What appcoin startups have in common with Midwest logging companies

Logging companies in the 19th century Midwest had a problem. In the remote forests where they set up shop, cash was hard to come by. Still, workers needed to be paid so they could buy food and other basic necessities. So the logging companies came up with a solution to the cash shortage: they would print their own currency.

This private currency, known as “scrip“, was denominated like U.S. currency and redeemable for goods and services exclusively at company-run stores. If a worker who received scrip in lieu of cash wanted to spend their paycheck elsewhere, the scrip would often trade at a steep 10 percent to 25 percent discount. Exchanging scrip for cash would result in additional exchange fees. And so most business was done at the company store.

Company scrip for the Network Age

Fast-forward 125 years and private currencies are once again being used by cash-strapped companies to keep operations running smoothly. Only this time, the companies are high-tech software startups instead of Midwest logging companies, and the currencies they are issuing aren’t simply a stand-in for cash. Private currencies have become a core part of new business models emerging around digital networks.

Often referred to as “appcoins”, these new private currencies are being used by issuers to simultaneously fund their businesses and bootstrap networks around their products. Unlike the company scrip of the past, appcoins are neither denominated in another currency nor redeemable for a fixed quantity of goods. Instead, the issuer designs their product in such a way that users have to dispose of some quantity of the appcoin to receive the value offered by the product. As a result, demand for the product results in demand for the appcoin, creating a virtuous cycle of adoption and price discovery.

The power of incentives

For early adopters of the appcoin, this virtuous cycle can result in a significant financial return, similar to the way that an early investor in a company can earn significant returns if the company is later successful and the value of their equity increases substantially. For example, if an early adopter of a product receives appcoins when there are only 1,000 users and the appcoin is valued at 100 satoshis each, and several years later the product has over 100,000 users and the price of the appcoin has increased to 10,000 satoshis each, this results in a 10,000 percent “return” for the early adopter.

The potential for financial return creates an incentive for people to adopt an appcoin product early on, even when the “cost” to doing so may be higher than using a more established alternative (for example, using a new social network app when there aren’t as many people to connect with as on other, more established apps). This incentive helps bootstrap the network, giving the app a fighting chance in the face of well-funded incumbents and speeding up the time-to-critical-mass that gives the network value and makes the app “sticky” for end users (or so the theory goes).

The future of appcoins

I have written before about why I am skeptical of appcoins. Disintermediation and centralization remain my top concerns. But given that there is no sign of the appcoin trend slowing down, with even “mainstream” apps with millions of existing users announcing plans to release an appcoin, it is worth thinking about what it would take for appcoin issuers to address these concerns and succeed with this model.

Appcoin issuers could reduce the likelihood of disintermediation by ensuring that there is as little friction as possible when exchanging currencies to use their app, while simultaneously doing all they can to increase the value of using the appcoin. And to minimize the risk that centralization has on the long-term value of their appcoin, issuers could create a succession plan to cede control of development to a more decentralized open source community.

The long-term future of appcoins is unknown. They could overcome these and other challenges and become a powerful tool for building products and bootstrapping networks. Or, they could disappear as dramatically as they appeared, destined to be a footnote in the pages of history like the company scrip that came before.

Featured image via WisconsinHistory.org

Bitcoin tips accepted:

Bitcoin address (what’s this?) (QR code)

1DbSQntfjitsJSLbqEiUpPuNdNC3JUFkD7

Bitcoin payment code (what’s this?) (QR code)

PM8TJSxeAdmFzCyejSZsKwD5AN1Zxqm5Y4px6bJYTS63Lvu9x6patBZKHo693QCHxYKjgvZwrZN5cmgzwQgNzUPpri42NYHkhTe7A8cZoC6fdHDhS7TJ

 

A critical look at appcoins

There has recently been a resurgence of interest in the phenomena known as “tokens”, digital assets that are issued and traded using a blockchain. What makes tokens interesting is the fact that they can be issued and traded digitally and globally without permission from a third party.

Tokens can represent many things: currency, property titles, collectibles, coupons, even corporate equity. There’s one type of token in particular that I will focus on in this post, and that is the “appcoin”.

An appcoin is a type of token that is required to use a specific app. Appcoins are like arcade tokens that are traded on the open market and fluctuate in price based on supply and demand for the token. You buy the token to play the game, and with appcoins, each game needs its own unique token.

A real-world example of an appcoin is GEMS, a token that was issued on the blockchain and was used to pay for advertising slots in the Gems social networking app. Another example is SJCX, an appcoin that is used to pay for hard drive space in the StorJ network. With both of these apps, you need to buy the appcoin to use the app.

Appcoins came about as a way for developers to fund the development of their applications without having to go the traditional finance routes of raising money by selling corporate equity or asking users for donations.

The idea is that once the app is completed, it will gain a critical mass of users who will have to buy the appcoin if they want to get value from the app. This drives demand for the appcoin, supporting its price and potentially delivering a financial return to the people who bought the appcoin early on during the app’s development phase.

As an investor, there are several problems that I see with this model:

1. The model is very developer-centric, solving a problem for app developers (raising money) but not for the app end-users. In fact, appcoins create new problems for end-users, since they now have to go out of their way to buy an appcoin to use an app instead of paying with the money they already have (or not paying any money at all).

2. Appcoins are a redundant form of digital money. Apps that require the use of appcoins can always be cloned and modified to remove the appcoin. Since appcoins add friction to what should be a frictionless interaction, users will prefer the apps that accept the money they already have in their wallets (or no money at all, the way free software has been used for decades).

3. Appcoins centralize development of an application. When one person or company issues the appcoin, this puts them in a privileged position over everyone else who could contribute to app development. This central issuer gets to decide who is granted shares of the initial stock of appcoins, and also who gets paid out from the proceeds of any sale of the appcoins to fund development and marketing efforts. This could lead to cronyism and inefficiencies typical of centralized resource allocation efforts.

In short, I believe that appcoins do not solve any problems for end-users, are easily replaced with more widely accepted forms of digital money, and present incentive problems that threaten the health of the app development ecosystem. Appcoins therefore do not offer investors a stable or sustainable long-term store of value – great for sellers, bad for buyers.

The only argument in favor of appcoins that I see as having any merit is the argument that applications that would otherwise be un- or under-funded now have a new way to raise funds for development. If users like the apps they use, they will buy the appcoin to support development.

My counterargument is that yes, so far appcoins have been a great way for some developers to fund their software projects. However this argument does not address the fact that, more often than not, appcoins are not a technical requirement for an application to work and could therefore be replaced by apps that do not require the use of an appcoin. If app users want to support developers, they can just pay developers with the money they already have.

My prediction is that this is exactly what we will see happen: as soon as an appcoin reaches any significant level of early traction, some enterprising developers will copy the app, remove the appcoin, and monetize the app by other means. This will flatten the market for the appcoin, leaving investors and users holding the bags.

I love the financial innovation that’s been enabled by the invention of cryptocurrency and the blockchain. I think that many financial assets will be tokenized, and valuable new assets we haven’t even thought of yet will be created and traded on these platforms. I just don’t believe that appcoins will be one of them (for long).

“Should I create a new token?”

This is a decision tree that I came up with for developers who are considering the idea of creating a new token for their app:

Untitled drawing (8).png

If you can’t articulate a compelling reason for why your app needs a token and why that token can’t be bitcoin, then you shouldn’t create a new token (and people definitely shouldn’t buy it if you decide to create one anyways).

Relevant links

What are Appcoins? [link]

Appcoins are Snake Oil [link]

Thoughts on Tokens [link]

Bitcoin tips accepted:

Bitcoin address (what’s this?)

16gPXNJPp4EBwcXdKCTFt4rU4FcppsquiV

Bitcoin payment code (what’s this?)

PM8TJSxeAdmFzCyejSZsKwD5AN1Zxqm5Y4px6bJYTS63Lvu9x6patBZKHo693QCHxYKjgvZwrZN5cmgzwQgNzUPpri42NYHkhTe7A8cZoC6fdHDhS7TJ

Insurance Fundamentals Collection

Long-time readers of my blog P2P Connects Us will know that I’m a big advocate of using insurance as a decentralized alternative to monopoly State regulations. I’ve previously written about how insurance can be used to regulate the sharing economy, and also how insurance can be used to deliver justice in cases where regulations aren’t complied with. I was therefore very interested to read the Insurance Fundamentals blog series by Albert Wenger, a partner at the venture capital firm Union Square Ventures. I’ve compiled links to the whole collection below for future reference:

  1. Understanding Insurance Fundamentals
  2. Insurance Fundamentals (Cont’d): Risk Aversion aka Concavity
  3. Insurance Fundamentals (Cont’d): Numerical Example and Reinsurance
  4. Insurance Fundamentals (Cont’d): Moral Hazard
  5. Insurance Fundamentals (Cont’d): Reinsurance Exercise Explained
  6. Insurance Fundamentals (Cont’d): Adverse Selection

Each post is a quick read but very educational and thought-provoking. If you have any interest in learning how the insurance business works, they’re definitely worth a read. While you’re there, go ahead and subscribe to Albert’s blog if you have a Tumblr account – the rest of the content is just as good.

Synchronicity

It’s been a while since my last post; so much has happened that I’ve hardly had any time to stop and consider the awesomeness of it all. Towards the end of 2014, I began working with the okTurtles Foundation to help them with a crowdfunding campaign that they’d been planning. I met okTurtles co-founder Greg Slepak after I became interested in his DNSChain project and reached out to interview him for my P2P Connects Us podcast. Shortly after this interview, Greg posted a blog post about how okTurtles needed a fundraiser, and I offered to help.

As I have previously discussed on this blog, identity is an important part of the human experience, and I believe people should have a more secure alternative to the legacy identity systems in use today where someone else is in control of our identities. Whether by a website, an employer, or a government, identities have been controlled by third parties for too long. DNSChain, to me, looked like an opportunity for individuals to break free of that control, and I was – and still am – happy to support that effort.

Around the same time that I started working with the okTurtles Foundation, I began having conversations with my friend Harlan about projects we were working on and daydreaming about what it would look like if we put our ideas together. We started talking about what a “decentralized application stack” would look like, something that could be used to build a bunch of different apps – photo sharing, messaging, collaboration, etc – which could all seamlessly interoperate with open protocols. Harlan called it “the last social network,” because it would make all the centralized, proprietary walled gardens that people mistake for their social networks irrelevant.

This idea excited me, so I got to work jotting down some ideas and Harlan built a website that pulled all the info off of GitHub. We ended up calling the stack “DStack,” short for “Decentralized Stack.” All I did was point to some projects that already existed and said, hey if we put these all together somehow, we could build a lot of cool apps on top which are completely decentralized. We would just need something for user identities, some way to store and transfer user data, and interfaces for the apps. Then Harlan and I both got busy with other projects, and we haven’t really touched DStack since.

Around this same time, in early 2015, I met an entrepreneur named Jay Feldis through my friend Mike Doty, who I knew from the local bitcoin meetup. Jay and Mike had been working on a product they called “CoinBox,” since rebranded to “Bitseed,” which was essentially a small computer that you could use to host blockchain full nodes for mining, staking, or just relay transactions on one of these networks. Jay presented a Bitseed prototype at a bitcoin meetup hosted at the Internet Archive, and I was intrigued by the possibility for Bitseed to solve the problem of low bitcoin node count by giving users an easy way to run their own full node.

Jay and Mike were working with a guy from SoCal named Konn Danley, who was helping them build the ecommerce store for Bitseed, and they just needed someone to help out with writing content for the website. I had some free time so I offered to help. When the website was almost done, I scheduled a tweet to go out a few days later, went back to work writing content for the site, and promptly forgot about the tweet.

Right on time, the tweet auto-posted and ended up going semi-viral, getting over thirty retweets on Twitter while a Reddit post about Bitseed simultaneously shot to the front of r/bitcoin. Bitseed was out of stock within 48 hours. It seemed there was demand for plug-and-play bitcoin full node hardware, validating our initial hypothesis. The Bitseed team then went to work over the next few months fulfilling orders and working on version two of the device.

During the R&D period for Bitseed v2, I was invited to join a new community of decentralized application developers called Blockstack. The mission was to build common infrastructure for the development of decentralized applications, a common “decentralized stack,” if you will. Sound familiar? I had found my tribe! I soon started helping them out, writing content for the website and inviting more people to join in the effort. Summer 2015 has been, for me, the summer of Blockstack.

Today, the Blockstack community is comprised of some of the smartest and most talented developers working on decentralized applications today, growing to include developers from 2WAY.IO, Bitmarkets, Bitseed, Chord, Creative Work, Mine, Nametiles, OB1, the okTurtles Foundation, Stampery, Tierion, and ZeroNet. Developers for these projects have all have faced daunting challenges when thinking about how they will develop their applications – start building components from scratch? Use this or that library? Is this the right tool? Can that software be optimized for building decentralized applications? As Blockstack matures, many of these questions will be answered for developers, who will then be able to focus on building beautiful interfaces and great user experiences instead of worrying about infrastructure development and maintenance.

Using Blockstack, developers will be able to create decentralized versions of popular online services like AmazonYoutube, Twitter, and Reddit, and even a whole new way of publishing and browsing websites, all while costing less in time and deployment costs then was previously possible. Developers will be empowered to eliminate central points of control and failure in their applications, weaknesses which have previously led to Internet censorship, repression of political or social dissent, mass surveillance, billions of dollars in financial losses, and hundreds of millions of compromised identities.

As I recently mentioned on a panel at the American Banker Digital Currencies and the Blockchain conference, decentralized applications change the economics of hacking by eliminating the ability to compromise millions of accounts with one successful hack; instead, criminals will have to hack into every device owned by individuals in a network of potentially millions of people, meaning that the hacker has to work that much harder, most likely making the attack cost more than it’s worth. Combined with payment systems like bitcoin, which can enable microtransactions, do not require identity information to work, and are not subject to chargeback fraud, Blockstack could be used to build a new kind of network that is more secure and more resilient than the web 2.0 that came before it.

For all these reasons and more, Bitseed and okTurtles have both joined the Blockstack effort. At Bitseed, we believe our dedicated full node device is a natural fit for software like Blockstack, and we look forward to working with the community to spread Blockstack nodes far and wide. In the spirit of the Blockstack mission to collaborate on common infrastructure, Onename recently announced they are working with the okTurtles Foundation to merge their blockchain ID projects and help advance the state of the art of decentralized identity technology.

Bitseed and okTurtles will both be participating in the first Blockstack community event, Blockstack Summit 2015 at NYU in New York City on September 12th. This event will bring together over a hundred of the top developers working on decentralized applications and blockchain technology today. I’m helping to organize Blockstack Summit, and couldn’t be more proud and excited about the great lineup of presenters, panelists, and attendees who will be participating in this event.

Blockstack is effectively taking the late-night conversations I had with Harlan from dream to reality, with actual working code and a vibrant, enthusiastic community contributing to the effort. There are still some issues to iron out, particularly around the exact definition of the stack and the governance of this new community organization, all which we plan to discuss and work towards resolving at Blockstack Summit. I believe that if we work smart enough and agree on a shared vision, this community has the passion and talent to make something truly amazing and world-changing. If this sounds like something you want to be a part of, I invite you to join our community and come say hello at Blockstack Summit.

Silicon Valley’s Deep Debt Weighs Heavily On My Future

Recently, I’ve been thinking a lot about what I want to do next with my life. Visiting home for the holidays and thinking about a “new year, new me” can do that, the way a long shower can sometimes lead to an existential crisis. Almost two years ago, I moved to the San Francisco Bay Area with plans to start or join a company that serves the bitcoin economy, and have spent most my time since pursuing that dream. I started a consulting website so people could contact me to learn about bitcoin, and I started a blog and podcast to share my ideas about how bitcoin and all things p2p can change the world for the better. The latter two endeavors have been more hobby than business, not netting me any notable financial gains. Instead, I consider them speculative philanthropy in pursuit of educating the public as to the best ways to acquire and use bitcoin and other p2p technologies. My more entrepreneurial endeavors, PawnCoin and Bitwal, have so far netted me no notable financial gains either, instead serving as learning opportunities that no accredited university could have ever offered me. I’ve learned a lot about cryptocurrency technology, startup entrepreneurship, and the Bay Area entrepreneurial ecosystem. I’ve also learned something which may forever change how I look at my role as an entrepreneur: Silicon Valley is in deep environmental and social debt.

My journey as an independent thinker started when I was a child, reading encyclopedias and history books in my free time, but reached a peak around the time that I graduated high school. I graduated early, leaving me with a lot of free time on my hands while my friends were still at school. This time was mostly spent playing video games, surfing Wikipedia, or watching documentaries online. It was these documentaries, and everything I learned from the Internet when I was following up on claims or references made in them, which led me to think deeply about my lifestyle and my own impact on the planet.

What I learned about the state of society and our planet’s environment made me more conscious about where the products I purchased came from. I chose to use a credit union instead of a bank, I began to buy organic products almost exclusively, I bought local produce more often to reduce greenhouse gas emissions and support the local economy, I bought an electric bike to reduce my dependency on oil companies, and I purchased clothing made from a hemp blend instead of cotton or polyester; in general, I started to “vote with my wallet” for a better world. This trend continued when I found bitcoin, which I saw as an alternative to a financial system that is rigged top-to-bottom to benefit the largest banks, corporations, and governments at the expense of everyone else.

Bitcoin was like a strong magnet, on the one side attracting me, and on the other, repelling. I have written before about how its total transparency was both reassuring and frightening to me, and about how unsustainable its mining process seems from an environmental standpoint. Addressing the sustainability concern is of deep interest to me, and is why I’ve been supportive of efforts such as Ripple and Ethereum, both projects that are trying to address some of the challenges that Bitcoin faces today. The reason Bitcoin’s sustainability is of such interest to me is that, as my personal story here describes, I am conscious of the impact that my existence has on the world and try to do my best to make my impact net positive. If I am going to put my money into something, and go so far as to encourage other people to also put money into something, I want it to be something that is holistically sustainable – something that is a win-win-win all around to the greatest degree possible.

Right now, bitcoin is kind of disappointing from a sustainability perspective. Bitcoin mining equipment itself has issues stemming from “dirty” component sources to questionable labor practices in certain manufacturing centers. Mining machines also require a lot of electricity to run, and while some of that electricity is thankfully coming from solar, hydroelectric, or geothermal power, I’d reckon a lot more of it comes from coal, oil, nuclear fission, or natural gas (it’s hard to say for sure since the mining network is decentralized and lacks meaningful statistics aside from its current and historical hashrate). I consider coal, oil, nuclear fission, and natural gas unsustainable due to the fact that they are non-renewable and environmentally destructive to produce and consume. Even solar, hydroelectric, and geothermal have their issues; the components used to create solar panels can be toxic, hydroelectric projects have been known to disrupt local ecosystems, and geothermal has only been deployed at a meaningful scale in areas near tectonic plate boundaries. On the whole, bitcoin mining is dirty business which will only get worse as the bitcoin price goes up and the network hashrate increases.

Thinking about bitcoin mining in this light has brought me to think about the broader environmental and social impact of electronics in general. Such technology has brought about rapid advances in productivity and connectedness, and yet average working wages in the US are stagnant and increased connectivity has brought with it mass surveillance and a new generation of narcissists. At the same time, landfills are overflowing with toxic e-waste, and recycling simply can’t keep up with the demand for new electronics, fueling a destructive mining industry and increasing demand for toxic chemicals and cheap labor (which only remains cheap because governments prevent competition in the labor market to protect incumbent businesses).

It is in this context that I find myself as a budding entrepreneur who is conscious of the impact my existence has on the world, and who seeks to always leave things better than I found them. I can’t even consider buying a laptop without feeling a twinge of guilt as I think of the workers exploited and air, land, and water polluted to create the device and deliver it to my doorstep; instead, I have chosen to use the same laptop since 2011 and I am not yet looking forward to the day that I must replace it. I have heard people justify such purchases as being a means to an end. I used to hear this argument in response to criticisms of environmentalists who fly on planes for work or play, and never found it very satisfying.

As I wrote in the first post on this blog, I have been thinking of shifting my focus from cryptocurrency to identity, and accompanying this shift is a desire to build and sell servers for personal use so that people can gain control of their digital identity and personal data. My concern is that, if I am to do this the way I perceive to be the right way, I face a lot of difficulty in doing so. I will have to source all of the components from both environmentally and socially ethical and sustainable sources, and manufacture the devices in facilities that offer people healthy working conditions and not just a living wage, but a thriving wage. Doing all that would be very expensive, even prohibitively expensive given that I am not a rich founder who can bootstrap a venture to success. Such a venture is something I’ve been discussing at length with my colleagues at the okTurtles Foundation as a means of making our work financially sustainable, and they share my concerns.

There is some precedent for success in ethical electronics: Fairphone is a really fantastic initiative to “open up supply chains, solve problems and use transparency to start debate about what’s truly fair.” That social enterprise has been alive since 2010, and has been independently funded without donations or VC investments. Ind.ie successfully completed a crowdfunding campaign and raised over $100,000 to finance the development of a distributed social network, which will culminate in the development of an “indiephone” and personal cloud platform which gives people control of their data. Combining these projects with networks like Maidsafe and Ethereum could create the ultimate p2p platform and fulfill my dreams of sustainable, ethical technology without the need for a new venture to catalyze change.

And where does that leave me?

I don’t know, but I do know that Silicon Valley and the electronics industry in general has a deep environmental and social debt to pay, and I wish to add no more debt to that burden.