Reflections on tokens (translation)

Stanford's popular engineering doctor Balaji Sreenivasan (subscribe to his twitter , he is funny) very eagerly and sarcastically took up the analysis of cryptotechnologies, even talked about them to Trump, he does so well ... err ... to dream.

It is not surprising that he heads a crypto startup that was going to launch mining chips on smartphones first, then apps, and now turned into a mix of social networking and crowdsourcing .

I did a free translation of the publication of the same name by Dr. Shrinivasan on May 27, 2017. There, he sometimes powerfully covers, the text is written for quite non-specialists, but there are also deep thoughts. Enjoy.

Since 2014, a new model of "true crowdfunding" has appeared in the world, using appcoins or tokens as digital assets. It is important to note that tokens are not ordinary assets or investments in them, they are more like keys to an API. Tokens are attractive in that they allow for a 1000-fold increase in liquidity and a 100-base customer base compared to traditional financial instruments. A kind of Kickstarter on steroids.

Below are 12 of my thoughts about tokens.

1. Tokenization became possible only after 4 years of building the infrastructure of digital currencies . Back in 2013, Bitcoin was not interesting for anyone. Since then, a lot of money has come into this cryptocurrency, several dozens of exchange markets have appeared, leading financial organizations have begun to study the possibility of using technology for application, Etherium has appeared with new principles of blockchain organization. If in 2013, Bitcoin was called “evil”, then in 2017, projects on the blockchain appeared in almost every country of the world. The maturity of the infrastructure and social acceptance of cryptocurrency has shifted to the next stage of development: campaigns to raise funds for launching new solutions on the blockchain have begun to multiply.

2. Tokens depend on the blockchain technology and the " code bases " on which they are based. First, it is worth understanding that a token is a digital asset that can be moved (and not just copied) between the parties via the Internet without the consent of a third party. So, Bitcoin is a token that is addressed in the blockchain, where information is recorded about the fact of the release of new tokens or their movements. Other tokens function the same way.

The key concept is that the token codebase and the blockchain database are not the same. As an analogy, imagine the banking infrastructure of the United States, which they began to use to control the Australian dollar: it seems that there are dollars here and there, and the cultures of nations are similar, but their monetary base is completely different. In the same way, two tokens can use similar code bases (monetary policy), but have different blockchain databases (money bases).

The success of Bitcoin happened after the release of several altcoins:

  1. Tokens based on their own blockchains or forks of the Bitcoin blockchain. These tokens appeared first. Some, such as Dogecoin, simply worked on the Bitcoin code base, where some parameters were changed. Others (ZCash and Dash) have implemented innovative privacy features. All tokens of the first wave began to work on their own blockchains, completely independent of Bitcoin.
  2. Tokens based on new blockchains and new code. The next step was the creation of tokens that worked on completely new code bases (the most famous example is Etherium). Etherium was based on the principles of the Bitcoin blockchain, but was designed as a programmable registry. Therefore, it was immediately broken (and repaired through hard forks, see below), but users received new features (proof-of-stake concept, new Solidity / Serpent programming languages, fast lighting network technology, smart contracts, Dapps support and etc.)
  3. Tokens based on forks of code bases and forks of code. The most important example is Etherium Classic, which appeared after the Harforka (complete separation of the blockchain chain from the previous one, with a simultaneous change in the algorithms of the new chain), which the Etherium team did just when they hacked the blockchain. Such actions with the blockchain require participants to switch to new algorithms, from miners - siphoning and supporting the new blockchain, in general, is very similar to a sharp maneuver and blows many from the board against their desire.
  4. Tokens released on top of the Etherium blockchain. As a rule, such tokens are based on the ERC20 standard, which was invented to support the so-called. "Interblockchine" (organization of automatic relationships between blockchains).

In general, releasing a token on a completely new code base is a technically non-trivial task, it is much easier to fork a Bitcoin blockchain or release an ERC20 standard token.

3. Buyers tokens buy private keys. The release of new tokens is often not related to mining - they are generated for the public placement of tokens. Public placement, or "crowdsale" is a collection of funds from Internet users in exchange for an offer to buy tokens (not to be confused with private placement).

Once a token is a digital asset, what exactly is a crowdsale member changing its money for? He gets a private key that looks like a certain set of characteristic length, consisting of numbers and letters.

In principle, the private key is like a password, only unusually long. It is also used to gain access to certain information in some information system, but with one difference: no one can reset the private key (like a password) if it is lost or forgotten. Lost the key - lost tokens.

4. Tokens are analogues of API paid keys. The analogy with paid API keys is quite appropriate. For example, when you buy API keys to Amazon web services, you change your money while using the Amazon cloud. Buying a token is very similar, because you redeem Etherium tokens (ETH) for computing in the decentralized Etherium network.

This gives the tokens a utilitarian meaning.

Tokens are similar to API keys, but this is how: if someone gets access to your keys, they can manage your personal account on Amazon. Likewise, if your private keys are compromised, the new owners of this information can transfer their digital currency to themselves. The difference is that the API gives only access to the account, and private keys - to the account and the crypto-money itself.

5. Tokens - a new model of technology, but not startups. Since tokens have a price, they can be massively emitted at the time of launching a new project to raise funds for its development (roughly as a prepayment for releasing a batch of a product on Kickstarter).

In this regard, this method of funding has become an alternative to conventional venture investments and previously unpromising projects such as open source projects immediately went to the niche.

6. Tokens are not an eroded alternative to traditional investments. Tokens are not assets (or investments in them) because they circulate within the blockchain of the project and do not lead to a “ blurring ” of the shares of its participants.

Traditional ways of attracting investments are slower than the way with tokens like this: a crypto project is 100 times more audience and collects money about 1000 times faster than with traditional money collecting. There are three main reasons for this: (1) it is possible to attract 30 times more buyers of tokens from the USA, (2) 20-25 times more - buyers from other countries and (3) the tokens' liquidity premium compared to traditional investments is up to 1000x.

6.1. Tokens can be bought by any American (actually not).

Selling tokens is different from selling stakes in companies, which is regulated by the Securities Exchange Act of 1934 , because the token is similar to the key to the API.

Since shares in companies can be sold in the United States only to "accredited investors" (3% of the population with assets exceeding $ 1 million), regulators will not limit the sale of "keys to API" without hitting a significant share of traditional IT business. In this regard, 100% of the market for American investors becomes available to crypto projects, unlike the venture capital market, where after applying the restrictions only a paltry 3% of investors remain.

It may be that the token will be released under the promise of profit from the activities of the company. For example, the issuer has decided that the owners of the tokens will have the right to receive dividends and voting rights in the company. In this case, there is a real tokenization of property (also called the issue of securities), which is very different from the utilitarian tokens scheme described above.

6.2. Tokens can be sold over the Internet to any resident of the planet.

You can sell something (and the value is that it seems that cryptocurrency cannot be frozen on accounts), however, many investors keep cryptocurrency and tokens on personal accounts inside a cryptobirge, and their regulators are horrifying as they want). But in general, yes, the US population is only 4-5% of the population of the planet and, hypothetically, another 24 times more people may be involved as buyers of tokens during the initial placement.

6.3. Tokens have a low premium for liquidity (up to 1000 times in comparison with traditional methods).

The token gets a price almost immediately after the announcement of the first sales and the market regulates it around the clock and globally. This somewhat distinguishes tokens from traditional securities. Since for some investments the search for a new buyer may take 10 years, and the buyer of the token (theoretically) you will find in 10 minutes, many projects must and can regulate the circulation of tokens by blocking transactions with them for some time to prevent speculation.

Whether you want to or not, you only have two options: sell or use project tokens. The difference between 10 years (hold) and 10 minutes (sell) creates a time compression factor of approximately 500,000.

Such a giant liquidity premium lays the foundation for the future dominance of tokens as a financial instrument. The ability to quickly withdraw money from tokens and reinvest them into new tokens causes rapid speculative growth.

7. Tokens will lead to the decentralization of financing technologies. Since the placement of tokens can be done in any country, the importance of coming to Silicon Valley or Wall Street becomes close to zero. Silicon Valley remains a place of concentration of technological capital, but physically go there, as before, is not required.

8. Tokens have created a new business model: "better than free." Technology giants such as Google or Facebook offer very useful products for free. Despite this, sometimes they fall into billions of dollars in order to preserve the right of free use for early users when the product is put on a commercial sales regime.

The token emission model for product development creates a real way for technology companies to give the community money from the product in the future. This is Kevin Kelly’s ten-year-old business model, called “ better than free, ” where users get the opportunity to make money with a project from the moment they register at an early stage of its development. The first example of such a project was the Kik messenger, there will be others.

9. Buyers of tokens are the same investors as bloggers are journalists . Tokens will break the barrier to entry into the investment market, and this is similar to how the Internet has changed the profession of a journalist with the advent of the blogger profession.

We can assume several effects of this:

Now there is no suitable term, but why these tools can not be called "commercial media" by analogy with "social media"?

10. Tokens will further increase the significance of the technocrat over the traditional director. Since the heyday of the personality of Bill Gates in the late 70s of the last century, the trend towards technocratization of managers has become noticeable. This trend will be strengthened by the mechanism for placing tokens, since children with a penchant for computer science will purely statistically create many valuable protocols. Many of the founders of crypto projects will have a set of qualities more characteristic for developers of open source systems than those used by traditional managers.

11. Tokens mean defense without lawyers. Since it is enough for the buyer of tokens to keep private keys to guarantee the protection of their investments, this will change the very essence of property rights. If now the state judicial system acts as an arbitrator in property disputes, then in the future this function will be performed by a distributed registry. True, many more copies will have to be broken in order for the blockchains to become trusted "lawyers-as-service" at the international level, but as a programmable addition to the activities of higher courts they can be useful.

12. Tokens can be common to all technology companies through the mechanism of paid accounts. Can the tokenization model be extended beyond protocols like Bitcoin, Ethereum or ZCash? It is easy to imagine the sale of tokens as tickets - one-time access to the system, a taxi ride, etc. Or using them as fees for authors rocking social networks is about the same as drivers earn now in apps looking for travel companions.


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