Insider Reflections on the ICO Bubble Part III: 2018 is when crypto begins to move from speculation…

In Part I of this series I presented my take on the ICO bubble as CEO of a company in the middle of the ICO process. In Part II, I presented post-ICO insights on what it takes to run a professional ICO at the end of 2017. In this final installment, part III, I present my crypto predictions for 2018 along with an illustrative model.

In previous posts I made clear my hopes and expectations that ICO markets tighten in 2018. I expect market forces (and regulators) to push a flight to ICO quality over quantity and I foresee industry standards for “good,” and “professional,” and regulatory compliant ICO’s to firmly take hold.

The crypto development I’m most looking forward to in 2018 is the evolution of crypto markets from speculation to utility.

2017 was the year that everyone and their mother heard of Bitcoin and watched in amazement as speculators drove up Bitcoin prices by nearly 2000%. $60,000 invested in Bitcoin in January 2017 would be worth more than $1 million today.

2017’s crypto mania was not limited to Bitcoin: Ethereum — Bitcoin’s programmable sibling — saw its market cap grew from $600M to more then $70B and the entire cryptocurrency market grew to $604B.

By the end of 2017, ERC-20 tokens had raised more than $5B in ICO’s and achieved about $40 billion in combined market value, however very few of those tokens had generated any actual product-level token demand (yet). Rather, the demand for the token economy in 2017 was nearly entirely based on traders’ speculation of future token demand.

2018 will be the year that crypto begins to move from speculation to utility.

2018 will be the year that crypto begins to move from speculation to utility, fueled by Ethereum-based protocols and ERC-20-powered products rolling out to businesses and end consumers. This is going to be game-changing for crypto valuations as actual product-driven token demand will start driving token prices. Token prices will begin to reflect the demand that actual users of the tokens are putting on the token, not just speculative valuations from traders.

I’m hopeful this will also drive substantive market analysis around tokens — similar to how stock analysts rely on DCF (discounted cash flow) and FCF (free cash flow) models. Expect TDF (Token Demand Flow) or similar models to emerge as standards for crypto valuations.

Demand-Based Token Economy Example: OST

Below I present an example of what product driven utility demand for a token economy could look like. In this example I present a hypothetical token demand model forecast for OST, aka Simple Token, as it is the token model I know most. First I present an overview of how the Simple Token OST model can generate product utility demand. Then, I present a hypothetical 2 year model for OST product-driven demand.

It would be great to see similar models posted for other ERC-20 tokens.

About the Simple Token, “OST” Utility and Token Economic Model

“OST,” fuels the Simple Token solution and the OpenST protocol which enables mainstream companies to launch their own cryptocurrencies, (we call them “Branded Tokens” or “BT”) powered by OST.

The big idea with Simple Token is to help any company benefit from getting part of their business on a blockchain without needing their own in-house blockchain developers. It’s akin to how companies rely on AWS for infrastructure, Stripe for payments, Salesforce for CRM, Shopify for e-commerce, and Twilio for messaging — we enable companies to focus on their core business and leave the blockchain infrastructure to us.

In order to launch a Simple Token powered digital currency, companies acquire OST (from the open market) and stake it on Ethereum mainnet against minting their own Branded Tokens, “BT” on OpenST open, scalable, side blockchains, according to the OpenST protocol. OST functions as the required reserve on the “value” chain (Ethereum) against the Branded Token economy on the “utility” chain (OpenST). The OpenST side blockchains provide consumer-grade scalability not currently possible on Ethereum mainnet.

Transactions on OpenST are smart-contract programmable, open, transparent, and immutable, and will have 3rd party validators— just like on public Ethereum — however OpenST moves high volume consumer-grade applications onto utility chains that leverage the security and ecosystem of public Ethereum minus the scaling challenges and high transaction fees. We will be benchmarking OpenST sidechains in the coming weeks; our internal minimum throughput rating to achieve for OpenST is 10x public Ethereum to start, at a fraction of the cost.

In addition — and very important to bringing crypto to mainstream — our teams are developing the Simple Token SaaS to help mainstream companies launch and manage their token implementations. In early 2018 we will launch Simple Token alpha, which will be the first Simple Token SaaS release on top of the OpenST protocol and platform. We will also launch a series of OST-powered products that will be available both as standalone products as well as fully integrated into Simple Token, such as OST-KYC, our KYCaaS and several other concepts under development.

Staking OST to Mint Branded Tokens

Companies stake OST on the value chain to mint their BT on the utility chain.

A conversion rate of OST to the BT is established during the company’s setup (e.g. 1 OST = 1000BT), and then locked so that the company cannot change the rules on their customers.

Branded Tokens minted through Simple Token are special ERC-20 tokens that are technically locked from trading on secondary markets. The only thing BT’s can be exchanged for are OST (unless the company or a 3rd party want to offer the user another crypto or fiat in exchange for the user giving up the staked OST against their BT).

The company’s users always have a right to claim the OST that is staked against supporting their earned/acquired BT from the company. (Btw: The locked from trading mechanism could be switched off later on. This enables OST to serve as a safe proving ground or accelerator for ICO projects, enabling them to first prove market liquidity on OpenST side chains, and without the ICO costs and headaches, before “going public” on Ethereum).

(NB1: We often next get the question: If BT prices are tied to OST, what happens when OST rises or falls? I’ll go into that in detail in follow-up posts, but the short answer is that price oracles could be used to set the prices of goods and services that the BT is earned or used for, so that the amount of BT earned or required automatically adjusts, and the company thus needs to acquire less OST to stake against their BT if the price of OST rises — similar to how if you needed 1 BTC a year ago, you could accomplish the same with 1/Nth a BTC today. Companies could also decide to insulate their end users from experiencing price appreciation or depreciation because of fluctuations of OST which BT is based on. It’s really interesting and advanced economic theory and we would recommend reading the side paper on price stabilization concepts we are exploring, to learn more.)

(NB2: We’ve also been discussing loan programs for putting up the stake of OST against BT’s. For instance, if a company wanted to start off with an economy worth let’s say $1,000,000 worth of their BT, they could pay a 3rd party say $50,000 per month over 24 months to put up the stake for them (and perhaps also with price stabilization features) rather than staking $1,000,000 up front).

Simple Token Product-Driven Demand for OST

In layman terms, what all this means from a token demand standpoint is:

• With Simple Token & OST, mainstream companies can easily launch crypto-powered digital currencies, on scalable blockchains, without the costs and drama of holding their own ICO.
• Every company that launches their crypto powered by OST needs to buy OST from the market and take it out of circulation by staking it as a reserve against a white-labeled BT offered by the company.
• When companies need to mint more of their BT, they need to go back to the market and acquire more OST, so there is always a stake of OST to support their BT.
• Every time one of their users want to exchange their earned BT for another crypto or fiat, it requires someone selling it to a buyer on the open market. So, the OST comes full circle, and product-driven supply/demand continues.

As more companies build applications and economies on OST, the interoperability between token economies becomes very interesting as well. For example, Token Economy A doesn’t want to receive Token Economy B’s token, but they are more than happy to receive OST since it fuels both of their economies. This enables consumers to spend their earned Token A with Token Economy B, as behind the scenes what actually gets transferred is the underlying OST. This provides for even more market demand and liquidity as network effects multiply.

In addition, Simple Token will be charging (in OST, of course) “gas” or transaction fees on the OpenST side chains, as well as fees for using the SaaS software modules that help companies setup, administer, monitor, and analyze their token economies. These fees are intended to be low to start and then scale up as companies get more value (and earn revenue) from their OpenST usage, similar to AWS or Stripe fees.

Hypothetical Simple Token OST Product-Driven Demand model

Here’s a hypothetical model, directional only, of the sort of product driven demand that could be derived as more and more companies launch OST powered apps and economies. (Please note: This is not an actual forecast, rather it is a model presented to give an indication of what could happen once product-demand for cryptos begins to take hold in 2018).

First, let’s assume that Simple Token attracts a range of customers of various sizes, with most being startups at first, and then more small, medium, large and enterprise companies joining over time. And, let’s assume that the OST solutions become more self-service over time so the number of startups and smaller companies on OST grow at a modest clip, while larger companies take more time to adopt the OST technology.

For the sake of this example, we modeled:

• 142 companies launch OST solutions in year 1, growing to 685 in year 2.
• Startups and smaller companies account for most of the growth in the early days: 113 of 142 of the companies in year 1 are startups and small companies, and 620 of the 685 total by end of year 2.
• We assume larger companies and enterprises may take longer to adopt the solutions.

Second, let’s assume that startups and smaller companies have much smaller monthly transaction volume than the larger companies.

That sums up to a hypothetical forecast of $26M of Branded Token transaction volume per month by end of year 1 and $100M per month by end of year 2.

That sums up to nearly $1B in cumulative customer-driven demand for Branded Tokens powered by OST over the two years.

The models above do not include any transaction fees for operations on the OST side chains nor any other payments in OST for other products like our OST-KYC.

The models above are hypothetical and should not be taken as our internal forecasts, rather they are meant to be illustrative of the types of customer-driven utility demand that could take hold within ERC-20 powered token economies starting in 2018.

There are 162 tokens on the CoinMarketCap list with current market valuations of more than $25M. It will be great to see what happens when many of those tokens start to generate meaningful product demand in 2018 and beyond.

LEGAL DISCLAIMERS

This post is not a prospectus nor a solicitation for investment and it does not pertain in any way to an offering of securities in any jurisdiction.

Purchasing, holding or using cryptographic tokens carries significant potential financial, regulatory and other risks, including potential loss of the entire value of Payment.

Tokens are only for sophisticated purchasers who are knowledgeable and experienced in the features and risks of digital platforms, digital assets, blockchain technology and smart contracts. Potential purchasers should determine for themselves the relevance of the information contained in this document and related materials, in each case as supplemented from time to time, and the necessity for additional enquiry, research and professional advice. Any decision to participate in a token sale should be based upon such independent investigation and advice as you deem necessary. This document should not be considered as a recommendation by any person to participate in any token sale or digital platform.