How the smartest people imagined tokens
Sep 11, 2023
A year ago, I took notes on how the smartest people wrote and thought about tokens.
If your faith in tokens wavers, read this to understand what tokens can be. Different people below have different thoughts on how tokens will play out and what they will look like, but one thing is true: tokens will be an important part of the future.
This is in no particular order.
Olaf + Chris Dixon: Podcast - April 2017
Tokens are meant for open-source protocols. Only the protocol layer
Companies are built on top of open protocols
Currently, open-source developers are forced to go beg for money
Capitalism is brought into protocol development + open source
Creators make lots of money
Same economic incentives as a startup
Olaf believes token holders = equity holders in the protocol
Network effects compound; gain wealth from user base growing
RSS lost the battle to Facebook/Twitter: closed beat open, largely bc money
Imagine if Linux had a token, one of the best investments in history
Trust no one; no need to trust anyone
Swarm intelligence will create things that we’ve never imagined. The biggest products are things we’ve never imagined
Balajis - May 2017
Tokens are possible because of years of work in infrastructure
Tokens are like API keys; they are not like equity
This redemption value gives tokens inherent utility
Tradeable API keys with more interesting dynamics
Tokens can be used to fundraise for both traditional companies or open source projects; they can be an alternative to equity-based financing
A way to fund previously unfindable infrastructure
Will decentralize the process of funding technology
Enable new business model: better-than-free
Tokens are a non-dilutive alternative to traditional financing
They aren’t equity because they have a clear use case
Stats
Greater than 100x improvement in people who can buy vs. classic equity
Greater than 1000x improvement in time to liquidity
Greater than 20-25x improvement in buyers because of international affairs and the cross-border nature of crypto
Token launch drastically differs from an equity sale because of the API key analogy; tokenized equity is a very different story
Casual investing becomes popular because there will be so many tokens
Developers > executives for this
Fred Wilson - June 2017
ICO and VC are two independent things
ICO’s main purpose: monetize product or service
Joel Monegro [2] - August 2016
The feedback loop is important
Token appreciates —> draws In early speculators —> developers and entrepreneurs —> devs entrepreneurs become invested in its success —> devs entrepreneurs build products around the protocol
Note 1: the feedback loop is all speculation
Good bc speculation is often the engine of technological adoption
Links to a few resources on how speculation has pushed technology forward
Note 2: At the end of the loop, applications will help token
New users drawn to protocol -> increase demand for token -> pushes the price up —> attracts new entrepreneurs/devs/investors and repeat forever
Conclusion: the market capitalization of the protocol always grows faster than the combined value of the applications built on top since the success of the application layer drives further speculation at the protocol layer
Cost structures of a protocol vs. company are very different (a network going from $20b to $90b is very different than a business going from $10m to $500m)
No idea - dead
Not fat applications or fat protocols independently of each other
Value is captured for subjective work at the application layer and objective work at the protocol layer. The application layer fees are part of the total transaction amount.
Example: Party A sends some value to Party B, Party C is an optional participant offering some subjective service to make the transfer go smoother, and Party D is at the protocol layer doing the objective work that A, B, and C all depend on.
Party A spends some amount (consumer of content or coffee)
Party B gets the lion’s share of it (creator of content or coffee)
Party C gets a fee if it helped move things along efficiently (content platform or LN channel)
Party D gets a fee for ensuring the whole system is running (bitcoin miner or bitcoin miner)
Continuations - July 2016
The more integrations for TCP/IP / HTTP, the harder it was for researchers/non-profits to contribute
Focus on protocols
Create protocol -> create value for itself by retaining protocol
Natural limit on how much wealth can be retained
If too much is retained by the creator, there is a large incentive for others to replicate it
Protocols will be adopted to what the people want (democratic)
Brand Burninham - June 2015
There is no way for a central authority to leverage network effect market power to extract rents from the participants
Jake Brukhman - July 2016
The larger point is that for decentralized applications, there are not one but two investment opportunities: the speculative value of platform crypto assets which tend to appreciate with network utilization and general success of the network, and the upside of the parent company business model embodied in private equity investments.
Nick Tomaino - May 2017
Tokens enhance incentives via increased ownership
Role of Tokens in a DAO
Usage tokens: required to use a service (hard to do if the entire stack is crypto)
Ethereum
Work tokens: a token that gives users the right to contribute work to a DAO in exchange for tokens
Augur, Maker
Tokens are the product not a funding mechanism
Beliefs
Tokens should not be issued before actual products exist
Issuing tokens only work for certain entrepreneurs (technically oriented)
Issuing tokens only works for certain products (network-based Internet products)
Chris Dixon - June 2017
Tokens enable two things:
Creation of decentralized networks combining the best of open, proprietary networks
New ways to incentivize open network participants, users, developers, service providers, etc.
The problem is that networks tend only to become useful when they reach a critical mass of users
Tokens are a way to help individuals who don’t have equity and give them value
Jai’s note: Tokens are not focusing on networks anymore it seems like
Tokens are a tool to align incentives among network participants
Naval - undated
New business model for open-source software
Allocate scarce resources using a scarce token. Users need the token to use the network. Owners of the resources get paid in the token. Pre-mine gets to keep a non-threatening amount.
Naval equates this to equity
Defined by: Give network operators the ability to collect new tokens in proportion to their contribution
Helped by: Route a small percentage of transactions to a foundation
Ends in: network usage increases, equity, and revenue increases