
Thoughts on Tokens - mycodebreaks
https://medium.com/@balajis/thoughts-on-tokens-436109aabcbe
======
isubkhankulov
_However, when considered as an alternative to classic equity financing, token
sales yield a >100X increase in the available base of buyers and a >1000X
improvement in the time to liquidity over traditional methods for startup
finance. The three reasons why: a 30X increase in US buyers, a 20–25X increase
in international buyers, and a 1000X improvement in time-to-liquidity._

these token sales are successful because people who buy into them are selling
off their profits from buying Ethereum (from $0.88 in Jan '16 to $193 today
>2000% return). Its a diversification play of course. Look how much the DAO
raised a year ago.

Its ridiculous that the _adults_ in the room like A16Z, USV, Balaji are
falling into hypnosis.

ICO's coming out have no product, no users, just a white paper and a nice
website, with an ERC20 contract address for deposits.

If you talk to anyone buying these tokens, they all say the same thing, that
they're buying to flip the tokens on Poloniex for a quick buck.

A recent example is Gnosis, which raised $12.5M by selling 4.17% of their
tokens at $30 each during the 1st auction round. They started trading at
$60-100 a week after the sale and now are trading above $200.

Look at the charts of coins delisted by Poloniex. immediate 50%+ drop. The
value of these tokens is their liquidity. Take that away and you won't see
these valuations.

For traditional VC's, if companies let their shares float on exchanges, the
SEC mandates financials. These tokens are designed around hopes and dreams.
Most certainly a bubble but more so a game of musical chairs, make some money
while the music is still playing.

Bitcoin at the end of the day grew in price from speculation BUT it had a real
use, albeit in the black market. It has grown from that since 2013 but not by
much.

P.S. Token sales don't even give up equity. These people are paying millions
for API keys they can't yet use? I don't think so.

~~~
modeless
Stopping investment scams like the current ICO bubble is exactly the reason
the SEC exists. It is an absolute certainty that this party is going to end in
regulation and it's also likely that a bunch of people will end up in jail.
The only real question is how long it will take the regulators to figure out
which one of them has jurisdiction here.

I say this as an early Bitcoin investor and current holder. Bitcoin was not a
scam, but many of these ICOs are blatant cash grabs specifically designed to
circumvent SEC rules about selling unregistered securities to non-accredited
investors.

I'll also say that I think current SEC rules are too restrictive and to the
extent ICOs represent Uber-like defiance of bad regulation, they could be a
good thing. But a totally unconstrained ICO market bubble may be far too much
of that good thing.

~~~
Jabanga
Claiming that adults making their own decision to buy the equivalent of a
digital collectible, is a scam, and should be prohibited with long stretches
of time in prison for those who take part, is why income disparity continues
increasing [1], why the financial sector is dominated by a handful of
corporate giants, and why it costs $6 million to do an IPO [2].

Attitudes like yours are not consistent with the principles of liberal
democracy, which rest on the idea that we should be free to do with our body
and property whatever we wish, as long as it violates no one's right to the
same.

I've never touched a digital token, and I wouldn't touch one unless the
landscape drastically changed, but I would never dream of wishing prison, or
worse [3], for those who buy or sell tokens. Their money, their lives. What
should the government create statutes to dictate how people spend their own
money?

PS: bubble != scam

Calling something a scam is a very serious allegation should not be done
lightly.

[1] [https://www.brookings.edu/research/make-elites-compete-
why-t...](https://www.brookings.edu/research/make-elites-compete-why-
the-1-earn-so-much-and-what-to-do-about-it/)

[2] [https://www.quora.com/How-much-does-it-cost-to-
IPO](https://www.quora.com/How-much-does-it-cost-to-IPO)

[3]
[https://www.theatlantic.com/politics/archive/2016/06/enforci...](https://www.theatlantic.com/politics/archive/2016/06/enforcing-
the-law-is-inherently-violent/488828/)

~~~
TeMPOraL
> _Attitudes like yours are not consistent with the principles of liberal
> democracy, which rest on the idea that we should be free to do with our body
> and property whatever we wish, as long as it violates no one 's right to the
> same._

If so, then I'd say it's clear those principles (as presented by you) are
wrong. They don't take into account the fact that human beings are _not_
independent, perfectly rational actors. Decisions people make are directly
influenced both by their situation/environment and by actions of other people.
If you can predictably fool an average person into doing something against
their interest and what they'll later regret, then there's no talking about
"free will" here.

Fortunately, laws do recognize that fact. A lot of them exist to shield people
from being predictably exploited. The question is not whether it's right or
wrong to regulate some business models; the question is whether the model is
harmful and whether it's worth to regulate it.

That's the practical reality of fallible humans with finite computational
capacity.

~~~
Jabanga
>They don't take into account the fact that human beings are not independent,
perfectly rational actors.

and

>That's the practical reality of fallible humans with finite computational
capacity.

and

>Fortunately, laws do recognize that fact. A lot of them exist to shield
people from being predictably exploited.

And who votes in these people who enact these laws? Other people. They are not
always rational, especially when dealing with issues of enormous complexity,
that obfuscates the effects of policy.

These laws will inevitably be used to stifle competition to vested interests,
in the name of consumer protection. See [1] above. Governing a complex society
composed of hundreds of millions of people through cookie cutter rules on what
non-coercive interactions are exploitive is not practical.

The spontaneous order of a decentralized, non-coerced society works
surprisingly well. For example, after the Mt Gox insolvency, people in the
cryptocurrency space wisened up, and stopped using Bitcoin exchanges that
didn't use the highest security standards, like cold wallet storage.

Yet the Wild West days of Bitcoin exchanges were a necessary phase at a time
when the Bitcoin market cap was less than $20 million and no VC company in the
world would have funded a Bitcoin exchange, so exchanges run by amateurs were
the best we could hope for.

In other words, had there been regulations requiring millions in capital to
start a Bitcoin exchange, we never would have had a nascent exchange industry
in the first place, and Bitcoin would never have gotten off the ground.

As the market grew, and venture capital began flowing into exchanges, those
exchanges became more professionally run and more secure. This was a natural
evolution that didn't need to be guided by top-down decree. Also, the
emergence of security standards that effectively protected against major hacks
was a result of trial and error, and the culture within the cryptocurrency
market of retail traders and investors evolving to become more vigilant. This
is a more robust situation than a market of sheep consumers corralled by
regulators who become the target of rent-seeking parties looking to use
regulatory barriers to stifle competition.

A couple of Bitcoin exchanges in the US were actually shut down in the early
days, due to regulatory enforcement action, which contributed to MtGox
dominating the market. Absent those regulatory restrictions, venture capital
would have began investing in US based exchanges much sooner, and thus we
would have had professionally run exchanges sooner than we did.

In conclusion, regulations destroy innovation and the development of
industries, and the lost benefits of that outweigh the short-term harm caused
by an industry's growing pains.

There is good reason societies that adopt liberal democratic principles have
historically prospered relative to those subscribing to paternalistic
ideologies. Thankfully with cryptocurrencies, industries operate more on
liberal democratic principles, whether the political institutions want them to
or not.

~~~
dwaltrip
> In conclusion, regulations destroy innovation and the development of
> industries

Let's go back to using leaded gasoline then, shall we?

And we should remove all nutritional labels from food packaging.

Safety ratings for automobiles are clearly a waste of time and are holding
back innovation.

Restaurant health inspections, also useless.

And I'm sure building codes have nothing to do with the fact the we don't
really have earthquake deaths in the U.S. anymore.

And so on...

Of course, not all regulation is effective, and some probably ends up doing
more harm than good. But we shouldn't throw out the baby with the bathwater.

~~~
Jabanga
Leaded gasoline damages the health of others without their consent.
Restricting pollution is obviously not the kind of "regulation" I'm talking
about.

We _should_ abolish mandates requiring nutritional labeling, safety ratings
for cars (carmakers far exceed government safety requirements anyway, because
it's good for business), restaurant health inspections, and building codes.

That is not to say we shouldn't have nutritional labeling, safety standards,
and restaurant inspections. But it should be voluntary, in response to
consumer demand for certified safety and quality.

Apple didn't become the largest company in the world by producing shoddy
products. The market rewards a reputation for quality. In other words, society
evolves toward safer and better quality products over time, whether it's
through government mandates or simply changing consumer preferences and
increasing consumer awareness.

I would argue that the agricultural and food safety regulations have
contributed to the modern industrial agro-business model, because they are
naturally geared toward more centralized operations. Small farms that
slaughter and butcher animals on the premises for example face significant
hurdles due to agriculture regulations. Cookie cutter solutions mandated by
the government kill diversity and encourage consolidation and centralisation.

The government can play an active and positive role, by creating voluntary
opt-in certification programs, that act as market signals for quality. For
example, it can create a voluntary food safety certification that
participating companies that meet its requirements can advertise with a seal
on their products.

The government can fund public information resources to better inform
consumers of the options available on the market and how they compare in
quality and risks.

I am not arguing against a government role in the economy. I'm only arguing
against mandating a cookie cutter solution that abridges the right of an
individual to decide for themselves what risks to incur.

~~~
dwaltrip
Thank you for elaborating/clarifying your position.

The idea of government actively facilitating a diversity of optional or also
private regulatory paradigms is interesting. I imagine there are definite
benefits that could result from pursuing ideas like that.

I do worry about the ability or desire of most individuals to analyze and
differentiate between such options, especially in cases with high complexity.

For many individuals, even with determined efforts to increase awareness and
to educate, it is simply too difficult or time consuming to meaningfully learn
if such and such product is actually safe. As technology advances, this
dynamic will likely become more magnified. It is fantasy to expect an average
individual to be able to determine if an arbitrary safety rating of a self-
driving vehicle is trustworthy, for example.

I wouldn't argue that many of our current approaches to regulation are optimal
in the slightest. However, I would argue that complexity is increasing faster
than our ability to manage it. To me, this implies that we have to make tough
trade-offs at times, perhaps accepting some slowdown in growth, in order to
not shoot ourselves in the foot.

Perhaps one improvement we could strive towards even now is some sort of
entrenched mechanism that would force serious re-evaluation of each regulatory
paradigm every so often (perhaps once a decade or so), in order to prevent
stagnation and ensure new learnings are incorporated.

I'm not sure how such a thing could be implemented, but anything that moves us
closer to internalizing an awareness of current imperfections and the never-
ceasing opportunity to make incremental as well fundamental improvements, I
think we would reap great benefits over the long term.

~~~
Jabanga
You're welcome. Thanks for considering my viewpoint.

With respect to complexity: the world is filled with complex services where a
purchase is a bet on outcomes that will unfold over many years. This myth that
people cannot organise themselves to procure complicated products/services
without mandates, price controls, central economic planning, etc to best serve
their own needs is outdated and needs to be put to rest.

People in a complex economy delegate analysis and assessment of complexity to
others, and this happens whether the delegation is mandated by a government
regulation, or a result of voluntary decisions. To go back to my Apple
example, the reason the typical consumer came to believe Apple products are
long-lasting and well-made, and that Apple provides high quality support, is
not because they personally interviewed everyone who's ever owned an Apple
product. It's because public knowledge, like Wikipedia, or the reputations
attached to particular products or companies, is a product of millions of
minds, finding and filtering out information to produce an accurate picture of
the world that can easily be digested by a typical person. It's a spontaneous
bottom-up process that trumps anything that could you created by centralized
committee.

I think the most regulatory restriction that can be justified is labeling
restrictions that codify common law. For example, if a court finds that a
particular kind of advertisement claim is misleading, it would be useful to
make a law stating any claim that follows this pattern is illegal, and for
government officials to police commercial communications and punish parties
making such claims.

Beyond that though, I don't believe the complexity of our modern world can be
addressed by mandatory solutions imposed by central committees. I think
there's a very high cost attached to the centralized regulatory approach. For
example, consider how much less health care spending may have increased if
decentralized bottom-up processes predominated, instead of top-down
organization:

[http://healthblog.ncpa.org/why-cant-the-market-for-
medical-c...](http://healthblog.ncpa.org/why-cant-the-market-for-medical-care-
work-like-cosmetic-surgery/)

------
runeks
If the only reason to buy a token is because you expect to sell it later at a
greater price, then this is known as a pyramid scheme, not investment. This
will end the same way as all other schemes that rely on continual capital
gains: collapse when people want to withdraw their profits, turning capital
gains into capital losses, and thus revealing that there was never any future
profit to be had (unless you were lucky to exit early).

Investment differs from speculation in that it offers a yield on capital, not
just a capital gain. When a company pays dividends to shareholders, all
holders gain. When a company's stock increases in price, the profits of those
who gain are taken from those who've lost. Speculation is zero-sum, investment
is not.

A yield on capital is fundamentally different from a capital gain, because a
yield is a flow of profit paid out right now, as opposed to an alleged gain
that will only be realized in the future (at which point the whole thing
collapses, because the system depends on continual appreciation). Importantly,
a yield on USD is paid in USD, a yield on bitcoins is paid in bitcoins, etc.
Paying a yield in a scarce currency is a challenge, while bidding up the
price, as measured by some other currency, is relatively simple.

~~~
cm2187
You can invest in Gold, which doesn't yield any return. The notion of
investment implies a return, whether it is a cash yield or a principal
appreciation.

But I would say bitcoins are more similar to fiat currencies than commodities.
Commodities have an intrinsic value due to their rarity. You cannot
manufacture gold (technically you can but in very small quantities). Which
means that if you find a gold coin which ancient romans were buying goods
with, you can still buy a suit with it today. You can call that a convention
but it is a convention dictated by the laws of physics, not by some white
paper.

Fiat currencies instead only have value by convention or law, anyone can
manufacture a new fiat currency, like everyone can create a new blockchain. A
government can by law change the algorithm behind any of these blockchains.
But a government cannot create gold. If someone finds a bitcoin key in 2000
years, long after the western civilisation is gone, it will be an interesting
piece of history that can but placed in a museum, but you won't be able to buy
a suit with it. With gold you will.

~~~
runeks
> You can invest in Gold, which doesn't yield any return. The notion of
> investment implies a return, whether it is a cash yield or a principal
> appreciation.

By my definition, that's not an investment. Nor would buying a rare painting
be an investment, but speculation. By buying gold, or a rare painting, and
keeping it locked away in your house, you're not making capital available for
productive use. You're just speculating that its price, as measured in
dollars, will increase. A transfer of value from the next buyer to yourself
happens when you sell it, but no value has been produced.

Regardless of the terminology we choose, can't we agree there's a fundamental
difference between buying something with money and holding on to that, versus
making that money available for productive use (e.g. a producer buying more
efficient machinery)? When you buy a bond you're investing, because the issuer
can use your capital to increase its productivity, while paying out a part of
the resulting profits as a yield. When you buy a lump of gold and gold on to
it, all you're hoping for is that the dollar will be devalued sufficiently to
make it appear that you can sell it for a profit (in dollars). No increase in
productivity needs to take place for the latter to occur, whereas in the
former case bond issuers can't afford to pay interest without creating
profits.

~~~
cm2187
I am not sure you can define a line between investing, speculation, lending or
gambling. They are essentially the same thing. For each of them you take a
calculated risk with your capital in exchange for a future profit.

------
harryh
To me the two most provocative points made in this essay are that tokens could
be used to fund open source projects and that tokens could be used to
distribute some of the value in large successful internet companies like
Google & FB to early adopters. I don't see how this would work though.

I buy a token for some random open source project (say a unit testing library
because they link to one as an example). And then what?

Or I buy a token in a new social network that eventually becomes very popular.
What does that get me?

They don't connect the dots on these ideas at all & I really wish they did. As
it is it sounds like they're trying to gloss over something that doesn't
really make sense when you try to think it all the way through.

~~~
wmf
I think the idea is that people have to spend the tokens to use the network
and thus they buy tokens from early adopters.
[https://coincenter.org/entry/what-are-
appcoins](https://coincenter.org/entry/what-are-appcoins)

~~~
harryh
Ya, I thought of that but that doesn't really make sense to me either. Open
source projects tend to be free to use. Under this plan you need a token.
Which costs money. That's a big change!

Kinda sounds like they're saying that if you change your open source project
to a proprietary software project you can get people to pay for it. Now that
may be true (for some projects at least) but that's fundamentally changing the
nature of what it is you're building.

~~~
wmf
I don't think app coins/tokens are intended for traditional software that runs
in isolation. The proponents of this stuff are talking about P2P networks
where other computers provide service to you (e.g. storing your data), so the
software may be open source but the service provided by the network is not
free.

Of course, some hustlers may try to use app coins in a cynical, Adobe-like
business model where you have to pay rent to run software on your own computer
and they may be justifiably rebuked.

~~~
harryh
Ya, I agree with you. Weird that the authors of the essay linked here
stretched things significantly further.

------
redm
I think it's safe to say that the entire market is currently being driven by
speculation. If it had a volatility index, it would be through the roof.

------
runeks
> _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.

As far as I understand, this is the exact opposite of what happened.

After a flaw in a contract, on the Ethereum blockchain, was exploited, most
people agreed to follow a hard fork which retroactively changed the core
protocol such that the interpretation of the malformed contract no longer
allowed exploitation. Ethereum Classic is the original, unforked chain, in
which the flawed contract is respected, rather than altering the core protocol
to circumvent a badly written contract.

~~~
mbrock
Kind of, except that ETC itself has also done a hard fork to do major protocol
changes, so it's not exactly right to call it the "original, unforked chain."

The original Ethereum Homestead blockchain was designed to demand at least one
hard fork. The mining difficulty was set to increase exponentially after some
time, in order to force the community to make a decision regarding switching
away from proof-of-work toward proof-of-stake. The ETC community hard forked
the Homestead chain to remove this "difficulty bomb."

That's quite different from the "TheDAO" hard fork, but it's still a hard fork
of a blockchain, so it's not true that ETC represents completely immutable law
-- that community can also demonstrably agree to hard fork.

------
aqsheehy
Another ponzi pumping article on HN

~~~
ben_jones
At least its happening here in the form of blog posts and not in a retirement
home with phones ringing off the hook.

~~~
aqsheehy
Oh don't worry it's happening there too

------
wangii
it's a power stuggle governments and central banks can't afford to lose. and
it'll be a recurring scheme to rob those don't understand the stake. it's
about who is/will be the monetary policy maker, governments/central banks, or
the market controlled by speculators? what are the exact differences between
gold and tokens?

------
pdog
Beyond buying some Bitcoin and Ethereum, is there anything else a prospective
investor should do?

~~~
knowaveragejoe
Tokens in organizations that you think may succeed? I'm not particularly clear
on details, i.e. how would you know whether a company is succeeding vs. just
being a speculator's toy.

~~~
vernon99
Ideally the organization itself should: a) be fully built on distributed
technologies, if that's not the case, this is a clear red flag as it gives too
much control to the founders to screw it. Ether+Web3.js+IPFS is a good combo.
Proper voting/execution system for members is also a must IMO but very few
actually have it. b) have a clear incentives model in place (built in smart
contracts which code you should be able to inspect), meaning both initial
users/contributors get increased value from participating and long-term growth
can be achieved. c) solve a real problem, obviously. There're some existing
models that can be disrupted as well as some of the more futuristic things
like prediction markets, distributed clouds, etc. All of that should be
explained in their whitepaper. That said, we're in a sort of 1999 situation
right now so expect it to correct short-term. Also there's a lot of scammy
projects now, so do your due diligence.

~~~
mbrock
It's very easy to make a "whitepaper" about solving some important problem
using Ethereum/Web3/IPFS with whatever interesting kinds of voting schemes and
incentives. Whitepapers of all kinds are basically designed to seem impressive
and downplay problems, just like any other promotional material.

Deciding whether the organization behind that whitepaper is legit, competent,
and serious enough to actually make it happen is much more difficult than
ticking some bullet points. Front end development is hard to do well,
cryptoeconomic mechanism design is really difficult and prone to horrible
failure, marketing is hard, profit is hard, etc etc.

(As an aside, I'm curious how many people actually understand how IPFS works.
Are we all clear that it's not a magic place where you can upload things to
make them available everywhere forever? In most important aspects it's
equivalent to BitTorrent with Magnet. You still need to seed!)

That all said, in the sense of the "Keynesian beauty contest" it doesn't
really matter whether a team will actually deliver anything good. If the web
presence and whitepaper hype is cool enough to generate a good buzz, that's
enough to generate a speculative wave where you hopefully won't be part of the
crash!

~~~
livestyle
It's also "very easy" not fall into FOMO token buying.

------
dangerousbeans
It's nice to have something a bit more meaningful than a mug from kickstarter
though

------
lowglow
I'm 100% bullish on tokens backing great projects and awesome people. I'm
going to help bring to light some quality uses of them by both people and
organizations.

------
livestyle
Tokens = Branded Gift Cards

------
WikipediasBad
This definitely feels like a bubble. But if anyone is interested in investing
in some potentially cool tokens and projects, I personally think the most
interesting ones are:

1\. Tezos (not part of ethereum ecosystem) 2\. Golem (part of ethereum) 3\.
Litecoin (they are pioneering the lightning + SegWit protocol first, before
BTC, the price could rise dramatically if it's a success) 4\. Dogecoin (this
one is just fun and has been a cult classic since it came out, don't recommend
anyone buying, just fun to add it to the list, much wow)

Disclaimer: I own no position in the above nor am I affiliated with any of
them. These are just my opinions.

~~~
jurandom
Any thoughts on Augur/Gnosis? Those have a real use case in my opinion.

~~~
mifeng
Are those just prediction markets or is there something else to them? I
remember there was a site called TradeSports everyone was excited about in the
early 2000s. It's problem was that there was very little liquidity for any bet
other than presidential elections and the Super Bowl.

~~~
jurandom
Why is low liquidity a problem? As long as there is someone betting for and
someone against an outcome, a prediction market is successful, right?

~~~
twoodfin
I bet 50 cents to your dollar that the S&P 500 will be above 2,500 on Jan. 1,
2018. Would I have bet 51 cents if offered? 55 cents? 75 cents? Without a
bunch of participants, we'll never know.

Markets with low liquidity are terrible at price discovery. Price in a
prediction market is (if we believe in the concept) directly tied to how
likely a prediction is to be true.

------
simonebrunozzi
Shameless plug, I've written an extensive article on "how to handle your
bitcoin investments in 2017", and I feel it answers many of the questions
raised here, mostly about whether investing in crypto (BTC or else) makes
sense, and how: [https://medium.com/simone-brunozzi/how-to-handle-your-
bitcoi...](https://medium.com/simone-brunozzi/how-to-handle-your-bitcoin-
investments-in-2017-cc8e38a2b297)

