First up. Balaji Srinivasan the Andreessen Horowitz partner who's also CEO of 21.co and a 2015 winner of the prestigious Climateer Line of the Day, see below.
Tokens are early today, but will transform technology tomorrow.
In 2014, we wrote that “Bitcoin is more than money, and more than a protocol. It’s a model and platform for true crowdfunding — open, distributed, and liquid all the way.”That new model is here, and it’s based on the idea of an appcoin or token: a scarce digital asset based on underlying technology inspired by Bitcoin. While indisputably frothy, as of this writing the token sector sits at a combined market cap in the tens of billions. These new “fat protocols” may eventually create and capture more value than the last generation of Internet companies.Here we discuss many concepts related to tokens, beginning with the basics for folks new to the space and then moving to advanced ideas.The most important takehome is that tokens are not equity, but are more similar to paid API keys. Nevertheless, they may represent a >1000X improvement in the time-to-liquidity and a >100X improvement in the size of the buyer base relative to traditional means for US technology financing — like a Kickstarter on steroids. This in turn opens up the space for funding new kinds of projects previously off-limits to venture capital, including open source protocols and projects with fast 2X return potential.But let’s start with the basics first. Why now?1. Tokens are possible because of four years of digital currency infrastructureThe last time the public at large heard much about digital currency was in late 2013 to early 2014, when the Bitcoin price last touched its then all-time high of $1242 dollars. Since then, several things happened:
- Bitcoin experienced a massive multi-year crash and recovery all the way down to $173 and back up to the recent all-time highs of $2800+
- Dozens of exchanges arose in many countries to facilitate the conversion of fiat currencies like dollars or yen into digital currencies like Bitcoin and Ethereum
- Major financial institutions began exploring the blockchain technology underpinning Bitcoin to build so-called “private blockchains” or distributed ledgers for internal or consortium use
- The programmable Ethereum blockchain launched, endured its own major crises, brought on major corporate support, and surged in value in early 2017In 2013, the legality of digital currency was still in question, with many predicting death and others going so far as to call Bitcoin “evil”. Those kneejerk headlines eventually gave way to Satoshi billboards in Davos and the Economist putting the technology behind Bitcoin on its cover.By 2017, every major country has a digital currency exchange and every major financial institution has a team working on blockchains. The maturation of infrastructure and societal acceptance for digital currencies has set the stage for the next phase: internet-based crowdfunding of novel Bitcoin-like tokens for new applications.2. Tokens vary in their underlying blockchains and codebasesTo first order, a token is a digital asset that can be transferred (not simply copied) between two parties over the internet without requiring the consent of any other party. Bitcoin is the original token, with bitcoin transfers and issuances of new bitcoin recorded in the Bitcoin blockchain. Other tokens also have transfers and changes to their monetary base recorded in their own blockchains.
One key concept is that a token’s codebase is different from its blockchain database. As an offline analogy, imagine if the US banking infrastructure was repurposed to manage Australian dollars: both are “dollars” and have a shared cultural origin, but a completely different monetary base. In the same way, two tokens may use similar codebases (monetary policies) but have different blockchain databases (monetary bases).The success of Bitcoin inspired several different kinds of tokens:
- Tokens based on new chains and forked Bitcoin code. These were the first tokens. Some of these tokens, like Dogecoin, simply changed parameters in the Bitcoin codebase. Others like ZCash, Dash, and Monero innovated on privacy-preserving features. Still others like Litecoin also began as simple tweaks to Bitcoin’s code, but eventually became test grounds for new features. All of these tokens initiated their own blockchains, completely separate from the Bitcoin blockchain.
- Tokens based on new chains and new code. The next step was the creation of tokens based on wholly new codebases, of which the most prominent example is Ethereum. Ethereum is Bitcoin-inspired but has its own blockchain and was engineered from the ground up to be more programmable. Though this comes with an increased attack surface, it also comes with new capabilities.
- Tokens based on forked chains and forked code. The most important example here is Ethereum Classic, which was based on a hard fork of the Ethereum blockchain that occurred after a security issue was used to exploit a large smart contract. That sounds technical, but essentially what happened is that a crisis caused the Ethereum community to split 90/10 with two different go-forward monetary policies for each group. A real world example would be if all the citizens of the US who disagreed with the 2008 bailouts changed in their dollars for “classic dollars” and adopted a different Fed.
- Tokens issued on top of the Ethereum blockchain. Examples include Golem and Gnosis, all based on ERC20 tokens issued on top of Ethereum.In general, it is technically challenging to launch wholly new tokens on new codebases, but much easier to launch new tokens through Bitcoin forks or Ethereum-based ERC20 tokens.The latter deserves particular mention, as Ethereum makes it so simple to issue these tokens that they are the first example in the Ethereum tutorial! Nevertheless, the ease with which Ethereum-based tokens can be created does not mean they are inherently useless. Often these tokens are a sort of public IOU intended for redemption in a future new chain, or some other digital good.3. Token buyers are buying private keysWhen a new token is created, it is often pre-mined, sold in a crowdsale/token launch, or both. Here, “pre-mining” refers to allocating a portion of the tokens for the token creators and related parties. A “crowdsale” refers to a Kickstarter-style crowdfunding in which internet users at large have the opportunity to purchase tokens.Given that tokens are digital, what do token buyers actually buy? The essence of what they buy is a private key. For Bitcoin, this looks something like this:5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KFFor Ethereum, it looks something like this:You can think of a private key as being similar to a password. Just like your private password grants you access to the email stored on a centralized cloud database like Gmail, your private key grants you access to the digital token stored on a decentralized blockchain database like Ethereum or Bitcoin.3a1076bf45ab87712ad64ccb3b10217737f7faacbf2872e88fdd9a537d8fe266
I stopped reading when I got to:There is one major difference, however: unlike a password, neither you nor anyone else can reset your private key if you lose it. If you have the private key, you have possession of your tokens. If you do not, you have lost access.4. Tokens are analogous to paid API keysThe best existing analogy for tokens may be the concept of a paid API key. For example, when you buy an API key from Amazon Web Services for dollars, you can redeem that API key for time on Amazon’s cloud. The purchase of a token like ether is similar, in that you can redeem ETH for compute time on the decentralized Ethereum compute network.This redemption value gives tokens inherent utility.Tokens are similar to API keys in another respect: if someone gains access to your Amazon API keys, they can bill your Amazon account. Similarly, if someone sees the private keys for your tokens, they can take your digital currency. Unlike traditional API keys, though, tokens can be transferred to other parties without the consent of the API key issuer.So, tokens are inherently useful. And tokens are tradeable. As such, tokens have a price....MUCH MORE
Tokens aren’t equity, because they have intrinsic use and because they are non-dilutive to the company’s capitalization table. A token sale is more similar to a Kickstarter sale of paid API keys than equity crowdfunding....Because I remembered the tulip quote and combined with "intrinsic" anything, needed to take a break.
The tulip quote long-suffering reader asks warily?
"Climateer Line of the Day: Uh Oh Andreessen Edition":
...Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.-Andreessen Horowitz partner Balaji Srinivasan
Mr.Srinivasan may not be aware that, since ca. 1637 or so, tulips have not had the best connotation in the world of finance....If you have any questions you can email Mr. Srinivasan for twenty bucks or do the whole A16Z team for $600, a discount of $40 from the rack price:
Here are a selection of 21’s prices per list:
On my break I listened to the Financial Times' Izabella Kaminska and the man from Florida, Joshua Unseth:
And then I listened again today.So @junseth was in London town and he came in to chat ICOs with me. Listen to the chat here. https://t.co/0m6DA9NYR5— Izabella Kaminska (@izakaminska) May 26, 2017
A superb specimen of the interviewer's art and a perfect exemplar of the oft-violated-but-not-here ProTip™ admonition "If you've got a live one, let the interviewee talk!"
Unseth ain't bad either.