In evaluating whether to invest in an ICO, many individuals look for parallels with traditional financial markets. This is natural: ICO seems to mirror IPO, coin market cap looks analogous to a corporate market cap, and so on. In such a new, fast-growing market, it is perfectly logical that observers and participants would try to get their bearings by reaching for familiar tools. However, when it comes to coin offerings and token ecosystems, the apparent parallels with legacy investment practices, such as IPOs, are not as useful as we might hope.
The Howey Test, for example, has been seen by many as a key tool in evaluating new tokens. But this test has a narrow intent that misses the broader applications of token economies. In a true token ecosystem, the token is the purpose and the community is the value. The disconnect arises because, fundamentally, tokens represent an entirely new instrument for investing in and operating businesses. Therefore, I have proposed a new framework for evaluating token offerings, which I call the 6 P’s.
Purpose: the externality and properties conferred by the token. What does the coin actually do? The token may have no purpose or function other than to represent an externality, such as an equity stake; it may unlock some type of value or make a system work; or it may in itself be the purpose when it is a currency. Generally, the more purposeful the token, the more active the role of the holder in the economy in which it circulates.
Provenance: the centralization of the issuer. This is crucial. Will there be successive rounds of issuance from one central party? Or is the token issued in a decentralized manner? This dimension runs from a single entity that may issue at will (e.g. World of Warcraft Gold) through a multi-entity issuance structure (e.g. a round-robin committee of issuers) to a totally decentralized issuance with a mathematically proven parameters (e.g. Bitcoin).
Profusion: the recurrence and nature of token issuances. This can range from one issuance for a fixed amount of tokens through a multi-round issuance up to a potentially continuous and unlimited issuance.
Persistence: the lifespan of a token, ranging from coins that are permanent (BTC) and may be transferred any number of times to tokens that are used only once (Amazon Gift Codes). Some tokens may be “burned” in order to retrieve their value, if, for example, they represent temporal access to a system or service. It is easy to imagine an intermediate token having multiple uses before being burned.
Privilege: rights granted to the holder of the token. A token can have no privilege other than ownership or it may grant a vote, an access, a share in some future value, or other benefits in addition to passive ownership. The range of potential privileges runs from zero, through to simple privileges that may be withdrawn by the provider at any time, up to contractual legal rights.
Property: the ownership aspect of the token. Does holding the token symbolize ownership of another good or asset? The Property aspect can range from “null” (e.g. Bitcoin), through simple claims (e.g. debt ownership), to outright equity ownership (e.g. company shares). Tokens that are tied to property must be issued in corresponding pools to match the underlying property. It is important to understand which privileges are inherent in the token and which privileges may be derived from the property behind the token.
Taken together, these 6 Ps offer a pictures of the many possible forms a token may have. This framework is not, like the Howey Test, primarily concerned with rendering a binary determination as to which legacy financial category a token should be placed in, although until regulators draw up new sets of rules designed specifically for this new technology, that question remains important. The 6 P’s are instead designed as a tool to give participants in token economies a way of holistically evaluating ICOs across each of their functions and merits. In answering the questions posed by the six categories, an individual can draw the most accurate conclusions about a given offering. It is my hope that the 6 P framework can be a step toward the full realization of the potential of the ICO as a powerful tool for individuals and businesses.
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