Businesses that are based on network effects will start to be built “decentralized first”.
— Fred Ehrsam

Blockchain Tokens and the dawn of the Decentralized Business Model

Over the last few years over $1bn has been invested in digital currency startups from venture capital firms and institutional investors. Then something odd started happening over the last 4 months. A handful of blockchain-based projects have raised a combined $250m+, but none of that money has come from venture capitalists. So what the heck is going on?

Blockchain tokens.

These projects are raising money by creating and then selling their own tokens through crowdfunding on a blockchain. At first glance this just looks like a new way to raise money, much like how a normal company issues and sells stock to raise capital. At second glance it goes far beyond that.

There are a few key components to these tokens:

  • They are the currency that is used in the app itself.
  • Contributors to the app are directly paid for their contributions in tokens. This can be extremely granular.
  • The tokens are easily converted to any local currency since they are on the blockchain.

As an example, let’s take Storj. Storj is a system for decentralized file storage. Like Bitcoin or Ethereum, there is no central operator of the network. The project raised $500k of Bitcoin through a crowdfund of their token, Storjcoin, on the blockchain. Storjcoin allows you to buy storage space on the Storj network, and conversely, you earn Storjcoin if you contribute your own computer’s storage to the network. If you buy or earn Storjcoin, you can purchase storage on the network, hold them if you think they will go up in value, or convert them to your local currency (1 Storjcoin is about $0.11 right now).

This is where the phenomenon goes beyond just a new way of raising money. It is projects creating their own economic ecosystems to make the entire thing tick. More precisely, it is about an entirely new business model that is being created and tried for the first time: a decentralized business model. In this model there is no central controlling company, and has shared contributions and ownership by all involved. This business model is uniquely enabled by the combination of the internet and cryptocurrency.

Other projects using this model include:

  • Steem, a decentralized Reddit where people are paid to contribute news and content.
  • Augur, a prediction market where people are paid to contribute the outcome of events as “oracles”.
  • IPFS, a decentralized file storage system with a native token called Filecoin.
  • Even Ethereum and Bitcoin themselves, where people are paid to contribute their computing power to process transactions. Ethereum originally raised $18m in Bitcoin in a crowdsale.

You’ll notice one other thing about these “projects” or “apps”: they are really decentralized software protocols. A protocol is a fancy technical term that means: a standard language that lets a bunch of people on the internet work together on a specific problem. Popular internet protocols that have existed for a long time include HTTP (protocol that defines how information is transmitted over the web), SMTP (protocol your email app uses for sending and receiving email), SSL (protocol your browser uses for secure data transfer, the little green key in your browser when you are making a credit card payment).

Historically it has been difficult to incentivize the creation of new protocols as Albert Wenger points out. This has been because 1) there had been no direct way to monetize the creation and maintenance of these protocols and 2) it had been difficult to get a new protocol off the ground because of the chicken and the egg problem. For example, with SMTP, our email protocol, there was no direct monetary incentive to create the protocol — it was only later that businesses like Outlook, Hotmail, and Gmail started using it and made a real business on top of it. As a result we see very successful protocols and they tend to be quite old.

Now someone can create a protocol, create a tokens that is native to that protocol, and retain some of that token for themselves and for future development. This is a great way to incentivize creators: if the protocol is successful, the token will go up in value. What if the creators are too greedy and keep too much of the tokens for themselves? Since this is all open source code, people can just copy all of the code (called “forking”) and start the exact same network over again.

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Bitcoin and Ethereum were the first to use this decentralized model, and they used it to bootstrap currency/transaction networks. The same model is now being used to bootstrap other networks.

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