Past issues

Dec 10 2018

#61: Detokenizing

📌 An opinionated recap of the most interesting news in crypto
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Detokenizing
For all the talk about tokenizing equity, we have the first case of the reverse transaction: a company is “equitizying” its tokens.
A brief background first. Digipulse is a Latvian startup that quietly raised c 3,473 ETH in an ICO in October 2017 to build an online digital inheritance service for crypto assets. They publicly launched a product just over a month ago, making headlines on Forbes and Wired.
But it's worth going through what happened in between and in the lead up to this recent development, as openly summarised by Digipulse CEO in a post where he announced the new plan, while getting a lot off his chest:

- First he starts off admitting they resolved to selling a token because all other funding options didn't work out. Brownie points for the honesty.
- As a side note, the token was most likely sold as an unregistered security (we are not lawyers, but it promised dividends from a revenue share).
- Throughout the post he shares his frustration about token holders not using the token for its purpose, but only speculating with it. He goes: "out of the 320 sign-ups we’ve had until July 25th, only 2 people have actually allocated tokens to the service".
- Small step back. At the end of Feb they actually announced the launch of a beta product. The hidden surprise was that they revealed fiat payments would be an option in the live version, a change that would remove the need for the token to access the service.
- Then at the end of May the token got delisted from the only exchange that had decent volumes. It's a security, they said. Drama ensued.
- What now? They decided to remove the dividend from the token in order to please the exchange and get it relisted: "goodbye profit sharing, hello exchanges", they announced nonchalantly. And it worked like magic: in a tweet from early June the company wished everyone “happy trading” as they got re-admitted. Bagholders who were promised a dividend were not very happy at this point, understandably.
- But there's more. At the end of June they stopped developing smart contracts for some reasons explained in a rather convoluted post by its CTO, leading to the departure of an early contributor (with all his tokens obviously, as they were not subject to vesting).
- Then the long awaited launch in early July.
- Which takes us to this week, when they announced their intention to 'detokenize' by offering larger holders the option to convert tokens into the company's shares (subject to KYC/AML) and giving out the product for free to smaller holders (the ultimate literal bagholders). The tokens will remain listed until December, in case holders want to sell at like 75% below the ICO price (if they find any buyers that is), after that they will be burned.

You've got to give it to them though, they are still here trying to turn it around, honestly explaining what happened and putting their faces to the new plan. Kudos for that, but what an utter mess. Our best guess is they must have realized the regulatory troubles they may have got themselves into and are now thinking they can sweep them under the carpet (presumably they will try to sneak in the T&Cs that by converting to equity one agrees not to litigate?), running the risk of making things even worse for them now. We can only hope they are taking proper legal advice, though if they were they probably would not have been so open about it all...

Digipulse is most definitely not the only case of a centralized company left with a useless and worthless token, sold in a legally questionable way for the only purpose of raising cheap non-dilutive capital. So this may end up inspiring some others in similar situations to give this avenue a shot in the vain hope of product or legal redemption. Those who are still sitting on piles of capital, may even try to buy their tokens back on the cheap or somehow architect a way to return the funds ('equitizying' the tokens and then dividending the remaining cash out to the converted shareholders being one way of doing that). But in reality, many issuers will just cash out what's left, walk away and vanish.

It remains to be seen whether there can be a bright future, or any future for that matter, for companies that go down that route. It just feels like irreparable structural and reputational damage for projects at such an early stage that will still need to hire and retain employees, convince new investors and customers. It's hard enough the normal way.

Now what would be fascinating to see is a decentralized project detokenizing. What Digipulse is doing may lead nowhere but is obviously relatively easy (yet painful) to execute, given it's a centralized entity that is taking all the decisions. But what if a decentralized network somehow came to the collective consensus that the native token was redundant? How would that even work? Some folks for example have tried to picture the situation where extreme token velocity would cause the network value to crater exposing it to attacks, forcing the network to drop the native token for a reserve crypto currency. This is probably material for a whole separate post.

A closing thought. Despite being only a drop in the ocean, the Digipulse announcement this week may go down in the history books as the moment in time crypto starts waking up from a long hangover asking itself what the hell happened last year. That's the hope at least.
🔥Thoughts
🔦Featured on Token Economy, by Max Bronstein

Warning: long post (but worth it)!

Max outlines how the infrastructure of a permissionless, censorship resistant and trustless decentralized financial system is getting built, by going through some core "primitives" and the relevant projects, from payments to stablecoins, from asset issuance to exchange, from derivatives to indexing and lending.
🔦Featured on Token Economy, by Brian Flynn

A plea for airdrops, burning mechanisms and royalties, to make it easier for users to understand NFTs ecosystems and interact with them.
Tony's latest take on the smart contract protocol wars is a must read.

He makes a parallel with the risks of reckless paid marketing for traditional companies, where these well capitalized platforms are now aggressively pouring capital in ecosystem development (eg ecosystem funds) as a signal to attract developers *before* they have figured out the 'LTV' formula. Often for the only reason that a competing platform is doing it.

"...until the “LTV” for new developers is higher, ecosystem funds are just a way to enrich mercenary developers."

He closes speculating on how we'll get first evidence of real end-user adoption on one these platforms, which is a very thought-provoking take:

"...the first viral hit will be distributed through traditional channels (e.g. App Store, Play Store, WeChat) and the “crypto” part will be functionally invisible."
An excellent round-up of the state of distributed computing landscape by Dani at USV.

She touches on the pros and cons of many approaches across multiple axes:

- dominant shared distributed compute protocol with custom interfaces vs several independent machine networks
- dual token model for back/front end vs single native token
- hosted vs 'serverless'/on-demand
- on-chain vs off-chain computing
- targeted vs broad geographical go-to-market.
Quarterly report on the state of the industry by Outlier. Lots of good data points and trends discussed in there as usual. 

The message in this one in particular is that despite the negative listed price action since the start of the year, there has been a ton of positive developments in the ecosystem on all fronts, paving the foundations for further longer term growth.
Nik Bhatia is doing an stellar job with his series on the relationship between Bitcoin and Lightning Network and the implications of layered money.

Here he draws a parallel between physical gold and its layers and bitcoin and LN, ultimately concluding that in order to achieve world reserve currency status bitcoin needs to "evolve in layers".

"Each layer serves a different function. Base layers are for final settlement, while higher layers are for facilitation of economic activity."
Another thoughtful post from Hasufly this week, perfectly capturing the often overly-politicized and insular state of the bitcoin community and the risk this poses.

As many would agree, it's easy to feel intimidated or even alienated by some of the bitcoin talk going on in the social sphere these days, despite all sharing a fundamental belief in the potential of the currency (and despite this being a harmonious era). Hasufly rightly describes the scene as not yet being as "palatable to the large center" as it should be, obviously a big blocker to mass adoption given the large majority of the population is still converted to the 'Nocoinery' religion.

His closing message calls for a universalizing effort, on par with that of a religion:

"...we should go out of our way to talk to Precoiners instead of Multicoiners. When talking about Bitcoin, we want to be open and apolitical and instead emphasize Bitcoin’s core message: no more debasement of our money and monetary freedom for everyone — no matter what else you believe in."
Speaking of evangelizing. Nic Carter's line-by-line, data driven rebuttal to a sceptical Bitcoin piece by the Washington Post is awesome.

Strong closing:

"Pundits will continue to ignore this; not because they’re incapable of reading the data, but because they don’t want to. They are deeply afraid of the world that Bitcoin threatens to bring about. They prefer a paternalistic, easy-money regime, where occupations like punditry are profitable. Bitcoin promises accountability and a hard money standard."

Send it to one Bitcoin sceptic you know.
The fascinating back story of how a Bitcoin Core developer discovered a critical vulnerability in Bitcoin Cash, why he decided to disclose it anonymously and how it ultimately got fixed before it could be exploited.

It's so refreshing to see this type of support in the ecosystem, despite the history and often conflictual relationship between the two camps. An exploit of such a critical bug would have obviously sent potentially catastrophic vibes across the entire industry, so the greater good was put first. 🙏

And a closing reminder for all developers in this space:

"Working through this bug, which certainly had the potential for catastrophe, has reaffirmed my belief that the threat of software bugs is severely underestimated in the cryptocurrency world."

BONUS: a follow-up post by Neha Narula of the MIT Media Labs on best practices for
"Reducing the risk of catastrophic cryptocurrency bugs".
Moshe from Medcredits published an in-depth sceptical piece on the perpetual discount token model.

His main argument is that they distort, or rather delay, the market price discovery mechanism as they take time to end up in the hands of end users (by being exchanged in secondary market) and ultimately end up having the same effect as price-reduction. This inefficiency may have some short term marketing benefits in boostrapping a network, but in the long term he argues it may impact network growth.

Those are fair points, but we'll probably see some creative ways or models that overcome these limitations. 
If you missed out on Handshake last week, here's another post describing how a DNS works and how Handshake and ENS are addressing some of its weaknesses and attack vectors.

The importance of these projects cannot be overstated.
Great state of the union on the work going on in privacy, undoubtedly one of the most exciting and potentially impactful area of research and development in hardcore cryptography.
Privacy
Leland Lee explores the CryptoKitty ecosystem and imagines a hostile takeover scenario.

These are fascinating aspects to think about in a world of permissionless innovation. If someone can build out accessory-games to CryptoKitties, it means that others could also fork different parts of the ecosystems to new chains.
Kyle of Multicoin also has some thoughts this week around dapps taking over a protocol and what a centralization-prone company could do when forking an underlying protocol.

The example is Augur, probably given the stark contrast between the amazing protocol code and the suboptimal user experience.

Augur's founder Joey responded saying he doesn't think there will be enough incentives for a fork to happen.
Alex Van de Sande unveils his concept of Sponsored burning.

In this model a "sponsor" of the TCR would provide donation tokens that would be given back to the TCR users and curators, aligning incentives and removing potential attack vectors.
NuCypher has released its proposed economics for stakers.

For products that are fully decentralized and aim to exist for a long time in the future, the economic design of incentives is the key area to focus on: if you get it wrong, no one will use the product.
For NuCypher, what they need to target is high availability (nodes are consistently online) and long-term service (in order to support long-lived access policies).

Miners are initially subsidized via an inflation schedule that decays over time as fees increase along with network adoption. There are also differential compensation rates based on the length of time one commits to staking.

(Disclaimer: we are investors in NuCypher).
A Coinbase designer shares his reasons for the need of a design movement to make crypto more user-friendly, with a great analogy to 1930s street signs.

There are a number of challenges to solve:
1. CONSIDERING A NEW FORM OF “ADDRESS”
2. THERE ARE NO EASY ANALOGS FOR CRYPTO–NOT EVEN STOCKS
3. CREATING MEANING OUT OF VERY LONG NUMBERS

and a set of broader questions
- How do we design intangible money?
- How do we build trust in a concept, instead of a company?
- How do we make it all simple enough so a child can understand?


Not many solutions are presented, if not the need for a whole new design movement.
A technical look at Fomo3D code, which can hopefully lead people to use the same concepts for better applications.
💥Newsy stuff
David Marcus' tenure as board member at Coinbase lasted barely 9 months. In between his appointment and stepping down, he became the lead of the newly established Facebook's blockchain team, as we covered in #48.

Now the rumours are flying around on Twitter and private Telegram groups as to the real reasons behind this move. It most likely boils down to two: either Facebook is building something that will closely compete with Coinbase, or Facebook is considering to acquire the company. Both options would clearly put Marcus in a position of conflict of interest. The former feels more likely, but the latter keeps resurfacing...

What's certain is that Facebook is damn serious about their blockchain efforts and whatever it is they are planning will have an enormous impact on the ecosystem.
In other news:
- Wall st. Goldman can't miss the party and so they also announced plans for a custody solution for crypto assets. We are hearing they are nowhere near having it.

- Exchanges. After the ICE news last week, Germany's 2nd largest stock exchange Boerse Stuttgart revealed they are developing an ICO platform, a trading platform and a custodial service for cryptocurrencies.

- Buy-backs. The ICON Foundation have announced a $5M token repurchase programme as a "great way to give back to our community as well as reinforce confidence in our own project". It will be interesting to see if more projects start doing this given their (arguably) depressed prices; presumably those that implemented good treasury management are best placed.

- M&A. Shapeshift has made another acquisition: Bitfract, a handy tool for converting BTC in several other crypto assets in a single transaction, built on top of the Shapeshift API.

- Tezos. The Foundation and the Breitmans' motion to dismiss a class action lawsuit was denied, while Bitcoin Suisse and Tim Draper are off the hook (though Draper's motion was granted "with leave to amend").

- Traction. OpenZeppelin crossed 150k downloads, growing at 11% wow. No bear market on the developer adoption front.

- Disclosures. The Chair of the House Judiciary Committee owns crypto.

- Bitmain. They are gunning for $40-50B valuation at IPO, off of a projected $10B in revenues for the year. If they managed to pull that off, they will have captured about half of bitcoin value in 5 years (assuming it stays at these levels). Sustainable? Their treasury management raises some flags...
😎 Cool new projects
Middleman is super cool.

It's a hosted wallet on the cloud for developers to use when a user doesn't have a local web3 enabled wallet.

Stuff like this makes it much easier for developers to have unified user experiences, and for users to experience the future of the web.
The Matic team (which is developing a Plasma-like L2 for Ethereum) has released something super cool: a Zapier integration for Ethereum.

This makes use of their Dagger tool, and opens up a world of integrations to amateur developers and casual business users.
CZ has unveiled on Twitter a small CLI based demo of the decentralized Binance exchange, with issuing, listing and trading of tokens.
As we've been following Aragon's path to fully decentralize its governance and development, here is the latest awesome update: Giveth is launching an Aragon Decentralized Altruistic Community to work on core Aragon infrastructure, which Aragon will fund in the beginning.
Curated on a Product Hunt collection!
💰 New funds
What have we missed this time?
💸 Funding rounds
General Catalyst, Lightspeed, Pantera Capital, Kleiner Perkins, 122 West and Ascolta Ventures piled into the $5.5M "pre-seed" round for Audius, a decentralized Soundcloud.

Audius is building a dapp and a protocol that ensure artists have influence over the long term development and rules of the platform, while owning their data and relationship with fans.
Tokenized real estate is here. 

The St. Regis Aspen Resort is conducting a Tokenized Asset Offering (TAO) for its Aspen coin, which represents a share of a REIT that holds the resort. The sale is happening on the Templum’s platform as a Reg D 506c security offering, open limited to accredited investors.
🤡 ICO madness
tZero is back in the news, and as always it's about the big monies raised.

First they closed the ICO that started back in December last year at $134M, somewhat shy of the $250M target they had previously shared.

Then they raised a bunch more capital from Chinese PE firm GSR capital, whom they had an LOI from in July:
- $270M in tZERO equity at $1.5B post-money valuation (!!), valuing Overstock 63% stake at just short of $1B (vs its market cap of $1.2B).
- $30M in tZERO Security Tokens from Overstock.com, that purchased them during the ICO;
- Up to $105M in shares of parent company Overstock.com common stock.

Our heads are spinning with all these numbers. Where is the product now?
👮 This week in regulation
Some practical pointers in here on how to interpret and enact the limited guidance provided by SEC Director William Hinman on sufficient decentralization:

- Any network with node participation and geographic distribution at least as distributed as the Bitcoin network should be considered sufficiently decentralized.
- Reward volatility may vary for small miners without making the network insufficiently decentralized.
- The presence of centralized mining power (even up to 61 percent of weekly mining power split between three miners) does not make a network insufficiently decentralized.
- The presence of powerful core developers or an influential foundation does not make a network insufficiently decentralized.
- An open-source, proof-of-work network may be sufficiently decentralized at inception.

As a reminder though, the SEC has not yet confirmed it shares commissioner Hinman's views.
ℹ️ About us
Token Economy is written and curated by Stefano Bernardi & Yannick Roux.

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