The Tokenised Economy

From the early days of capitalism, when from 1633 the Hollandische Mercurius referred  to capitalists as the owners of capital, on to David Ricardo who, in his Principles of Political Economy and Taxation  is seen as the one who actually coined the term capitalism, until today: the structure and behavior of the enterprise as the main capitalist entity, hasn’t changed that much. With the advent of blockchain technology, the evolution of the enterprise could pick up pace, dramatically.

An enterprise can be defined as the largest participant of an economic system with an ideology based on – in most cases – private ownership of the means of production and their operation for profit. In the early days, the owners of an enterprise would manage its operations themselves. With the advent of the public corporation, ownership and management were separated from each other: in most cases, the owners did not participate in the management of the company but delegated this to employed executives. With this separation of ownership and management, and a trend towards larger entities with hundreds to thousands, to hundreds of thousands of employees, enterprises had to be structured in a way that would enable a proper management and controlling. In democratic countries, there are specific sets of regulations and laws that provide the framework for owners’ and managers’ scopes of action.

The Enterprise As An Institution

Throughout the history of capitalism, enterprises have been regarded as stand-alone, singular entities, existing because of the product and service portfolios they would offer to the market. Aspects of enterprises’ interdependencies and connections with their environments played a minor role: one of the better known examples of this is James Buchanan’s Public Choice theory that describes people’s decision-making process within the political realm. When, with the Industrial Revolution, people became aware of the significant external effects enterprises could have not only on the lives of their employees but on the environment, etc., something changed within the enterprises: owners and managers started wondering how they could address their enterprises overall impact on the outside world.

Another aspect that made managers think of the interdependency of their company with others, was marketing. Companies discovered that it wasn’t enough to produce high-quality products – they had to tell potential customers about it and even had to compete with other companies offering similar products.

The Enterprise As A Platform

Acknowledging external impacts of enterprises and the shift from supply-side to demand-side driven markets mark a clear behavioral change for enterprises: trade  unions, environmental regulations, but also purely economic aspects, such as just-in-time production or supply chain optimization, all have led to a new kind of enterprise – evolving from institutional constructs into a platform, acting as hubs mainly responsible for organizing a network of partners making sure a final product will be presented to the customer.

The enterprise as a platform: these days, most companies would be happy being regarded as a platform. After all, that propels them into the top ranks of the innovative minority according to AccentureBain and other consultancies.

And yet, the platform enterprise isn’t state-of-the-art.

Platforms may offer many positive aspects but they lack all advantages of a decentralized, trustless system, such as a blockchain protocol. Apple, Tencent, Siemens, or other giant platforms are centralistic structures that are successful as long as each platform partner plays along: as soon as one entity in the supply chain fails, the product can’t be delivered on time or with a certain quality. Costs of managing and controlling the platform processes itselves have become immense. In the event of an external irregularity, e.g. an activist group’s protest on the basis of an alleged misbehaviour, followed by a consumer boycott, could force even market leaders to halt the production process or even to discontinue a product line. Platforms are highly sensitive against irregularities because of their centralistic architecture.

The Enterprise As A Protocol

There is a cure for this sensitivity: if platform enterprises improve themselves further and evolve into protocols, they become resilient against internal as well as external attacks and they can regain what most of today’s companies have continuously lost in the past years: credibility and trust in the eyes of consumers. A protocol can be described as a defined set of rules and regulations that determine how data is transmitted in networks. A blockchain protocol is a decentralized database and ledger that allows all participants of the network to work with the identical, consistent data set at any time.

Convergence: Blockchain + Smart Technologies

A protocol enterprise uses blockchain technology to share the database and its additional, external intelligence, such as AI, autonomous machines, VR or AR, to collaboratively manage and control a supply chain process. The system is completely decentralized, featuring automated processes in line with a set of rules and regulations all participants have agreed on – the governance model. A liquid feedback mechanism ensures that all participants have the ability to participate in the network’s opinion making process. Depending on the intended level of openness, either selected third parties or the general public may also join the network. In the first case, a private, permissioned blockchain would allow a pre-defined group of participants to join the network. If everybody should be granted access to the network, a public blockchain would be used.

Cryptoeconomics & Token Design

Participants of blockchain networks need tokens to communicate or, more correctly, to transact on the blockchain. These tokens can take different shapes: they can represent a value store only, or they come with a set of instructions defining the so-called token design, or cryptoeconomics of the network. Cryptoeconomics describe the incentive mechanism that motivates participants to actively engage in the network.

In the same way, the token design is the regulatory framework for behaving within the network, it’s the (re-)presentation of each participant’s behaviour and value system. In other words: the token is the representation of the brand equity of the network’s or protocol’s participants. Customer perception will be created through the design and use of the blockchain network tokens. Since all transactions in a blockchain are immutable and, therefore, represent an accurate, consistent history, all actions of a protocol enterprise are open for scrutiny by third parties, s.a. auditors, or the general public, i.e. (potential) customers. CEOs of protocol enterprises won’t have to fear misleading accusations by activist groups. However, they have to be aware that omniscient auditors or customers form their opinions on the company on the basis of a complete behavioral history. Bad times for fraudsters!

A Tokenised Economy

It presumably will take years, if not decades, for existing enterprises to evolve in protocols. Also, many of today’s platforms will not join this evolution and will remain platforms or even morph back into institutions before the end of their business cycle. But for a new breed of contenders, blockchain technology provides the basis for a tokenised product offering already today. These vendors won’t necessarily regarded as enterprises in the first phase, but they might take over the role of today’s market leaders.  The key aspect of a tokenised economy is the token representing the behaviour and values, or, the brand equity, of market participants.

Blockchain technology is still in its infancy: most systems are not enterprise-ready, yet. However, the decentralized and open nature of blockchains provide the basis for a market penetration in an insane mode . Bitcoin, the first blockchain protocol, has evolved into the world’s 6th largest  currency by circulation  according to the Bank for International Settlements. The figure is based on a value of bitcoin at $10,765 each, meaning that the total value of all bitcoins in circulation is $180 bln. Bitcoin evolved into this widely used currency within nine years of existence – being the very first of its kind, initialising the category of cryptocurrencies.

Solarcoin, another cryptocurrency and token, was launched in 2014.  It’s a global rewards program for solar electricity generation: 1 Solarcoin represents 1 MWh (megawatt hour) of solar electricity generation. Verified solar electricity producers,  may get Solarcoins for free when participating in the network. 99% of Solarcoins will be given to solar electricity producers of 97,500 TWh (terrawatt hour) over 40 years. The creators of the Solarcoin foundation expect a market price of $30 per MWh in unregulated and unsubsidised markets. As of today, a Solarcoin costs $0.50 – so, there us a long way to go to reach a $30 price tag. However, at $0.50, Solarcoin has the third largest market capitalisation of all cryptocurrencies, reaching over $45 bln. Since renewable energies, especially solar power, cover more and more of the world’s energy consumption, we could expect the Solarcoin network becoming the or one of the main vendors within this space. And, what else is Solarcoin than a reasonably tokenised product offering?

For us, blockchain technology is more than a database and a ledger: it’s the basis of a tokenised economy. Done right, blockchain protocols not only allow new vendors enter a crowded market, their decentralized and open characteristics provide the tools for decentralized and open business models, such as (a renaissance of) cooperatives, collectives, etc.. Blockchain technology provides the tools – creators and entrepreneurs may now use them and start morphing centralized, vulnerable platform enterprises into decentralized, resilient protocols.

Crowdstart Capital acceleration program and innovation

Innovators and people talking about innovation.

How can companies go from talking about innovation to innovating?

There is a strong trend, especially in larger organisations, to try to further innovation by appointing Innovation Directors (mind the capital letters), Heads of Innovation, Innovation Evangelists etc. While the intention is good, it is simply very difficult to pinpoint how successful innovation can be introduced and integrated into a very long tradition of doing things by the manual. Does that mean that more innovation is happening? Do the people responsible for spurring employees to “think outside the box” actually change culture or do they one day find themselves playing cajón in a giant drum circle of executives wearing black turtlenecks? (Note: from a real life situation, without the turtlenecks).

We at Crowdstart Capital don’t pretend to know the answer to these burning questions, but we can say that the need for innovation is not receding. It’s more likely rising exponentially with the emergence of new technologies and concepts such as convergence or game theoretic advances, which require a new understanding of the future of society. By changing perspective, applying concepts from other fields to problems previously unsolved (like game theory in Bitcoin or physics to evolutionary biology) or simply taking a moment to recognise already existing ideas, groundbreaking innovation can be achieved.

The hard selling point for many investors in our digital token sale is how we develop companies and promote innovation better than corporate incubators or accelerators. There are two reasons why I believe in our investment hypothesis: 1. Our well-developed and customisable acceleration process, and 2. Our direct connection to and understanding of corporate needs. Below we will outline the five steps of our acceleration process:

Phase 1. Selection
Based on industry criteria, CSC sources and selects startups in the following industries: 

  • Industry 4.0 (IoT, Automation, Supply Chain)
  • Energy (Solar, Wind)
  • Legal Tech (AI, Compliance)
  • Healthcare (Data Accessibility, Security)
  • Space (Earth Observation, Satellites)

Our selection is based on three parameters:

  1. Product – feasibility, innovative-ness, market-need, location, etc.
  2. Team – vision, expertise/competence, “coachability”, i.e. communication and cooperation skills, diversity, etc.
  3. External factors – current CSC portfolio, industry needs, legal aspects, etc.

Phase 2. Onboarding
Aligned with industry requirements, we onboard the new startup into our acceleration process. We make an in-depth assessment of the technology, vision, financials, etc. in order to accurately adapt the following steps of the process.

Phase 3. Product Development
As a response to Phase 2, in close collaboration with the startup team we develop the product using agile methods. Collectively, we have decades of experience of developing scalable products from scratch. This experience will be put to work for and taught to each startup. The product development is constantly being correlated with strategy and vision of the future exit partner.

Phase 4. Matching
As a final reality check, we match the needs of our corporate partners with the product developed during Phase 3. If needed, we go back to the drawing board and adapt, if not we proceed to Phase 5.

Phase 5. Exit 
In the guided sales process, we leverage our experience in private equity, venture-funded firms and as investors to create the maximal value for all parties. 

Using this process, we attempt to leave innovation in its natural environment, the entrepreneurial and curiosity-driven world of startups. Without altering the habitat or motivation for startups to realise their vision, our goal is to aid them in their hard work.

„Traditional VCs Are Dead“: Full House at The State Of The ICO Ethereum Meetup

“I can honestly say my industry is being disrupted beyond belief right now. The funny thing is, I like it”, said Jamie Burke during yesterday’s Ethereum Munich meetup “The State of the ICO”. Jamie is betting his Outlier Venture’s fund on the idea to launch a handful, large ICOs to invest in communities and therefore in economies, rather than in startups.

Jamie’s fireside chat (no, there was no fire but it was hot as hell) with Datarella’s founders Michael Reuter and Joerg Blumtritt was a fascinating tour de force towards a potential next level of venture investing in general, and a new breed of investors focusing on communitarian, anti-fragile investments rather than amassing a portfolio of companies of which 90% will fail.

Before, lawyers Dr. Nina-Luisa Siedler of DWF and Dr. Markus Kaulartz of CMS inspired the audience with their highly informative and at the same time very sympathetic presentation on the legal aspects of ICOs. Both being long-time experts in the field of blockchain, managed to entertain everybody although their messages were far from being easy-going. Especially their slide “Consequences in case of incompliance” filled the room with enthusiasm. Their complete slidedeck “Legal Aspects of ICOs” can be downloaded here.

Again, the Ethereum meetup was a great success: everybody learned a lot, and from what we overheard on the floor, some of the individual conversations until late at night resulted in new ideas for …. future ICOs.

What is an Initial Coin Offering ICO?

ICOs have become a popular way to fund any kind of projects on the blockchain. An ICO is an event in which a project sells part of its to be offered digital tokens to early investors in exchange for money today. ICOs provide a way for project creators to raise money for their future operations. The digital tokens don’t necessarily function as cryptocurrencies by allowing investors to pay with it, but can have other or additional key functions, such as representing tokens for using smart contracts in a respective blockchain.

The ICO usually takes place before the project is completed, and helps the project team fund the expenses undertaken until launch. For some of the larger projects, part of the ICO money goes into a foundation that provides ongoing support to the project. They also work as an initial distribution model for the digital tokens, especially those with a PoS consensus algorithm.

Typically, anybody can participate in an ICO by investing some money. The ICO participants are invested in the success of the project.  And they provide early liquidity for the digital tokens when they start trading. As co-owners of the project participants can help spread the word and raise awareness in their respective communities.  They are also usually motivated by a profit potential if the project takes off and the tokens become worth more than the ICO price.

What’s the difference between an ICO and an IPO?

At first glance, ICOs resemble the better known IPOs. An Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company usually are sold to institutional investors that in turn, sell to the general public, on a securities exchange, for the first time. There are some similarities between ICOs and IPOs – both of them are used to sell a stake and raise money, and both invite investors who (hopefully) recognize both the potential and risk of investing their capital in order to make a future profit.

However, there are significant differences: Because of the infancy of the digital token market, ICOs are mostly supported by early enthusiasts and not necessarily by professional investors. In that respect, they are similar to crowdfunding, but with the backers having a financial stake in the project. ICOs are also not regulated or registered with any governmental institution and there are usually no investor protections other than what is built into the project’s and/or the digital token platform itself.

Today, most ICOs are marketed as digital presale tokens akin to giving early access to an online platform or game to early supporters. In order to try to avoid legal requirements that come with any form of a security sale, such as in an IPO, many ICOs use legal disclaimers and tell the participants that they won’t participate in a securities sale.  Different to most crowdfunding campaigns, ICOs don’t account as donations because they give digital token purchasers a stake in the company and a right to vote on future decisions. Neither can they be called the cryptocurrency equivalent of stocks. The U.S. Securities and Exchange Commission SEC and their counterparts in other countries have remained largely silent on whether digital tokens account as securities. A framework tries to weigh in on the issue but stops short of providing a definite answer, part of which is due to the unregulated nature of blockchain itself.

How does an ICO work?

Rather than issuing a formal prospectus or Information Memorandum as in an IPO, most ICOs are represented by a technical white paper, timelines, project goals and other information that will help potential investors understand and evaluate the project. The white papers are very similar, in structure and format, to traditional academic whitepapers. They explain the project itself, how the platform will work, how it can benefit participants, and how the project will be developed technically using the proceeds of the ICO. Since ICOs happen before project completion, or sometimes even before the project starts, being transparent and comprehensive about the details of the project is key to gaining trust and appreciation with potential investors.

After the ICO’s launch, digital tokens are made available for sale and will have value in the future for those who will work with the platform and/or for those who will use it as traceable assets. While in the very first phase of ICOs, the preferred currency was Bitcoin, most projects launch their own cryptocurrencies today. A list of cryptocurrencies can be found here.

ICOs typically last from a few days to a few weeks, depending on how quickly the initial supply will be sold. Therefore, investors should be aware that the ICOs roadmap reflects the plan of the project’s founders but doesn’t necessarily fit into reality, when there is excess demand and the offering must be closed earlier because the cap on the total amount raised is met before the proposed end of the offering.

Once the ICO is completed and the project launched afterwards, the digital tokens typically get listed on cryptocurrency exchanges to trade against other cryptocurrencies or fiat money. The price usually reflects the overall cryptocurrency market sentiment, project-specific news, the addition of new features and the ability of the project team to reach their goals described in the business plan.

Advantages and downsides of an ICO

An ICO is a great way to bootstrap a blockchain based project and gain the initial capital necessary to motivate a talented team to join the project and get started. It is possible to raise as much money as in a typical seed round. of a venture capital VC or business angel funding. The difference, however, is that the founders don’t need to give up equity for the money invested.

An ICO removes many of the hurdles present in the VC process and allows startups to take the shortest way to the market by directly presenting the idea to potential customers and gauging general interest on the project.

A problem with ICOs is that many of them have turned out becoming scams, ideas that never materialized or failed to deliver on their promises. Building on the hype surrounding digital tokens in general, some teams launched projects that lacked solid ideas and not enough initial research was done to prove the viability of the project.

Investors, on the other hand, usually cling on to the general success of Bitcoin and successful ICOs like Ethereum, one of the most successful ICOs ever, and see every ICO and blockchain project as the potential for making easy money. Due to the fact that becoming an investor in an ICO is very easy – you just have to verify yourself as a natural person with an address in a country the project teams allows to participate, some investors might lack a sound practical or theoretical investment experience and therefore might not be prepared for the things to come.

Following several cases of failed projects and outright scams, there has been a raise in wariness and skepticism toward ICOs, and the landscape is gradually self-regulating itself by adopting a set of rules and best practices to evaluate every project. There are now platforms performing due diligences on ICOs and help investors better asses the risk structure of the project. That’s forcing project teams into being more clear and transparent about their projects.

Another problem with ICOs is that, unlike venture capital investments, they  aren’t regulated or registered with any government or organization and therefore offer no investor protection. They owe this characteristic of ‘trustlessness’ to the nature of the Blockchain technology that supports them.

Crypto currencies and real (fiat) money

The technical term for real or physical money is fiat money. Fiat in this case derives from Latin and means “let it become” or “it will become”: money without intrinsic value that is used as money because of government decree.

Fiat money is physical money (paper money and coins), while so-called representative money is something that represents intent to pay the money such as a check. Fiat money is backed by the government, and representative money can be backed by different things, e.g. by the money in a bank account, like a personal check. Without any backing, both fiat and representative money would be worthless. In fact, every US Dollar in circulation is backed only by “the full faith and credit of the United States”, and has no inherent or intrinsic value whatsoever. Then, there is commodity money that is created from a good, often a precious metal such as gold or silver. Unlike fiat or representative money, commodity money has uses other than as a medium of exchange.

Main differences between fiat currency and crypto currency
Bitcoin, the most popular crypto currency in the world as of March 2017, has a fixed supply of 21 million coins, beyond which no more coins can ever be issued. That gives all bitcoins in circulation some form of value at any time, with the potential to increase in value over time. Until 2140 all 21 million Bitcoins will be mined.

Back in 2010, Florida programmer Laszlo Hanyecz asked someone into accepting the 10,000 Bitcoins he’d ‘mined’ on his computer in exchange for two pizzas from Papa John’s.  He got his two pies for $30 of literally found money. In March, 2017, Laszlo Hanyecz could exchange his 10,000 Bitcoins for $10 million at one of the crypto currency exchanges none of which existed 7 years ago.

Speaking of generating new Bitcoins, there are no institutions ‘printing’ additional funds. The only way to bring additional coins in circulation is through a complex process called ‘mining’. As a reward for bringing new coins in circulation, Bitcoin ‘miners’ receive the privilege of being able to spend these coins first.

Until the last Bitcoin is mined, anyone in the world can participate in the mining process.  There is no approval process to go through, as Bitcoin is so-called public blockchain welcoming people from all over the world to participate. All funds are controlled by the people active in this ecosystem, creating a decentralized system, or blockchain. Bitcoin has no single point-of-failure, making this blockchain network far more secure and completely tamper-proof. Unlike fiat currency, where one institution – a central bank – is responsible for controlling money supply, Bitcoin is consumer driven.  Then, Bitcoin has multiple points of distribution, as the mining process takes place all over the world. In March, 2017, there are more than 6,000 miners, or: nodes, actively creating new Bitcoins. Lastly, Bitcoins are typically held in wallets – as fiat money is. But a Bitcoin wallet is a digital wallet, represented by an app on a mobile phone or another kind of computer.

Bitcoin is not the only crypto currency. As of March, 2017, there are 755 different crypto currencies with a total merket capitalisation of roughly $25 billion. However, there are only 9 currencies with a market cap above $100 million, with Bitcoin ($16 billion) and Ether ($4.5 billion) being the only ones with a market cap in the billions.

List of Top 10 Crypto Currencies Market Cap (March 2017)

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Bitcoin: A Primer for Policymakers

This plain language guide by Jerry Brito and Andrea Castillo describes how the digital currency works and addresses many of the common misconceptions about it. In this primer, the authors describe how the digital currency works and address many of the common misconceptions about it. They also analyze current laws and regulations that may already cover digital currencies and warn against preemptively placing regulatory restrictions on Bitcoin that could stifle the new technology before it has a chance to evolve.

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How lawmakers can protect digital currency consumers without harming innovation

In their March 2017 report State Digital Currency Principles and Framework, Peter van Valkenburgh and Jerry Brito offer model language for a sui generis statute or implementing regulation to States that have begun to look at how digital currencies, such as Bitcoin, and the businesses that utilize them to provide consumer products, interact with money transmission and consumer protection policy.

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