IC…No

I don’t invest in cryptocurrencies, but I like to keep an eye on what’s going on in the space. Ethereum is making a bit of a splash. Subtokens built on it reliably raise tens of millions of dollars in crowd sales. I suspect this is all a bit of a bubble, but who knows, maybe its the next big thing and I am going to miss the boat. So I’m going to read the whitepapers for most of the top Ethereum projects by market cap and write down my thoughts on the value of these tokens.

Let’s start at the top with Golem.

Golem currently has a market cap of $302,742,047 and intends to become a decentralized marketplace for computing. The team claims it will become cheaper than AWS, which I am highly skeptical of. But even if they don’t achieve this, there would still be a use for such services. As renting computing power from providers in different countries while bypassing conventional payment infrastructure could prove useful for reasons of regulatory arbitrage. (“Regulatory arbitrage” — a humorous euphemism, but in a world of unjust laws, not a darkly humorous euphemism.)

Whether Golem will prove $302,742,047 useful is an open question, but what is not an open question is that GNT token is a clumsy funding hack that decreases the usability of the platform. Here they announce the token:

The Golem Network Token (“GNT”) account is a core component of Golem and is designed to ensure flexibility and control over the future evolution of the project. GNT is created during the crowdfunding period (described in this whitepaper) and, following the first major release of Golem, GNT will be attributed a variety of functions in the Golem network. ● Payments from requestors to providers for resource usage and remuneration for software developers is going to be exclusively conducted in GNT. ● Once the Application Registry and Transaction Framework are implemented, GNT will be necessary for other interactions with Golem, such as submitting deposits by providers and software developers or participation in the process of software validation and certification (as described in the Application Registry section). ● The general conditions for using GNT will be set in the Transaction Framework, but specific parameters of these interactions will be possible to define within each software integration.

Notice how the value of GNT is defined not by what it enables, but what other tokens are proscribed from doing. GNT will be valuable because people will be prevented from purchasing Golem’s services with any other token. Instead of paying for your computations in ETH, you will have to go to an exchange, lose ~1% in exchange fees, this possibly on top of what you lost buying ETH, hope the volatility of GNT doesn’t screw you, then pay for your computations. Crypto has usability problems a plenty; adding this to the mix is just cruel — imagine if every store you shopped at required you to use a different currency. Not only would this be incredibly inconvenient, but it sort of defeats much of the point of money.

So GNT’s value comes at the expense of Golem’s users, offering no benefit over ETH; what about the next on the list, Augur’s REP token. REP gets a pass, as it is an implementation of TruthCoin and I’ve always thought TurthCoin was very clever. Unlike Golem, it could not function without a second token. REP adds value that could not be gotten otherwise and the users of the platform are not required to own REP to do anything. TruthCoin is a well-thought-out, bordering on brilliant idea for a decentralized oracle, whose token acts as a necessary second dimension of scarcity in the protocol. It would take too long here to explain how it works, but I recommend you read Sztorc’s supremely clever paper, which can be found here: http://www.truthcoin.info/papers/truthcoin-whitepaper.pdf.

But back to the superfluous tokens. Next up, GNO. I hate to pick on Gnosis, as they are creating infrastructure for prediction markets, and this is God’s work. Also, their reverse Dutch auction was highly amusing. Nonetheless, their token, GNO, is duct-tapped into their contracts in an even more wacky way than Golem’s. Here they answer that perennial question, what are Gnoisis Tokens?

There is a fixed number of GNO tokens (10 million) . Up to 90% will be sold in an auction.There is a 0.5%(*) platform fee for creating predictive assets (requirement for trading).GNO tokens generate WIZ (short for Wisdom) tokens . The more WIZ that is used on the platform, the more it will be generated per GNOWIZ can be redeemed to pay $1 worth of fees (very similar to KFEE).Fees can also be paid with the token that is used in the market (ETH/BTC token/…) . Once they are paid, the fees will be sent to a third party auction contract and auctioned off for GNO.

Simple right… They explain further:

How Can Gnosis Remain Viable if Participants Choose Not to Pay in WIZ? A core value proposition of Gnosis (and decentralization) is to guarantee future characteristics of platforms to both users and developers without relying on the trustworthiness of an operating company. In order to do this, elements including fee rates, must be codified into the software itself. It is expected that WIZ will be the overwhelmingly predominant method for paying fees in the Gnosis ecosystem. In the unexpected event that this is not true, and users are paying in BTC or /ETH, the platform may become vulnerable to low-fee copycats or potentially even illegal forks of the Gnosis codebase. These alternative platforms may logically cause erosion of the Gnosis userbase, subsequently triggering justified loss of developer confidence that their created markets and applications will remain viable on Gnosis. In order to avoid this scenario, we designed a fee-reduction mechanism to bolster competitiveness of the Gnosis platform. The result is added confidence for developers and partners that Gnosis is the infrastructure they should be building markets on.

So GNO is necessary to create WIZ, and WIZ can be used to pay trading fees. But unlike Golem’s token it is not artificially required to be used to pay for anything. However, they have a jankey incentive structure designed to make WIZ more appealing, called the fee reduction mechanism. And this is necessary because if it wasn’t necessary someone would create a fork where WIZ wasn’t necessary, which would be disastrous.

They elaborate:

Two core requirements for the fee reduction mechanism is that it is both decentralized and costly. The mechanism must be costly in order to eliminate spam or manipulation. The core functionality of the mechanism is as follows: All fees paid in BTC/ETH/Tokens go to an auction contract outside the control of the Gnosis team. If fees exist in the auction contract, any GNO token holder can submit a bid, bidding their held GNO against some amount of fees contained in the auction contract. If the bid is accepted, the GNO will then enter the auction contract and the user will receive the fees specified. When the user’s GNO enters the auction contract, the fee reduction mechanism will be triggered causing a reduction in fees on Gnosis proportional to the total amount of GNO held in this auction contract. The auction contract is one-way and GNO cannot leave this wallet

There is a notion in design of elements emerging from the process exactly. Of carving a tool just so, to solve the problem simply and naturally. Reading their whitepaper where everything seems to work fine with just ETH, I seriously wonder if the team at Gnosis can honestly say WIZ emanated from them naturally.

Next up, we skip DigixDAO because it’s not very interesting. From what I can tell it is a literal security, offering a share of the profits of some gold tokenization scheme.

Next on the the list is Round, a mediation platform for online videogame tournaments, which is so vaguely specified it’s hard to say much about it, save that I recommend the team learn LaTeX. However, I don’t see why one couldn’t use Bitcoin or Ether bonds to incentivize the judges. This doesn’t seem high-stakes enough to use a decentralized oracle on. Even just a multisig would likely work fine for this use case.

We’ll have to skip SingularDTV, with its awful pun name, because its horrible site, a singularity of bad webdesign, has no link to a whitepaper, and I can’t find any information describing how it works or even what it is exactly. All I know is it’s worth $97,801,800. Markets are rational. Markets are rational. Markets are rational. Say it three times, Dorthy.

Iconomi is a bit of an ouroboros, an Ethereum index fund of Ethereum tokens. One wonders if the best way to outperform this market is to not participate at all.

Melonport seems to be identical to Iconomi, even lacking a link to the whitepaper on their website — I had to google to find it. And speaking of ouroboroi, do you think the Melonport Ethereum token index fund will buy tokens from in the Iconomi Ethereum token index fund, which will have already purchased tokens from the Melonport Ethereum token index? Its token uses the same model as Golem. Here they describe why it is needed:

To build the Melon protocol and strengthen the network effect, there will be a digital token issued. This token is called the Melon token (MLN) and will be distributed through a contribution period. These Melon token can then be used to use the core, as all usage fees are collected in Melon token. Since module developers invest time and effort into building these modules and since many of them will have an active cost of running, such as for example server costs of running a price feed, there needs to be a way to incentive them. Melon solves this by incentivizing module developers in the same way as almost every blockchain incentivizes its miners. By giving them the transaction fees — or usage fees in the case of the Melon protocol — and by creating an amount for them created through inflation. The Melon protocol will do the same thing and thus effectively future proofing development

Had Melonport gone with traditional investment, there’s little reason these fees couldn’t be collected in ETH. Or if they must have had a crowdsale, why sacrifice usability when you could just distribute ETH fees directly to early investors in proportion to the amount they contributed?

Anyways, I may turn these notes into a proper essay at some point. But for now, I’ll post this and just say even though I wasn’t expecting much, I am genuinely shocked at how bad most of these projects are. I’m sure there are lots of people working on these projects who are much smarter than I am am, but their ends themselves seem poorly thought out. Or when the ends are good, as is the case with Golem and Gnosis, unnecessary tokens distort many of the good features of these protocols.