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On Tokens 1.0 vs. Tokens 2.0 and Fundamental Blockchain Innovations
What if (almost) everything we are seeing today with token projects were merely part of the first generation, and will bear only little fruit compared to what the second generation might bring?
This isn’t a far-fetched scenario from reality.
Truth is,- many ICOs projects have lost the meaning of the token function, in favor of the crowd-funding carrot.
Web 1.0 vs. Web 2.0 Analogy
When the web came along in 1993, and we were entering its first phases of applications development, we certainly didn’t see nor were able to implement everything that we are benefiting from today. That was in part due to early technical limitations, and in part to the naturally required evolution for progressing from basic to advanced usages based on experience and learnings. In essence, you can’t get from ground zero to the summit in one straight shot, but rather via a series of gradual ascents from one level to another.
When something new comes along, we typically try to emulate the old ways before we invent new ways that we didn’t know of before. For the Web, the native uses of the Internet turned out to be two-way channels where users produced the work (as opposed to broadcast channels that were most of the Web 1.0 era). So, it took until 2002-2005 for most entrepreneurs to understand that and to build apps that took advantage of it.
With many token projects, it looks like we are copying what we already see versus inventing what we don’t discern yet. Sadly, for several token projects, there is more token and less blockchain. There is more currency, and less tokens that represent utilitarian work. There is less organic relationships between blockchain functionality and token capability, and there is more hyperbolic claims about these linkages than substantively demonstrable capabilities.
If you hear of a project that is going to “do X on the blockchain”, and it looks like anything another startup or company is doing, you need to ask what the role of the token is in relation to the blockchain capabilities. And you need to ask: what would happen without the token? Why do you need a blockchain? What is the blockchain enabling that could not be possible before?
These observations are based on my insights into the market activity, complemented by the recent flurry of projects that are landing in my Inbox, some of which are being frenetically funded with little scrutiny. The token itself is not the innovation, and we tend to forget that.
Many token projects are proposing to use the blockchain’s currency feature as a linchpin, but that is a very limited use case, in the grand scheme of blockchain capabilities. Internal cryptocurrencies are good, but they only target value transfer efficiencies. Efficiency improvements are useful, but where is the magic?
The ICO was novel in its multiple currency creation, via the ERC20 standard, which is merely about that. But we are not doing so well in terms of implementing more creative usages for a token.
Revisiting Blockchain Fundamental Innovations
Let’s revisit the fundamental blockchain innovations. Bitcoin gave us native mining, basically a way to boot-up a blockchain out of connecting computers together, and it gave us a blockchain that rewards work and workers. The Ethereum ICO was innovative in that it popularized the concept of paying for running business finance logic (smart contracts) on top of the blockchain, and it gave us the promise of a universal, general-purpose software development framework for creating decentralized applications, ones that don’t rely on a spoke-and-wheel, top-down, command-and-control or counterparty-heavy governance scenarios.
Today, I feel we are in a lull of Token 1.0 bottom, where we are “doing tokens” with a loose interpretation on blockchain capabilities.
Not only is Token 1.0 attracting the wrong types of projects, it is also attracting the wrong types of people who see opportunistic gains from spinning a currency, raising from the crowd and promising the moon, with little accountability to be held against.
We must ask what is the role of the blockchain, and sometimes, it is not that obvious.
When Bitcoin and Ethereum were in their infancy, their success was not assured, while still full of uncertainty. But that is the nature of how great innovations occur. It is when things are not so obvious that they can get the most interesting later.
How do we get out of this rut?
First and foremost, we must revisit and apply the basic innovations of the blockchain. Then we need to assess token functionality critically, without over-engineering the token capabilities.
Remember that token functionality is a hypothesis that remains to be proven in the market.
So, what are the basic and fundamental innovations that must be reflected in a token usage?
For one, it is about the removal or disappearance of a counterparty (or intermediary) who is no longer needed for the successful completion of a given transaction or interaction. For example, blockchains are really good for automatically executing the consequences of certain actions, conditions, logic or whatever “state” comes their way.
Second, it is about using the token as a reward for a type of work that is provided, whether it is computational or human work. This is also called incentive, but that word has been misused as a carrot for enticing users to try something, and that is not the same as a genuine work reward. The blockchain can be a good rewards engine for automatically dispensing tokens to those who do the work, as evidenced by Bitcoin, Ethereum and Steemit who function that way.
Third, blockchains can help us get to decentralization in a given process or organizational construct, whether it is along an architectural, political, logical or technical dimension. However, decentralization for the sake of decentralization is not the goal. Decentralization must bring with it given features such as increased security, better decision-making, co-operative sharing of benefits, fault-tolerance in network resiliency, or other ones where there is a visible outcome improvement to the non-decentralized way.
Finally, blockchains hold the promise of decentralized organizational governance, a theme that continues to percolate in blockchain circles as a sort of nirvana end-state. Decentralized governance is an ambitious goal and comes with various degrees of feasibility, but it can only be achieved gradually, and not suddenly. Here too, the 1.0 models will most probably fall short or fail, especially if they attempt to airdrop DAO-like beliefs on their communities. Decentralized autonomy is a step-wise function that we get to gradually, and we still have much to learn about implementing it.
I recently started to use the contrast Native vs. Grafted to depict a simple classification of token roles. If the token is native to the blockchain, app or protocol, it means that the blockchain, decentralized protocol or application cannot function without it. In contrast, grafting functionality later is more tricky. Not only the resulting outcome may or may not be that innovative or useful, the chances for success will certainly be lower because it will be harder to achieve sustainable user engagement when users don’t have “blockchain skin” in the game.
For example, the Rarepepe project (despite its racist roots) is a good example of a truly native blockchain application across many dimensions: with Rarepepe, the assets can only be issued on the blockchain and they are linked to specific tokens; the Rarepepe token supply is limited, creating a scarcity; Rarepepe collections cannot be faked or copied, but they can be transferable peer-to-peer; and authenticity is inspected by trusted parties (Rarepepe scientists) that function like trusted decentralized nodes.
We need to challenge ourselves to create Token 2.0 projects. Token 2.0 will be achieved in part via a return to applying more creatively the fundamental features of a blockchain, and in part by erasing the mediocre Token 1.0 projects that are currently polluting the environment.
We need to put the blockchain back into the equation, and not the token.
If the token is a propeller head, its impact must be felt like a rocket. Make sure it is not looking like a set of rowing oars.
Note: We will discuss Tokens 2.0 vs. Tokens 1.0 at the upcoming Token Summit in San Francisco, December 5th. You can register here.
[Thanks to Vitalik Buterin for inspiration (during our panel chat at ETHWaterloo), and Fred Wilson for reviewing a draft and beefing-up the Web 1.0/2.0 analogy.]
Concise and refreshing take on tokeneconomics. As we enter a speculative orgy, all types of bunker valuation theories are emerging, and we need to return to basics. This is the money quote: “token as a reward for a type of work that is provided, whether it is computational or human work.” Yes the work needs to be genuine.
I’d add: the network’s value needs to correlate with the marginal value of the work. This work needs to have increasing returns to scale to justify aggregation.
Computational work such as storage (Filecoin, Storj, etc) have marginal value trending to zero in the future. No good 4 token. Dentists marginal value is high, but have no return to scale/aggregation. No good 4 token.
William Mougayar you are incorrect in saying that the Rarepepe project has racist roots “(despite its racist roots)” and I hope that you inform yourself about the history of that meme. A youtube search for “the frog that broke the internet” will do you well to watch, and features yours truly in a segment https://www.youtube.com/watch?v=lyEQCYnYbyU “(Rarepepe scientists) that function like trusted decentralized nodes.” Honestly im not sure what is decentral about a trusted node, in the above example all the scientistis talk to each other and act on a 100% subjective basis regarding the artwork. Also what is interesting is that creating blockchain meme cards is using a smart contract in the token creation and in trading them on the decentral exchange – counterparty. These two smart contracts are in third and fourth place as the most widely used with erc20 and an ico vending machine being the top 2. These are the real life use cases for blockchain and smart contracts, icos and rarepepe.
Fully agree. One point I do not see: Decentralization is about killing middlemen without great value added in many cases, so the immediate benefits are financials: more money to each party no?
Would saying “some racist roots” be more accurate? –> https://www.adl.org/education/references/hate-symbols/pepe-the-frog
No, in fact the article you linked says as much…
‘The Pepe the Frog character did not originally have racist or anti-Semitic connotations. Internet users appropriated the character and turned him into a meme, placing the frog in a variety of circumstances and saying many different things. Many variations of the meme became rather esoteric, resulting in the phenomenon of so-called “rare Pepes.”
The majority of uses of Pepe the Frog have been, and continue to be, non-bigoted.’
No it would not be more accurate. Since you want to go to this kind of logic. What kind of roots does ETH have ? ETH has some Child porn apologist roots http://archive.is/44W0G
I suggest we reframe the whole discussion around decentralization. While overall our current economic and technological systems need heavy doses of more decentralization, it’s worth reexamining.the ends we’re working towards.
As currently framed, the focus has been to MAXIMIZE decentralization. Much of this is ideological. Many prefer to take this to the extreme, e.g., a DAO.
As you and many other have noted, there are tradeoffs between centralization and decentralization. Both centralization and decentralization have plusses and minuses.
Human nature craves influence and control. Even the best intentioned “decentralized” projects (e.g., Bitcoin) are being shown to be subject to centralized influences (e.g., miners, developers, whales).
So I suggest we REFRAME the quest as one of OPTIMIZING centralization vs. decentralization. This needs to happen along multiple dimensions (e.g., as you allude to Vitalik’s notions of architectural, political, logical, technical). Think of centralization and decentralization as being on a continuum, not binary.
Do we need MORE decentralization? Yes. To the extreme? No.
You’ve taken this analogy too far, and I don’t agree with it.
I agree with that, – that’s why I linked to the article.
I am on AO (Acronym OVERLOAD)! Please say what your acronyms stand for. Thanks.
Sorry. DAO = decentralized autonomous organization, see e.g., https://en.wikipedia.org/wiki/Decentralized_autonomous_organization.
As William has written, “autonomous” can refer to governance and/or operations. http://startupmanagement.org/2016/11/26/daos-automating-governance-or-operations/
Hey, Vince! I really appreciate your reply. And just for the record, writers in all fields today have forgotten the protocols of how to use an acronym and saddle their readers with FUD (Fear, Doubt & Uncertainty). I’ll be reading along on something and run into these acronyms and search in vain for what the heck it meant. I wish the things had never been invented. It’s so easy for a single writer to spell it out than the thousands of readers who get stopped at that very point. Again, I thank you and vented my spleen for others who might have wondered what this was all about. 🙂
You missed the openness of the interactions. And, that these interactions are real and can not be corrupted. The utility of the token, but equities have no utility and still they have value. The issue with the tokens is the missing valuation method, one that should consider the quality of the network interactions. A valuation framework that considers the tokens network effect. The value of a token is not in the protocol, because protocols are based on logic and logic is not fundamental to nature. Logic 40 years ago was different than logic today. And, we are biased. This can not be fully eliminated, we can only explore biases and find better solutions. So, all protocols will need to be updated at some point of the current logic will become worthless. A valuation method that considers the network effects and the quality of the interactions is the direction token 2.0 should be navigated towards. That will begin to establish holding value in the global marketplace.
Ive taken it too far? You need to ask – your – source of inspiration if he has taken it too far. “Thanks to Vitalik Buterin for inspiration” how do you feel connecting your token article to the above mentioned statement? Do you see how easy that was? Sow the wind, weap the whirlwind as they say in the bible. The one that has gone to far is the inspiration for your article, not me. Under the logic of “some racist roots” then we can deem the same logic of your inspiration some ______(insert quote from vitalk) ___ roots” so indeed if one wishes to reach far, as you have done, then indeed one can say your inspiration has at the very least questionable roots. I know that many are quite senitive given all the frozen funds, woops. Every single time that you use the statement you did in the article, I will point out how and why it is wrong, every ,single, time. What I wont do is say “I dont agree and you have taken it too far”. Instead I will explain the- how and -why of how you, you here are wrong.
You missed the openness of the interactions. And, that these interactions are real and can not be corrupted. The utility of the token is less relevant at first and have no value if no one is on the platform. Equities have no utility and still they have value. The issue with the tokens is the missing valuation method, one that should consider the quality of the network interactions. A valuation framework that considers the tokens network effect. The value of a token is not in the protocol, because protocols are based on logic and human logic is not fundamental to nature. Logic 40 years ago was different than logic today. And, we are all biased. This can not be fully eliminated, we can only explore biases and find better solutions. So, all protocols will need to be updated at some point or the current logic will become worthless. A valuation method that considers the tokens network effects and the quality of the interactions makes most sense to me. Once people have a better understanding of the valuation method for tokens in the global marketplace, everything will take shape. But, it needs to be related to the quality of the network effects. Yes, you are right, People tend to do what has been done before. And, that’s been using equity valuation methods such as discount rates and everything else for tokens. These old methods are flat out wrong for tokens.
Decentralization is about an open ledger that is not corruptible and there a ton of benefits with this. The immediate benefit was a store of value but that was only possible because Bitcoin was first to market and established a global network.
Good comment. Agreed on transactions being non-corruptable.
I agree and support degrees of decentralization, especially in how we get there, via steps, not all at once, and not idealistically.
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Nice article worth reading thanks
We need to put the blockchain back into the equation, and not the token. I dont agree completly thats why i trust LEDU COINS.
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