Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - William Mougayar: Unpacking Initial Coin Offerings (ICO) and Token Sales

Episode Date: June 20, 2017

Token sales, often called Initial Coin Offerings (ICO), are exploding in popularity. Seemingly each week a new record is hit with huge sums being raised by alpha-stage projects in almost no time. William Mougayar, an investor, author and blogger, who has been at the forefront of the token sale movement joined us to unpack the most dynamic trend in the blockchain ecosystem. We cover the great promise of token sales in disrupting venture capital and changing how startups are build and grown. We also address the apparent irrationality of valuations and what distinguishes a responsible from a reckless token sale. Topics covered in this episode: The current state of the ICO market Issues with recent ICOs such as BAT, Bancor and Gnosis Why more attention needs to be paid to the relationship between token and application usage How one should think about token valuations Whether we are in a bubble or not How VCs are responding to disruption through ICOs Episode links: Startup Management Blog "The Ultimate Reading List for Blockchain, Token and Cryptocurrency Sources" "Tokenomics – A Business Guide to Token Usage, Utility and Value" Raising Tokens to Build a Company or an Ecosystem? Business Blockchain on Amazon Vitalik Buterin on Token Sale Mechanisms Buyer Beware – AVC Token Summit YouTube Channel Token Summit Website Thoughts on the Bancor Token Sale This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/188

This is Epicenter, Episode 188 with guest, William Mugayar. This episode of Epicenter is brought you by Jax. Jax is a user-friendly wallet that works across all your devices and handles both Bitcoin and Ether. Go to JAAWX.I.O and embrace the future of cryptocurrency wallets. Hi, welcome to Epicenter, the show which talks about the technologies, projects, and startups driving decentralization and the global blockchain revolution. My name is Sebassanku, and my name is Brianne Favianne. We're here today with William Mugayyar. William is somebody who's already been on the show two years ago,

so some of you may remember him. Of course, we'll link to the old episode in the show notes. And he's somebody who many of you will already know. He's doing lots of different things in this industry. He's an investor. He's invested in, for example, Open Bazaar, but also a whole bunch of other projects. He's been involved with Ethereum since for a long time. He's an author.

He's written a book called The Business of Blockchain. I think or the business yeah business blockchain and he's a organizer of token summit recently there was a big conference in new york around icos token sales and some of these new developments there he's also a blogger he's written prolifically about these topics so he's really kind of all over and especially around i think the token sales and and what's been called come to be called icos he's on a ton of work writing thinking about that so thanks so thanks so much for coming and and joining us today, William. Hello, everybody.

Maybe can you just share a little bit to people who don't know you so much? Like, how did you originally become interested in this industry? And what has your journey been? Sure. So I've been in technology for close to 35 years and was involved with the blockchain in 2013, when at the time it was Bitcoin. And I was lucky that Vitalik lived in the same city that I am. And at that time, I met him and became familiarized with the Ethereum project.

And since then, it was very obvious to me that this was going to be an important phenomenon, as important as the Internet was, 22 years ago. So I became very focused in terms of trying to understand it, to learn it, and to be very close to those that were very much at the forefront of this new technology. So I became associated with the Ethereum project and others as well and started to invest and research and advise companies in the space because of the potential that I saw. And so it's been close to three and a half years, basically, a very intensive work in this space. And I write a lot on my bloggers as well.

And you recently wrote a book. Can you share a bit about, you know, what's the book about? How has the reception been? True. We haven't been together since the book came out, which was almost a year ago. So I wrote the book in the first half of 2016. And the reason why I wrote it is because I wanted to explain the blockchain in business terms to a mass audience. As you know, the blockchain, the way it started and the way it still is, by and large, is very much of a technical phenomena.

So a lot of the discussions were very much of a technical nature. And there was nothing then that was attempting to explain it to a business audience. So that was really my impetus and my motivation for writing the business blockchain. Because I wanted to explain it in more ways than one. And it is a very encompassing subject. It is not easy to wrap your head around it. it has many facets, it has many implications. And I wanted to write it in a business, I wanted to write something in a business language,

and I did that. And the book came out. It was the first book that came out on that topic that explained it. And since then, the book has been translated in eight languages. What was interesting is that the first three languages were Chinese, Japanese, and Korean. And that told me that the interest coming from the Asian countries was very, serious. So this also told me that the phenomena is very global. There isn't one country that is doing better than another. There are a number of countries overall worldwide that are all

advancing their technology implementations and everything around blockchain is very much of an international nature, kind of a phenomenon. I have the book in English and also in French, because it was translated in France recently. And we've got a couple of copies in the office. And whenever a new recruit comes in, and maybe the, like, especially the people on the business team that haven't maybe, like, been involved in the blockchain space so much, you know, they're sort of coming into it.

You know, we always sort of point to that as one of the reference manuals to learning how, you know, blockchain, sort of change the paradigm and it's it's been really helpful for at least you know two people in the team that uh they have it you know like on their desk and often uh go back to it so thank you it's true i was in paris last month to launch the french version of the book and i think you were one of the first ones to receive the french version you saw it before i did yeah yeah i know you're you're uh well you're someone who works with you had sent me a copy and uh and unfortunately i forgot to bring the book with me to the signing, but I'll have to see you in some of the other point to get it signed.

So let's jump into the core topic today, and that is ICOs. At the moment, there are, it seems, every week at least one or two new ICOs coming out. And we've had a lot of, a lot of projects on the show that have gone on to do ICOs. You know, it's come with some, I guess, I'd say, mixed reaction. A lot of people obviously are interested in learning about these projects and sort of the innovative nature of these projects. That's certainly what I'm interested in. On the other side, there's a lot of, we've getting a lot of sort of like, I wouldn't say negative feedback, but we're getting some feedback from people that, I guess, are concerned that were giving a platform to projects that perhaps are damaging to the community or the ecosystem

of the whole or perhaps not legitimate or these sort of things. So there's been mixed reaction, at least from our side. But taking a step back and looking at what has been happening and just the enormous amounts of money that have been raised in these last two to three months, Give us your analysis of this ICO rush. Sure. I think the way I see things right now is that it's going to continue and accelerate for the rest of the year. About a month or two ago, I predicted that we would end the year at about a thousand ICOs total

and at least a billion dollars in terms of money raised. And I think we are really on track to maybe even exceed that number. We are pretty close now to having one a day. This week I saw about four or five that were announced or either in progress. And right now when you hear of one, it makes the headline. But fairly soon it's going to be very difficult to track all of them because it's going to be, it's like another startup that has raised some money. So if anything, this phenomena is going to continue to accelerate for the remainder,

the remainder of this year, 2017. And I would say we're probably still in the early stages of it. We haven't seen a peak yet, or we haven't seen the middle part of it yet, even. Yeah, I mean, it seems to me also what's crazy is not just there's more and more, of these projects during ICOs, but also if you look at like the amount of money raised and how much time it is raised, it's just getting crazier and crazy and crazier. And it's like every week there's a new record. There's a new and you know like when we did the cosmos fundraiser, which was at the beginning of April, you know, we raised 17 million in 28 minutes, which was at the time kind of like a record. But since then there's been like five, six projects that have done like much more money and less time.

And, you know, it's no time at all. This is, and then, of course, now we have for something like Bankor, which was just, I think, the largest crowdfunding campaign ever, right? And bigger than the Dow, bigger than anything that's ever happened. And it just seems to keep going like that, right? I mean, I don't think it's probably going to be, new projects are going to be even bigger than Banker, I think. Yeah.

Well, actually, this is concerning to me, and I tweeted about this recently. It seems to me that these kinds of records are the new vendors. matrix of the token era. Back in the internet era, there used to be vanity metrics that didn't really mean a whole lot. And some of these companies now that are raising ICO money, token sales, they seem to be more interested in breaking another record and taking another headline, whether it is that they raised more money than the previous company, or whether they raised it faster, or whether they had a...

had the highest market cap on the first day of being listed. Like yesterday, we saw Ayota claiming to have a valuation of $1.5 billion on the first day of being listed. So these kinds of records, I think, when you look back, are going to be meaningless, really. People are confusing success being, raising money to success being having a company, having a product, having a product, having users, having customers, and being successful in the marketplace in really proving that what you have dreamt about and the vision that you have can be executed upon and can come to reality. And that is really what matters, what's going to matter in the months and years following the initial

ICO. The initial ICO, the initial token sale is just that, is just raising money on a promise of something that you still have to deliver on. And right now, the whole market is running on a lot of optimism. Everything, everybody is taking the best case scenario that everybody is going to be successful. Everybody is painting a very rosy picture. Everybody has a great white paper and a great vision. And the products are not even developed yet. I'm applauding them for raising money. There's nothing wrong with that because money is going to be funding this innovation. But what really is going to matter is the teams delivering

on their visions and delivering on their promises to the marketplace. I think that's a very, very valid point. I mean, the people look at these vanity metrics and of course, it's always interesting and it's sort of fun to throw them around. I kind of like when I'm in speaking with, you know, like people that are not necessarily in the space. I kind of like throwing out there, oh yeah, this company just raised 36 million and two, you know, in 30 seconds or whatever. You see their eyes light up. People don't really understand, you know, what that means. But it's a reality and it's, it's kind of fun to do that. But on the other hand, you're right, you're right about the fact that we need to have companies that can execute on this. And if you just look at like regular

startups, right, like out of a hundred startups, whatever, like 90 some will be. probably fail or not execute on their vision. That metric is probably true as well for these companies. It's possible a lot of people lose a lot of money or that these founders perhaps

take off with that money and themselves become enriched personally. What do you think the future holds for if we look at things like realistically speaking? Exactly. I mean, what has become

easier is raising money, yes. But what has not become easier, what has not changed is the difficulty level of developing a company. The laws of a startup evolution of how startups start, how they evolve, how they bring a product to the market, how they get users, how they iterate on the product, and how they solidify their position in the marketplace, that has not changed. The physics laws or the laws, the natural laws of startup growth have not changed and they will not change. Just because you can raise a lot of money doesn't mean that your chances of success are going to be greater.

If anything is the opposite, the traditional VC wisdom is if you have less money to start with, you will be more careful with how you use it and you will make better decisions. decisions and you will make the better decisions overall. So I'm a bit worried right now when suddenly a team of two or 12 people have in front of them 15, 20, 30, and recently we've seen $150 million at their fingertips. And what they will do with it is really putting a lot of faith in them doing the right thing and doing it at the right time. So nothing has changed in terms of the difficulty levels

of bringing a product to market. And people keep looking back at Bitcoin and Ethereum as a success story, and they want to emulate it. And they say, well, Bitcoin did it, Ethereum did it. But you should not forget, Ethereum has been added for three and a half years. And there was a lot of blood, sweat, and tears in the Ethereum project, especially in the early days.

it was not a straight line to the top from the early days. There was a lot of hard work. There were some mistakes that were made, and each mistake was recovered. There were iterations. I shouldn't say mistakes, but they were iterations, small mistakes. All startups make mistakes. Obviously, if you have a lot of money,

you can cover a lot of your mistakes because it gives you more time to correct them. So maybe that's the silver lining that these companies have. But it's kind of a bit unconventional to think that you can raise once and then fly on your own for the rest. So we should see what happens in a year or two

from the time that these companies raise money. And we should see what kinds of progress is being made in the marketplace. And that really is going to become the measure of success. as potentially with them. Let's take a short break to talk about the I-Price, a competition being run by the Energy Innovation Hub. The I-Prize is all about the machine economy,

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So let's just play this out a little bit. So you mentioned that you don't think we are at peak yet. it's going to accelerate more projects are you going to start doing ICOs so how do you see that playing out like how far is that going to go what what kind of counter forces are going to happen and you know what is this whole environment going to look like a year or two years from now i think we are still in a honeymoon period right now where the entrepreneurs and the icos and the startups that are raising this amount of money are being given the benefit of the out in terms of being successful. There's a lot of free money around because a lot of the money

that's going into this new wave of companies that are being funded is coming from money that was already appreciated in the crypto capital space. So if you look at the whole market in the market capitalization number, about a year ago, we were about $20 billion. And today, year after, we're at $110 billion. So about $90 billion were made somehow out of almost out of thin air. There is that much value that just became available, became created in the last year. And a lot of that money is being recycled into these new projects. When you look at these new projects, more than two-thirds, between two-thirds and 75% of the money coming in is crypto money that has been recycled from other projects.

So this is positive because it's funding innovation. And there's going to be a long time before we're going to come back and say, well, now what have you done? So a lot of these companies that are raising right now, I think they can run for a year before we can start to ask some hard questions as to the progress. So the smart companies need to have more transparency going forward in terms of letting everybody know what they are doing and where they are. About a month ago, I wrote a blog post saying that the cycles that these companies, the ICO companies go through, after launch, they go into what I call a darkness period where we don't really know where they are at.

It's very difficult to get the real metrics coming out of these companies before really being able to point and say, well, here, there are customers here. there are users. So if you think of this in a quadrant where you start at the launch and then you go into the darkness and then you transition into a period where you go into the reality

and very few companies are in that reality quadrant. And the companies that are in that reality quadrant are companies like SteamIt, like storage, Cia, Bitcoin, Ethereum, of course, Zcash, and maybe I've left a handful but there are very few and far in between.

These are companies that you can point to and say, well, here, they have customers here, they have a website, they have an application. Most others, they go from launch to darkness. And that darkness could be one or two years. So that's really what's going on right now. What's going to play out, it's difficult to kind of predict exactly, but I said recently that we need to see a few more failures before things start to come down to reality. Right now, 30x is the new 3x. A hundred X is the new 10x. So definitely there is something that is not real here. And I remember back in the dot-com era when the crash happened, there was a period where we thought that the sky was the limit. We thought that everything

was going to the moon. and this is when it started to crash because the moon is not something that you can put a ladder on and reach but once you have that feeling it can go on for so long before reality sets and usually that takes an amount of time before we start to realize that things are not real here so all I'm doing here is just pouring a little bit of cold water

and me as a person, I'm not going to change anything. I'm not going to be able to change what's going to happen. Entrepreneurs are going to run with it. Companies are going to run with it. I see who will be raised and tokens will be sold at valuations that are unrealistic, perhaps, before we start to realize, well, maybe this didn't make sense in certain parts. And in a way, it's okay because we don't know what the boundaries are.

And the only way to know boundaries is to touch them and to go over the limit and then to hurt yourself and then you realize, well, this is the boundary. This works. This doesn't work. And right now we're still experimenting. We don't even know what the perfect token sale characteristic is. There are many variations and many opinions as to what is the ideal one. And we can talk about that in a few minutes. So there are lots of experiments being made right now, and we're making it up as we go, more or less. But there are certain ways that are a little bit unusual, and once in a while we are seeing them.

And like the Bankor example and the IOTA example, again, we keep going back to those, and we can talk about others. And each one is a learning lesson. There are things you can emulate from what these companies are doing, and there are things that you should not emulate from what these companies are doing. Yeah, I mean, just one thing to add here that I think is also an important factor, which is that a lot of these projects have so much money that they don't need to go back and sort of justify what they've done to get more money, right, which is the sort of VC dynamic you have. So, you know, there may be kind of an exaggerated VC, maybe valuations are too high, but then, you know, two years later, they have to come back and say, like, you know, is their traction. But then you have projects like, you know, we did a podcast with Golem like the other week. And when they did their crowdfunding campaign, it was kind of reasonable, right?

They raised like $9 million or something or $10 million. But now, because of the ether appreciation and because of the appreciation of the token, they have like more than $100 million, right, in assets. and there's a lot of projects like that and you know it's starting to be significant number of projects like that so they have infinite runway almost so that makes it also tricky right because they didn't have to they can really build

for stuff for a long time before they so that day of reckoning it's not clear when that's coming true and it's going to come in a different way than we need more money we have no more money unless some of these companies are really reckless and they spend all the money, then it becomes obvious that they cannot go anywhere. But theoretically, they can go on forever. I mean, almost forever.

They can go on for five to seven years and not ask for more money and look like they are working on something. And I've seen companies, traditionally speaking, that have raised a lot of money before the token era that can go on for two, three, four years. with a semblance of doing things but they are not progressing in reality but the public should be asking

we should be asking, I will be asking questions a year from now to these companies that have raised a lot of money and we'll have to see what they do with the market because at the end of the day you can fake so many things but you cannot fake having customers, you cannot fake having users and you cannot fake

traction. You cannot fake a number of things that have to be visible. You can tell a story for so long until you have to show that there is something real out there. You mentioned before the bank or crowd. Maybe we can dive into that just a little bit. What did they do? What do you think did it well and what you don't like about what they did? Well, I wrote a blog post on it yesterday. Without going into a lot of the details. What they did very well is they orchestrated the marketing campaign extremely well. So they communicated everything they were doing that was impacting the sale. It was clear they wanted to maximize the number of token being sold. And they achieved that and they overachieved it. So you could argue that and say, well, why do you need so much money and why have a hidden

cap? I'm not in favor of hidden caps. That was another thing, that they did. They did not disclose the cap they had in mind until after, until three quarters of the way into the sale. And they said later they had a hidden cap of 250,000 ethers, whereas they ended it at 400,000 ether, which exceeded the Dow raise of $150 million. So I don't have any evidence, but you could argue that one of their internal goals was to overpass the Dow, again, to get another headline saying that they were the highest raise in the token era, maybe it's coincidental, maybe it's not, but they did eclipse the Dow by $3 million, and they got that headline.

Now, they are saying that they need that much money for their reserve system to work. Fine, but we're still questioning. I'm not the only one that's questioning. shame. The fact that this was a fairly greedy way of getting money from the crowd. And $150,000 is a lot of money that could fund maybe 15 to 30 startups. You don't need that much money to start something. Traditionally speaking, companies are raising $1 to $5 million. You can do a lot with $10 million. dollars. So I'm going to give them the benefit of the doubt.

I don't want to pick on them for too long. But let's see what they do with it. That's really the more important thing. But every time you have one of these, we learn. We learn some things. So with the bank ordeal, we're saying don't do a uncapped race. It's not a good idea. When we got the bat, the basic attention token, the brave token, it was all done

in 15 or 30 seconds. So there, what we learn there is to not do something like that where only the sophisticated investor will know how to pull the trigger faster than the average consumer. There are funds that have developed what is called a sniper wallet. I don't know if you've heard that term before. A sniper wallet is a technology that goes and snipes these crowd sales faster than others.

And they have the advantage because they have developed that technology. But it's not fair for the consumers that are sitting on their computer and maybe had to wake up at 4 a.m. or whenever the start of the sale is and hit on their buy button from the wallet, send money. And then before they knew it, they're going to be the loss in the queue. Because somebody has figured out that they gave another high level of gas. That's how some of the bat token buyers got in is they raised the limit on the gas. And they got in front of the line because the priority of the transactions was ahead of others.

So what we learned there is to limit the gas have the gas limit. That's something that Bankrupt did. But what they did, they lowered it too low. And it provided a logjam in the transaction queue because all of these transactions were had a low gas limit and they were lining up. And that created another kind of bottleneck. So I'm not in favor of sales where you have an hour or three hours to do it because the blockchains are not ready to take that much transaction volume.

The Ethereum blockchain was choking at that particular time. I did a test during that time. I sent some ether from one place to another. and it took hours and hours before it was confirmed. It took close to nine hours until everything got caught up on that same day. So we don't need to create this sense of urgency. Nothing good happens when you rush things. Why just one hour?

Why three hours? Why not go with two weeks and one week and have a more orderly kind of a token raise where the cap is known, where you allow a lot of token holders to buy into your sale, if you believe in distribution, if you believe that users are going to lift up your application and then help you to make some headways in the market. If you believe that you want to empower developers and users at large to use your application, why not maximize the token sale for distribution as opposed to making a quick buck very fast and then closing it after three hours and then and then not caring whether there was chaos in between or not

that's a great point I mean we can point out that a number of crowd sales that depending on the on the model ran into similar problems so you mentioned the fact that during the the Bankor sale, of course, it's sort of like a DDoS attack on the network. I tried to send some ether as well and wasn't able to just straight up, couldn't send. And they are also some crowd sales like the BAT crowd sale were, in my opinion, just, you know, it is undemocratic. There's no other way to put it other than it's just, there's no fair and equal distribution of of these tokens. You wrote a blog post recently exposing your thoughts on Bankrupt, and in here you say that permissionless doesn't need absurdness or recklessness.

This sort of appears to be what we're pointing at here is absurdness and recklessness with the way that these crowd sales are conducted. What do you think are some of the ways that we can mitigate some of this? absurdness. People are pushing the limits because, just because it's possible. I mean, they could have raised even more. They could have opened this for another two hours and maybe raised another $100 million probably. What can we do? I mean, we can point at it. We can people like me and others have written on it maybe indirectly like Fred Wilson. I was a bit more direct and called them out.

Whereas Fred today prescribed a set of generic practices for token sales and his partner, Albert Wenger, also has written about that topic. I think that's one way of doing it, is pouring some cold water on it. We can't wait for disasters to happen necessarily. One area that I think we can do better as an industry is right now, Now, there is no standard way of reporting on these filings. If you want to, if you're interested in one of those filings, you have to read each one of the terms. And I've read more than a dozen of them.

And they are from six pages to 24 pages each. And they go through a lengthy amount of describing the issues process, so what they are issuing. how many tokens, the value, and how they are distributing them. And there's no standard, which means that everyone is describing their token sale in a very different way. So it leaves a lot of uncertainty to the reader and to the investor, to the consumer, to try to interpret these terms and to find out what is missing and what is not missing. And in my analysis of these close to a dozen of them, there are holes in most of them.

And there are things that people don't say. And you have to kind of figure out what is not said and what is meant and how much leeway they have. So what would be valuable is to have some kind of standard way of at least reporting on it. So instead of each company having 12 different ways of announcing a sale, what if there was one standard way? and within that standard way, they can have their own parameters. But at least we would be looking at this from a more standardized aspect. And this is a project that I'm working on right now, actually, that will be announced in the coming days

where it's going to provide more transparency and more standardized ways to file for these token offerings in a way that would benefit the consumers, that would benefit the investors, And that will allow them to compare these offerings in a more comprehensive way and not having to decipher them. And only the astute one, astute reader will figure out what's missing and what's not missing in those sales. Because they are all over the place right now. So William, I'm really curious.

What are some of the things that you like that people do in Crowtail or that you would like to see. And in particular, I would also be interested in your comment on, on, you know, two crowds sales that are coming up that are taking, doing some different and novel things. One is IPFS, which is going to do the file coin crowd sales soon. And they're doing that via this new platform called CoinList, which is associated with Angel, so which is already being used for crowdfunding, equity crowdfunding for startups, but you're not in the crypto space. And that's going to be limited to accredited investors, right? So most people are not going to be able to participate. And then the other one is the civic crowdsale, which is Winnie Lingham's startup.

And they're basically doing some kind of K-Y-C of investors where you're going to have to, you know, at least authenticate that you're a person with a phone number and an email address. So what do you think of those approaches? Do you think those will become more prevalent? Do you like the direction they're going? Well, these are more sensible examples that are not going to create chaos, at least. And in the case of Civic, they've announced that about three quarters of the sale amount is going to be filled in the pre-sale stage, meaning that, and they said it's already filled in that regard.

So this was done with the KYC process, and it's a more orderly. process. In the case of IPFS and FileCoin, Coinlist, as you said, is an accredited vehicle. So there it's limited even more. And the idea here is that anybody that invests should be prepared to lose their money. And that's usually the thinking of investors. Accredited investors are mature enough that they only invest on the premise that they could lose all of the money. And it wouldn't be fair to subject consumers to the same risks that investors that can afford to lose their money are facing. You know, accredited investor, it just means you have more than one million in like liquid assets, right? And I mean, I don't see how they risk with the IPFS or Filecoin crowd funding campaign is going to be all that different from

bank or or any of these other projects, right? So the risk isn't really that different, but it's limited. So is that consistent? Or wouldn't you then say all of them should be limited to accredited investors? Do you think some of them make sense, but others should be open? Well, in the case of IPFS and FileCone, they have been added for a number of years. There are applications that are running on IPFS today. And so I wouldn't put them at the same level.

level as Bankor, although Bankor said they've been working on their system for a year and so on. But IPFS is a lot more real, and FileCone is a lot more real. There are users, you can point at them, you can point on applications that are using IPFS. So the main thing here, and I've been writing about this as well, is the linkage between the token utility and the usage of the token to the actual application or to the protocol, specifically that's underlying it. At the end of the day, the reason why you have the token is not just that the token is a funding mechanism, although at the surface it appears to be a very efficient funding mechanism because you have money,

you have tokens, you just convert them and you have real dollars in the bank. But in the long term, the real value underlying this, and I said this when I opened the token summit, I said, we're not here to talk about the price of tokens and the value, on the, and the actual market mechanics of speculating on them. We're here to talk about the business models that the tokens enable. So the whole conference, the token summit that I ran in New York three weeks ago, was focused on discussing in detail what are the business models, what are the utility aspects to usages,

and the value and the features that the tokens can have in the context of a business model. in the context of what will it do to the user? What will it do to the developer? Is it a right? Is it giving the usage? Is it a right to do something with the application? Is it a toll?

Is it a value exchange unit? Is it an internal currency? Is it a way to earn money as well, to earn value? So with Filecoin and IPFS, they are related because Filecoin is the monetizable way of storing, of storage, that the IPFS applications are going to be using. So there is a relationship there. with the civic application, there is a relationship between the token itself and the identity and the role of showing your identity and proving your identity is going to have. And the role of the token is going to facilitate that process.

So the more I see real linkages, the more I get excited, the more I see value, especially if it's working already. like the case of SteamIt, for example. The Steamit wallet is part of the logged-in experience. So if you are a user on Steam-It and you log in and you're already in the Steam-It application, right in there, there's a drop-down menu that says wallet. So your wallet is in there as part of your user experience. Every time you, if you create a post, a content, or if you upvoted, or if you write a comment, automatically either money is taking out of your wallet or money is deposited in your wallet.

And you don't even think about it. It just happens in the background. But the token, the Steam token is part of the application. And we need to see more of those kinds of applications where the token is very intrinsic and very much an atomic unit of the application itself. And maybe the user doesn't know or doesn't touch the token, but they touch the actual application and and automatically something happens with the transfer of token value back and forth. And that's, that's, that gets me more excited and, and that's what we should be looking for and

asking these companies is what is the token linkage to your application or to your protocol specifically. Let's take a short break to talk about Jax. Jax is your wallet, your complete user interface to cover all your blockchain needs. I've been using it and I've been loving it. Now, Jack supports a lot of different cryptocurrencies. I suppose Bitcoin, Ether, Lightcoin, Ethereum Classic, Zcash, Augurap, and they're adding many more, keep responding to users' needs.

Now, with Jacks, a nice thing is that you can manage all of those coins within a single wallet and you are in control of your own private keys, they're not on their server. And there's a single 12-word seed that you can use to backup your wallet, all your coins, and sync them across different devices. Talking about devices, they're on pretty much any device that you can think of. You can get it on PC, Mac, Linux, you can get it on smartphones like Android and Apple and iPhone. You can get it on tablets or even browser extensions for Chrome and Firefox.

And on top of that, in Jax, you can actually exchange different cryptocurrencies for each other because they've integrated a ShapeShift. And more partnerships and integrations are coming down the line in 2017 that are going to make Jax. even better. So Jacks is really making blockchain and cryptocurrency successful for the masses, easy to use for the masses. Make sure to get your own Jack's wallet at jacks. I.O. Or you can get it from any of the app stores you are using. We'd like to thank Jacks for their support of Episenter. So you mentioned Steamid. Are there some other interesting uses or kind of combinations between products and tokens that you're currently seeing?

on the consumer end, I think it would be interesting to find out what happens with token. There's an application called token that Coinbase has just released a beta version of. There's another equivalent one called status. Status is going via an ICO route. Excuse me, fairly soon. That's my understanding. So these will be in the flavor of consumer applications that will be, on your smartphone specifically.

And I've said this before. What I'm seeing here is that the money that we have in our pockets and the money that exists today in our bank accounts, that's getting competition from cryptocurrency. It's getting competition from cryptocurrency in the apps, in apps that will be in our smartphones or in wallets. that are in our smartphones. So if you're one of the kind of leading early adopters,

you have some cryptocurrency in wallets or in exchanges. But soon you will have them in the apps. I'm a user of Steam It. I have value. I have a bit of money that has some value in the Steam It, in my Steam It app. And that has value. So we're going to see more of those emerging.

I'm hopeful that a consumer app like token or status will eventually have millions of users because the token is a very efficient way to send and receive money or send and receive value with a very low transaction fee almost close to zero. So one of the use cases that token, the app token I'm talking about, is a, is a, is showing, showcasing on their beta version is the ability to send money between consumers as easily as you can send a text message. So imagine you're sending money as easy as just sending a text message and you say, I want to send one ether from to you, to Fabian or to Sebastian. And it happens in seconds at a very, very low transaction fee very efficiently.

And nobody's in the middle of that. It's not like Venmo. It's not like PayPal. It's not like doing a transfer with a bank because there's nobody in the middle. You're just doing it on the blockchain. And Combease is just a very lightweight intermediary. And I think there's a lot of value in having a see this kind of alternate way of sending and receiving money.

So people ask me, so why is this going to replace what we currently have? And my answer is that you cannot compare. You cannot compare to the current system that we have. Because you will fail every time when you compare it. This is a new system. This is a new alternative system that is being created here. There is still lots of friction between the current world that we have and the cryptocurrency world.

Every time you want to go in and out of it, there is friction. And that's why the merchants are not taking off on accepting Bitcoin or cryptocurrency. Because the credit card works very well, cash works very well, a debit card works very well. We're not going to replace that. But if you enter a new system where cryptocurrency is a native unit and the only way to transact value is with cryptocurrency or with tokens, then you don't know anything else. And then you say, well, this is efficient. And the analogy I give is, remember a few years ago when we started to build the cellular network, cellular phones took off everywhere in the world. But we didn't use the landlines to do that.

We had to build towers. So it was a totally new infrastructure. We built a tower infrastructure to have the cellular system happen anywhere in the world. the world. When the web came along, we didn't use the mainframes. Before the web, the mainframes were the prevalent computing platform. We didn't use the mainframes to power the web and the internet. There was a bunch of servers, client server technology, is what took over the web. So it was a new infrastructure. So think of this whole, what we are enabling here and we are building a new infrastructure totally, that almost doesn't have any regards.

or doesn't care almost about the current infrastructure, the current way of dealing with money. This is a new way of dealing with value. So every application that is raising a token, they should have more tighter linkages between what users can do with their application and what users hold in terms of tokens. Because that's what's going to make the whole thing

fly, that's what's going to make everything work in a way that is kind of give and take. Because if you want a real good economy to work, you need people to buy things, you need people to sell things, you need people to earn things, you need people to also be able to spend it. And in a way, this is all about creating a new economy. We can call it the token economy or the blockchain economy. but this is about the creation of something new that didn't exist before. So we have to enable transactional activity in this new economy, and that's very important. So I want to come back maybe to the applications.

I mean, I'm going to have a somewhat contrarian viewpoint here, because I see I'm not super optimistic at the moment that we're going to find native killer apps. where people just regular, you know, like your parents, your friends at school, like people that are not, like techies are interested in startups or or interested in blockchain using this type of technology every day like they're using Facebook. And so one of the things you mentioned is that so credit cards are easy. And I think for the for for most people, that's the case on onboarding with credit cards. with competing applications like Lydia, PayPal, or not the Lidia, sorry, Venmo in the U.S. is made incredibly easy by the fact that these companies are regulated and it's easy to use a credit card to onboard. And I think that applications, native sort of blockchain applications that are trying to apply this new model to existing use cases like status or, or, or, or,

token, and I love what status is doing, but I think that if we take those examples, so they're attacking, they're sort of going into the messaging space, that space is already extremely fragmented and where there are incumbents that have enormous networks, network effects, Facebook, WhatsApp, we chat. I think that it would be more likely that a company like Facebook would have success by integrating some sort of token than it is for a startup in the blockchain space to have 10 million users in this space. I'm not sure about that. For Facebook to adopt a token model, they would have to disrupt their advertising model,

which works very well. So Facebook is going to be facing the innovator's dilemma. I mean, just for payments, I'm talking about sort of not replacing Facebook's business model, but let's say Facebook says, okay, in WhatsApp, now you can do payments and you can send tokens in WhatsApp and you can build applications using this WhatsApp token. And maybe they do a nice CEO.

or something like that, right? Possibly. They would have to do it on the blockchain and not using a payment processor in the background and giving the illusion of a peer-to-peer where there was a processor in the middle. Right. But even then, then you're still going to have the friction

with onboarding because when you want to get money in, you're still going to need to use a credit card. And currently the way that's set up is there needs to be some sort of a K-Y-C done and people are not, people are not going to do that. But what if you don't have to do that? What if you earn those tokens from other means?

I did recently a TEDx talk where it was about the future of work as it relates to tokens. And in the future, you will be earning more tokens than we are earning tokens today by doing what I call active work or passive work. So again, I go back to Steam it as an example. You'll be earning real money, and what if you've earned it by just doing something or by sharing your data, for example? That could be a passive way of earning money. What if you're sharing some of your disk drive, like storage or via file coin or CIA, and you're earning money, I mean tokens, because you're sharing your drive, you're sharing your computing cycles, and use that money the next day in your token wallet. So we're going to have that new economy.

It's not going to be that I bought these tokens with $10 or $20. I mean, I get those. I love those use cases. Like, those use cases get me excited, personally, me. But I think that it remains a very, for the most part, I think it will remain a very niche thing that will attract people that are interested in sort of innovative type of technologies, you know, to sort of techies, but I don't see any of my friends that, you know, have college degrees,

work at startups even, investing time in trying to make a little bit of money on the side by renting their disk space or selling their data or like doing a, like a gig or something, like a five-minute gig or something. Let me weigh in on this. I think a few points are important here. So first of all, the point that, you know, existing companies that kind of integrate tokens and stuff, I don't think that's going to be really the case in the same way.

Because if you're going to do a token sale, or if you're going to have a, you really need to figure out how that token is going to be at the core center of the business model. And that's just something fundamentally different. You can't just like plug that in in the end, but you have from the ground up to do something new. And I don't think existing big players are going to be able to do that because, you know, as William pointed out, right? They have their existing models, existing processes, existing business models.

And you can't just plug that in at the end. I think that's very, I think that scenario is very unlikely. When I say that as, I present that as a scenario, it's super unlikely that would happen, I think. Unless you use that as a competitive advantage, like what KIC is doing. Because KIC does not have an advertising model right now. So for them, KKK is going to be issuing a new currency called K-I-N, to empower their users, and they have millions of users. So we are going to start to see more and more non-Blockchain companies adopt the token

model in as much as it can empower their users, in as much as they can uncover usages and utility and value for their users in terms of that token. whether it's the creation of something where they earn it or where they can spend it. So it could be a great currency inside these apps that already exist today that did not have previously a model where they could monetize. And I just want to point out one other thing that Sebastian said, you know, which is this point that, okay, I don't see like regular people like adopting this. And I think a few things.

So first of all, I mean, I have noticed. Just in the last few months, the number of people that I sort of know that aren't in this industry, they are getting interested, they want to buy Bitcoin and ether. And of course, it's largely driven by the speculation and by the value increase that's here. But there's an enormous amount of influx in people. And, you know, we're seeing this across the board. You know, Coinbase is at capacity. The Ethereum meet up here as like $200.

When the topic is like, you know, light client and something, some things that people will not understand, you know, as a regular meetup, are an epicenter, you know, downloads have been going through the roof like crazy. It's just all over, right?

We're seeing an explosion. And I think the other thing that's important here is when you are able to build really this incentive thing as a core part of the product, you know, like steemit has done it,

right? But you participate on there and you profit from the network's growth. I think that's enormously powerful. And you would be able to build social, networks, any kind of network effects will work, you know, extremely well with tokens. And I think we will absolutely see, you know, mass participation in those kind of projects very,

very soon. Yeah, with Steem-It, I mean, so Steem-It is a great example of a success, right? Where I think I would point to as here's an example where we've created value out of, I guess, nothing out of, out of content, I guess, but where people are coming into the system and they're gaining value from that. And they've been pretty successful at bringing in people from outside the blockchain space or the Bitcoin space or whatever, like the non-Bitcorners. But it's still a pretty niche type of thing.

And with regards to your first point, Brian, I think a lot of the influx right now is just speculation. I think that a lot of the people that we've seen come on as new subscribers to the podcast, Yeah, they're interested in the technology, but I think like myself, when I first got interested in this technology, it was driven by potentially, you know, like a means to make some money through this speculative speculation, which was Bitcoin at the time. I think that's driving a lot of the interest is not how can I use this to, you know, make my life better or do new. types of things or whatever, I think a lot of people are coming in because they're looking at it as a way to make some money. Well, some of these new applications are going to be as easy to use as the WhatsApp and

the Facebooks and what we see today. So that's why when I saw the early versions of token and status, I am encouraged because these are very easy to use applications that anybody can use and they won't even know they are interacting with the blockchain because there's nothing geeky about these applications. Same thing with Steam it. If you can publish something on Reddit, you can publish something on Steam it with the same ease, with the same way, and you don't really see the blockchain in the technical sense. So we're going to see more and more of these kinds of applications that are hiding all the

complexity behind and just working well on their user interface and user experience. Yeah, I think so, but I think like, you mentioned Reddit. I mean, even Reddit, even though it has millions of users, asks 10 people if they know what Reddit is. A lot of people don't know what Reddit is. It remains a sort of, you know, internet culture type of social network that is known by like a certain subset of people and it has nowhere near the notoriety,

I think, in the sort of general population, it's something like Facebook. So I'm not saying that there's no rule. for tokens to have a place as a

valid way to construct new use cases new business models, etc. But I think for the

majority of consumers are just regular people it will remain a niche thing. But I mean, Ceresia,

Reddit is at the moment the number four ranked website in the US. Yeah, but in the US, in the US, that's a good point.

And globally. I regularly tell people about Reddit and they have no idea what it is. And like educated people. So maybe it's the people I'm hanging out with. I wanted to come back to one thing about crowd sales. So Sebastian and I were also talking about it a little bit before the show. And I'd be really curious about your opinion here, William. So to me, you know, it seems like this is such a massive disruption of, you know, venture capital.

How do you see that? think venture capital is going to survive as it is today? How will be changed by that? And what are venture capitalists thinking about what's happening here? Are they worried? Are they scared? How are they dealing with this? It depends on who it is we're talking about. I think there's a number of scenarios that are going on right now. There are some VCs that have been very early with this and have seen it before others and already have participated in companies that are going to have tokens or maybe they invested in funds that are investing in tokens. And here I can name USV or Andres and Horowitz as examples.

So, and you can count them maybe on one hand, those that have seen this earlier than others and are already in it. There is another segment and these are the traditional blockchain types of investors that were very early with Bitcoin. And they're also now realizing that there has to be a play with tokens. So here we have the blockchain capital and the Pantara that are also going to be playing with token-based funds. And then the third segment is the VCs that are very interested. And some of them attended the token summit and interacted with me. And they have maybe done one or two participations in token sales. And they would be maybe the next ones to kind of start to get into.

interested. And then you have the rest. And maybe the rest is maybe 95% of the VCs that have been totally not touched by anything to do with tokens right now. And maybe that number is 98%. They have one limitation, which is their current LP limited partnership agreements. In most of them, prevent them from investing in this type of currency, which is cryptocurrency. So that's the reality. VCs are bound by the limited partnership agreements that they sign when they raise money, which says they can do certain things and not other things. And the cryptocurrency item was not part of the vocabulary two years ago or three years ago. So what's happening, either these VCs have to raise new funds with new terms or they are. going back to the LPs and trying to change some of the terms to allow them to invest in

those tokens or at least in something that will become a token. And many of them are just waiting and not wanting to get involved for another year or at least to see what's going to happen. And that's fine as well because there will be opportunities. Suppose there is a crash one day. I don't know when that might be. Maybe there is no crash. but when things become a little bit more clear,

when things become a bit more reasonable, when things become maybe a post-crash period, perhaps, there will be opportunities to make money as well in a second stage of this evolution, in the same way as if you look back to the Internet, we had the dot-com crash 99 to 2000, 2001. They were still kind of happening. And then we had a dry period for two or three years.

and then 2004 and forward, everything started to happen again, and then we have been on a very strong trajectory since then. So the same thing could happen, and we had new players come in in 2004. Either those that survived the crash or new ones that came along were able to raise new money and did well, and are still doing very well. So that's what might happen with VCs going forward. But do you think they will be able to adapt? I mean, because one of the things also about VCs is they had this advantage, which is they have access to these companies that, you know, I as a regular, you know, regular people have very difficult access to investing in startups.

But VCs can. But this is different, right? Here, like, fairly normal people can invest. So all of a sudden, you kind of have this level playing field. So I wonder, do you think that model can. can survive. I'm sure it's going to survive, but the question would is it being threatened. Yes, it is being threatened.

It's being disrupted a little bit. So like anything, it's not going to change everybody. What's going to happen, we're going to see new players come along, new funds that just focus on cryptocurrency and they will play the roles of VCs. We're seeing that already. we're going to see some VCs create new funds that just focus on that particular segment. So it's a new asset class, basically, cryptocurrency crypto assets. It's a new asset class.

And we're going to see new even accelerators. We have one called co-founded. I'm an advisor to them as a disclaimer. who is kind of think of them as a tech stars or as a Y combinator. And their model is a token model. So they help emerging startups start and grow, but go the ICO route. So we're seeing those emerge. So we're going to see basically new players.

We're going to see existing players take new role. and we're going to see some old players that will not change and that will continue to go the traditional route. And this will not die overnight. Some of these funds have a 10-year horizon. So if you just raised a recent fund two years ago, you still have another seven or eight years to spend that money and you will spend it gradually. So this will be an evolving space, an evolving way that will.

way it will change. Cool. Yeah, I mean, absolutely agree. It's certainly going to be a long, long process, but I do think it's going to be very interesting to see what happens to venture capital. And I mean, of course, we also have the chance now to have these kind of crowdsourced venture capital, right, which is happening to some extent where you have even with something like shape shift in prison, right, where you're going to have on chain asset management. And then, you know, maybe you can follow different people managing assets. There's going to be so much innovation and change happening in this space. It's going to be. It's going to be. It's going to be very, very interesting to see that. So with regards to my positions earlier,

like I agree that there's a lot of innovation coming and, and I'm super excited about it. But after being in the space for so many years, you know, we've been just, we've been waiting for these killer apps, right? And they're, they're taking a long time to come. And I think that, yeah, I think I agree with you, Brian, that it's, it's, it's a long. road until we get to anything that's near what we might imagine as a, you know, successful company today, like Facebook type users or or Google or something like that. Sure. Of course.

I mean, these are gigantic companies, but we have the first killer app. It's here, right, which is crowdfunding. I mean, this is a killer app, right? It's bringing network, Ethereum network to absolute capacity, breaking records, changing how startups approaching it. So, you know, we may like it, though. You may not like it. We may think it's irrational.

We may think it's leading to crazy things, but it is a killer app. That I would agree with. Yes. Well, William, thanks so much for coming on. We ran quite long, but I think it was super interesting talking to you and hearing a bit about the important work you're doing and the perspective on this insane industry and all the latest development. So thanks so much, William.

Thank you. Bye bye And of course To our listeners We're going to have links To some of the blog post William is written on his blog Startup Management

Dotorg There's a lot of interesting articles On there So we'll link to that also To his book So you can check that out And yeah And it's a token summit

website too I'm sure they're going to have Another interesting conference coming up And I think the last one had a lot of interest around it and I'm sure this can turn into a good conference series.

We also have a YouTube channel where all of the sessions from the Token Summit have been published now. Excellent. Yeah, so we're going to link to that as well so people can check out the YouTube side. So thanks so much to our listeners for tuning in. Once again, we're going to be back next week with another episode. And if you want to support the show, you can do so by leaving us an iTunes review that helps new people find the show and makes us very happy.

So thanks so much and we look forward to being back next week.