ICO - the dawn of a decentralized business model

    Inspired by thoughts from co-founder Coinbase Fred Ehrsam's blog

    . What's up? What happened

    Strange events began to occur literally 4-5 months ago. Until this time, over the past three years, venture capitalists and funds have invested about $ 1 billion in cryptocurrency startups, but just in recent months, several blockchain projects have raised more than $ 250 million, and no venture money has been invested in any of them. What is the matter?

    Let's look at some examples:

    The SONM project is a decentralized global supercomputer for cloud computing. Like Bitcoin or Ethereum, they do not have a centralized owner and network operator. The project attracted funding of $ 42 million, selling SNM tokens for bitcoins and ethers. The token allows you to buy and sell computing power. If you have earned or bought SNM, then you can purchase, for example, the computing power of miners or keep them as an asset. If you think that they will rise in price, you can exchange them for any other currency (1 SNM costs today about $ 0.068)

    Gnosis is a forecast market where you can buy and sell forecasts for the outcome of an event, where participants are paid to confirm the event as “ oracles ". The project raised the planned amount of $ 12.5 million in just 10 minutes.

    Steem or Golos is a decentralized Reddit where people get paid to contribute to news and content.

    Token sale

    All these projects did crowdfunding on the blockchain, and in order to raise money, they issued and sold their own tokens. If you saw in this process just a new way to raise money, just like a company sells shares, then take a closer look and you will see how far all this goes beyond simply raising money.

    In all large projects, tokens have several key components:

    - The currency that is used in the application itself.
    - Contributors (investors) of the application directly buy tokens from the creators.
    - Cryptocurrencies (tokens) are easily converted to any crypto or fiat currency.

    All these projects create their own cryptoeconomic ecosystems, but in essence, we say that this is a completely new decentralized business model that is just being created and tested. The essence of this model is the creation of a network in which there is no central, controlling company. Network ownership is shared among all participants, which is a unique business model. It became possible thanks to a combination of new features of cryptocurrencies and the Internet. It is these facts that indicate that the phenomenon goes beyond the usual new way of collecting money.

    In these “projects” or “applications” we can notice one more thing: they really are decentralized software protocols. Protocols are a modern technical term, standard languages ​​that allow people on the Internet to work together on specific problems.

    Here are the popular Internet protocols that have been used for a long time:
    HTTP - the main protocol that determines how information is transmitted via the Internet;
    SMTP - the protocol for sending and receiving email used by your email application;
    SSL - the secure data transfer protocol used, including , your browser

    One of the creators of Union Square Ventures - venture capitalist Albert Wenger writes on his blog: “Historically, it is very difficult to stimulate the creation of new protocols.” This is due to the fact that it was not possible to monetize the creation and maintenance of these protocols. It is very difficult to get a new protocol because of the “chicken and egg” problem. For example, to create an SMTP email protocol, there was no direct monetary incentive. Much later after its creation, companies such as Outlook, Hotmail and Gmail made a real business on top of it. As a result, we see very successful protocols, which are usually quite old.

    The new business model has a great way to encourage creators. Now you can create a protocol, create a token of this protocol, save a part of the token for yourself for future development, and if your protocol is successful, then the token will grow in value. Moreover, since such platforms are always open source, if suddenly the creators are too greedy and leave too many tokens for themselves, anyone can simply fork the system and run the same network, but with better conditions.

    It is tokens that can help solve the problem of “chicken and eggs,” which arises when creating network projects. To understand this problem, let's look at several well-known projects: Twitter, Facebook, Reddit. The value of being the first customers in these networks was very low. Few people used them, so there was no content. Now millions of people use these applications, and people find great value in them. In other words, the value of a network grows when more people join it.

    Give value to people and you will create a new network.

    To attract people to join the network, decentralized platforms give token buyers partial ownership of the network. They pay tokens to their depositors, and token holders hope for its future growth potential (this is how to be the first Bitcoin miners). Also, this can be compared to buying a share in a startup. The sooner you buy them, the more property you get at lower prices.

    These incentives are amazing; they compensate and complement each other. Clients and contributors have a lot more incentive to join your network, even if it is still sparsely populated, it is already becoming useful. Such models have been used by startups to attract employees for many years. Now decentralized platforms and applications use it to encourage all potential users from all over the world to join the network at an early stage.

    All this greatly simplifies the creation and launch of the network. Network projects tried every possible thing to solve the “chicken and egg” problem, for example, Reddit created its own content until users filled the platform with their own content, and Facebook used the Harvard student directory to fill its network.

    Bitcoin and Ethereum were the first to use the decentralized model. They used it to populate customer networks for currency exchange or transactions. This model is currently used by dozens of decentralized applications to create their own networks.

    Imagine what would happen if this model was applied from the very beginning for such projects as Twitter, Wikipedia, Facebook, Reddit or Uber. Instead of the main company owning the network and making money by extracting rents from the network they created, the software protocol would replace the centralized operator, and all the creators and participants of the network would mutually own it. Network contributors (such as Uber drivers) would not be working bees, but would be more like co-owners of a network in which they themselves create value.

    A decentralized protocol is the network operator.

    Such a decentralized business model can be described, for example, as Uber, without the need for Uber as a company that controls drivers and passengers, or as Reddit, without the need for Reddit, as a centralized hosting, or Facebook, without Facebook itself. Of course, there will be companies that support these networks through any value-added services, for example, checking cars in Uber or auto financing, it just will not be the one company that owns the entire network.

    It may be too early to talk about this, but tokens and the new decentralized model can mean a whole series of global changes for the world:

    If the project builds decentralization first, then it does not matter where it is located: in Africa, China or Silicon Valley. It is on the same global blockchain network. The investment market and access to project financing are becoming more equal, where anyone can become the creator of the project and receive financing. On the other hand, anyone can become a venture investor and get the opportunity to invest in any project. Thus, at first the blockchain technology gave us Internet money, now it gives us Internet assets.

    Most likely, it will be similar to the processes of creating websites in the late 90s, or the processes of creating mobile applications in the 2000s.

    Projects such as BITSHARES, Steem and some others have their own blockchains. Others, were created on top of the main large Colored Coins platforms on Bitcoin, Augur on Ethereum, but all these facts and phenomena work regardless of the platform and blockchain protocol.

    I believe that most often we will see that tokens will be built on major blockchains, such as Ethereum, just like most tools for web developers, created libraries and examples, focused on platforms such as Ruby on Rails or Django. Many web applications were created on them, as they greatly simplified the deployment of websites. At the same time, there are still many important infrastructure projects to be done so that decentralized applications and tokens can be created as simply as a website for a modern developer.

    The increase in the number of tokens, most likely will be similar to the increase in the number of applications in the App Store and Google Play, will begin slowly, and then will grow exponentially.

    Just like web and mobile applications, first there will be thousands, then millions, many of them will not be needed by anyone, some will be in demand, and some will become super hits. There will be many problems, painful lessons, hacks like DAO, many large projects can fall. Some people will focus only on the financial side of this wave, such as Wall Street 2.0, and until they see the whole phenomenon. This is the largest and most important trend that we will observe in the world of digital currencies in the next few years. Most likely, this will be the basis for the first monster applications, which, as they say, come forever.

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    Today we have only a few basic protocols, but look how much they do for our lives: HTTP gives us data over the Internet, SMTP gives us email, SSL gives us secure data transfer on the Internet.

    The decentralized protocols and tokens on which they work are the beginning of a mechanism for creating a huge number of such protocols, which means the global equality of opportunities to have joint digital ownership in networks that we can buy and sell. This is what leads to greater innovation and better opportunities for consumers as well as businesses around the world.

    Regulators such as SEC will certainly want to know more and somehow enter this big game, but hopefully they will see that tokens have fundamentally different properties than securities, that the token not only grows on the exchange, but also helps to grow software protocol. By working in this way, tokens allow the use of innovations in these protocols, which will become an additional force for the Internet economy.

    For many decentralized applications, protocols and tokens, most of the basic concepts are still true, but there is still too little time to gain full confidence in the trends. Fundamental core protocols should be as modular as possible. And I think that we will see decentralized applications that are built on many different protocols, when one application has one token and will be built on a series of basic protocols.

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