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

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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]

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