Reflections on Tokens

Today it’s too early for tokens, but behind them is the future of technology.

In 2014, we wrote : “Bitcoin is more than money, and more than protocol. This is a model and platform for real crowdfunding - fully open, distributed and easily implemented. ”

And this new model has already been implemented - on the idea of ​​“appcoin”, or “token”, which is a scarce digital asset, based on technology inspired by “Bitcoin”. At the time of this writing, the market capitalization of the token sector was estimated at tens of billions of dollars (of course, this sector is overvalued, and yet). Such “ fat protocols ” may ultimately create and attract more capital than the latest generation of Internet companies.

Here we will discuss many concepts related to tokens: let's start with the basics for newbies in this area, and then move on to more complex concepts.
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Transferred to Alconost

The main thing that should be understood: tokens are not shares - they are more like paid API keys. Nevertheless, they can give a 1000-fold reduction in the time for reaching liquidity and a 100-fold increase in the customer base compared to traditional means of financing technologies in the US (such as Kickstarter on the most successful projects). This, in turn, will allow financing of new types of projects that previously remained outside the scope of venture capital opportunities, including open source protocols and projects with the potential for a quick double return.

But let's start with the basics. Why tokens came right now?

1. Tokens are the result of four years of digital currency infrastructure development.

The last time the general public heard about digital currency was at the end of 2013 - the beginning of 2014 , when the price of bitcoins last touched the then maximum of $ 1242 . Since then, something has happened:

• The cost of bitcoin over the course of several years has dropped down to $ 173 and has risen. It is now slightly below the record high of more than $ 2,900.
  
• In many countries, dozens of exchangers appeared , which facilitated the transfer of "paper" money, such as dollars and yen, into digital currencies: Bitcoin, Ethereum (Ethereum), etc.
  
• Large financial institutions have begun to study the underlying blockchain technology for creating bitcoins to create so-called “private blockchains”, or distributed registries, for use on their own or as part of a consortium.
  
• An ethereum programmable blockchain was launched , which survived major crises , received substantial support from corporations and increased in price in early 2017.
  

In 2013, the digital currency still did not have a certain legal position: many predicted her death , and someone went so far as to even call bitcoin evil . But in the end, these kind of predictable headlines are a thing of the past, and at the Davos economic forum one could see a billboard greeting Satoshi , and the Economist magazine put on the cover an artistic interpretation of the technology behind the bitcoin .



By 2017, all major countries already have digital currency exchanges, and every major financial institution has a team working on blockchains. The development of infrastructure and the adoption of digital currencies by the society laid the foundation for the next stage - the Internet crowdfunding of new bitcoin-like tokens for a new field of application.

2. Tokens differ in their blockchains and code bases.

First of all, it should be said that a token is a digital asset that can be transferred (not just copied) between two parties-participants via the Internet without the consent of any third party. Bitcoin is the very first token: with the ability to transfer bitcoins and release new bitcoins , recorded in the corresponding blockchain. Other tokens also have a transfer mechanism, and changes in the monetary base are recorded in their own blockchains.

One of the key points is that the token codebase differs from its blockchain database. We give an analogy from the real world. Imagine that the US banking infrastructure began to manage the Australian dollars: both currencies are “dollars” and have a common cultural background, but they have a completely different monetary base . In the same way, two tokens can use the same code bases (monetary policies), but have different blockchain databases (monetary bases).

Due to the success of Bitcoin, several different types of tokens appeared:

• Tokens based on new “chains” and branches of the Bitcoin code. These were the first tokens. Some of them, such as Dogecoin, simply changed the parameters in the Bitcoin codebase. Others, such as ZCash and Dash, introduced new privacy protection solutions. And there were those (for example, Litecoin), which began as small modifications in the Bitcoin code, but eventually became a testing ground for new functions. All these tokens launched their own blockchains, not related to the Bitcoin blockchain.
  
  
• Tokens based on new “chains” and new code. The next step was the creation of tokens based on completely new code bases, and the most striking example of them is Ethereum . Ethereum is a Bitcoin-based project that uses its own blockchain and is designed from scratch to enhance programming capabilities. At the same time, the number of possible types of attacks increases, but the functionality expands .
  
  
• Tokens based on branched "chains" and code branches. The most important example is Ethereum Classic, based on the ethereum blockchain branch , which is incompatible with the original , which occurred after finding a security hole that allowed the use of a large smart contract in an unintended way. At first glance, this is a technical issue, but at its core it was a crisis that caused the Ethereum community to split into two groups with different monetary policies - 90 to 10. Example from the real world: Imagine that all US citizens are not Those who agreed with the Emergency Economic Stabilization Act of 2008 would change their dollars for “classic dollars” and create another Fed.
  
  
• Tokens released on top of the Ethereum blockchain. These include Golem and Gnosis - they are based on ERC20 - tokens issued on top of "Ethereum" .
  

In general, it is technically a difficult task to launch completely new tokens on new code bases, and it is much easier to launch new tokens via Bitcoin or ERC20 tokens based on Ethereum.

The latter deserves special mention, since Ethereum simplifies the production of tokens so much that this procedure is the first example in the Ethereum manual ! However, the ease of creating tokens on "Ethereum" does not mean that they are basically useless. Often, these tokens are something like a public debt receipt intended to be purchased in a new chain to be created, or the purchase of another digital product.

3. Buyers tokens receive private keys

When creating a new token, it is often pre-mined and sold when the token is launched, with a crowdsale or both. Here, " pre-mining " means the allocation of part of the tokens for the creators of the token and related parties. Crowdsale - Kickstarter-like crowdfunding, in which all Internet users have the opportunity to buy tokens.

Tokens are a digital product. And in fact, their customers acquire the private key . In the case of Bitcoin, it looks like this:

5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF 

In the case of "Ethereum" - so :

 3a1076bf45ab87712ad64ccb3b10217737f7faacbf2872e88fdd9a537d8fe266 

You can think of a private key as something like a password. Just as a password gives access to email stored in a centralized cloud database (Gmail, for example), a private key gives access to a digital token stored in a decentralized blockchain database — for example, Ethereum or Bitcoin.

However, there is a significant difference: unlike a password, no one, including you, can recover a lost private key. There is a private key - there are tokens. No key - no tokens .

4. Tokens are similar to paid API keys.

Perhaps the best analogy for tokens is the concept of a paid API key. For example, if you buy an Amazon web services API key for dollars, it can be exchanged for machine time in the Amazon cloud. Likewise, the purchase of a token - for example, the "ether" (ETH) - allows it to exchange its computational time in the decentralized network of computing "Ethereum".

This exchange gives the tokens their own utility.

Tokens have one more common property with API keys. If someone gains access to your Amazon Services API keys, they can bill your Amazon account. In the same way, if someone sees the private keys of your tokens, he can get your digital money . However, unlike traditional API keys, tokens can be transferred to other parties without the consent of the issuer of the API key.

Thus, tokens have their own utility. And tokens can be traded. So, tokens have a price.


The exponential growth of tokens (not related to Bitcoin) before the market correction. Data - coinmarketcap.com/charts

5. Tokens are a new technological model, not just startups.

Tokens have a price, so they can be mass produced and sold at the stage of the birth of a new protocol - to finance its development, just as startups used Kickstarter to finance product development.

Usually money in this case - in the form of digital currency - goes to an organization that issues tokens, which can be either a traditional company or an open source project funded entirely by the blockchain.

Just as an increase in sales is an alternative to fundraising, so launching tokens can be an alternative to traditional equity-based financing. Moreover, tokens allow you to finance a distributed infrastructure, which was previously impossible to finance - for example, an open source infrastructure. However, you should proceed with caution: before embarking on the launch of tokens, read these three articles and consult a good lawyer!

6. Tokens are a “non-dilutive” alternative to traditional financing.

Tokens are not stocks because they have an internal utility and they are not dilutive with respect to the company's capitalization table. Selling tokens is more likely selling paid API keys via Kickstarter than crowdfunding shares.

However, if we consider tokens as an alternative to classical financing through the issuance of shares, then sales of tokens give a more than 100-fold increase in the available customer base and more than 1000-fold reduction in the time for reaching liquidity compared to traditional methods of financing start-ups. There are three reasons for this: a 30-fold increase in the number of buyers in the United States, a 20–25-fold increase at the expense of other countries, and a 1,000-fold reduction in the time for reaching liquidity.

7. Tokens can be bought by any American (more than 30 times increase in the number of customers)

The release of tokens differs from the sale of shares: the latter is regulated by the US Securities Trading Act of 1934 , and the first is more like the sale of API keys.

Shares can be sold in the United States only to so-called “ accredited investors ” (3% of the adult population with a net worth of> $ 1 million), and the sale of API keys in the United States cannot be limited in the same way without harming the IT industry. USA. Therefore, if tokens (like API keys) can be sold to 100% of the American population, this gives a 33-fold increase in the available customer base in the US compared to traditional financing through the issuance of shares.

It should be noted, however, that sometimes tokens can be issued and explicitly advertised as a way to get a portion of the profits from the company's work. For example, an issuer may want to give the owners of tokens the right to corporate dividends, the right to vote, and the total share capital of a company can be expressed in these tokens. In these cases, we are actually talking about tokenized shares (namely, the issue of securities), which is significantly different from the examples of the Appcoin, which we discussed. If you do not want to be limited to accredited investors in accordance with the US Securities Act, do not issue tokenized shares. The principal difference is that a regular token is simply a useful digital product, such as a paid API key. Again: first read these three articles , consult with a good lawyer, and only then start your own tokens!

8. Tokens can be sold worldwide via the Internet (20-25-fold increase in the number of buyers)

Starting a token is usually international , and digital currency comes from all over the world. If a newly opened bank account within a few minutes receives thousands of transfers from around the world in the millions of dollars, it will most likely be frozen. And the sale of tokens in digital currency for companies is always open. Given that US residents make up only about 4–5% of the global population, the international sale of tokens multiplies the available customer base by another 20–25 times.

9. Tokens have an advantage in liquidity (more than 1000-fold reduction in time to exit on liquidity)

The token receives a price immediately after the sale, and this price is freely formed on the international market - no days off and no lunch breaks, which cannot be said about promotions. Before reaching liquidity, shares may take up to 10 years , and a token can theoretically be sold within 10 minutes (although the creators of the token can and should block the tokens cryptographically to prevent short-term speculation).

Regardless of whether tokens are sold or used, the difference between 10 years and 10 minutes before reaching liquidity is a time advantage 500,000 times , although, of course, any valuation will be higher and more stable within a 10-year period.

This huge advantage in liquidity will in itself be the reason that tokens will dominate whenever they are legally and technically feasible, since the inverse of the time to liquidity will be included in the degree of cumulative average annual growth rate . The rapid achievement of liquidity allows you to reinvest in new tokens, which accelerates growth.

10. Tokens will be able to decentralize technology financing.

Tokens can be launched in any country, so the importance of being present in the United States as a whole and in Silicon Valley or on Wall Street in particular, will decrease to attract funding. Silicon Valley is likely to continue to be the world leader in technology invested in technology, but now it will not be necessary to go personally to the United States, as was the case with the previous generation of technical specialists.

11. Tokens create a new business model: “better than free”

Large technology companies such as Google and Facebook offer extremely useful free products. Despite this, they are sometimes harshly criticized for making billions of dollars in profits, whereas their first clients receive only free services.

After the problems that appear at an early stage are eliminated, the token launch model will give high-tech companies (and open source projects in general) a technologically feasible way to distribute revenue across the user base behind the company's success. This is the “ better than free ” model: users earn money for being the first customers. Kik is the first example of this approach, but other similar projects can be expected.

12. Buyers of tokens will become for investors what bloggers have become for journalists.

Tokens will remove the barrier between professional investors and buyers of tokens, just as the Internet has removed the barrier between professional journalists and bloggers (including microbloggers).

And this is where it will lead:

• The Internet has allowed everyone to become an amateur journalist . Now millions of people will become amateur investors.
  
• As in the case of amateur journalism, some will turn out very well, and thanks to their success in buying tokens, they will be able to get into a professional league.
  
• In the end, it became mandatory for professional journalists to use Twitter - as well investors of any scale of activity (from seed investments to hedging) will come to purchase tokens.
  
• New tools will be developed, similar to the Blogger and Twitter platforms, which will make it easy to use, buy, sell and discuss tokens.
  

There is no term for this phenomenon yet, but it can be called “trading media” - by analogy with “social media” (English “commercial media” and “social media”).

13. Tokens give technicians an even greater advantage over traditional managers.

Since the advent of Bill Gates at the end of the 70s, there has been a tendency to increase the technological competence of managers . With the proliferation of the sale of tokens, it will only increase, since valuable protocols will be created by people who are even more inclined to work in the field of pure computer technology theory. Many successful token creators will have the skills that you will often find with open source software developers than with traditional executives.

14. Tokens are instant security without intermediaries.

Buyers tokens to ensure their safety is required to store only the private keys, and this changes our concept of property rights. In the case of tokens, the decision about who owns what kind of property is not made by the state judicial system, but by the international blockchain. It is clear that there will be a lot of controversial border cases, but over time the blockchains will form “legal regulation as a service” - as a worldwide programmable supplement to the Delaware State Chancery in the United States.

15. Tokens can be summarized for each technology company as paid logins.

Can the token model be extended beyond the pure protocols — Bitcoin, Ethereum, ZCash, etc.? It is not difficult to imagine the sale of tokens as tickets - for access to logins, trips by car, future products. They can also be distributed as rewards to authors who make a significant contribution to the work of social networks, or to drivers who help car sharing networks to develop. In the end, tokens can be expanded to “iron”: when someone buys a place in the queue for Model 3 from Tesla or resells a ticket, he exchanges primitive tokens. But first, the model must prove the performance on the protocols, and only then it can be generalized.

Conclusion

Tokens are a very recent phenomenon, and, most likely, a significant market correction will occur (at the time of the publication of the transfer, the capitalization of the discussed tokens passed the global maximum and fluctuates at a level close to the level at the time of publication of the original article). To deal with the expected abundance of tokens and work with them, we need information sites like Coinlist , portfolio management tools (for example, Prism) , stock exchanges (for example, GDAX) , as well as many other components of the technical and legal infrastructure supporting tokens.

But the world has already changed. Tokens are 1000 times better than the tools that are now, and this can be observed infrequently.


About the translator

The article is translated in Alconost.

Alconost is engaged in the localization of applications, games and websites in 68 languages. Language translators, linguistic testing, cloud platform with API, continuous localization, 24/7 project managers, any formats of string resources, translation of technical texts .

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