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A Token is Not a Short Term Carrot, Ceci N’est Pas Une Pipe
Consider the much-discussed painting, The Treachery of Images (“Ceci n’est pas une pipe”; “This is not a pipe”), by the French surrealist painter, René Magritte (1898-1967).
Magritte highlights for our consideration the idea that an image of a pipe is not the same thing as the pipe itself. His statement is taken to mean that the painting itself is not a pipe; it is merely an image of a pipe. Hence, the description, “this is not a pipe”.
Conversely, a token is not a short term carrot, nor a stick for that matter. Just having a token doesn’t mean that you have a working business model attached with it.
Amidst the flurry of ICOs we are seeing, a trend is emerging in token distribution practices: reserving tokens to incentivize users to participate or take action.
There are different ways this type of incentive is being thought of, one of which resembles getting a free drink coupon. So, you enter the bar because you were given a free drink ticket. You order the drink and mingle as expected, giving the illusion you are hooked and will stay, but do you actually stay and spend more? You could leave for a variety of reasons, but the ticket alone wasn’t the clinching factor in keeping you there. It was only good enough to get you there to try it.
Just as companies need a strong value proposition [read], the token being part of your product, also needs to have a strong value proposition:
Token Value Proposition Test: By whom will the token be used; how; for what benefit; and resulting in what valuable transactional activity?
— William Mougayar (@wmougayar) July 14, 2017
Token Value Proposition Test: By whom will the token be used; how; for what benefit; and resulting in what valuable transactional activity?
— William Mougayar (@wmougayar) July 14, 2017
Acquiring users & getting the token to work right with said users is a dual challenge. Doing both doubles the difficulty factor: 1) gaining a critical mass of engaged users (or developers) for your product, and 2) finding a sustainable utility factor the token together.
This brings us to the topic of Token Utility Fit (TUF). It is analogous to product-to-market fit (PMF) in startup-speak. For a refresher, please read Product/Market Fit is a Continuum.
Just like PMF, until the token fit is evident (via metrics), you are still at the hypothesis level.
Looking at the market, I’m seeing two types of startups and companies who are contemplating, or implementing ICOs, and I’ll admit being in the enviable position of interacting with several of them, each week.
One type is the new startup that aims to design the token as part of a new product. They are typically targeting an existing market, but with the token as the novelty. Example: Blocktix, for event promotion and ticketing, or AdEx, who wants to create an decentralized Ad exchange. [Disclaimer: I don’t have any affiliation with these 2 examples, nor am I recommending them. They are just examples.]
Another type is the existing startup or company who wants to apply the token to their already-running model, with the variation being on how to accommodate such tokens. Kik is one example that has been publicized already [I did a fireside chat with Kik’s CEO Ted Livingston at the Token Summit in New York last May]. There are many other examples being planned, as my Inbox is filled with some of them. The scenario goes like this: Company X has an existing product. They want to add a token. I immediately ask them to focus on token functionality and refer them to my post on Tokenomics that outlines the various utility scenarios.
In either cases, the working token is a hypothesis waiting to be proven. Initially, you assume that user behavior will be aided by the token. In practice, only real traction metrics tell you if you were right, wrong or need to iterate.
To further complicate matters, there is a difference between a token that is designed for a decentralized protocol versus a token that is part of an application. The key difference is that developers are the primary targets for a protocol, therefore the token utility is oriented towards them via utility use cases of technical nature, e.g. gas for running smart contracts, voting rights, mining, or security deposits. And with an App token, the usage is more related to actions that end-users will take, e.g. posting content, engaging with a service, creating a new service, or buying/selling something.
Ideally, your product functionality works in lock-step with the token, while the token is transparent and in the background. A good example is Steemit where users focus on their natural engagement with content, and their wallets are automatically credited or debited, depending on the actions being taken.
The killer app for the blockchain is not tokens, but it is how to design private economies. Tokens are just enablers to that.
— William Mougayar (@wmougayar) July 13, 2017
The novelty with App tokens is what they enable, namely a transactional mini-economy that results in buying/selling or earning/spending activities within itself,- a circular economy of sorts. But a circular economy doesn’t mean a circular (read Ponzi) token. Real work must be done, and real value must be created, as a result of user actions. If your user base engagement is fledgeling, a token may not be the panacea, unless it is properly threaded into the product, and user behavior is accompanying the token utility.
The token itself is not your new business model. What the token enables for you and for your users is the key part to focus on.
Excellent.
But maybe we need to bifurcate traditional thinking on what a business model is.
Value is where the transaction takes place or so both of us came up as experts in the craft of creating value, pricing and transactional ease. Companies prospered because of the transaction.
Is that true anymore? Or is the value not in the transaction but in the rebound of the currency value which honestly from the outside seem extant from one another?
Well, the latter is only true if there a real ecosystem to support this currency appreciation.
Valuation vs. value.
If they get too disconnected, it’s not such a good thing.
@wmougayar In your post you said, “I’m seeing two types of startups and companies …[1] token as the novelty….[2] startup or company who wants to apply the token to their already-running model”
Both of these are pretty sad, if companies are only chasing a “token” because it is hot and being glorified.
If we truly care about business models, as you stated in your opening talk at your recent Token Summit http://startupmanagement.org/2017/07/13/my-opening-token-summit-talk-video-and-updating-the-cryptoassets-reality-quadricle/ then I believe the ecosystem would be far better served if we were having “decentralization summits” and not blockchain or token summit.
I say, “Bravo!” to your statement that the “token itself is not your new business model.”
However, I would like to challenge your statement that “what the token enables for you and for your users is the key part to focus on.” If that is all the community is going to do then we will only see the two “sad” models that you mentioned.
Instead, I believe that there should be only one business model, which begins with the question: Is this something for which decentralization makes absolute sense!
If the answer is “no” then you end up having the two models you are seeing.
However, if the answer is “yes” then you need to ask is blockchain the best tool for implementing the decentralization and then, only if you have said “yes” to this second question should you then ask if a token is the best tool to implement the blockchain because of “what the token enables for you and for your users.”
So I agree, we ultimately get to the same place. However the problem is that too many companies simply want to implement a token and be a part of the gold rush, which is why you are predominantly seeing those same two models.
Rather than a focus on best practices on implementing decentralization.
Great comment.
“Is this something for which decentralization makes absolute sense!” is absolutely the right question, and I do ask it, along with “why do you think you need a blockchain for this.”
But the token utility could have an innovation factor itself, whereas the blockchain is just there in the background, to support the token operations.
There are layers of Decentralization, eg it could be at the infrastructure level, Middleware or App/user interaction level (such as p2p).
Agreed. The more useful the tokens become the better, Ripple comes to mind as exciting token innovation too.
However, aren’t the tokens themselves already, by their very nature, decentralized?
It is really the people that want to simply do an ICO without putting decentralization first that I was really trying to speak to, obviously not you.
When I talk to people about what ICO’s are all about (or should be), I always start by explaining decentralization and then inevitability end up talking about collecting baseball cards. 🙂
To answer your question, the degree of decentralization depends on how the token is implemented, post-ICO.
Good point! And hopefully the companies come out of the “darkness” long enough for people to judge it. 😉
[Note: for any one reading this an not familiar with “darkness”, it is one of the reality quadrants specified in this post also by the author. http://startupmanagement.org/2017/06/16/the-reality-quadrant-in-ico-projects-and-token-sales-part-ii/%5D