Why Tokenized Ownership Is The Best Alignment Tool Since Equity

Winkrypto

特邀专栏作者

2020-08-11 11:54 (UTC+8)

This article is about 9640 words, reading the full article takes about 14 minutes

Re-understand the value of tokens: why do some projects need tokens, and how should tokens be distributed?

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Re-understand the value of tokens: why do some projects need tokens, and how should tokens be distributed?

Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from

Chain News ChainNews (ID: chainnewscom)

Give someone a dollar and they'll help you for a day. Give them tokenized ownership and they'll be on your side for life.

“Tokens,” digital representations of ownership, are the most powerful incentive and coordination tool since the advent of equity due to their frictionless distribution and adaptable nature. While there has been a healthy dose of skepticism about token experimentation over the past two years, certain token designs are undeniably accretive and could become self-fulfilling prophecies, similar to early-stage equity.

In this post, we'll first briefly review what key factors brought cryptocurrencies to this point in history, and then we'll define what early-stage equity ownership actually is, what it achieves, and how it accrues value ; and finally, we will highlight why tokens are the best medium for distributing ownership and incentivizing cooperation.

image description

Original image by Randy Fath
Bitcoin, Ethereum and various tokens

After a decade, we can now look back at Bitcoin as the Internet's first successful answer to two major challenges:

Provable digital scarcity and provable digital ownership, enforced only by code and not by law. Until then, ownership can only be enforced by the state, violence and law.

Humans and machines coordinating a global network obey simple rules, where code is the law, incentives dominate, and honest or altruistic actors are not assumed.

Fast-forward to 2014, and Ethereum became the most influential initial coin offering (ICO) to date, raising $18 million in a decentralized crowdfunding in which participants essentially bought the Ethereum project A part of , that is, ether currency, namely ETH.

Ethereum's ICO was indeed an important moment in history, when capital was coordinated globally towards a common goal, to fund the development of the project without relying on a trusted intermediary, and to obtain a digital Representative, that is, ETH in return.

It's worth pointing out that ETH was just a commodity at the time, used to pay for transactions on the Ethereum blockchain, and was not necessarily intended as an investment vehicle; although humans do have a tendency to speculate on many things... .

Ethereum token sales are similar to crowdfunding that already existed at the time, represented by sites such as ArtistShare (2001), IndieGogo (2008), Kickstarter (2009) and GoFundMe (2010); Based on donations or rewards (before product launch), with a few exceptions such as CrowdCube (2011) and Seedrs (2012), two UK-based equity crowdfunding platforms still cannot accept , Canada, Japan) to enter. Selling ownership has proven challenging in certain jurisdictions, most notably the US, which reserves equity investments to accredited investors (ie, those with a net worth of more than $1 million). This is positively developing though, thanks to the JOBS Act, which has allowed non-accredited investors to participate in equity crowdfunding with certain restrictions since 2016, thus giving rise to platforms such as SeedInvest.

In 2017-2018, we saw a large number of projects copying the fundraising mechanism of Ethereum. These projects have a vision and that is want to attract capital to build it, they crowdfund and give investors a token in return for capital, just like Ethereum.

This may confuse some investors though, as many of these ICOs are not selling ownership but actually a token that can eventually be used to pay for services when the project comes to fruition. This can be included in the ranks of reward-based crowdfunding, that is, rewards may be given in the future, and claims on rewards (tokens) can be transferred and sold in the secondary market.

There's nothing inherently wrong with this approach, depending on how the token is presented to investors, but it's clear that only a few projects will be able to make their token design work unless they do additional design for their tokens to capture value. Useful for those investors who view it as an investment.
The theory is as follows: Given that the token has a maximum supply, investors hope that future services will generate enough demand, and the future token supply is limited, that this will increase the value of the token. This belief is likely based on the success of Ethereum. By 2017, Ethereum had achieved record returns, token designs based on future demand were very similar, and there was no clear value capture mechanism-this made it impossible for many traditional investors to participate in Ethereum.
The irony is that Ethereum became the go-to platform for raising money through ICOs, and when people invest in ETH, the demand for ETH will continue, which gives ETH huge utility and leads to it The rapid rise of the Internet - we've all seen that. This token design, with no real value capture mechanism and pinning its hopes on future adoption, has turned into a self-fulfilling prophecy for Ethereum, largely as adventurous investors seek to replicate ETH’s returns elsewhere:
Buy ETH
Participate in ICOs, replicate the success of ETH (some have succeeded)
This further promotes the value accumulation (supply and demand) of ETH as most of these ICOs retain their ETH treasury.

This has attracted more entrepreneurs (and, unfortunately, opportunists) to build projects and raise capital through ICOs.

This spawned more investors buying more ETH.
Then repeat 🔁…
Looking back, we can attribute Ethereum’s success to several factors/events that were critical to Ethereum’s growth and fueled the ICO movement in 2017:
Bitcoin's success

Distributed ownership, which means that many talents can get involved in the project very early, have a personal interest in the project, and become active evangelists for it-this is better than any traditional startup can dream, This has led to the rapid development of the Ethereum ecosystem and its infrastructure.

The development of exchanges creates liquidity in the secondary market and stimulates further speculation on ICOs, thus boosting ETH.

Corporate interest, with an Ethereum corporate alliance, which could reassure investors that "enterprise adoption" of the platform and ETH will be possible in the future.

Among the biggest contributors are all the other projects trying to replicate Ethereum's success. They quickly turned Ethereum into a self-fulfilling prophecy, attracted more talent, created more value for the network, and turned ETH into an excellent investment, thereby becoming a global leader in the minds of investors. A very good value storage tool, which helps to enhance its perceived value, especially now that Ethereum is developing to ETH 2.0, has a clearer value acquisition mechanism, has a proof of stake, and may introduce a fee burning mechanism (EIP- 1559).

However, the stories of many token experiments are less exciting. Unfortunately, too many projects with ulterior motives got funded, too many teams perhaps deliberately over-ambitious on their roadmaps, and too many investors lost money along the way because these projects raised too much money.

After all, many startups fail, and decentralized projects are no exception. However, this is also an era of rapid experimentation, and there are obviously success stories; many teams have successfully designed their tokens, and other real-world utility has emerged beyond payments, a topic we covered two years ago up. These experiments are not in vain, but are the early stages of an important paradigm shift: the global distribution of ownership of early technology projects. A Brief History of the World (of Venture Capital)

What exactly is ownership in an early stage project?

For a long time in history, it was easier to lend money to a company than to buy stock in the company, in part because before the introduction of the limited liability company in 1811, investors could be held liable for the company's debts. If you are interested in this part of history, I highly recommend reading Nicolas Colin's "A Brief History of the World (of Venture Capital)".

Lianwen Note:

Today, investors have a strong interest in investing in equity because, unlike investing in credit, if conditions are very good, the potential returns are unlimited, although the possibility of losing all capital is also high.

However, equity has another interesting property: you can trade it for money and time.

It starts with the founders, who have put their energy and intellect into something they jointly own, but have yet to generate value to any third party. Anyone who works in a start-up company has a deep understanding. Here, exchanging lower salary for higher ownership, motivating employees to go further, creating more value, and transforming this initial sacrifice into rich results, this This situation is not uncommon. In the old world of credit, this could also have been accomplished with the promise of bonuses based on the future success of the company, but actual ownership certainly feels more appropriate; and it allows further reinvestment of capital, driving more growth, and further Increase the probability of large-scale liquidity events.

When a business or a project is constrained by cash, equity is a great tool to reward those who put in their time into the project and further motivate them to work towards the success of the project.
Time is needed, but usually not enough to build a successful business, so for those who prefer to invest, such as VCs and angel investors, there is another way to get in the game, to buy equity. The competition to invest in the best projects is fierce, so investors differentiate themselves by offering added value: they are willing to give their services “for free” in order to improve the odds of a venture’s success and improve the prospects for returns.

Therefore, ownership of early-stage projects can:

Buy with time or money with equity instruments;

The ability to bring human capital and financial capital together towards a common goal: entrepreneurial success.

How does early equity accrue value?

In the early stages of a company, valuation remains subjective for a while. There are ways to fix this perception, such as market opportunity, team experience, and comparable deals, but the main factor is a subjective perception of the opportunity and what can be achieved in the best case. For a long time, the ultimate goal is conceivable, but the road will be very difficult and, most importantly, the probability of success is very slim; only through hard work, and a good relationship between investors and team members Incentives to cross the finish line.

Until the company hits a critical mass of recurring revenue, the stake remains mostly speculative because nothing is done yet, but as long as someone is willing to pay more to get that stake, that is, as long as it is in the eye of the beholder As the underlying value increases, the value goes up. The factors that drive value-added may be market development, business success, or it may be that with a clear roadmap, people subjectively believe that what has been established so far will be more valuable in the future. Eventually, there will be investors who start to think about what has been built so far and what is still on the horizon, maybe because it gives them cash flow or synergies, or maybe they feel like the odds of "success" have increased , so I believe this project should be able to obtain a higher equity value.

But in innovative or high-growth industries, there is often neither free cash flow nor dividends, that is, no value extraction, due to already profitable operating or capital expenditures. Possibly not even a liquidity event. But people will always have a subjective view of the value that may be created in the future, and the opportunity to eventually capture value, and therefore have a psychological price for the price they are willing to pay today.

If we look back at many startups, the equity value of these companies can be close to zero for a considerable period of time. However, there will always be a founding team with a vision of what they can achieve, for whom the stake is valuable. And in most cases, if they want to be successful, they need to grow the team, so they distribute ownership and maybe even sell ownership to fund growth. Except for a few people who understand the vision, this ownership is effectively close to worthless in the eyes of the world; but the belief that it might one day be worth money is enough to align the incentives and help the entire team realize the vision.

In a few cases, the vision does become a reality, and ownership that was considered worthless by the world is now worth a fortune. A tool that aligns people's interests, motivates people to work toward a common goal, creates value at scale despite the extreme subjectivity of value over a long period of time, and ultimately becomes a self-fulfilling prophecy — Just like Ethereum.

The incentive to invest one's own time or money in exchange for ownership is enough to incentivize value creation, even if the path to value extraction remains unclear for many years. This is the boost you need to overcome difficulties.

Investing money vs investing time

Retail investors can now exchange money for ownership of early-stage companies thanks to new equity crowdfunding platforms like Crowdcube, but there’s still a lot of friction involved, and it’s still pretty exclusive.

As we've seen, often you can also trade time for ownership of a company by being involved in the early lifecycle of a project - but that's also pretty exclusive, since few people can afford to do so.

Then again, time investment can be more creative, it doesn't need to be a full time investment to be worthwhile. What if people could temporarily invest their knowledge, expertise or connections in exchange for ownership?

The most recent example of this comes from YouTube, and I'm sure there are many more. As the YouTube platform begins to professionalize, we're seeing interest in multi-channel networks, trusted third parties who work with content creators and help with most of the administrative processes like promotion, funding or representing them with brands Negotiate in exchange for a revenue share.

In France, there was a network called Talent Web, and one of their growth strategies was to give equity to the largest YouTubers in France at the time, which would incentivize them to help the network grow; this was logically possible because most YouTubers in France Streamers will gladly join their influencer network.

It worked: within a year, the network was acquired by Webedia, a global media company, for 25 million euros, and the top three YouTubers received a 12.8 million euro stake. Clearly, much of the value created here comes from incentivizing the right people to leverage their network, but they are also free to devote their time to other ventures.

It's clear that ownership aligns incentives and creates value, so intuitively this should be done often, but why is it rarely done? There are many reasons for this, such as cost, regulatory and complexity of distributing ownership (and the need for trust from recipients), and in particular liquidity events are rare in the equity world. Could there be a better way to easily assign ownership?

Reintroducing... Tokens
Equity is a fantastic alignment tool, both human and financial capital. It’s also a great incentive lever: if one owns equity in a hotel chain, one now has one more reason to book a room at that hotel—similar to loyalty points.
In practice, however, the distribution of equity ownership is not as simple as loyalty points. Rewarding contributors with equity below a certain threshold for their time is often uneconomical due to legal complications, and for acquirers, there is another problem:

Utility value: How much is this stake worth, based on what, and how easily can I sell it on the secondary market?

Trust: Can I trust this team to continue working on this project? That way the equity will be worth something.

Governance: Do I have any rights?

All these hurdles mean that ownership is cumbersome to acquire, own, and trade despite being the single best incentive tool.

As the world becomes increasingly digital, will there be a way to represent ownership digitally? As we can see, this is no small feat, people have spent decades studying cryptography, but Bitcoin has now set a precedent for proof of ownership without relying on a trusted third party.

Could there be a way to easily distribute ownership, or reward contributors for their time with a share of building the platform? … With the introduction of smart contracts in Ethereum, and the advent of dispute resolution mechanisms, we can build self-reinforcing contracts that reward work with ownership.

Could there be a way to represent digital ownership of a project or a company that can be easily transferred or traded and that can grant governance rights? Also, yes, ... with one token!

Tokens allow anyone to transfer ownership at a fraction of the cost.

Tokens allow for encoding incentives, eg: if Alice does xyz, she receives 10 tokens, all automatically. This is much more flexible than equity, which entitles shareholders to a stream of dividends or eventual liquidity. Here, tokens can entitle future active participation rewards in exchange for attention, expertise, or liquidity.

Tokens can be used to give governance rights to even the smallest investors, which would be impractical in normal times. When communities form around these networks, it incentivizes token holders to further increase their holdings as it gives them a sense of belonging and community.

Tokens, as a digital commodity, can be easily sold because with the advent of decentralized exchanges, the resistance to creating a secondary market has all but disappeared.

As such, tokens are a powerful tool, and like all tools, it needs to be used correctly. For a token to be meaningful, it needs to be properly designed.

Proper Token Design

As we have discussed, equity is not just a funding tool, it is also a coordination tool, which makes it more effective than credit. Therefore, the best token design is to have the best coordination tools, through smart contracts, the possibilities should be infinite (but limited by law).
So, what is good token design? In a nutshell, every network, every DApp, and every company is connected to some extent with different degrees of trusted participants. These participants have resources to sell time, infrastructure, liquidity, knowledge, etc., and participate in Those who want to buy these resources, that is, the market.
Specifically, this can take many forms, such as cryptocurrency exchanges.

Provide and maintain an infrastructure backed by human capital and expertise.

Incentivize market participants to provide liquidity and build infrastructure.

It is a convenient way for traders willing to pay a small commission to take advantage of this infrastructure when they wish to trade one asset to another.

In this example, value is transferred between the different people involved, creating profitable businesses and useful services, and all actors benefit from the creation of the market. This is the fundamental difference between traditional markets and networks, because in the latter, market participants own the market and therefore benefit as a whole from the onboarding of new participants, even if they do not directly serve them.
So fundamentally, the best token design will incentivize the necessary network participants to take the risk of adopting a new platform before its value is clear, and reward them with ownership that has value in the future due to their contribution .
Tokens can’t just be used as a fundraising tool, it’s going to be hard to work unless the team can use the money raised very efficiently and build services around it. Therefore, distribution of ownership through tokens must be in exchange for valuable contributions, and this distribution should occur disproportionately when these networks need it most. To give a few examples:
Compound, Curve, and Balancer are open financial protocols that provide users with incremental value as smart contracts deploy more assets. The earliest liquidity providers play a vital role, and because they are the first batch, they also bear the greatest opportunity cost and security risk. By being rewarded with tokenized ownership, early adopters have an additional incentive to invest time and effort in adopting the protocol and growing the network.

In projects that rely heavily on governance, like MakerDAO, Nexus Mutual/Unslashed, or DAOs that invest in funds like MetaCartel or StakeDAO, there can be an ownership pool (tokens) allocated to those who contribute the most to further incentivize participation (note : Incentive governance is easier said than done, and may have unforeseen consequences).

In projects that aim to bootstrap the market, like Ocean Protocol for data, or Orchid Network for bandwidth and privacy, the first participant to invest the time to integrate the platform should be rewarded with ownership.

If a project requires integration to succeed, they should not hesitate to give ownership to incentivize integration.

There are many more examples, but to summarize: a token is a coordination tool and a way to incentivize work, with potential excess compensation for contributors, and as such, it is the greatest leverage a project can have to steer one or more parties of its market.

Value capture in the context of tokens

If people don't assign value to tokens, it's hard to create incentives. This is why money, as a trusted medium of exchange, has always played a vital role in coordinating human activities.

Just like the self-fulfilling prophecy of early equity, the same can be true for tokens as long as they have built-in value capture mechanisms. Importantly, while tokens don’t need to capture value from day one, there must always be a path to value, either through tokens directly capturing value, or through tokens indirectly representing ownership of something of value . There needs to be a clear reason why people get tokens in return for helping, not cash.
Among traditional businesses, the best example is Amazon (AMZN), which re-injected profits into the Amazon network, and in 1998, Jeff Bezos (Jeff Bezos) sent out an early letter warning investors that he Say: The path to value extraction is clear, but it makes more sense to delay value extraction in order to build a more valuable network.
To capture value, a token can ultimately:

There is a token design that incentivizes token ownership, such as reduced fees.

Fee reduction mechanism for token holders.

Concerns about tokens being classified as securities

source:https://medium.com/

A concern in the digital space, and probably the reason for many poorly designed tokens in 2016-2018, is the fear that selling tokens to retail investors, satisfying the 4 conditions of the Howey test, would therefore be considered conducting unregulated securities issued and sued.

image description
source:
There are many articles on this topic, in short:
It is best not to sell tokens until the network is live.

Giving away a security token in exchange for work should be fine.

Tokens are unlikely to be considered securities if they are designed to require active participation to capture value (eg: staking -> work -> fees).

There are obviously uncertainties with this law, so please seek legal guidance and do not take anything in this article as legal advice, but it is worth mentioning that regulators generally want to incentivize innovation and value creation, while protecting retail investors. One hopes that regulators will accommodate token designs that may approach securities, but only if such tokens are innovative and clearly generate value creation, rather than straight-forward token sales.

Token Distribution: In the Right Hands

Given that the best tokens are incentive tools, the right people should be those who can bring value to the network early. Therefore, we feel that the best way to distribute tokens is to distribute some tokens to the contributors who are most critical to the success of the network. A good example is the recent success of Compound’s COMP token, which took the top spot of DeFi protocol by incentivizing people to use the platform and provide liquidity, increasing the value locked by 5 times. In this case, the only way for the general public to acquire the token is through active participation in the network, meaning that only users can earn the token and thereby gain ownership of the network.

image description
Source: Defipulse.com/compound
VC or angel investor with relevant network/expertise

in conclusion

Be active in the community and have a disproportionate amount of influence

future market participants

in conclusion

Imagine if, in 2007, you could get paid for every thousand views your videos on Youtube generated, even though it was only worth a few dollars at the time. Will you upload the video elsewhere, or promote its competitors?

Imagine if in 2012, every time you took an Uber or provided a driving service, you could get some equity in the company. Assuming you're happy with Uber and the company is growing, would you still ride lyft? What if, on top of your usual cash back, you could also earn equity for referring new clients?

Imagine if in the early 2000s, every time you sold an item on Amazon, you received some equity in the company. Will Amazon grow faster?

These ownership incentives don’t even need to replace existing ones, but can clearly complement them. Intuitively, we can see that this will disproportionately reward those who take risks early on, invest time in building these platforms, and play a key role in their success. These platforms obviously wouldn't be where they are today without early adopters.

Using tokens to distribute ownership allows platforms and networks to scale faster than ever before. Once your early adopters/contributors also take ownership of your success, they become your biggest supporters.

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