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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