One trillion crypto-tokens

The pace of new digital currency issuance is accelerating as the infrastructure matures and makes it as easy as clicking a few buttons. These tokens are unable to be copied as unique structures on the Ethereum blockchain and can tap into the broader ecosystem, from exchanges to market making functions.

Indeed, there are 137 token launches in this 30 day period, easily eclipsing the dot-com boom in numbers with $2.1 billion already raised this way year to date:

Figuring out how to value these tokens is difficult with no agreed upon framework as there are so many factors at play.

For tokens that couldn’t just be replaced by a faster, more scalable Bitcoin/Ethereum (eg via Raiden or Lightning) with additional computational complexity possible (eg via Plasma), you need to consider monetary economics, game theory and behavioural economics to really understand where the value could go.

Assuming the team has the necessary skills, one of the more curious questions is how many tokens to issue within the ecosystem, before any considerations of how new tokens are created or destroyed.

At the top end of the scale is the current Kik token sale for Kin with 10 trillion total supply in future and 1 trillion being sold now. This compares to around 60 trillion US dollars in existence today, but 1.4 trillion in circulation in terms of base currency by the USA, on top of which more money has been issued for loans, derivatives and so on.

The most popular supply number is Bitcoin, with 21 million, which fits in well to its current role as a store of value for some and new role as an asset for allocation in future.

This allows for some interesting models of future value as Lou Kerner outlined from a recent conference call.

A fixed supply and increasing net inflows also help it accelerate in value and actually become more “valuable” in popular perception as this happens, similar to a veblen good.

From 10 million to 1 billion

2D to 3D

There hasn’t been much discussion about how many tokens a project should issue, particularly as these tokens , the most honest take has probably been Vinny Lingham’s take that 1 billion “seemed” like the right amount.

For our Ananas project to leverage blockchain technology and AI to bring communities together we originally had a target supply of 10 million Anacoins and cool inflation system to add more coins.

Anacoins are used on our platform to incentivise collation, creation and verification of “objective subjective” data and sponsor key elements, creating a nice feedback loop so the value of the Anacoins is linked to the perceived value of the platform despite being built on a charity.

We focused on encouraging people to hold these coins as we buy more and redistribute them as a foundation, something particularly important as new communities come online and start building their own views and beliefs into the platform.

At 10 million coins it became clear that this would be a “premium” coin product, but that this could limit individual participation and breadth as it would rapidly be exchanged in fractions of coins, reducing the feeling of ownership and participation. In a project like this where huge network effects kick in within communities and across communities, this is not what you want.

As such, we decided to go for an increase to 1 billion coins, so a huge number of people could hold a whole coin and remove the inflation mechanism to make things simpler to model and understand.

We set the price at $0.02 per coin to provide a downside anchor of $0.01 (we have a reserve to stabilise if needed, but not in an automated way) and an upside anchor of $1 a coin, which could be fair if we build the platform we have envisioned.

Coins’ll float too

h/t Meltem Demirors

Another important element in building a token economic system is the number of coins that come to the market at any given time/are available for trading.

On Coin Market Cap this is usually the circulating number of coins times the price of each coin. This doesn’t reflect the major holders being dormant, as this paper on major dormant Bitcoin hodlers studies, with some estimates that two thirds of all Bitcoins don’t trade.

For Anacoin we decided to have 80% of coins locked or dormant on day 1, meaning a circulating cap of under $4 million when issued despite a great team, advisors and positive mainstream media coverage.

The key rationale behind this is that one of the main drivers of Ethereum, Bitcoin and other currencies is the true believers and evangelists that have been built not only by their mission, but by the fact that so many have held onto these through the thick and thin into the recent large upswing as the utility value of both and network effects increased dramatically.

This is in contrast to some of the mega token sales this year, where they will need to go from no product to a billion dollar protocol to deliver value to thousands of technological literate purchasers.

This is a tall order and could lead to terrifying blowback.

It is better to start low and prove yourself to the community, which will give ample support to projects with good momentum, as well as consistently increasing the number of true believers backing you.

This only holds in economies where token economics are not hopelessly entangled, as discussed by Neufund here. If the price goes up and access becomes more difficult as a result to something of scarce value, you’d better hope that the system is designed for that.

Perfect numbers

A different type of perfect

Unfortunately there is no “right” number for token economies.

There are, however, some handy guidelines that can be used

1. Holders will fixate around key levels, few can envision $0.001, but many can understand $0.01
2. As seen in penny stocks, people often think under a dollar is “cheap”, but something like Amazon at $1,000 is “expensive” as division is hard. Price low for mass adoption and upside, price high for exlusivitiy
3. Token inflation and new minting make it difficult for people to model correctly. This is good for issuers, typically bad for purchasers. Where there is no defined inflation model (hi ethereum), you need to really trust the governing body (hi Vitalik Buterin).
4. Mega raises sound nice but take away from capital efficiency and structural stability, it is better to start low and build up as the market determines value and normalises
5. Not mentioned above but millions of dollars of tokens for the founding team without milestones or targets is dumb, particularly as there is already de facto going to be a large cash infusion into the project. Avoid.

The number of tokens will continue to proliferate, but, optimistically, 95%+ of them will probably end up worthless as liquidity disappears.

In amongst the detritus there are some real gems being built, with this new mechanism and infrastructure allowing for some really interesting token economies to align incentives to build projects that might not have been possible before.

Emad is Co-CIO of Capricorn Fund Managers and Co-founder of Ananas, a UK-based charity using cryptocurrency to create a decentralized global knowledge base for peace.