Until now, the Internet was good at distributing information, but horribly bad at dealing with money and the human trust that it encapsulates - money just never felt native to the network of networks. For that reason, today's successful websites are mostly financed by advertising models, making them noisy and intrusive to our privacy.
Cryptocurrencies have the potential to change that. It looks like almost any existing Internet service: online media, social networks, even search and commerce could be rebuilt, better, with their own Altcoin currency at the core. But with Internet money also comes an entirely new layer of social, economical, technological and legal questions, new forms of greed and abuse, and new risks for entrepreneurs.
Will Altcoin projects change the world, or will they just go down in history as that crazy period of time when the Internet people were delusional enough to believe that they can start printing their own money?
Real state issued money, not that fake computer thing. Source: flickr/ZeroOne
There are those who believe that Altcoins are scams, Ponzi-schemes, honeypots for dumb money, even outright illegal. This critical position is aptly represented by a marmot-loving lawyer.
Others see tremendous disruptive potential precisely in that combination of blockchain technologies as a means to reach consensus on information and money as the ultimate measure of human trust. While still considering them to be experiments, we go on and review all those scams, Ponzi-schemes and illegal honeypots for dumb money as if they were harbingers of a brighter future.
How did this discrepancy come to pass?
Altcoin projects fascinate through the depth and breadth of the ideas they hold. To fully understand their potential, one would have to study just about any subject matter available at a present-day university. As far as we know, no one can seriously claim to hold the one truth about Altcoins, be it about their technology, social impact, legality, the impending cryptographic doomsday due to quantum computers or even their future impact on marmots. In that light, here's our attempt at an overview of the spread of opinions on cryptocurrencies in general and on Altcoins[1] in particular.
Economy: Out West, a Chance of Disruption
A lot of Altcoin projects use their own currency as an internal means of payment. Divisible and safely transferrable at no cost in almost no time, the cryptocurrencies at the core of these new systems allow for new economic models. They allow people to share tiny amounts of free hard disk space or processing power with others, to pay a fragment of a cent for a good blog post or they can serve as a transport medium for something else, even for fiat currencies. In many cases, the Altcoins in question cannot be replaced by anything else. Fiat currencies would be way too expensive and slow to transfer and neither safe enough nor divisible enough for the use case and even Bitcoin is clearly too slow or too expensive for certain projects.
This use of Altcoins has tremendous disruptive potential and hopefully it will get a right to stay around until its potential has been fully explored. Switzerland, for example, suggests to interpret such situations as a simple "money for goods" exchange and thus as something that is already regulated under existing law.
As soon as something gains the character of money, people start seeing it as a store of value and they will want to trade it, independently of its use as a means of payment for goods. Due to trading activity and changes in the overall usefulness of this "money", its price starts fluctuating and – where's volatility, there's life – we have Altcoin trading.
Traders speculate on the future worth of something and it didn't take long for people to figure out that they could release a cryptocurrency with no present use, even one that doesn't exist yet, purely under the explicit or implicit promise of a speculative future value. Such currencies have been issued to promote the adoption of a newly created system, as a retainer for those building the system (sometimes called "premine"), or they have been sold right from the start to raise money for the creation of a new system.
We enter the dangerous realm of alternative (some say fake) financial instruments, peer to peer IPOs (ICOs), crypto shares and crypto bonds.
While in this area too, a legal interpretation of such activities is "under construction" at best, we can safely say that there have been a lot of activities that are illegal, even under existing law. Outright frauds like hit and run ICOs, but also innocuous promises made by developers regarding the future value of the tokens being issued, their character as a "share" or "bond", or their "backing" in something real.
Yet, again, cryptographic financial instruments have enabled things that would not have been possible otherwise. They enabled companies to start up or finance their next wave of expansion that would have had a hard time explaining their offering to anybody but those who already understand cryptocurrencies. They enabled a number of products to jump over the hurdle of initial adoption and they gave honest developers a change to invest their time under the promise of future rewards. They allowed people with just a few dollars on their hands to invest in startups, without greedy middlemen, for good or bad.
Like with the use of cryptocurrencies as a means of payment, we hope that in the end, the unagitated "Swiss" stance will prevail towards their use for financing the early phases of a new venture. Because in this case too, cryptocurrencies enable new economic models that are of potential value to society as a whole.
What needs to be done seems quite clear. Basic rules of honesty, transparency apply and are probably even chartered by the existing legal framework. No promises about the future value of things should be made and organizations holding people's money need a banking license. Flat-out refusing the right of existence to crypto assets because they are not explicitly mentioned in our existing legal texts is a conservative reflex that will stifle the exploration of much-needed innovative potential in our economy's dealings with money.
Society: Not so Stately
Ask your Grandmother what she thinks about Bitcoin and she'll paint a colorful picture: it's that computer money that gets stolen all the time. Criminals use it for fraud, extortion and to sell drugs. The Chinese may have something to do with it, and some shady Japanese guy, who may not even be Japanese.
Social acceptance of Bitcoin, not to speak of Altcoins, is low. In a way, this has enabled and saved the existence of Altcoins: no regular person expected these "tokens" to do anything useful and this gave the insiders plenty of time to try, fail and learn how to get things right.
Life is change, and change is happening faster than exopected. The Swiss Canton of Zug allows its citizens to pay their taxes in Bitcoin. Venezuelans are said to start putting money into Bitcoin because it's better than the medium of exchange their state is issuing. Cypriots did so when their state tried to socialize the losses of Cyprus' banks.
Running a currency is hard, almost as hard as running a nation state. Unfortunately, the crypto world is full of people whose ability to run a nation state, on a scale from zero to John F. Kennedy, is rather on the zero side of the spectrum.
Early crypto people are like the early computer nerds who thought that a computer doesn't need a GUI or that the Mosaic browser is for weaklings. Like computers and the Internet, crypto projects need to become humane if they want to gain social acceptance and only if they do so, economy and law will follow.
In that sense, the writer of this text agrees with his fellow marmot lover that Altcoin projects have to grow up. He says so with bright eyes to future skies, not with the past's knife in the back. In the process, the projects will shed some of their purest convictions, and that's OK.
Law: How Many Hodlers Does it Take to Read the Civil Code?
So far, the reaction of lawmakers and regulatory bodies to Bitcoin and other cryptocurrencies have been astonishingly lenient. Some take this as a sign that the honeymoon of the State and Big Money has ended after the events of 2008. Others will say that the blockchain hasn't made enough of a dent in the universe yet for these behemoths to become fully aware.
Until there is a clear legal framework, Altcoin projects will have to rely on trying to be as compliant as possible with existing law. This is a dangerous situation. Laws can fall into place unexpectedly and more aggressive authorities could try to use existing laws on the handling of money to bring down otherwise legal services. Fiat money has frequently been used as an attack vector to bring down otherwise legal services like encrypted mail hosts or whistleblower websites. With cryptocurrencies, such an attack might be even easier.
That cryptocurrencies are operating on the fringes of the current legal framework poses another challenge: What gets stolen if crypto "money" gets stolen? What law is broken if the code that was supposed to be law has a bug? The crypto world lacks legal protection.
The crypto community has solved many of these problems on the basis of "what happens in crypto, stays in crypto". But with the imminent arrival on the scene, of dumb money and its clever lawyers, inside solutions like the BFX tokenized haircut or the DAO hardfork will become harder and harder to pull off.
Technology: Hardforks and Whale Dumps
The beauty and the ugliness of these early blockchain project lies in the fact that many of their technological chances and limitations are baked into their core protocols, and that those are out here, for all to see. While we can think about the potential pitfalls of a distributed technology and learn to mitigate some of them with the help of prototypes, we cannot simulate the pressure of millions of clients and the pull of billions of dollars. The blockchain's ungodly closeness to money, combined with our inexperience in dealing with decentralized protocols are a recipe for many small and large disasters. Combine this with the hubris of a few twenty year olds wo have just learned to program and somebody will be shouting "code is law", and somebody else will be making profitable use of that "law", and chaos will ensue. Geeks are prone to forgetting that technology doesn’t stand for itself, that it can only be useful if it plays nicely with society, law and the economy. Until this happens, Altcoin projects are experiments, with a beautiful promise of a brighter future. And we geeks should approach them as that, and with a lot of humility, care and respect for those who know more about the many complex matters we are messing with.
Conclusion
The lack of a clear legal framework, half-baked or outright fraudulent economic models, low social acceptance and the use of half-understood cutting edge technologies turn Altcoins into an experimental asset class. (If you want to consider them to be assets at all). If you want to invest a little bit of play money into an experiment and maybe learn something along the way, you are in the right place, at the right time, and you probably won't end up in prison. But you'll have to do your own due diligence.
As a tentative guide, here is a set of questions we employ to judge the "fundamentals" of an Altcoin project. Feel free to add in the comment section.
- Is there clarity about the current and future creation of the tokens in question?
- Is there clarity about who holds the tokens, now and in the future and what the holders will be using them for?
- Is there a compelling use case for the tokens in the context of this project or could the tokens be replaced by another type of asset or left out entirely?
- Is there a potential inflow of money into the project, e.g. does the project sell something?
- Can the token be of value by itself (inside or outside of the project's ecosystem), e.g. as a medium of exchange?
- Will the token become more useful as a medium of exchange over time?
- Was there a pre-sale of tokens? Who holds the money raised? Were there any promises made towards the buyers? How will the money be used? Is there full transparency about the pre-sale, the funds raised, the use of those funds?
- The individuals or the company issuing the token, are they doing their best to comply with the existing legal framework?
- Is there a chance at all for them to comply with the legal framework in their place of origin?
- How big is the chance that the services offered will irk lawmakers or other governing bodies in the project's place of origin or worldwide?
- Do the individuals or the company issuing the token have a form of organization (or incorporation) that is appropriate for their project?
- Does the company or collective of people backing the project have all the skills and experience needed to be successful? We are looking for a broad range of skills here: economy, society, technology, law.
- Was there a high investment of "elbow grease" before any fundraising event?
- Are there technological proofs of concept, prototypes, high-level descriptions of the future system? How well do any prototypes work?
- Since these are technology heavy projects: what base technologies are used, how does the code being submitted to GitHub look? How are technological decisions made? What decisions are being made?
- Since these projects foster social change: will the creators be able to weather the social impact of their project and society's impact ON their project? Do they have a clear plan regarding the social impact of their project? Are they trying to do good?
- How does the project balance openness and decentralization with the need to remain able to act efficiently?
We use the term "Altcoin" for "any coin but Bitcoin". We do not think that it makes a lot of sense to differentiate Altcoins from App Coins since most Altcoins have some kind of application character, either by offering supposed improvements over Bitcoin, by offering special kinds of services or by being used as a payment system for certain kinds of applications or services. All cryptocurrencies are software in a certain sense. ↩
Great post. Thanks!
I like the term App Coin. Alt coin is definitely an outdated term. One of the most revolutionary features of crypto (and i feel rarely talked about as such) is that it encourages and incentivizes a creative feedback loop on the system to help it grow. This is obvious in steem on the surface with posts acting as crowdfunding of advertisements and feedback on features, etc. It was true long before with bitcoin, the whole community was involved in extending bitcoin into the physical, finding merchants to accept it as payment, creating easier and safer ways to send and receive bitcoin, creating infographics and videos to help people understand it. There is built in reward to help it grow, add flexibility to features, strengthen it and then create services that integrate the coin to extend its use further.
its a new social/economic entity type entirely. This is key to the innovation behind crypto. The App Coin is a powerful hybrid between economy, society, technology, law. As @iainc points out these are necessary expert ingredients necessary for creating a successful crypto the last ingredient being utility. In bitcoin this was creating an unprecedented efficiency between all of these ingredients with money. In crypto 2.0 it's about combining this efficiency with more specificity and flexibility.
As you say it is an experiment. Will App Coins continue to divide and multiply? Or will a few rise as the platforms that all the unique and desired utilities will be built upon. I am curious where it will go from here.