Editor’s note: Adam B. Levine is the Editor-in-Chief of the Let’s Talk Bitcoin Network, an independent, original content platform focused on the future of money. He is also the Chief Visionary Officer at Humint.is, a consortium working with brands and individuals to build customer cryptocurrencies for good. Contact Adam here and follow him on Twitter @GamerAndy.
Crowdfunding has become increasingly popular over the last few years and the market somewhat saturated. One of the problems of crowdfunding is if you don’t need or want the reward offered in exchange for your donation, there isn’t much incentive to support a project. This is a problem we can change, and by doing so reinvent cryptocurrency as we know it. I’ll also describe “The Startup” that I believe many people will eventually create to provide the services described. Please steal the idea.
There’s No Reason
Why are cryptocurrencies valuable? In the case of Bitcoin, because it was the first and is by far the largest, receiving the majority of monetary and media attention, with the one harmoniously building the other. Look at the second most popular coin, Litecoin, and the value is not as clear. The technical changes made compared to Bitcoin are slight. Unless you really value a larger monetary base (4x more than bitcoin) or faster confirmation times that provide illusory benefit (you just need 4x more of them for the same amount of certainty), there isn’t much you can do with Litecoin that you can’t do at far more places or with far more people than Bitcoin.
This is because the only reason to buy Litecoin is an expectation that its value will increase over time due to more people buying them speculating the same thing. Lacking a good reason or first-mover and earned-press advantage, you’re relying on the greater fool theory of investing which is a recipe for long-term disappointment. Indeed, the great hope for Litecoin or any standard alt-coin (any cryptocurrency that is not Bitcoin) is to find its way to an exchange that benefits from easier trading than in forums or chat rooms, where trust can be hard to find.
The thing we’re missing is a reason. The greater fool suffers from there always being a limit to the number of fools before the gains start to slide and buyers turn to sellers trying to lock in gains. Once upon a time the value of dollars was secured by gold. You could trade in a minimum amount with the issuer of the currency (the federal government, or private banks depending on the time period) and this secured the purchasing power of the dollars. Fixing a price to gold isn’t because gold is the only thing you can peg it to, but rather because it’s thought of as something valuable and can be universal in nature. But not everything needs to be universal in nature, and some things that are universal in nature don’t need to be valuable themselves as money.
Goods and services are valuable in monetary terms but not in a monetary sense. By fixing issuance of a custom cryptocurrency to a good or service, with a company ready to accept it at a fixed or floating rate, a single individual or group — even only capable of local distribution — can support a globally tradable cryptocurrency should the story be compelling enough or the private issuance small enough.
Why We Mine
This means that even in a currency with the entire money supply in circulation, you can have a long-term controlled deflationary trend simply by lowering the exchange rate at predictable intervals allowing people to buy or sell in advance of the change based on their situation.
So mining really is a marketing decision; you pay the price of not being the first seller of the currency, instead relegating yourself to 50 percent while allowing those doing the work to run away with wild profits. They’re the ones who get to tell everyone how great it was doing it.
Backed Company Cryptocoins
Take any freemium software-as-a-service company; for premium features they could accept U.S. dollars as happens now. They could also issue their own cryptocurrency, a token that offers savings when used with the company it is associated with. The service would accept at 20 percent off the U.S. dollar prices for all their services. It would start off mined, and 50 percent of the block reward would go to the company, with 50 percent going to the miners.
The miners have a coin that has real value because from minute one, you can use it to purchase these particular services. And yet as a cryptocurrency, it is tradable for Bitcoin, on exchanges, etc. The network will initially start because computational power is cheap and early adopters are more inclined to devote CPUs to mining cycles than they are to dollars on a service they might not even want.
If your company only accepts dollars, there’s no reason for your customers to care about the company once their needs have been met. With a proprietary cryptocurrency, simply holding some of their value in your coin means they profit from the growth of your business and future price increases in the cryptocurrency value.
This can be done naturally by adjusting to the market over time. Or it can be done via a long-term schedule published in advance to allow the market to price in the information and bias the customer’s mental math toward holding your coin for future gains. Since a project’s coin is really just a claim on future value from that specific project, anyone holding your coins is a stakeholder vested by their actions whether mined or purchased on a market. If more people are interested in your project or product later, a fixed-supply token will, seeing more demand and no change to supply, become more valuable both for the company and any users holding it.
One of the most appealing things about cryptocurrencies like Bitcoin is their rules-based nature. The rules are set out in advance and apply to everyone evenly because the protocol simply has no capacity to accept anything outside the rules or to deny anything within the rules.
Ideally this would be done on a schedule that causes slow, steady deflation in the currency over time. Each token becomes more valuable because fewer tokens are required to pay for the service that still costs the same amount of U.S. dollars.
Once a customer spends the coins with the company, the coins don’t need to be destroyed; as the company receives them they should be sold back into the market. SaaS is an exceptional early use-case for this sort of proprietary-token service. Unlike most businesses, cost is primarily front-loaded with only maintenance and R&D as primary costs after the initial launch.
Because of this, the per-user cost of providing premium features on SaaS is basically a rounding error rather than a relevant factor determining the sale price. The company could sell them back into the market to take profits in Bitcoin or another currency of choice.
At the point you wish to stop trading with them (which should be at least five years in projected duration), there should be a final turn-in period either done surreptitiously, where received stock is simply not sold back onto the market, or be announced, which might lead to a rush against the price. If built on one of the upcoming Metacoin platforms like Counterparty, these tokens can be made “callable” at a contractually specified price on a contractually specified day. So where every Cryptocurrency used to live on forever once it was created, experiments and mistakes can now be unwound.
Once the market is mostly cleared of the legacy coin, a new one can be launched and the cycle can start over again.
Assets, Crypto or Otherwise
You can create a price with anything simply because someone, somewhere is willing to trade something else for whatever you have. Obviously some assets are better than others, but instead of thinking about raw goods, let’s update our mindset.
Any product, good or service offered by a company can be physically backed by a product, and the more popular the product the more attractive it is as a good to hold. With a blockchain-type product, messaging, financial or otherwise, the course is simple; it’s a rotating option that grants whomever holds the “share” (see Stan Larimer and Daniel Larimer) a copy of the new blockchain product on a set date at a fixed rate.
Even after a company has exhausted their potential ideas and abandoned such a coin, the very fact that it is so inexpensive could be its resurrection. Another company could opportunistically buy those very cheap and abandoned shares, then announce they’ll be honoring them for their service or product with the rate of exchange being the characteristic that defines the intrinsic value since they are one and the same.
With physical products, you have the liability of existence, and that means the equation is different. You must project production and determine your monetary base based on a multiple of that number, with again a gradual increase in value over time to promote users to spread out spending over a slope rather than piling in all at once.
Let’s say I can produce 10,000 high-quality rare wood-cutting boards in a year and I want to start redeeming at 100 woodcoins per cutting board, with each cutting board going for $50 when paid in dollars. That gives us 1,000,000 Woodcoins for a total money supply once mining is completed. Your production is such that you would rather ship more at the end of next year than the beginning, say because you need to ramp up production.
Every month, you lower the price a little bit in woodcoins. These planned price drops are points around which the value of Woodcoins rise in advance because they will be able to buy more in the near future.
Aside from reference products, in this case a cutting board, an entire offering could be built around this with the prices scaling to suit those with small amounts and those with large amounts. As you collect woodcoins in exchange, you have the ability to either sell them back onto the market, which lets you capture the market price they now represent, or hold onto them and draw down the money supply to further increase the value.
How Is This Crowdfunding?
The crowdfunding connection is inherent because a coin can be introduced, mined and traded in advance of the product being ready. The market price is derived based on the expectation of future value of the project the currency is built around. When the currency can be redeemed per the social contract by the issuing company for the product, the promise is fulfilled to those who bought the currency to pre-purchase the good or service.
This allows people who don’t want the eventual reward to still purchase, evangelize and participate in your project. Even if they don’t want it, the more successful the project is, the more valuable the currency that interacts with it is and, therefore, they gain financially even if they don’t give a shit about the project themselves. It turns crowdfunding from something where you buy merely to support your passion into something you also buy because you speculate that lots of people will be passionate about it, therefore increasing the value when you buy early.
Create This Ecosystem
So who can do this? Just about anybody. And anything that people pay dollar bills for can be used to imbue a company cryptocurrency with value. It is still decentralized, it is still out of the control of the company once created and it is definitely possible to fail with market forces at work. But it does change the way one thinks about crowdfunding projects. There’s no need for Kickstarter at all if the right pieces can be brought to bear.
Pick Your Platform
While many companies create products, very few create cryptocurrencies. The most common way a cryptocurrency is created is by forking another cryptocurrency, nearly all of which derive from Bitcoin. Bitcoin is a revolutionary and incredibly powerful tool for P2P monetary transactions, but its development legacy and the need for a continuous blockchain from its first launch means that it has many legacy issues and duct-tape fixes. Lacking knowledge and appreciation of these complexities, many talented developers find themselves running into repeated frustrations. Furthermore, Bitcoin is an all-in-one client which means individually desired functions can not be easily separated out.
The startup will offer alt-coin creation services and economic consulting to best determine the fundamentals of the new coin and implement the vision. To that end, it would be desirable to use one of the metacoin platforms that can be easily modified and have a clean development history free of the legacy issues from coins developed early in the cycle. The whole ecosystem is open source so there is a wide array of tools to choose from already and many more on the horizon.
Example platforms include NXT, Bitshares, Ethereum, the CounterParty Protocol and the Mastercoin Protocol.
The Results
Results include a reinvention of crowdfunding and the ability for any industry from software as a service to brick and mortar to create a class of enthusiastic and invested consumers incentivized to grow your brand. It’s a way to leverage into the Bitcoin ecosystem, and it’s a reason to own an alt-coin that’s not the expectation of more fools piling in.
And we’re just getting started.
Lead illustration by Matt Innes; additional illustrations by Bryce Durbin