Why Tokens are Eating the World
The title of this post pays homage to Marc Andreessen’s epic post in 2012, “Why Software is Eating the World.” Marc made some very interesting observations in that seminal post where he succinctly forecasts much of what has transpired over the past half-decade. Software has been the leading driver of change in the world and the software giants such as Google, Amazon, Facebook, Salesforce and the like have only continued to grow in size and scale — leading much of the world into a new era and forcing companies and industries to transform, in order to keep up with the pace of innovation.
In a similar fashion, Bitcoin & blockchain technologies are slowly but steadily gaining momentum with a breakout year in 2017. As I write this post, the markets have cooled off significantly from their highs when Bitcoin touched $3,000 last month and Ethereum reached $400. They are now respectively hitting lows of $1,800 and $140 within weeks of touching their all time highs. Those of us who have been around the crypto world for a while will be quick to point out that we will continue to see higher highs and higher lows over time. This is due in no small part to human psychology, and the resultant bubbles and busts which are part of the cycle of crypto, and technology adoption curves in general.
The recent momentum in the crypto markets has also opened a door to a new world — allowing companies and projects to conduct large scale ICO’s (Initial Coin Offerings) or token sales. With the recent cooling off, it may take time for the market to determine if it can support both the volume and size of these offerings, but it’s certainly been an eye-opening experience for me. I was privileged to participate in this industry and complete a $33m token sale for Civic. We also just announced our partnerships with over 20 companies, representing over 250m Monthly Active Users, to begin to accept Civic Logins and 2Factor Authentication services. This may become the first large scale usage for blockchain by the public (who won’t even know it’s built on Bitcoin technology).
The main reason for my post today, is that I feel we’re entering a new era within the crypto world. Civic opted for a token sale rather than an ICO for a number of reasons. The difference is that rather than creating a mineable cryptocurrency, we sold a token that sits on top of the existing crypto networks. We’re not relying on miners to mine our token, and we are not building the network around this — instead we are deriving a use case from the infrastructure that has been built up by the crypto community over many years. We didn’t need to create a cryptocurrency, we just needed to create a token on top of an existing cryptocurrency. We are now entering a realm where its possible for applications to be built on top of blockchain technology, and this is enabling new use cases and, more importantly, the ability to create “private economies”. Balaji S. Srinivasan does a great job of summarizing how tokens are beginning to permeate every facet of our society.
Private economies
I spent a lot of time at my previous startup, Gyft, thinking about what we termed “Merchant Issued Currencies”. When I analyzed the volumes & statistics behind the gift cards that Amazon, Starbucks and others issued, I was staggered at the scale they were operating at. We’re talking about billions of dollars, stored in (unsecure) gift card codes, but which are reasonably liquid and tradeable on open markets and secondary exchanges for gift cards. These companies utilize the gift card metaphor to issue their own currencies, but ultimately, they are still denominated and pegged to fiat currencies.
This means that any inflation of those fiat currencies effectively also destroys the underlying value of the gift card that was issued and, as a result, even if these companies create products that retain their value, if the value of their currency is debased (for example, if they were based in Zimbabwe during hyperinflation), then the value stored within the underlying gift card would also diminish.
Does this have to be the case? Maybe, but could we have a situation where companies can issue their own private currencies that trade against fiat currencies ? This would allow companies to control the value creation and expectation by participants in the network that utilize the currency, without unpredictable inflationary pressures. This is not dissimilar to the way that Bitcoin and Ethereum functions within their respective economies — there is an issued currency and a cryptographically guaranteed inflation rate. These currencies then trade on exchanges based upon these known factors.
The cost to setup a virtual currency, with the security of mining, processing of transactions and the need for a team of cryptographers is prohibitive for most companies, even if only from an economies of scale perspective (every companies does not have to run a blockchain). Luckily today, with the advent of token technology, this becomes more straightforward and cheaper by building on top of pre-existing crypto infrastructure.
Civic has created 1 billion utility tokens that provide access to identity verification-related services in a decentralized, token-based ecosystem. These tokens represent a unit of account for the network. The bigger the network grows, the more utility in the token — and because the number of tokens are fixed (no inflation in the total supply, although they will be released over time). As the size of the network and transaction volumes within it grows, this will create demand for the tokens.
A proprietary, uniform token like the Civic token (CVC) can minimize traditional transaction costs & speeds up settlement for all participants in the ecosystem. It also allows us to enforce privacy and effectively creates what is really a public utility for identity based transactions.
Uncorrelated Token Assets
I find it notable that when Ethereum & Bitcoin crash, that the prices of other cryptocurrencies tend to follow them downward too. The reality, right now, is that most of these other assets are highly correlated to market sentiment.
In times of volatility, traders tend to swap their crytocurrencies from risky ones (like newer coins) to safer ones (like Bitcoin) — and the easiest way to do this, is by converting into another asset traded on cryptocurrency exchanges. So, when Bitcoin/Ethereum has large gains, traders look for opportunities to increase their footprint across the cryptocurrency sector. However, if Bitcoin/Ethereum drops, holders will trade the other cryptos into “cheaper” Bitcoin/Ethereum.
What will happen when a highly liquid & tangible asset, let’s say for instance Gold, gets a token? Let’s assume we bought 1,000,000 ounces of gold and created 1,000,000 tokens — each pegged to the gold price and redeemable for the actual ounce of gold. The token price should trade against the gold price — assuming there was enough liquidity, so if Bitcoin/Ether gyrated, it would not impact the token price of gold, even though technically, the token is a cryptocurrency. The gold price is uncorrelated to the cryptocurrency prices.
We’re currently in a world where the belief is that the majority of crypto tokens and coins are all highly correlated with each other, but these fluctuations distort the reality of what’s happening underneath. Not all cryptocurrencies or tokens are created equal.
Delaware, where the majority of tech companies in the US are registered, has led the way with its new bill to recognize Blockchain Stocks. I will predict that within the next 2–3 years we will have a slew of companies listing their shares on blockchains— and these shares will not correlate to the price of Bitcoin/Ethereum — even though they are token based assets. So on a day when the Ethereum price crashes, it is unlikely that you will see that crash impacting the price of a token that has an underlying asset.
The value that is derived from cryptocurrency networks powering these stock issuances will purely be a function of supply/demand, and the transaction fees for mining smart contracts. Placing 1m units of gold onto the Ethereum Blockchain, for example, will not have a different impact from 1m units of Magic The Gathering trading cards — the only value driver being the demand for trading those items on the blockchain and not the actual value of the underlying assets themselves.
The primary value of the token infrastructure provided by blockchain technologies will be related to the adoption of the infrastructure, the cost of transactions and network security. It will not be pegged to the value of the underlying assets on that network, but rather the activity levels for trading those assets.
When we look at Civic, we don’t see how the value of Civic tokens is correlated to the cryptocurrency ecosystem, except that there is demand from crypto buyers/traders. We aren’t dependent on the price of Bitcoin, Ethereum or any other crypto. The value of our network is solely dependent on the nodes within our network and the demand that we are driving in creating real world use cases — functional applications and use cases for consumers, businesses and the public sector. We are leveraging blockchain technology to build real world solutions that demands the use of a token. In the same way that Starbucks could issue their own CoffeeCoin, this coin would be uncorrelated to the price of Ethereum, even if it relied on the ERC20 token standard.
The only caveat here is this: Given that these token assets can typically only be purchased on exchanges that accept cryptocurrencies like Bitcoin, the demand for Bitcoin & Ethereum will rise at the fiat onramps (exchanges that accept fiat). However, once the token economy grows and becomes more mainstream, it’s not far fetched to believe that you could one day buy a CoffeeCoin, blockchain-based stock or Civic token directly via your bank or brokerage account.
Blockchain technologies are changing the way the world functions and tokens appear to be yet another killer app, for now. If we’re able to move land registry & title deeds, identity, commodities and stocks to the blockchain, we will succeed in making the world far more efficient and secure. I believe this is just the beginning of the token economy, but it’s early days and we are all still learning.