There’s some hype rising around appcoins recently, and I’d like to give our perspective on the subject. Waves is all about custom tokens, this is what we’re focusing on, and that’s we want develop as a major use-case. On the other hand it should be developed in the right direction, otherwise it can just fizzle out, regulators will be all over it, scammers could use the approach for their nefarious purposes etc.
So let’s define first what appcoin, or apptokens, or custom application specific token is. Let’s use “Custom Application Tokens” name, or just CATs. I must say that I don’t really like appcoins, it is focused on monetary aspect mostly and has already had its portion of bad press a while ago.
Apptoken or CAT is a cryptographically secured transferable blockchain token used as an integral part of application functionality, having a certain intrinsic value established at open market.
Let’s break the definition down a little.
Cryptographically secured means that classical public key cryptography is used to maintain the ledger, that is a token holder controls her tokens as long as her private key is not compromised (since the token is transferable)
Token is actually an entry in a public ledger. Its interpretation goes beyond the ledger itself, and has to be determined externally, through applications that use the ledger. It is integrated in the application functionality, which can be done in different ways.
Intrinsic value is attached to the token through application integration. As long as the application provides some value the related token has some value too.
The actual token value is subject to price discovery at open market, that emerges naturally for blockchain systems. Their decentralized nature is conducive to emergence of trading platforms on top of them, also blockchain systems can have internal trading functionality.
That all might be pretty abstract so let’s provide a quick example, showing how versatile this approach can be. Let’s say we start a social network and want to raise money for its development. We can launch an internal currency for our network, issuing a token on a public blokchain. Having it on a public blockchain might me be crucial, since its provides transparency and creates trust. Internal currency can be transferred within the network, certain services can be paid for with ut, and we make a commitment to provide a network-wide banner advertisement for, say, 100 tokens. If our network is successful it grows in size, we have a bigger user base and the ads, bought by advertisers, are shown to more people. It means that our token value has to rise too, since advertisers get more bang for their buck.
Through issuing this coin we provide a valuable service for our social network users (value transfer), raise funds for development and even provide an investment vehicle. We’re able to raise funds directly from the crowd and social network users, who can see the value in the network since they use it. We don’t have to go to VC’s, we cut the middlemen and appeal directly to our users.
It’s a very basic example but hopefully you can get the general idea. The nature of the tokens may vary, what unites all the different approaches is token integration into some external application and intrinsic value being determined through a certain price discovery mechanism.
Of course the first example of CAT’s is Bitcoin native token and native tokens of thousands of cryptocurrencies that came after Bitcoin. In this case application is blockchain itself, native token is instrumental for existence of open blockchain systems. Such tokens can be called native CAT’s.
Soon after Bitcoin emergence people realized that blockchains are nothing else but a distributed ledger, and, as such, it can store entries related to more than one token. So custom tokens emerged (NXT, Bitshares, Ethereum, Waves….). Their usage might be quite versatile, and is basically determined by an external application that uses them. They are just CAT’s, and the scope of their usage is limited by imagination only.
Besides their usage in applications what attracts most people to custom tokens is their usage for fundraising. Cryptocurrency ecosystem has created so-called ICO (initial coin offering) scheme. Native tokens of a new coin are sold to investors, proceeds are used for development, and investors hope to make profit if the new cryptocurrency is successful. ICO’s are booming since it is pretty well defined scheme to raise funds for a blockchain related projects. Custom tokens will allow to expand ICO’s approach to cryptocurrency projects to a wider class of projects. Your application has to use a custom blockchain token as a part of its functionality, and there should exist a certain mechanism connecting the application success to the token value.
The benefits for fund-raising are obvious, by addressing your user base you get not only money but also feedback, testers, and promoters. Crowdsale-type fundraising might be much easier to execute than usual VC-based investment, and, on top of that, each dollar raised through it is more valuable, since you get added value from your community. This is a fledging market which can turn the whole venture investment business around.
Of course there are many obvious obstacles along the way. Custom tokens can be used basically for everything, but if you use them for fundraising you can’t use them for all types of projects.
Let’s list certain approaches that should NOT be used.
You can’t promise to pay dividend to the token buyers. It’s a securities offering. If you really need to do it go to Securities and Exchange commission and file for IPO.
Tokens can’t represent equity in your company without approval from corresponding regulatory bodies. You can attach certain voting rights to them (meaning for example your users can decide on the development direction), but you can’t connect them to equity without proper legal backing.
You can’t issue tokens and promise to buy them back with a premium later. It clearly constitutes a security offering; read up on Howey test.
CAT’s are essentially a digital product with flexible value; you don’t break any laws if you sell them. They should be used in a working application, or at least in a mature prototype. They are NOT securities without proper registration with corresponding agencies, attempts to use them as securities are basically doomed and can be detrimental for the whole ecosystem.
Please use CAT’s responsibly and they will become established as a major fundraising vehicle and can make tons of new projects a reality. We might experience a paradigm shift in business practices, it’s all still quite fragile so special care should be taken so we don’t get off the right track.
I’m confident that in near future many new applications for new tokens will appear. Think about the way CAT’s can be used in YOUR application, you might come across some new and terrific idea.
This article was originally published on Waves Platform Blog.