I want to looking into the economics of Cryptocurrency tokens and how this could change the marketplace model.
Links I found useful:
Article which inspired this:
- MUST READ How Crypto Tokens Will Enable the Disruption of Businesses like Uber and Airbnb
- A Letter to Jamie Dimon
- Distrupting Finance – FinTech and Strategy in the 21st Century (book)
- What is an Asset-Backed Token? A Complete Guide to Security Token Assets
What I learnt
The power and utility of cryptocurrency appears to be due to decentralization. Generally speaking, decentralisation appears to be inefficient and not in anyway fundamentally better than other models of operation. However, it works in places where there is no trust or the main form of currency is unstable. While cryptocurrencies may not ever be used on a mass scale, their use may rise in the future.
Consider the rise of money from the book sapiens by Yuval Noah Harari:
Initially, when the first versions of money were created, people didn’t have this sort of trust, so it was necessary to define as “money” things that had real intrinsic value. History’s first known money— Sumerian barley money—is a good example…Barley money was simply barley—fixed amounts of barley grains used as a universal measure for evaluating and exchanging all other goods and services.
Today, most money is just electronic data. The sum total of money in the world is about $60 trillion, yet the sum total of coins and banknotes is less than $6 trillion. More than 90 percent of all money—more than $50 trillion appearing in our accounts—exists only on computer servers. Most business transactions are executed by moving electronic data from one computer file to another, without any exchange of physical cash.Sapiens by Yuval Noah Harari
A common argument against cryptocurrency I used to hear is that they have no intrinsic value. It doesn’t and most of the money circulating in the world is simply fiat money meaning that it has no intrinsic value. But people assign it value once they begin to trust the system. The first cryptocurrencies to grow in prominence on the world stage will likely need to be tied to something which has intrinsic value similar to ‘Sumerian barley money’ or a Stablecoin.
Now, I am more focused specifically on crypto tokens. These are built off existing blockchain infrastructure such as Ethereum and can be more specific to a business. Creating a new cryptocurrency is much more time consuming. These tokens appear to have the ability to democratize the process of building new businesses and crowdfunding. Under the current system there are limits to capital raising, regulatory requirements and general conservatism of the existing financial industry. While these can be a good thing, it can limits the flow of capital and slow innovation. Furthermore, the use of crypto tokens can actually reduce the cost of the good or service by the consumer.
Consider this business model illustrated on Finn’s cave (read it for a more in depth explanation) for a fictional ride share platform:
- There are 1,000 total LyberTokens that are issued, and there will never be any additional tokens created.
- Rides are bought with LyberTokens, and drivers are paid in LyberTokens.
- The more rides that occur, the more demand for each LyberToken because there is a fixed number of LyberTokens. The price per LyberToken will naturally appreciate with the demand.
- If riders do not have LyberTokens, they can still pay with fiat currency, like a US dollar. To facilitate this, Lyber charges riders 3% more than the US dollar ride price.
- There is a ~0% transaction fee for each ride.
- Lyber rewards drivers and riders who invite friends to use Lyber with LyberTokens.
This example involves an Initial Coin Offering or ‘ICO’ to raise capital which anyone can access and sell LyberTokens. It allows founders to access the retail investor market in addition to the Venture Capital market. There is a low barrier to accessing capital.
The ICO would follow this process (defined in Disrupting finance):
- The white paper announcement: a report with an outline of the business similar to a prospectus
- The release of tokens: often issued via smart contract whose code is public. Usually, the token generation is composed by two sub- phases: pre-allocation, granting a discount on the purchase of tokens and allocation, at full price.
- Token listing: Complete the ICO, tokens are listed in one or more exchanges.
They key point here is how the crypto token ‘LyberToken’ is defined. It is not ownership in equity of the business as a share is but rather an underlying currency used facilitate transactions on a platform. Value is generated as demand on the platform is increased (this is as the supply is limited).
Again, referring the Finn’s cave article, there are multiple issues with this business model that need to be understood for it to work effectively. For instance you are creating a currency or token system as an underlying asset. Does this then need inflation, appreciation and general trust in the system to work? Will people also speculate on the token value and artificially impact the price without purchasing rides (rules of purchase should avoid this)?
This is quite a fascinating concept as there are no transaction fees. Owners make money from an appreciation in the value of the token. Something that is still missing in this equation is trust, people still may not trust the concept yet. But it is a fascinating concept especially as it changes the nature of the marketplace sector and delivers more value to the consumer. Existing businesses can be disrupted by token based copies. The question I have, if someone makes this concept work, is how to do existing businesses incorporate this into their marketplaces to create value? I see how it creates a ‘exit plan’ for early investors but not a revenue generation model. Without transaction fees is there a monetisation model?
These token marketplaces already exist (in different forms to the hypothetical example shown above):
The Next Steps
I find this space fascinating. I would like to write about it more, in a format where I do way more research and understand the space better.
The Next Ship
What are dreams and why do we dream?