News and opinions on tokens and cryptocurrencies
Token Economy
📌  #19: Tezos, Colony, Crypto acquisitions
(also published on Medium)
🏛 Tezos disaster & governance structures
(This is becoming too easy, we're almost longing for a week where nothing happens, so we can see if we can actually come up with interesting ideas ourselves..)

The problem of crypto governance has been paramount lately, and will be for a long time.

We witness it every day. With BTC's Segwit and 2x drama. With ETH's hard fork and ETC. And so on.

With projects now raising absurd amount of monies in ICOs, there is now an additional friction point that can skew incentives for different parties in governance decisions.

All of this, mixed with regulatory and tax implications of raising for, and then running cryptocurrency networks.

With perfect timing, just this week we started chatting with a team about governance structures and how to best setup the whole ordeal. This also led to us thinking a bit more critically about current implementations.

One semi-default solution that has been adopted lately is to have an independent not-for-profit Foundation receive the "donations", and then fund or acquire a for-profit company that actually develops the protocol.

At this point, I'd like to introduce the biggest problem here: the inherent conflict of wanting to develop an open source project in a decentralized fashion while also becoming stupidly rich.
This is a hard one to solve for.

If you really care about the future of the project and network, then in the above structure you really only want to be heading the Foundation. You want to control the cash, make decisions about what gets developed, and so on.

But people want to become stupidly rich, and that's harder to do when you're in a not-for-profit foundation that can't distribute its "earnings" to owners/employees.

So the founders of Tezos, like many others, decided that they were going to continue working inside a corporate structure and then get acquired by the foundation at a later point for a pre-agreed amount of money.

Aside from it being most likely illegal (pre-determining things like these effectively doesn't really render the foundation autonomous and independent), that seems like an awful amount of risk to be introducing in the system.

Tezos is at this very moment dangerously testing the risks of the model.

This is super sad, but announced, as anytime there is half a billion dollars sitting in an account somewhere, people will disagree about it.

This is why we always suggest not raising this crazy amounts: the money isn't yours, and it will probably cause you more headaches than benefits.

The story is still unclear as we've don't know much.
The three main pieces to read are: the first WSJ report (link is to Archive, so we can read it for free), the more detailed piece on Reuters with the background on the founders (and some chilling quotes) and the post written by Arthur Breitman on Medium.

The story got some attention and many others have written about it including Bloomberg and Alphaville.

To make it short:
- the founders are saying that the Foundation's manager was trying to give himself an undue bonus; and that the Foundation wants to micromanage every single decision causing huge delays
- the manager is saying that the Foundation isn't really independent and that the founders want to control the stash as if it's their own
- there was a request for the manager to step down, but apparently it's not happening
- there are proposals for a subsidiary of the Foundation to hire the Breitmans

I don't want to draw early conclusions here, even thought I've always been critical of a project that wanted to raise infinite amounts of money (and every subsequent one after them).

Ouryel from ISAI VC, who backed the Tezos ICO, has a better view of it all and wrote his thoughts on "Is the Tezos ICO dead?"

We don't really know what should or is going to happen.

Personally, we feel sitting on half a billion dollars worth of cash + the tokens is a bit silly and would urge for a refund of at least the USD value of the donations. This would still leave an absurd amount of money for development as well as a very reasonable worst-case scenario outcome for the "donors". But we know that's probably not going to happen.

Some law firms also don't think it's gonna happen on their own and will try to make some money by bringing some kind of suit
For us, the big takeway here, which is really nothing new, is that governance is paramount.

We have passed on deals where we didn't like how the structure was setup, and I'm sure we will continue to do so.

We will now continue to spend more time in figuring out the best structures to allow for flexibility, speed, potential financial return but also transparency, accountability, fairness and decentralization and will help the projects we invest in with these type of decisions.

Ideally I think, should the project only aim to create value at the token level, we would prefer to see the team heading a non-profit entity, with a solid and diverse board, and well defined boundaries for operations of different types (eg. hiring, treasury management, code development, hard forks, etc.) as well as a sounds policy for team compensation + long term incentivization, which is another tricky but interesting matter.

I think we will start to see big "donors"/investors want to have some control oversight borrowing from the old-word of VC board seats - and if the power dynamics start to change might also start to see smaller investors pool together.

This is another great use case for something like Aragon, where everyone could have a say.

Bonus, probably what will be one of the most infamous quotes the crypto space will be remembered for were the party to end:

"Kathleen Breitman told Reuters that participating in the Tezos fundraiser was like contributing to a public television station and receiving "a tote bag" in return. "That's kind of the same thing here," she said."
☠️ Colony & the death of the firm
We are big fans of what the Colony team are working on (we are not investors, nor advisors).
Yes, it's been a long time coming and it's not quite there yet, but now that the foundations of what they are building have been unveiled a bit more we can appreciate how it's all coming together, touching on many hopes and beliefs that we share about the future or work and society more generally.
On the topic of future of work, Nick Tomaino just published an awesome post called “The Slow Death of the Firm”. In it he goes through the historical reasons for and literature about the existence of the 'firm' as an organisational structure, then moves on to how Bitcoin pioneered a new form of organization that is fully decentralised, touching on the potential benefits that such paradigm unlocks (new type of work, more global, inclusive, task-based, open; better alignment of interests; new products that were not previously possible). Embracing decentralization and forging new types of organizations requires the most idealistic philosophical intentions, as well as the utmost discipline to achieve. On that note, the last part of his post becomes very relevant to Colony, and other projects we are excited about (e.g Aragon). Nick talks about some of the hurdles slowing down decentralized organization from being mass adopted, namely governance and accurate measuring/rewarding of contributions.

Colony aims to address some of these hurdles. It is a framework that enables better human collaboration via codified governance and incentives, a new societal fabric abstracted from the real world legal constructs where participants can contribute resources to any colony and get rewarded purely based on their output. Reputation earned is 'spendable' in influence over the governance of relevant colonies. Colony itself will in the long run be run as a colony, past a first slightly more centralized phase.

If you haven't gone through the Colony Whitepaper, our friend Nick has done a stellar job at giving a high-level overview of it, with some exceptional drawings as a bonus too! At the end of his post you will also find a Q&A with Jack Du Rose, co-founder of Colony, where amongst other things we talk about how he pre-empted Marco Santori and the SAFT Project...
We are excited to seeing how Colony gets adopted once it is released in the wild, what emergent behaviours it will unlock and how it may play a critical role in reshaping 'work' as we know it.
Coincidentally, Colony released their Q4 Update last night.
🍰 Monetary policy in a Proof of Stake world
🎁 A guest post by Kyle Samani of Multicoin Capital

Vitalik released a new paper this week providing more details about Casper and Ethereum’s upcoming transition from proof-of-work to proof of stake. This got me thinking about monetary policy in a PoS world.

PoS changes everything. Most importantly, PoS changes how to think about risk-free rates, and therefore everything built on risk-free rates: the capital asset pricing model (CAPM), risk premiums, and more.

Let’s for a moment consider a world in which goods and services are priced in and denominated in some PoS-based crypto. Many implications:

1)The argument for “store of value” vs “medium of exchange” is nonsense. Many in the crypto community are rightfully frustrated by inflation. This is the core thesis for gold: a store of wealth that governments cannot inflate. These same people typically shun proof-of-stake based systems because they inflate in perpetuity. But this misses the other side of the trade: if you don’t want to be inflated, stake your coins! As long as less than 100% of coins are staked, you actually beat inflation by staking. This is the ultimate paradox: to escape inflation, you should keep your money in the monetary system that perpetually inflates.
2)The inflation rate of staking = the risk free rate.

3)Accessing the risk-free rate is permissionless an risk-free. No brokers, no intermediaries, no capital market, no interest rate risk. Just stake your coins.

4)Anyone can always beat economy-wide inflation by staking risk free. In the last decade, most major governments have pumped copious amounts of money into their respective economies. This quantitative easing has been far higher than inflation as measured by CPI or interest rates offered by governments on their own debt.

5)Because of #4, perhaps people will become more risk averse. If you’re guaranteed to beat inflation, you may seek out less risk. The rippling effects on risk premiums throughout the economy would be profound. The value of all higher risk investments could fall substantially.


Crypto will drive step-change improvements in economic efficiency at the macro level. This is measurable by comparing the market cap of a company versus the network value of a crypto that’s used to provide a 100% directly competitive service.

Let’s consider an example in which a company is a monopoly and controls 100% of global revenues in its target market with net margins of 10% and a PE ratio of 10x. This company would trade for 1x revenue.

Now let’s consider the same economy, but as a crypto. The revenue of the company = asset flows through the system. As long as the velocity of the currency is over 1 (which it has to be by definition in this context), then the total network value will be less than 1x asset flows = revenue of company. Velocities can vary significantly, but as a point of reference, the velocity of the M1 money supply in the US is about 5.5x.

Crypto networks will be far more economically efficient than centralized comparisons.
📝 Are crypto acquisitions ever going to be a thing?
This week there have been two posts on a rarely discussed topic, which we, as investors, find extremely interesting (and a bit scary): network acquisitions.

The question is: can one cryptocurrency "acquire" (to use a 20th century term) another? Or, can one tokenized ecosystem "incorporate" another?

It's a very tricky thing to think about, and in fact the views are widely ranging.

There's a fascinating post by Niraj Pant and Dillon Chen about forks and merges.

In it, they propose "merging chains" as another new tool to better align incentives and continue development of different protocols.

So, just as we can fork blockchains, we could also merge different ones (with various methods they try to imagine in the post).

It all seems pretty hard. Kyle from Multicoin thinks it's going to be pretty close to impossible, and wrote about why acquisitions in crypto are in practice not possible.

Here, we're still pretty unclear on what is actually going to happen if two teams working on projects in the same space decide to combine forces and work together. Another one to add to the "things in cryptoland that make my brain hurt but oh boy how more interesting is this stuff than SaaS" pile.
🐦 Thread of the week
Nelson Rosario, a lawyer covering cryptocurrencies, had the insane idea of tweeting: "One like, one unpopular Blockchain/Cryptocurrency opinion".
That lead to 900 likes.

He only got to 65, but what a great thread it was. We suggest you check them all out on Twitter, but we also have selected a top-12 here, even of some we don't agree with.

1/ trusted intermediaries are sometimes great
5/ the UX in this space is garbage
13/ outside of Bitcoin no one has proved a real long lasting use case for decentralized applications
23/ smart contracts are not smart and not contracts. Who is in charge of marketing around here?
26/ a future where every business has it's (its*) own token is a nightmare hellscape
30/ if Satoshi didn't do a whitepaper, and just did some blog posts, we wouldn't have to suffer through all these piles, except PonzICO 🔥
35/ with few exceptions, never have people made so much money by delivering so little of value
37/ the worst marketing move in this space has to be calling it an ICO, that said, stop. trying. to. make. Token. Generation. Event. happen.
45/ state issued crypto with better UX would destroy the current offerings
47/ we ever going to figure out environmentally sound PoW, or nah
48/ PoS just seems like it shouldn't work, you know it's true
54/ also, the State is going nowhere. what are we going to do have Blockchain managed use of force?
65/ too many people in this space seem more concerned with proving how smart they are than building. You're all geniuses. Now go build.
📌 Token Economy
A must-read, heart-felt and well-balanced letter from Adam Ludwin of Chain in response to Jamie Dimon's recent dismissive views of Bitcoin.

While the first part does a great job at explaining what a crypto asset actually is, the second part brings you right back down to earth from the current hypes of crypto land. 

There's still a long road ahead.
As always Vitalik's posts must be read at least three times before they sink in, and still we're left wondering if we actually got it.

This one covers "medium of exchange" tokens or appcoins as he calls them i.e. tokens that are used as the internal currency of a decentralised economy. These are by far the most popular type of token.

His point, eloquently made by using the equation of exchange, is that for valuations of this kind of token to persist in the long run there needs to be a constant flow of buyers and sellers. This is assumption is often wishful thinking because of:

- the implicit (opportunity) cost of holding the appcoin vs holding BTC/ETH and the potential to incentivise market manipulation;
- velocity, which for a medium of exchange token could (should?) theoretically be very high (but as we know has a negative impact of network value).

As an alternative solution Vitalik argues for medium of exchange token supply to have built-in "sinks" i.e. mechanisms to reduce token supply (e.g. explicit application fees used for token buybacks and burns).

"Sinking" in yet? 🛀
CoinList is officially spinning out of AngelList.

This was always expected, but it's still interesting to see that they are pushing full force on this front.

One notable thing, is that of the 6-people team, 5 come from AngelList and 0 from Protocol Labs (which developed the prototype together with AL).

The people coming from AL are also top-notch and top-executives, including AngelList's CTO, COO, and former Director of Product, Head of Fundraising Infrastructure.

Some of them were also involved in the launch of Republic, which was AL's foray into retail equity crowdfunding.

For this reason, I expect AL to have a significant equity stake in the company versus the single individuals, as investors in the main entity could otherwise get a bit nervous.
Linda Xie continues her very useful series of introductions to specific projects.

This time the focus is Decred, a fork of Bitcoin which introduced Proof of Stake alongside PoW.

Notable things:
- supply was pre-mined for 8%, with 4% going to cover costs for the team. I like this approach quite a lot.
- block rewards are split: 60% to PoW, 30% to PoS and 10% as development subsidy.
10% seems awfully steep to me as a dev payout, even if it goes to the Foundation and not the team directly.
- the cool thing about Decred is that there is a way for the network to vote on proposed changes (so the 10% could later be changed if the community felt it was too much).
Chris Burniske was Laura Shin's guest on Unchained this week, where he spoke about his Cryptoassets book and his models for evaluating token prices.

We were fortunate to be able to listen to him live at the venture retreat, but this is the next best thing :)
Balanc3 is a hint at what we'd love to see happen more in this space: transparency, accountability and good intentions.

This week they showcased the financial statements of Gnosis, Aragon, and Digix.

We feel there needs to be a standard here which, even if not very useful in valuing the tokens (as compared to a financial statement for a public company), could help people clearly identify projects that are run seriously and with a long-term focus.

Hopefully we'll see many other projects added to the list.

Mind-blowing fact: Gnosis has over $1B in assets. 😱🤑
To be discounted for liquidity (as they own most of their own tokens), but still.. wow
Speaking of gnosis, Martin shared a few quick steps to get started with development on their platform.
This one is gonna have to go to Pocket for a deeper read given the length and juiciness.

Alexander (an analyst at Lowe's Ventures) goes pretty deep explaining what mechanism design is and why it is such an important topic to grasp.
Oh, the irony of securing private keys. 

A tour inside Xapo's Bitcoin vaults in the Swiss mountains. 
Someone took the time to write up a detailed factual report on why Veritaseum is a total SCAM in plain sight. Not that it wasn't obvious just by looking at their website, where they claim nonsense like "Imagine Having the Keys to the Internet in 1994". 

This thing, whose founder owns 98% of its token supply, that hasn't shipping a single product yet, was trading at an implied network value of $25 billion in July, folks! 🚨
🤡 ICO Madness
CB Insights weren't just rolling their thumbs laughing at ICOs. They just unleashed the mother of all reports on the investment trends in this sectors. 
😤 First they ignore you, then they laugh at you, then…
It has become truly exhausting to keep track of Russia's position on crypto. 

The latest is about Government's plan to issue the Cryptoruble, a state-backed, non minable, subject to tax if origin cannot be proved, crypto currency exchangeable for Rubles presumably at some licensed exchange.

"Cryptofiat" might be what capital controls by centralized governments look like in the crypto age. Ironically, this will do niothing but further reinforce the value of uncensorable crypto assets.
💰 New funds
The first crypto fund-of-fund has arrived, in a sign that the industry is starting to mature.

It's Protocol Ventures by Rick Marini of Branchout fame. Target $100m starting from $1m of his own cash, aiming at backing 10 crypto hedge funds (Metastable and Neural being the first two).

PS: we own the URL, get in touch Rick! are releasing a lot of good content in conjunction with the start of their presale.

Carlos and team have done all the regulatory heavy lifting required to issue a tokenized security, then "forked" the Blockchain Capital playbook and made some significant improvements to it (apparently blessed by Brock Pierce himself). Namely that liquidity won't be depended on secondary markets alone (note that BCAP is effectively illiquid after being delisted from Liqui, so much for a liquid fund). In fact Spice token holders will have direct interest in the fund entitling them to receive exit proceeds as dividends as and when they happen (BCAP instead in part re-invests proceeds in part uses them for buy backs).

As we have shared in the past with Carlos, we are still on the fence about liquid venture funds. It's obviously a fascinating experiment and we like the democratic side of opening up the asset class to a broader spectrum of investors, but we don't quite understand the value of secondary market liquidity in the short term. It seems redundant for venture were NAVs don't quite move in the first 12-24 months. In fact we fear it may end up attracting the wrong type of investors looking to speculate in an asset class that requires patient capital. We also wonder about the psychological impact on the partners of having a traded price.

We'll watch from the sidelines with interest. 
A brand new shiny blockchain focused fund in the SparkLabs Group family is unveiled (note: not closed). 

Headed up by Joyce Kim (ex Freestyle VC, co-founder of Stellar), they will target mainly equity investments globally, carefully vetting ICOs and reserving 10% of the funds for passive long positions in crypto currencies. 
ℹ️ About us
Token Economy is written and curated by Stefano Bernardi and Yannick Roux.

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