The Breakdown - Narrative Watch: The Tokenization Saga Continues

Episode Date: November 20, 2019

Three stories about tokenization today: ShapeShift launching FOX (an exchange token); BlockTV launching a token for media contributions; Satoshi's Treasure helping Tezos distribute tokens through games. That's enough to get me curious and thinking about tokens in a historical context: the promise, the problems, and the latest.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another Crypto Daily 3 at 3. What's going on, guys? So today we're going to do a narrative watch where I dive a little deeper on a full topic kind of end-to-end. And this came out of seeing a bunch of different pieces of news around tokenization, which is, I feel like something that we maybe haven't talked about as much recently. It's pretty clear that it's out of vogue, right? This is a time for maximalism and for, excuse me, a return to fundamentals in some ways. And so it's interesting to see a number of pieces of news from ShapeShift, the Exchange, from Block TV, the media company based out of Israel, and from Satoshi's Treasure, that somehow

relate to tokenization in some way. So what I wanted to talk about is kind of do almost like a linear history of the once and potential potential. promise of tokenization, the problems of tokenization, and then I'll spend a little bit of time on these set of news stories that are kind of the latest in tokenization. So let's start with the promise, right? So this is something that I think we forget often because of everything that transpired and because of the ICO boom and because of how crazy it was. But there was an idea behind tokenization that was more than just kind of this rampant fundraising mechanism, right? And so loosely put and or simply put, I guess, and this is cribbing,

a little bit from this piece, Why Decentralization Matters by Chris Dixon, which I think is probably the most thorough topic or writing on the matter, aside from maybe this piece by Sheridan Erickson, The Future of Network Effects, tokenization, and the end of extraction. But basically, what these posts are arguing and what the larger idea was arguing was that effectively tokenization represented a transformation of power in networks. And networks being that the business, businesses, the companies, the organizations, the political structures all around us, right? It wasn't one type of network. It was all networks. And the issue was, specifically, if you look at the Fang companies, right, the Web 2.0 companies, which were supposed to be these liberating forces that

allowed people to create, not just consume, what happened, in fact, is that they created network effects that created incredible user lock-in, right? It became enormously expensive, either literally or in terms of just switching costs for people to actually leave networks. So that could be Facebook because all of your friends are there and you don't want to miss out on what's going on. It can be a literal switching cost in some cases. And so effectively, all of these networks started with aligned incentives to their users, which is they wanted to grow, right?

Inside of a network, the whole point of a network effect is that the more people who participate in that network, the more value it has to each other. of those participants. And so at the beginning of the life cycle of a network, everyone involved, both the users and the owner of the network, just want to grow the network in pure terms. They want to grow as many people as they can because it creates more value for everyone. However, at some point, you get to a plateau where there's no longer any ability for platforms to grow or they can't grow in the same way that they used to in terms of numbers of pure users. So they have to extract more from each of the users they have, right? So you can see this graph from Chris

Dixon's chart, for those of you who listening, it shows kind of the growth over time in a platform's relationship to users. And over time, it moves from attract to extract and showing, again, that at the beginning, all it wants to do is attract new users by the end of its cycle or medium in its life cycle, it just has to extract more from those users it already has. We see this all the time when Amazon Prime gets more expensive, when companies change their data policies to be more onerous and have more control, right? You see it in terms of relationships to the businesses that get built on top of networks where at the beginning they cooperate and eventually they compete. I think probably the best example of this is Amazon who is systematically crowding out the

independent resellers or an independent third-party sellers that helped build its business and even crowding out now and pushing out traditional companies by building their own Amazon-owned brands, using the data they have. So anyways, what's undeniable is that this is a phenomenon of networks and that the businesses that surround us and drive our lives are network businesses. Now, the idea of tokenization was on some level to obliterate the distinction between network owners and network users. If there wasn't a separate exogenous class of owners that were separate from the users, you wouldn't have the same incentive to extract more from those users because the users are the owners. That's the idea, right?

This is the kind of the big pie in the sky vision of what might have been. Now, there was a second piece of this idea that wasn't just about a grand kind of utopian vision of all the networks users were the network's owners, but a mechievous. by which to overcome the bootstrap problem of network. So the bootstrap problem is that at the beginning of a network, when there are fewer people participating in it, it is less valuable to each of those people. So there's less incentive for each new person to come on. And as it grows and it grows and it grows, at some point it hits a critical mass where there's more incentives for people to join and less incentives for people to stay away. And that's where we really see kind of

huge viral loops. But at the beginning, it can take a really long time to actually get sufficient amount of value inside a network to actually incentivize people to come. The idea or one of the ideas of tokenization was that it would overcome the bootstrap problem by giving, creating this kind of additional separate incentive to the early users, right? It would be this early financial incentive to actually join, right? So that was, again, the idea on some theoretical level. And there are a lot of people who are really excited about this. You know, there are a lot of projects who did actually in good faith want to go build alternative businesses to the, you know, the companies that we see around us and that we still have such problems with. However,

there were a lot of problems as well. So let's shift over to the problems of tokenization. The problems of tokenization are incredibly numerous. And so I would just want to kind of breeze through them because I think anyone who's watching this is quite familiar with all of this. And basically it's like what was theorized versus what actually happened. And I, And I think in some ways all of this comes down to the fact that the speculative value and the financial fundraising use case of tokens. The disruption that they represented in terms of how easy it was to fundraise from anywhere in the world and from anyone in the world totally overwhelmed all of these other theoretical use cases and theoretical value propositions, right? The speculative use case was so, they were so tuned for that use case that it just crowded out all the space. But let's expand upon that a little bit.

So problems of tokenization. One, they were for lots of projects simply a way to skirt around securities regulations, right? Again, going back to the fundraising piece, they seem to kind of exist and operate outside of the existing frameworks, or at least that's what people wanted to be. In point of fact, a lot of these sales and kind of where things seem to be landing is that a token may not in the long run be a security, but when you offer it before a product is launched, it certainly seems to be. Now, we don't still have perfect clarity in the U.S., at least, around how different securities are designated.

We continue to use this word utility token, which was basically invented by the industry as a way to, say, not a security. And the idea was theoretically that people actually use these things, so they're not just kind of an investment asset, they're a working asset in some ways. And they should be treated as such and differently. The problem is, one, we made that up, not regulators made that up. And two, most of these projects, when they actually did their issuance, weren't running. And in fact, the projects that stayed behind and tried to actually get things up and running before they issued tokens,

a lot of them actually just missed the window of ICOs. But at the same time, they're not potentially being hammered by the SEC in a couple of years. So I'll leave it to you to decide who was better off ultimately. But one of the problems is that tokens got so wrapped up in the bad faith efforts in a lot of cases and just the confusion in other cases around skirting securities regulations. Second, tokens almost invariably create friction in a user experience, right? You're effectively asking someone to have a symbol of your ability to do something, right? Or alternatively, you're asking them to use your proprietary money for your ecosystem rather than the money that they already have, right? So there's a whole friction that happens inside almost every type of user experience that introduces a token.

In a lot of ways, the question for projects is, in what circumstances is the friction that is inherent and inevitable with a token actually worth or the new value worth that friction that is inevitable, right? So friction, but I think that, again, going back to the problems, is that when it came to actually using them, again, rather than just speculating on them, there is huge friction. Second, this speculation use case, right? As many people as there were who were thoughtful and well-intentioned in reading these Christics and essays and thinking about the future of networks and the future of business models and what they might be, there were 10x, 20x, 50x, X, 100x,x, a Googleplex X, more who just saw that this was a ludicrous, fast-moving, insane sort of, you know, bubble. And they wanted to

get in on that. And they wanted to speculate and they wanted to move quickly. And that ended up being what the story really was for all of these token projects and for the entire ICO boom. It was about speculation. That created its own set of problems. Problem one, incentive alignment or misalignment. If you're a founder or an early investor of an equity startup, your equity is basically worthless until it's not, which means someone else wants to buy it later at a higher premium. And that's going to take years and years and years in most case. In fact, if anything, equity is overly burdened, some particularly on early employees who don't get liquidity.

You know, they vest after four years, but then it could be five years later and they've moved on to a different company because they had nothing more to do at that first. tech company and they still don't have any liquidity from that. So any discount to their salary they took has been meaningless. However, the flip side of equity is obviously that when you strike it right, it's enormously powerful, right? When Facebook IPOed, it made 1,000 new millionaires overnight in San Francisco, in the Bay Area. So the incentives, though, are still aligned in the sense that everyone is building for the long term and there's no quick exit and there's no way for people to get out fast. In fact, if you look at some of the biggest issues that people have with the state of venture

capital now, it's things like founders taking too much money off the table in later fundraising rounds, which people are worried creates misaligned incentives. Now, that's a whole different debate that we don't have to get into here. But what's for sure is that part of the challenge of tokenization in the context of what are effectively technology startups is that it creates these really warped incentives where when you have day one liquidity and you have, and you have big pops because of, uh, of, uh, of kind of listings on exchanges or whatever, you create everyone who you gave, you gave an incentive for everyone who got in early to cash out, uh, some or all of their tokens, right? And, um, and that is founders. That's early

investors. And in fact, by the end of the ICO, uh, days, this is what we saw, what people called the shit coin waterfall where, you know, uh, early investors would get in with sometimes a hundred percent discount, right? They would just get free tokens to give social proof to that project so that the next round of investors could get a 50% discount, so that the next set of investors could get a 25% discount so that the next set of investors could get the ICO price, so then the retail investors could get whatever it was later. And so obviously you see the end of the chain in this case is the retail investors and that's what happened just over and over and over again. So the point here though is that the the tokenization, at least as it was

designed with no lockups, no holding mechanism, no nothing like that, just create a huge incentive misalignment. Fourth, you have issues or fifth, I don't even remember what I'm on now, issues of liquidity, right? So they seem to be hyperliquid. They were when things are going well. When things are going poorly, tokens are incredibly illiquid, right? Like if there's no demand for people to buy tokens, then they are just effectively useless pieces of digital data and string. rings of private keys that sit aimlessly forever in your brain on an exchange. And that's where a lot of the market is now and why so many people have left is that they just have these useless, irrelevant things. That also makes it really hard, of course, when there's not enough liquidity

for projects that are trying to be sincere and are really trying to explore some of these different types of use cases to make anything work. And finally, overapplication. So behind me this whole time has been this tweet from Rocco at Ustrak. on Twitter. This is what the Eighth Circle of Hell looks like. It's from tokenfest in 2018, and there's neon lights flashing and a sign that says tokenize everything. Because we had, on the one hand, the tokenization of money, right, and the alternatives to money that Bitcoin and things represented. And then on the other hand, technology crypto, tech crypto, and the attempt to disrupt all of these networks around us, it got very muddled very fast, as to say, nothing of

securities tokens and all these things. And it was just like tokenize everything, tokenize the world. I mean, that was the mantra for a while. And it was so overstated, it ceased to mean anything. So what has happened and more specifically what's the latest? Why are we talking about this today? Well, the reason that I wanted to focus on this is that I saw three different pieces of news that's somehow related to tokens. And I think it's interesting to actually try to see what that might mean for the state of where tokens are. So first is that. that ShapeShift, the exchange is offering a new token or is launching a new token. And now it's in the context of bringing 0% commission trading to crypto.

At least that's what Eric Voorhees from Shapeshift is saying in his Twitter thread. So he says all Shapeshift customers can now trade for free on the new Shapeshift.com platform while retaining full control of their keys. Why are we doing this? Too many people still leave their funds at custodial exchanges because non-custodial solutions, dexes and swap services have been either illiquid or high. priced. With 0% commission trading, Shapeshift now solves both of those problems. How does it work? Today we release the much anticipated Fox token, Shapeshift's loyalty asset. The model is simple.

Hold Fox and you trade at 0% commission rate. If not, you traded our retail rate. You don't spend or lose the Fox token to get the benefit, just Hodel. We think, and this is actually the tweet that really inspired this in some ways, we think tokens are tremendously powerful tools for user engagement and we're determined to demonstrate how they can be implemented responsibly. So as of today, exclusively at Shaf, you pay zero percent commissions and get 100 percent in control of your keys. So there's a lot going on here. One, I think, you know, Eric is an interesting and thoughtful voice and I don't think would have gone into this unless they were, you know, I basically take at face value this idea or this sense that they're being, they're determined to demonstrate

how they can be, how tokens can be implemented responsibly. Second, I think that one of the things that's been clear of the course of the last year is that effectively outside of, money tokens, right? Things competing to be some form of digital money or digital store of value. You know, the whole idea of utility tokens hasn't really played out except in the context of these exchange tokens, right? So obviously, BNB was kind of the granddaddy of these. It performed well during the 2018 bear market. BNB awards holders get benefits in terms of the trading fees that they pay. They also get BNB value return to them in the form of a quarterly burn where 20% of of Binance's profits are burned in in in BNB, which hopefully creates positive price pressure.

It was recently and came out that finance had crossed a billion dollars in cumulative profit because they burned 200 million in BNB, so they've actually stuck with that promise. So obviously a lot of different exchanges have launched their own model for this as well. There's the Leo and all this sort of stuff. I think what's interesting and notable about ShapeShift is that they're trying to do it to incentivize use of the decks. And it seems like maybe a little bit less complicated or complex in terms of how it's implemented. But I think that it's interesting because this is a reminder that so far, this is one area where, you know, the actual, the benefits of the experience in a lot of cases seem to outweigh the friction of the experience and people actually use it.

And maybe that makes sense because it's in the context of the buying, holding, trading, speculating behavior that is still right now the most core and native crypto use case. So that I think is interesting. A second piece of token news that I saw that I've noticed is so you guys know that I do every Monday a video version of Long Read Sunday with Block TV. And they just announced a couple weeks ago that they are launching a token. And so a lot of folks in the space were pretty skeptical of this. There's a lot of reasons why I think some of them have to do with the leadership of Block TV. and other projects that they've been involved in, some of it has to do with just the question of why do a token, right?

In some ways, this feels like it harkens back to those late-Ives, late 2017, early 2018 days when people were like, oh, we'll slap a token on it and it transforms the business model. But you also have folks who are a little bit more open, right? So Cryptoman ran here says, last week when I heard that Block TV news was issuing a token, I shared the same sentiment as Mike Dutus from the block, Obviously, why does a crypto media channel need a token?

After watching this, it seems there's a much bigger vision at play. So this is the CEO of Block TV. So I'm going to mute myself for just a minute and turn this on and let you listen to it in his own world. So why does a media organization need a token? The answer is simple. Block TV wants to publish the best and newest information. And in order to do that, we are willing to reward those who provide us with it. I've been a journalist for 15 years.

And I can tell you that the only reasons people provide information is in order to promote something they're doing or bedmouth someone else. We want to give them a better incentive, and the BLTV token gives us the tool to do it. When a news source sends information into our BLTV newsroom, our professional editorial team receives it, verifies it, and if it meets our standards, packages it for publication. After we publish the story,

we track its performance, and through a smart contract, smart contract on the blockchain, track its impressions on our various media and social channels. We can then determine a reward based on the story's reach, engagement, and the contributor's reputation score. But here is the really big vision. Block TV is just a proof of concept for this model. Eventually, this will expand and be replicated not only for others in the crypto media sphere,

but for all news organizations, just think about it. sports, gossip, politics, and many other coverage topics. So a news publication that rewards those who make the news, we think it's only fair. What do you think? BLTV token will be listed on BitTREX Global, November 21st, 2019. So, okay, so there's a lot here. I mean, one is what we think about the idea of a newsroom that rewards contributors in this way.

There's a lot to get into there. I think, yeah, it's almost beyond the scope of this one. I think we could do a whole video here. So I think that in some ways, what's for sure is that the media model today doesn't work the way they used to. And there's weird misalignment of incentives pretty much everywhere you look, right? If it's advertisers, then the question is who is advertising with you and how beholden them you are.

If you have a different type of business model, you know, that involves sponsorship, how do you figure, you know, again, who are you beholden to? You know, there's a reason that I think that a lot of people are turning back to just paid subscriptions because then at least your constituents are or the people that you're responsible to, the people who are paying you are your actual conscriptions. of the news. But again, that also creates weird incentives in today's world, at least, to be hyper-reactionary, right? And to be just kind of red meat for whichever particular community is willing to pay you. So I think that there's a challenge to go around, let's say, in the

media model. And it doesn't surprise me, actually, that someone's experimenting with this idea of effectively user-owned media in some ways. But I also think that there's there's still going to be challenges. So, you know, I'm not kind of sure about where this all lands, other than I think that it's a, it's an experiment that I, like I said, I'm surprised that no one else has done yet. But so like I said, where I land in it is as some amount of skepticism. I think that there's a lot of skepticism in the community, but it's hard to deny that the media model is in a challenging spot right now. But again, what we're looking at kind of is the larger trend of just the fact that we're all talking about tokenization today for some reason. And then the last and third and last piece that I wanted to pull up is this piece about Satoshi's treasure basically working with startups to offer an alternative to air drops.

right so this is by Lee Kuhen and she writes Eric Meltzer of primitive ventures which who kind of initiated Toshi's treasure, Satoshi's treasure. Melzer says the Tezos Foundation has become the clandestine startup's first client with a side game for players to earn Tessie starting in December. So far Meltzer said roughly 20% of main game keys have been released all the keys should be released by mid-2020. So the point of Satoshi's treasure is basically it's a global game, It's a global hunt for keys to a $1 million Bitcoin prize. There's a bunch of different ways it incentivizes collaboration for people to go find clues, where they can actually get closer to winning these awards.

And the interesting thing here is that basically they're trying to replace this idea of air drops, which is just dropping free money onto people and hoping that it somehow matters with basically an alternative to proof of work, which is proof of literally proof of literally. actual creative work, not just mining work. And so will this actually be a model that lots of token communities use to incentivize things? Does it actually get people more excited about the underlying asset? Or is it just an interesting and fun game dynamic? Does that even matter? I'm not really sure, but I do think that it's interesting that you're seeing these things slowly, slowly, slowly answer some of the challenges of the problems of tokenization that we saw. So let's wrap up. What is the

actual takeaway of this. I think that the short answer is that the experiments in tokenization are not yet done. I think that what you're seeing and what you're likely to see over the course of the next year is more and more things that react to and try to solve some problem of tokenization that we saw in 2017, in 2018, and fix it in a way that makes more people be open to the idea of tokens, right? So that could be the distribution of tokens, as we see with Satoshi's treasure. It could be the purpose of tokens, as we see with ShapeShift's Fox token. But either way, I think that there's, you know, no matter how much some part of our community would like it to be. So I don't think that we've seen the end of tokenization.

In fact, I think in some ways that the real question is just 10 years down the line, you know, which if any use cases besides money will have they actually have manifested in? and become a thing for. So anyways, like I said, not necessarily a huge conclusion, but something that's really interesting to note, and that's kind of the point of narrative watch, is just when you see things start to emerge at the same time, I think it's worth taking note of. What do you guys think? Is tokenization the same shit that it's always been, or is it something more interesting? Is there a version of it that actually gets you excited? Let me know in the comments, and we'll keep this conversation going. But for now, guys, thanks for watching. Thanks for hanging out,

and I will see you tomorrow. Peace.