In 2014, some on says “Bitcoin is more than money, and more than a protocol. It’s a model and platform for true crowdfunding — open, distributed, and liquid all the way.”
That new model is here, and it’s based on the idea of an appcoin or token: a scarce digital asset based on underlying technology inspired by Bitcoin. These new “fat protocols” may eventually create and capture more value than the last generation of Internet companies.
1. Tokens are possible because of four years of digital currency infrastructure
The last time the public at large heard much about digital currency was in late 2013 to early 2014, when the Bitcoin price last touched its then all-time high of $1242 dollars. Since then, several things happened:
- Bitcoin experienced a massive multi-year crash and recovery all the way down to $173 and back up to the recent all-time highs of $2800+
- Dozens of exchanges arose in many countries to facilitate the conversion of fiat currencies like dollars or yen into digital currencies like Bitcoin and Ethereum
- Major financial institutions began exploring the blockchain technology underpinning Bitcoin to build so-called “private blockchains” or distributed ledgers for internal or consortium use
- The programmable Ethereum blockchain launched, endured its own major crises, brought on major corporate support, and surged in value in early 2017
By 2017, every major country has a digital currency exchange and every major financial institution has a team working on blockchains. The maturation of infrastructure and societal acceptance for digital currencies has set the stage for the next phase: internet-based crowdfunding of novel Bitcoin-like tokens for new applications.
2. Tokens vary in their underlying blockchains and codebases
To first order, a token is a digital asset that can be transferred (not simply copied) between two parties over the internet without requiring the consent of any other party. Bitcoin is the original token, with bitcoin transfers and issuances of new bitcoin recorded in the Bitcoin blockchain. Other tokens also have transfers and changes to their monetary base recorded in their own blockchains.One key concept is that a token’s codebase is different from its blockchain database. As an offline analogy, imagine if the US banking infrastructure was repurposed to manage Australian dollars: both are “dollars” and have a shared cultural origin, but a completely different monetary base. In the same way, two tokens may use similar codebases (monetary policies) but have different blockchain databases (monetary bases).
The success of Bitcoin inspired several different kinds of tokens:
- Tokens based on new chains and forked Bitcoin code. These were the first tokens. Some of these tokens, like Dogecoin, simply changed parameters in the Bitcoin codebase. Others like ZCash and Dash innovated on privacy-preserving features. Still others like Litecoin also began as simple tweaks to Bitcoin’s code, but eventually became test grounds for new features. All of these tokens initiated their own blockchains, completely separate from the Bitcoin blockchain.
- Tokens based on new chains and new code. The next step was the creation of tokens based on wholly new codebases, of which the most prominent example is Ethereum. Ethereum is Bitcoin-inspired but has its own blockchain and was engineered from the ground up to be more programmable. Though this comes with an increased attack surface, it also comes with new capabilities.
- Tokens based on forked chains and forked code. The most important example here is Ethereum Classic, which was based on a hard fork of the Ethereum blockchain that occurred after a security issue was used to exploit a large smart contract. That sounds technical, but essentially what happened is that a crisis caused the Ethereum community to split 90/10 with two different go-forward monetary policies for each group. A real world example would be if all the citizens of the US who disagreed with the 2008 bailouts changed in their dollars for “classic dollars” and adopted a different Fed.
- Tokens issued on top of the Ethereum blockchain. Examples include Golemand Gnosis, all based on ERC20 tokens issued on top of Ethereum.
4. Tokens are analogous to paid API keys
The best existing analogy for tokens may be the concept of a paid API key. For example, when you buy an API key from Amazon Web Services for dollars, you can redeem that API key for time on Amazon’s cloud. The purchase of a token like ether is similar, in that you can redeem ETH for compute time on the decentralized Ethereum compute network.This redemption value gives tokens inherent utility.Tokens are similar to API keys in another respect: if someone gains access to your Amazon API keys, they can bill your Amazon account. Similarly, if someone sees the private keys for your tokens, they can take your digital currency. Unlike traditional API keys, though, tokens can be transferred to other parties without the consent of the API key issuer.So, tokens are inherently useful. And tokens are tradeable. As such, tokens have a price.
5. Tokens are a new model for technology, not just startups
Because tokens have a price, they can be issued and sold en masse at the inception of a new protocol to fund its development, similar to the way startups have used Kickstarter to fund product development.The money is typically received in digital currency form and goes to the organization issuing the tokens, which can be a traditional company or an open source project funded entirely through a blockchain.In the same way that boosting sales is an alternative to raising money, token launches can be an alternative to traditional equity-based financings — and can provide a way to fund previously unfundable shared infrastructure, like open source. A word of caution, though: read these three posts and consult a good lawyer before embarking on a token launch!
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