In the modern scenario where we have Tokens, ICOs, Private Equity, and IPOs, how the fusion of these financials instruments can help enterprise companies and startups to create new values and in a SEC compliant way?
The 2017’s ICO bubble was not only a bad thing, because a lot of projects with different visions and ways to understand the use of tokens were funded. As of Q4 2018, we have now the data to know how Tokens can create values, what kind of use cases they can provide and, on the contrary, what kinds of mathematically-driven Token Economies can’t drive the request or the intrinsic values of it and what is a scam.
The Utility Token
To define what’s a Utility Token is, first of all, we have to understand the difference from Tokens and Coins:
A Coin is a crypto asset, like Ethereum, EOS, Bitcoin or AION, that is running on top of its own Blockchain, paying miners/validator for maintaining the network usable and secure.
A Token is a crypto asset on top of a Blockchain Network that is not used to pay miners/validators.
As I wrote in my last article “What is a Cryptocurrency?” on HackerNoon
“Today, in general, a crypto asset is a programmable store of values, based on the request and demand for the use of the technology behind, with infinite use case and undiscovered potential.”
The most critical challenge is to drive value through the request of the Token. Assuming that a Blockchain based startup is solving a real problem, he have to develop a programmable math around the economy of his Token that will drive the demand for it.
The 2017’s Bubble teaches us that things became more complicated when you have to create values with Tokens rather than Coins, let’s check the data from what is happened after the bubble to understand the how to create value:
Case 1: Build a Utility Token to raise money and develop a Coin
If you’re developing a blockchain network, the use case of a Token is to make an ICO, on top of an existing Blockchain capable of Smart Contracts and use the ICO funding to develop your network with your own Coin. In this case, the request is driven to transact in your Blockchain and for the usage of Decentralized Applications built on top of it.
This setup is how a lot of Famous Blockchain networks started like EOS, AION, ICON, TRON, IOTA, NXT and even Ethereum.
Building a Coin is the only the already validated use case of a Crypto Token; the problem is when you want to create values in a platform or a community built on top of a blockchain network?
Case 2: Build a Utility Token to be used as a Currency to by goods or to use a service
The idea to use a Token rather than an existing cryptocurrency or FIAT to buy a service or use a Dapp function increasingly arose two main concerns… First of all, Token price volatility is a considerable barrier to mass adoptions, on another note, the user experience of a Dapp, for now, can’t be competitive with the most accessible web 2.0 User Experience:
For example, in a Dapp marketplace, where you have to use a Token to buy an item, the procedure to get the purchase done is difficult and slow. You have to buy the Token from an Exchange, after that, you have to make a transaction from the Exchange to your Crypto Wallet, and finally, you have to make another transaction from your Wallet to the website’s Wallet.
This slowly and complicated user experience is a huge gap to scale for Dapps in general.
During the ICO bubble there were a lot of projects are coping existing services like Uber or Airbnb, but with a Token as currency to use it.
In order to succeed in web 3.0, the distinguishing factor would be focusing on issues that are not already resolved, challenging something that is very difficult to solve outside of the Blockchain Technology. In the vast majority of business applications you would think of, an existing web 2.0 company would win in the short term, and in the long run, maybe that company have time to make his Token or starting approaching Blockchain Technology in some ways, so it’s too risky to compete with an existing solution only copying it.That said, some companies like Internxt in distributed Cloud Service Industry, are developing an exciting way to solve this problem in the short run. The concept is to form a web 2.0 like user experience for customers that can buy services with USD or any FIAT and automatically exchange it to their Token and in the end deliver the Tokens directly to the seller. I’m interested in watching the evolution of this hybrid method in a year or so…
Case 3: Build an Utility Token to incentivize users to stake Tokens with in app bonuses
Another use case we tested in the 2017 ICO hangover is to use the Token to generate incentives for token holders to buy more and “Hodl.” The 90% of these projects are not Decentralized Applications, but Web 2.0 apps that tried to create values with their tokens using centralized app incentives or bonuses.
As the outlook for such use case category remains gloomy, there are some very noticeable exceptions: Binance grew like crazy and posted profits close to Nasdaq’s in less than one year. In the Binance example, using the BNB Token to create values via bonuses is only a short therms milestone, they’re developing a Decentralized Exchange with a dedicated Blockchain fueled by BNB in 2019.
The question, in this case, is, why a company have to create a Token?A centralized application can do bonuses developing a centralized coin in the regular web 2.0, like Experience Points or video game’s Currencies. The problem is that there are no values added true decentralization in this use case and is very dangerous because a platform has to become incredibly huge quickly, like Binance to create demand using this setup.
An exciting way to use this setup is to create some kind of Proofs, that are not precisely like consensus Proofs but are based on users actions to do something betting a stake of their tokens. Two interesting cases are NumerAI that are trying to predict financial movements by requesting users to stake and betting their tokens to deliver market predictions or Bounty0X that is requiring users to stake their Tokens to validate other users tasks for bounties rewards. We can call this setup Proof of Communities, and I’m interested to see the evolution of that.
Case 4: Build an Utility Token to incentive users to sell their data and split the earnings
Data is the new oil and Decentralized Data is the step forward in terms of quality and values in this field.Some companies are developing Dapps where finally people can become the Mark Zuckerberg of themselves monetizing their own data.
This idea to incentive users and split earnings from data requests is dramatically cool and can work in the long run if a Dapp can scale fast and effectively source & deliver data based on users interactions and actions. Within this space, a Utility Token would work fine in the B2B field, where companies pay in using the Token to request data and automatically in a decentralized way the Smart Contract pay the user owner of the data requested.
The Long Run effect of the 2017’s Bubble
During the ICO bubble, every CEO of today’s already dead token-related startups talked as he was the next Steve Jobs as well as every ICO investors thought to be the next Mark Andreessen. In the end, all of this figures have something in common, they didn’t have a long-term vision especially in finance, because Technology Industry needs money, a ton of money.
If you’re running a Decentralized Application based startup or every kind of crypto-related project, everything is a challenge and expensive. First of all, you have to pay blockchain developers, they’re so expansive, at the same time you have to challenge the Blockchain technology limitations, that are expansive and kills the user experience of your application. The last but not the least, you have to compete with the web 2.0 industry, they are fast, cheaper and user-friendly, so be sure that in the short terms they are very likely to be the winners in most sectors.
So you need money and time to scale, you can’t expect to have millions of users and earnings for a lot of time.
Raising $10M, in order to start a No Profit Foundation (Like Bill and Melissa Gates), burn all of the ICO funding to be listed in some big exchanges and to fight with regulators, hoping to scale quickly and reach revenues rapidly doesn’t look like a smart idea.
If you want to survive in this field you need to get more funding and increase the value of your equity, so you need a regular Company, because regulators have spoken, to be compliant you have to follow some rules and you need to be incorporated in the right place with the right financial facilitators and smart investors to grow.
The Convergence, a new amazing approach for Blockchain Startups
At the end of the 2017s Bubble, the Blockchain Ecosystem is starting to mature, and Startups is beginning to develop more mature financial long term visions, trying to figure it out how to create value in an SEC compliant way.
Today the most used document is the Simple Agreement For Future Token “SAFT” as a model to raise money by selling Tokens in a private sale to Qualified Investors rather than public ICOs. Another compliant way is to Airdropping Tokens for free or for early adopters, reaching capital only using regular equities from regular investors.
After the Bubble, being SEC compliant and running a regular organization is critical! With a Convergence-friendly setup, Utility Tokens could be used to finally fix and validate values of some intangible assets like data or community engagement. The idea to validate Data and engagement is a huge step forward for startups in all over the world, helping all kinds of investors to understand the real value of tech companies, bridging the general lack of familiarity with technology-driven lateral thinking.
In Private Equity, Startups are valuated more from the intrinsic values of their communities and their data rather than from their EBITDA; this is creating a lot of misunderstanding and fear for non-tech related investors. The problem is that these kinds of values are not 100% measurable with math and sometimes is easy to overvalue or undervalue a tech company.
What if Utility Tokens values based on the request and demands for their use can help tech companies to have a complete validation of their most important assets like data or communities engagement?
Let’s start to think about it with an example:
In a scenario were a tech company like Facebook had a Utility Token, SEC compliant with a 30% of tokens owned by Facebook Inc. what this could mean? If Facebook would use this Token as the only way to interact with the Facebook’s users data, the market cap of that token based on the request and demand, will validate the intrinsic value of the data that Facebook have and the same time could create shared revenues with data owners that makes users more comfortable about sharing things.
If at the same time Facebook develops some kinds of gamification based incentives for its users, powered by staking token or even rewarding actions with collectibles and drops, this could validate the engagement of Facebook’s community.
This setup could be a huge game changer for a Blockchain startup that is not already public and big like Facebook and has to deal with investors to get the money to became big. If a startup has an incredibly active community and valuable data, when it has to deal with investors, explaining why these assets are so critical for his discounted cash flow, with the ownership of a percentage of Utility Tokens as an asset, the validation of it could be tangible and real.
This convergence from Utility Tokens and regular Financial Instruments could be a massive step forward for startups and could radically drive innovation in all over the world.
One more things… There is a huge Elephant in the room..
Security Tokens and Assets Tokenization
As I wrote in my last article “What is a Cryptocurrency?” on HackerNoon the concept of Security Token or Tokenization of tangible and intangible assets are not directly programmable in a decentralized way, and they need to be centralized for a fixed price and have to deal with regulators because the line that divides this financial instrument and Ponzi Scheme is incredibly light.
For example, the Gemini USD or USDT have a centralized and fixed price backed by real USD in a bank account, always in the eyes of the SEC. In contrary one of the biggest scam in Crypto history BitConnect, they fixed the price of their Token in a centralized exchange driven the price up to 3% every day, and this is a classic Ponzi Scheme.
I decided to be helped by a financial expert to talk about this, because this kind of crypto assets are not understandable by a Blockchain and tech expert but is a completely an old-school financial like assets. So I asked the help of Enrico Petocchi, a financial expert that is trying to help investors to embrace cryptocurrency and Blockchain related project to write something about this and complete this article by pre-tracing what’s next:
“In a few words, Security tokens may be seen as crypto (digital) certificates representing a pledge/access to some or all of the issuer’s underlying assets and/or cash flows.
As utility tokens widened the scope of investing (by providing a methodology to monetize goodwill based on data gathering, production or consumption communities, etc.) security tokens will make it possible, inter alia, to (i) securitize flows from diverse asset classes, (ii) fragment assets’ ownership in digital (and possibly tradable) certificates.
Security tokens will allow for venture investing with limited governance limitations and pave the way to asset-backed finance and portfolio is unbundling as well as extreme investors’ cherry picking.
The combination of CryptoCapitalMarkets (ICOs & STOs), regular exchanges willing to access investors directly and the possibility that crypto-exchanges will create enhanced liquidity on alternative securitized assets is increasingly empowering large Corporates and Start-ups alike with an unprecedented breadth of tools and fundraising techniques.
Crypto-FinTech Convergence would make Financial strategy a competitive weapon more than an execution task, helping to bridge the gap between money, ideas & markets by dynamically tailoring specific investment proposals to relevant stakeholders’ groups. Simply, the end of the beginning”.