

    • Around the time of the invention of Bitcoin, which was during the financial crisis in the US, there was also a developer crisis occurring

    • Developers in this new generation are creative and innovative, and want to use their skills in more decentralized networks because of the benefits provided

Platforms and incentives

  • Platforms are characterized by their battles with other platforms

  • Cryptocurrencies provide the opportunity for participants of the network and platform to have aligned incentives

Network and critical mass:

  • Crypto tokens make networks grow at an unprecedented rate

    • Incentivizing all early users

    • Less financial rewards and more utility as the network grows

    • Overcome traditional chicken/egg problem (the consolidation of power)

    • Combats the complaints that people have about networks like Facebook

  • As the network grows, the early adopters transition from receiving financial rewards for their participation to receiving increased utility when the network reaches critical mass, which is mutually beneficial. Just like with start-ups, there is an element of risk/reward for the early users

  • There are over 1,000 different tokens - allows for the testing out of different economic and governance schemes.

Tezos - a new blockchain Case in point

  • Operates a self-amending ledger

  • Allowing users to modify the rules or prototype through discussion and voting on the changes.

    • Users can make Tezos evolve as they determine it needs to evolve and;

    • Opportunities for developers to earn sizable incentives as they work to add value to the network

  • Tezos is unique in that it proposes to balance the potential increase in value of the network with the incentives provided to users by token inflation.

Staking

  • Ethereum’s move from proof of work (POW) to proof of stake (POS) has opened up the conversation on staking in the industry.

  • This idea has unlocked design space that had previously been untapped as well as provided a way to punish bad behavior by creating negative incentives.

    • Unlock design space

    • Punish bad behavior by creating negative incentives

  • Email is an example of a platform that does not have negative incentives, as evidenced by the amount of spam emails that are sent because there is no negative consequence for spammers.

De/Centralized systems:

ICOs:

  • ICOs – Mostly not legit, but some are promising

    • Signs of promise: active/running code, existing team to write code, Matching the stage of the industry with the ambitions of the project.

    • Red flags: rent-seeking tokens, eliminate the middleman, raising money for another centralized system, releasing of a white paper that is just a marketing brochure, with no technical specification of protocol.

  • Mistake in paradigm shift: Don’t shoehorn the ideas from existing world into the new paradigm shift, all we know is the existing world, the paradigm shift is only interesting when we do new new stuff not old stuff.

  • Successful websites are those that are all-in on the internet, rather than adapting their website to be like their already existing business

    • Only 2 of the top 50 websites on the internet are for products that existed before the internet [Answer: MSN.com and Micosoft.com]

  • Best tokens take a cut of all transactions rather than rent-seeking e.g. micro-payment


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A big thank you for Lex Lim from Mutual Works, thanks for your detailed comments and feedback.

Onward, Upward and Untethered,

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