How will crypto apps make money?

“Our token will go to the moon!” isn’t good enough anymore.

Last night I figured out what might kill crypto. And it’s not a black swan event. History suggests it’s the natural end of the path we’re on today.

A crypto cautionary tale

In the early days of the internet, developers built vital infrastructure: shared protocols like TCP/IP, HTTP, and SMTP that opened the door for the browsers, sites, and apps we love today. But a limited number of protocols needed to be built, and there wasn’t much money in that work. So most developers moved on to build applications.

Applications attracted users. They collected user data and sold it to businesses, aggregated user attention and sold it to advertisers, or sat in the middle of user transactions and took a cut. In general, if you could attract a lot of users, you could make a lot of money. As an early consumer app, you could tell investors with a straight face that your plan was to focus on growth and figure out monetization later. Enough apps had done this that it wasn’t scary. Many people who built internet applications got very rich. But development of the shared protocols that made it all possible atrophied, limping along in the noble and non-lucrative world of open source software. People groused about the lack of protocol innovation but they followed the money.

Core to the promise of crypto is that thanks to tokens, blockchain developers can make money working on protocols! If you launch a token with new functionality that other developers build decentralized apps on, and if those apps grow, the value of your token can skyrocket as a thousand flowers bloom. If you launch your own blockchain, you can get paid for each transaction on it too. Value accrues to the protocol layer.

This is why so many companies doing ICOs say they’re building new protocols, not just apps. That’s where the money is right now, and smart crypto founders and investors know it.

We’re in the infrastructure phase again with crypto. But this time, something is very different.

Suffocated by the invisible hand

I love the story about the guy who spent 10,000 bitcoins on two pizzas. Poor guy. Those bitcoins would be worth 70 million dollars today!

I bet that’s more money than all decentralized crypto apps combined have earned in revenue to date.

Bitcoin has been on a wild tear recently. I’ve written about why I think this is happening and why the upward trend (with peaks and valleys) is likely to continue. Things like regulation and scaling issues will slow it down. But the economic incentives of Bitcoin holders are too strongly aligned to let it die a natural death.

What could kill it outright? Economic counter-incentives.

To simplify: if no one can make money on decentralized apps, no one will build them. If no one builds apps, no one can make money on protocols either. Investors will lose money and stop funding crypto projects. All the skeptics will be proven right. And the crypto dream as we know it will die, not with a bang but a whimper. Killed by the same force of economic self-interest that birthed it in the first place.

Sure, centralized companies will learn to use blockchain to do what they’re already doing faster, better, and cheaper. But the fully decentralized apps promising a future free of middlemen? Dead. Or, perhaps worse, sent back permanently to the realm of hobbyists and tinkerers from which they’ve so recently emerged.

This isn’t good enough. We need to prevent it from happening.

The promise of a decentralized future is too great, and too interesting, to let it die without a fight.

Choose your weapon

I believe we can solve this problem, but the first step is acknowledging it. If you do nothing else after reading this, please stop confusing arbitrary price appreciation for a revenue model. At the project level, that’s a bad bet. At the industry level, it’s toxic to crypto’s future. Govern yourself accordingly, or be wiped out by the next crypto winter, SEC ruling, or savvier competitor.

We need to find the right revenue models for crypto apps, and prove they work. And many of the usual suspects are out, or at least out of vogue.

Selling user data? Yuck. We want a shared data layer, not centralized silos.

Advertising? Hard to make the numbers work with blockchain’s scaling issues.

Taking a cut of transactions? Then you’re a middleman, even if the cut is really small — and if it is, you’ve got bad economics.

Blockchain developers want better answers. If they like your app but not your revenue model, they may fork your code and change it.

ICO investors want better answers. They’re expecting a return. Failure to deliver will put your company and the crypto space at risk.

Our community wants better answers. And they’re a big part of why we’re all doing this. Right?

We need to prove that crypto projects can become sustainable businesses. We need to show that digital money apps can monetize.

So — how will crypto apps make money?

I don’t have the answer yet. Do you?

I’m an Entrepreneur in Residence working on crypto projects at Foundation Capital. Got a good answer? I’d love to hear it, privately or in the comments.