Expert Insight

Why tokens matter

Pedro Febrero explores the importance of cryptocurrency and tokens and how they allow organisations to create and share value

Before Bitcoin and other cryptocurrencies were created, it was impossible to send value over the internet as easily as we send data, for the simple fact data can be copied while money can’t.

Until the rise of Bitcoin, we could only leverage double-entry bookkeeping – two parties held copies of their own ledgers while a third entity (the government or financial institutions) verified disputes and the veracity of each agent’s ledger.

Of course, with the rise of cryptocurrencies, it became possible to transfer value over the internet. Much like an improved version of MOIP (Money Over IP), Bitcoin enabled people and businesses to simply register and send value using a distributed ledger, meaning there is no need for third-party verification and trust can be achieved between two parties.

In a sense, the most revolutionary aspect of Bitcoin was the abstraction of the concept of value over a network.

While in the past copyright and patent registration made a lot of sense in order to protect your product, business, or network, nowadays, with the rise of cryptocurrencies, there is a new layer of protection which is much safer, more efficient, and more user friendly: network value.

For the first time in history, any product or company can have a token associated with its network. Given user interactions translate into value creation, there is little reason to spend time and money in creating legal barriers when your company’s ultimate incentive is to grow value on its network.

Value and ownership of networks

Companies and businesses protect their findings through patents and copyright laws, due to the fact there is usually a hefty investment made to promote innovation. While it would be better for the world if every company had access to every innovation, businesses need some level of protection against copycats – otherwise there is little incentive to promote innovations, as a low ROI would not compensate for the level of risk taking.

If we look at the big picture, this is what we can conclude:

  • Innovations need to be protected, otherwise there is little incentive to innovate.
  • Protection means removing the ability for other companies to copy said innovation.

 

What if the same problem could be solved with cryptocurrencies, tokenomics, incentives, and rewards?

Even better, what if value could be granted through the ownership of tokens? Imagine if tokens could give some sort of utility to its holder, like governance, curation, or validation powers?

To me, the real great thing about cryptocurrencies is the fact they give any network value. Instead of relying on enforcement through legal and forceful means, why not just give your innovation value by linking a token to it?

I argue any network is protected when a copycat can only copy part of what makes a certain innovation great. This is because network value cannot be copied – it must be earned through an active community of users who see real value in your product. No company would be directly exposed to copycats.

MOIP (Money Over IP)

There’s a bunch of examples of projects trying to accomplish this solution. From social networks like Steem and artistic networks like Celio to advertising networks like the Basic Attention Token, these projects understand a very basic concept: it is possible to endow a network with value, even if the underlying asset is not money per se, by linking a value transaction to each user interaction.

As with Bitcoin, when your asset is endowed with price discovery, it becomes incredibly more interesting to hold. In turn, these types of communities have a chance to survive longer because, besides a common goal, there is common value being shared amongst users.

It’s the same logic you apply to your money, shares, or virtually any asset you own: the more people use that asset (transactions), the more valuable it will become.

The key takeaway is that transactions give value to networks, and to have transactions, you need to have a currency.

Cryptocurrencies: Distributing value to all…

If you ask yourself at this point what is the purpose of any currency, it becomes clear: to protect value. The fact fiat currencies were linked to gold was a way to achieve that outcome. With the rollback of the Brenton-Woods agreement, the USD and most world currencies shifted away from this logic, meaning value was only guaranteed by trust in the currency due to network effects.

The only problem? There is no transparency or accountability within the centralised fiat-based system.

During the time gold was used as a reserve for fiat deposits, bankers and financial institutions were in check. In order to lend, they had to prove they held a certain amount in gold reserves.

When gold stopped being used as a reserve for fiat currencies, consumer credit soared.

Cryptocurrencies can, once more, shift the paradigm.

By imposing a decentralised, transparent, and fully-auditable system, it gives people a way to transact and store value away from country-specific currencies and policies. When a corrupt government or financial agency puts the squeeze on its citizens, there is a way to opt-out.

Plus, innovators have a way to protect their inventions by endowing these networks with value that is shared by the community of users.

With the rise of cryptocurrencies, new business models will be created. Hopefully, these will give users power to rule the network by distributing value through tokens to any agent interacting with the product or platform.

From the many to the few

Finally, what I hope cryptocurrencies achieve is to empower users. Instead of top-down solutions, business plans, ideas, management decisions, or user participation, cryptocurrencies can foster an environment for cross-project collaboration and exponential value-added user interactions.

Instead of a few people owning a huge proportion of value and risk, why not share it with the community of users like Bitcoin did?

A way to think about this is by comparing DAICOs and STOs.

STOs, or security token offerings, are seen as the new, better form of ICOs – fully regulated and compliant. Do you think they will be the catalyst that will enable global adoption?

I, personally, see little value in conducting STOs. From an investor’s point of view, what I will be joining is a limited community, closed to most of the world that cannot participate because, somehow, they do not tick one of the compliance boxes (like not being an accredited investor).

If cryptocurrencies came into existence to decentralise value, what will happen when proper DAICOs, or decentralised autonomous ICOs, start to arise with milestone-based funding and community-approved goals? How can an STO compete with a global project with no boarders, managed by a community of users?

That, my friend, is the true meaning of decentralisation.

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