📌 TE #23 incl. tokenized debt, higher-order tokens, German BaFin ICO update & more
Token Economy
also published on Medium
🌊 Opening the floodgates
The news flow this week suggests that retail and institutional crypto floodgates are just about to burst wide open.

Let's recap:
A new feature that lets Square Cash users buy/sell (not send yet) bitcoin through the app has been rolled out to a small subset of their user base.

The app ranks steadily #1 in the Finance category of both the US iOS/Play app stores, so it's a pretty big deal (even more so as a $17 billion listed company).

The bet is that Bitcoin resonates much more strongly with the mobile generation (*cough* millennials *cough*) than more traditional investment asset classes.
Unsurprisingly given Jack's dual hat, Twitter came out at the same time with a post where it claims the platform is attracting the crypto conversation, with a remarkable correlation (or causation) between Bitcoin price and tweet volumes.

In other news, Twitter is probably trying to sell its data to Crypto hedge funds...

PS it's happening on Google too.
The CME announced at the end of October its intention to launch Bitcoin futures in Q4; its CEO this week confirmed that futures might start trading in mid-December.

The CBOE followed suit with some positive statements about Bitcoin ETFs coming to market soon, and Ether derivatives might not be too far away either.

Large hedge funds and asset managers have been waiting anxiously on the sidelines for the ability to go leveraged long/short in a collateralized bitcoin instrument, and the wait seems to be finaly over.

The Man Group, with $100 billion AUM, is ready to pull the trigger, among many others that, according to Novogratz, are at best six months away from doing the same.
Coinbase just released a new product specifically aimed at institutional investors, with the aim of unlocking “$10B of institutional money waiting on the sidelines”.

Coinbase Custody provides institutional investors with at least $10 million in deposits a secure digital asset custodian to store client funds, for a hefty price of course.

We all knew this was coming, as it's an extremely obvious gap in the market today, and Coinbase is the best positioned company to provide this service.

What's most interesting in this announcement is that Coinbase holds $9 billion of customer funds on its platform.

Everything in crypto spurs a million thoughts, and this is no different.

The premise of Bitcoin and decentralized currencies was that we could stop relying on third parties to control and gatekeep our monies, but it seems most people still favor the convenience of the "I forgot my password" link over their financial sovereignty.

Does this mean it's all moot? Does this mean this game is now really only for speculators?

I spoke recently with a private bank, and the blockchain lead said that 100% of the customers who expressed interest in buying cryptocurrencies would have wanted the bank to hold the coins on their behalf.

To me, this is mind blowing. It goes against all that brought me to this space in the first place, but I also realize not everyone will be onboarded to cryptocurrencies and decentralized computing with my ideals and goals.

Despite encouraging open-source initiatives like Token Standards aimed at pushing secure self-custody solutions, we need to start accepting this fact, and still make sure we strive to build fair, accessible, uncensorable, trustless systems that can help and be valuable also for people that don't really understand it all, as we use hundreds of technologies we don't really understand.

BUT, the risk of having people misuse a technology is real, and it needs to be managed. Education is a start but we hope to figure out other ways to do it too.
So where does that leave us?

In short, the friction points that kept the masses away so far (e.g. user experience, security and custody, collateralization) are getting properly lubed up.
If you thought 2017 was crazy, wait for 2018. Despite the hacks, the forks, the scams, the lawsuits, the regulators stepping in, it's not hard to foresee things getting much wilder next year. 
While our focus remains firmly on early stage projects getting off the ground to build the future of a decentralized web, we are not immune to the amount of capital that is rapidly flowing downstream and the media headlines that prey on it. With so much focus on the speculative side of this asset class, the risk is that the disconnect between fundamentals and prices will continue to expand, as well as volatility. 

We will continue to try not being overly distracted by it, keeping our eyes on who's building for the long term rather than who's buying and selling.
💋 SpankChain Q&A
While SpankChain is wrapping up its ICO, we thought we would get its founder Ameen to highlight some of the interesting things they have done in the process.

As way of background, SpankChain is re-architecting the technical and economic infrastructure behind the adult industry, a $100 billion global market where intermediaries still get away with extracting preposterous value, censorship and discrimination. The industry feels ripe for decentralization via blockchain-based applications and, as pointed out by Kyle, SpankChain could onboard millions of new users to crypto.

So let's get on to it.

TE: How did you and your team end up working in the adult industry?

AS: So after leaving my year-long job as the ConsenSys expert on payment channels, I started out looking for the best payment channels use-case, which turned out to be live cams and payments for the adult industry. As we did more more research on the industry, we started to learn about the scale of the discrimination against the adult industry embedded in our existing financial infrastructure, and then we become even more committed to helping adult industry performers and businesses migrate their funds to Ethereum. 

TE: You’ve run your ICO with a rather innovative way price discovery mechanism. Can you explain briefly how the token sale has been structured and what you’ve optimized for? How will you ensure transparency in the strike price reveal phase? Anything you’d do differently now that it’s done?

AS: So the token issuance was structured as a custom, blind, same-price, state channels auction. With our design we were optimizing for the flexibility to select the quantity of tokens issued and the token price after receiving all the bids, instead of before. We still operated within pre-determined constraints, because we committed to selling between 30-60% of our tokens and raising between $5M-$69M, but we were able to respond to the market within those constraints. 

As for ensuring transparency, the final strike price will be public and the set of signed bids that we ultimately select will be sent to the smart contract to be verified and will be public, so our community will know exactly which bids were accepted and the price offered in each. 

Now that it's done, I don't think I would do anything differently, except maybe ask BCH and BTC to wait until our ICO was over before having their civil war.

TE: You have architected a multi-token economic model a la Gnosis: a utility token plus a usage token. Can you elaborate on the need for two tokens for your economy to function? Where does that leave you from a regulatory perspective? At the risk of over generalizing, which types of network should consider a dual token structure?

AS: The "two-token" system we used is helpful because it allows us to decouple platform usage rights from the price fluctuations of our utility token. Holding 1% of SPANK allows a performer or platform business to use 1% of SpankChain infrastructure fees, regardless of the price of SPANK. With the proof-of-spank verification game, we're pretty confident that we fall firmly in the "utility token" regulatory framing. Generally speaking, application networks with shared, public infrastructure could use our token model to help subsidize usage by early adopters and to act as a dynamic license to use the platform. 

TE: How will you attract performers away from existing highly trafficked sites where presumably the overall economics are superior, despite paying higher fees? More generally, what’s the biggest risk factor in the success of this project?

AS: We'll attract performers by offering them better rates, access to our valuable clientele of the newly crypto rich, and shared ownership in the network. Over time, we think the best ones will help attract their existing users as well. The biggest risk factor to this project is probably us spending ourselves to death marketing before the consumer market is ready to adopt crypto in earnest. It's really important for us to get the timing right.

TE: From a tech perspective, you have implemented payment channels. Can you briefly talk about what payment channels allow you to do?

AS: Our payment channels allow us to have scalable transactions with no gas costs with all the security benefits of the blockchain, without having to wait for sharding or plasma. Through our in-browser payment channel wallet, Vynos, they allow our users to pay in tips to our performers and to watch pay-per-second private shows.

TE: Tell us a little about vynos.tech. What is is and what’s the plan for it?

AS: Vynos is our in-browser payment channel wallet and allows our users make micropayments for both live and static content. It will integrate with our camsite, clipsite, and third-party applications across the SpankChain ecosystem to allow users to seamlessly move between all our apps. In time it will be expanded to include token transfers and hashlocked atomic transactions, which will allow SpankChain to make instant payouts to performers and businesses. 

TE: Tell us a bit more about the SpankFund, what’s the plan for it and who should reach out to you about it?

AS: The SpankFund is a way for us to subsidize usage for early adopter performers and platform businesses and help accelerate the development of core services and applications on our platform. If you are interested in building at the intersection of p0rn and blockchain get in touch!

Disclaimer: one of us personally participated in the ICO.
📌 Token Economy
Ryan rings the alarm bell once again, picking up on SEC Chairman's remarks last week and impersonating coach D’Amato:

"We can mobilize, self-regulate, and align around some common sense disclosures and token sale best practices, or we can get the shit kicked out of us, and watch (much more repressive) regulation come from on high."

Ryan's making a strong case for Messari, his new endeavour aimed at bringing transparency to the crypto world which we have covered in issue 20.
Bitcoin Clashic has got to be one of the coolest stories of the week even if underreported. 

After Bitcoin Cash's planned hard fork, someone didn't go with the flow and continued to mine on the old chain.

And then, a website and twitter account spun up and we also have Trezor support for it.
Great post by Ryan from Blockstack where he outlines a framework for assessing whether a network necessitates a protocol token. 

TL;DR if both answers are yes, good chance it does.

1. Are the operations consuming a resource of every node on a decentralized network
2. Is there a key action on the network that can be incentivized by token distribution?
Jordan Cooper has quite a contrarian view on dapps. 

While the consensus seems to be that the best investment opportunities in the crypto space will continue to be at the "fat protocol" layer, Jordan is wide open to the possibility that early winners may emerge in an uneven and unpredictable fashion at the application layer of the stack, much earlier than what adoption curves would suggest.

Key: remain open, question everything, particularly the consensus (see what we did there?)
Wow, strong piece here.

I'm sure you've all had these thoughts. I certainly have.

Sometimes it does feel like the dream is dying. Obviously in the crazy ICO space, but more often than not even in the BTC space.

This piece is built to push IOTA's model, but I do think it is an issue worth thinking and talking about. I am wired to never question Satoshi's model, but we might just have scraped the surface of what's possible and should think more about other models.

As a bonus, Time Berners Lee also shared his fears about the web specifically this week.
A great simple comparison of tokens and equity in a company that will ICO and how VCs think about it by Jamie from Pillar VC.

TL;DR is that, based on their assumptions acquiring tokens directly often represents a better financial return for investors, but that they still prefer equity for all of its additional features.
An interesting segway into the next post, a tweet that sounded a bit too realistic for us.

"#BCASH Manifesto in Fleecing Noobs
1. Accumulate cheap $BCH at $300
2. Exploit mining hyperinflation to accumulate more
3. Tell all your insider strategic influencer buddies
4. Wait till B2X is cancelled and pump the price
5. Tell everyone it's the new $BTC
6. Dump... GG"
The BCH story is not finished, and Ryan Selkis had a very widely shared post this week with his thoughts on why the Bitcoin Cash story is not to be ignored.

There's a lot of explaining of specific interests for different groups and a solid dose of speculation about motives and actions.
If you're interested in Byzantine Fault Tolerant (BFT) consensus, and you should be if you're here, this is a good read explaining the differences between three approaches: the two Casper versions (the Friendly Ghost, Vlad Zamfir's work and the Friendly Finality Gadget, Vitalik's work), and Tendermint (on whose blog this piece appears).

You can get a good read at this in ~10 mins.
Truffle continues to ship awesome stuff for Ethereum developers all over the world.

The latest is Ganache, a personal Ethereum blockchain which you can use to run tests, execute commands, and inspect state while controlling how the chain operates.
I'm leaving this for last, because it does seem that people think we don't have enough content.

Karpeles just posted about the whole situation with Mt.Gox's bankrupcy proceedings - and, to finish it up with a cherry, proposed an ICO to raise funds to bring back Mt.Gox.
😎 Cool new projects
We first featured Dharma in issue 9, so it's awesome to hear they have since been heads down working on refining the vision and the product roadmap while forgoing a token sale, opting for YC instead.

"Dharma is not currently doing a token sale and will not do so unless a compelling need for a protocol token emerges in the ecosystem’s development, be that 2 months from now, 2 years from now, or never." 👌

"Foregoing a token sale has given us the agility to experiment and learn." 👌👌

Music to our ears!

There have been a lot of talks about and a number of teams setting off to work on tokenizing equity, not as much about debt. Dharma as planning to address precisely that, by developing a standard protocol, built on top of 0x, for the issuance, underwriting and administration of tokenized debt agreements.

Some of the possible applications built on Dharma are super interesting, like tokenised SAFTs and peer-to-peer margin lending.
Another example of a cool project that has no intention to do an ICO. Let this be a trend!

Set is building a protocol to bundle together any ERC-20 token into a higher-order abstract token collateralized by the underlying tokens via smart contracts.

The immediate use case is indexes and ETFs, competing with the likes of Shapeshift's Prism (though Prisms are collateralized by Ether rather than the underlying tokens). We could also think of a secondary market for LP interests in crypto-funds, powered by the Set protocol.
Missed this one with all the drama last week, but I think it's a really interesting one.

Gramatik, a pretty famous electronic music producer, sold off a future percentage of his revenues for $2.25M.

This has been an obvious use case for a while, but it's really hard to implement it in a fully trustless way, and I think I always made the mistake of saying "well that's not trustless nor legal" when it seems people don't care that much about either, and just starting might be more important than getting it perfect.
🤡 ICO madness
Plans for this were first reported in September, and it looks like it's actually going ahead now. The website says "Pre-ICO Starts Soon".

A pretty mind blowing fact, other than this is literally a floating hotel and casino which is being built in Norway and will presumably sail to Macau when ready, is that the actual Norwegian government is financing 80% of the construction cost (the numbers reported don't quite add up though). Is this a first for a government endorsed ICO?

Back to the ICO, the idea is to issue a crypto-currency to circumvent capital controls for Chinese high-rollers who pay frequent visits to Macau casinos. There is a large junket market that currently handles that flow of money and takes exorbitant fees in the process, so Dragon crypto-coins, exchangeable for non-negotiable chips, will supposedly eat the junket companies lunch. Some of the proceeds are to finance construction, some are effectively to pre-pay some casino chips.

Shady at best.
👮 This week in regulation
As anticipated last week, the German financial authority BaFin has issued a more detailed position on tokens and ICOs.

In short, it's very good news for the German crypto ecosystem and for Europe as a result. In fact it's probably one of the most welcoming regulatory stances on crypto currencies so far.

For a dissection of it we suggest reading Neufund's post.

Alternatively here is a TL;DR:
- Tokens are 'units of account' rather than securities, and therefore will not be fall under securities regulations.
- Exchanges need to be authorised by BaFin via a lightweight broker license (since they are not dealing with securities)..
- BaFin reserves the right to investigate token issuers on a case by case basis, detailing a list of risks associated with investing in tokens.
After enacting the ban on the binary options industry in October, the Israel Securities Authority is very worried that fraudsters will move into ICOs.
💰 New funds
Starting to see dedicated ecosystem funds, we think this will accelerate as for the first time a venture fund can compound its exposure to an ecosystem as well as hedge the risk of investing in a single project.

This might warrant a post for itself, but it's simple:
- if you hold Steem tokens and then invest in Steem projects, if a project goes well and it makes Steem tokens more valuable, you are doubly exposed to upside.
- on the other hand, holding Steem tokens is a hedge if you get the wrong Steem project but are still right on the ecosystem bet.
😤 First they ignore you, then they laugh at you, then…
Interactive Brokers chairman Thomas Peterffy  took out a full page ad in The Wall Street Journal to warn about bitcoin and that it's best it stays as separated as possible from the real economy.

I'll be honest, I'm not sure about the implications of having Bitcoin derivatives and futures being mixed in in retail and institutional portfolios, but can't imagine it being much worse than being exposed to student debt or other fully-artificial and toxic assets.
Presented without comment.
ℹ️ About us
Token Economy is written and curated by Stefano Bernardi and Yannick Roux.

If you're building a new fundamental piece of technology for the future, please reach out 🤙
Feel free to send links to include in the next issue, or any comments you might have on this one!
Token Economy · The Dolomites · 38121 Trento TN · Italy
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