This post, more so than any previous post, represents a compilation of unfinished thoughts. I have so many questions surrounding app coins (or “tokens”, as some prefer to call them), and there don’t seem to be many answers. The topic is a deep rabbit hole that lends itself to grandiose posturing on one side and vitriolic attacks on the other. If you’re interested in economics, finance, or technology, and you’re willing to help me think through the characteristics of this new asset class, then buckle up and rest assured knowing that I have no idea what I’m talking about.

I’ll do my best to cover the concepts as they were introduced to me. The whole idea of an app coin is based on blockchain technology, so if you’re unfamiliar with the phenomenon I’d suggest reading my last post: A Brief Introduction to Blockchain Technology.

What in the name of Davy Jones’ locker is an app coin?

I first came across the idea of an app coin in a post on Fred Wilson’s blog, AVC. The very brief blog post–which can be read in full here–quotes a primer on app coins published by CoinCenter, a non-profit focused on the policy issues facing cryptocurrencies like Bitcoin. Here’s the interesting bit:

“Open platforms have proved difficult to create because it has been historically difficult to monetize them even if they become successful—by nature they are public goods. Now, however, [developers] can incorporate a scarce access-token, an app coin, into the design, distribute that token to users, retain some amount of the token for themselves, and if the platform proves popular, the token (alongside the holdings of the developers) will grow in value and remunerate the developers for providing a public good. This new model challenges the concept of equity as traditionally understood, and carries entirely different risks and rewards.”

Whoa, what? I blinked and I missed it. I still have no idea what an app coin is and suddenly we’re challenging the concept of equity as traditionally understood. That would have major implications for venture capitalists and startup founders.

Looking to learn more, I followed Fred’s link to the primer on app coins. Still feeling confused after reading the primer, I explored the links at the end of the article and stumbled upon a post by the founder of Coinbase titled App Coins and the Dawn of the Decentralized Business Model. I’d definitely recommend taking a few minutes to read that article, which suggests a very bright future for app coins. I’ve tried to sum up the main points below, with a few edits for clarity.

Blockchain-based projects are raising money by creating and selling their own “app coins” through crowdfunding on a blockchain. There are a few key components to these app coins:

• They are the currency that is used in the app itself
• Contributors to the app are directly paid for their contributions in app coins
• The app coins are easily converted to any local currency since they are on the blockchain

This is where the phenomenon goes beyond just a new way of raising money. It is projects creating their own economic ecosystems to make the entire thing tick. More precisely, it is about an entirely new business model that is being created and tried for the first time: a decentralized business model. In this model there is no central controlling company, and has shared contributions and ownership by all involved. This business model is uniquely enabled by the combination of the internet and cryptocurrency.

…

You’ll notice one other thing about these “projects” or “apps”: they are really decentralized software protocols. A protocol is a fancy technical term that means: a standard language that lets a bunch of people on the internet work together on a specific problem. Historically it has been difficult to incentivize the creation of new protocols. Now someone can create a protocol, create an app coin that is native to that protocol, and retain some of that app coin for themselves and for future development. This is a great way to incentivize creators: if the protocol is successful, the app coins will go up in value. What if the creators are too greedy and keep too much of the app coin for themselves? Since this is all open source code, people can just copy all of the code (called “forking”) and start the exact same network over again.

…

So how do you get people to join a brand new network? You give people partial ownership of the network. Just like equity in a startup, it is more valuable to join the network early because you get more ownership. Decentralized applications do this by paying their contributors in their app coin. And there is potential for that app coin (partial ownership of the network) to be worth more in the future. This is equivalent to being a miner in the early days of Bitcoin.

…

Imagine if this had been the model from the start for projects like Twitter, Wikipedia, Facebook, Reddit, or Uber. Instead of a central company making money by owning and extracting rent from the network they created, a software protocol replaces the central operator, and all of the creators and contributors to the network mutually own it.

…

This is the biggest and most important trend we have seen in digital currency in a few years. It will likely be the underpinning for the first killer apps it feels like we have been talking about forever. One only needs to think about the few major protocols that exist in the world today to see how much common good they create: HTTP gives us data across the internet, SMTP gives us email, SSL gives us secure data transfer online. Decentralized protocols and the app coins that make them tick are the beginnings of a mechanism to create more of these. This means more global equality and opportunity, mutual ownership in the networks we contribute to, more innovation in the world, and better options for consumers and businesses.

Well, that’s a lot to process.

Will someone please just tell me what the definition is?

I really like the flow of ideas in the article–the author is obviously enthusiastic about the topic–but it seems to me like a lot of important concepts were glossed over. For instance, what is the actual definition of an app coin? The author starts off by making the following three points: (1) app coins are the currency used in the app; (2) contributors to the app are paid in app coins; (3) the app coins are easily converted to other currencies. These three points make app coins sound like alternative currencies.

currency – (noun): something that is used as a medium of exchange and a store of value

However, later in the article the author says, “So how do you get people to join a brand new network? You give people partial ownership of the network. Just like equity in a startup, it is more valuable to join the network early because you get more ownership. Decentralized applications do this by paying their contributors in their app coin.” This quote makes app coins seem like equity, or shares in a company.

equity – (noun): ownership, especially when considered as the right to share in future profits

I’m not saying that app coins need to be either currency or equity. I’m saying that if app coins are indeed a new asset class, they need a succinct definition separating them from what already exists.

Brace yourselves. Here come the naysayers.

After reading and trying to process App Coins and the Dawn of the Decentralized Business Model, I was feeling pretty confused and happily optimistic, similar to how I felt after my wisdom teeth were removed and my mom said we could go get soft serve ice cream. I decided I wanted to learn more about app coins and The Coming Dawn, maybe even pin down a definition for the elusive new asset class, so I googled “what are app coins?” The fifth result was titled Appcoins Are Snake Oil. So that escalated quickly.

The article (I’d encourage you to take a few minutes now to read it) presents a distinctly different view of app coins. The piece was published by the Satoshi Nakamoto Institute, so-named after the founder of Bitcoin. I’ve tried to sum up the main points below, with a few edits for clarity.

App coins. What a great way to fund an open source project, right? You just create an app, and then make it less convenient by creating a cryptocurrency (or “app coin”) that is required to use it, some of which you sell to investors to pay for development of the app. There’s no way that couldn’t work! It’s just like selling stock in a company, right?

Wrong.

…

App coins should not be considered a valid investment and are inappropriate as a means of funding open-source projects. Furthermore, once the arguments in this essay become well enough understood by investors it will be impossible to fund a project by selling an app coin because the price will rapidly tend to zero.

…

Because any app coin must compete with Bitcoin, there is inherently an aversion to holding the app coin rather than Bitcoin. This means that an app can always improve by transitioning to use Bitcoin instead of the app coin. Since we are talking about open source projects, it is always possible for anyone to fork an existing app and make the changes himself.

…

There is an opportunity cost for all time spent holding the app coin because better currencies are available which can be expected to provide better opportunities. There is thus an economic incentive to provide services which make the app coin as invisible as possible so as to provide access to the app with as little hassle as possible. But necessarily as a given number of users learns to hold their app coins for lower and lower periods of time, the value of the coin must decrease and the price of app services in its own app coin must increase.

…

App coins are a terrible idea. They are clearly just a needless complexity. Why would I want to use different money for my gas, food, and rent? This defeats the whole purpose of having a money economy.

Aggressive to say the least.

So what exactly is this article saying? Though they don’t provide a succinct definition, it becomes clear that they see app coins as a form of currency. Note their implied understanding when they say “You just create an app, and then make it less convenient by creating a cryptocurrency (or “app coin”) that is required to use it”. Basing their arguments on this understanding, they proceed to the conclusion that “app coins are a terrible idea.” And I agree with that conclusion, if by “app coins” we really just mean “alternative cryptocurrencies”. Let’s look at a simplified example.

Imagine for a moment that I want to start an open source project distributing a cool new software product that I have developed. Instead of looking for venture capital investments, I decide to sell Japanese Yen in order to crowdfund my project. Why am I selling Yen? Because I decided that you have to use Yen in order to buy my product.

It’s abundantly clear, even to the casual observer, that this doesn’t make much sense. The price of Yen won’t necessarily go up if my product sells well. People won’t necessarily hold Yen, they’ll just inconveniently convert their current holdings to Yen whenever they want to buy my product. Heck, since this is an open source project, they may just take the code and rewrite it so that they can use any currency they want. Something tells me that version would be more popular.

In a sense, this article moves us closer to an understanding of app coins by telling us what they cannot be. App coins cannot simply be an alternative cryptocurrency. Without possessing additional characteristics or conveying additional rights, their price would tend towards zero.

Beyond a new currency: partial ownership

In addition to referring to app coins as currency, App Coins and the Dawn of the Decentralized Business Model also refers to the coins as ownership. Remember, one of the main points of the article is that “there is potential for that app coin (partial ownership of the network) to be worth more in the future.”

What does partial ownership of the network look like? Does it mean that some users have more control over the network than others?

This seems to fly in the face of everything we know about blockchain technology and open source projects. One of the main goals of blockchain technology is a decentralization of power, a distribution of trust across a network. If app coins grant certain users more control, doesn’t that move us further away from blockchain technology and a true public good?

Making a case for future profits

Different views of the situation are more optimistic. Let’s say app coins represent a right to future profits. We can imagine that an open source project on the blockchain would be able to generate profit. Some of these earnings would go to the users that contribute to the operations of the network, and some would be pooled and distributed to owners of the app coins. The app coins wouldn’t act as a currency; in fact, the coins wouldn’t be used within the operations of the project at all. They would simply indicate the right to receive a portion of the future profits.

Oh wait, that’s just equity…

To be fair, the concept of equity in an open source protocol does add a layer of complexity. For example, because the protocol code is publicly available, anyone could copy the code and make slight tweaks in order to create a competitor. If the competitor is obviously superior, the value of equity in the original protocol would plummet–the value would migrate to the equity of the newly created protocol.

This setup would also discourage large ownership stakes in any project. Imagine that a private investor decided to support an open protocol in its infancy. That investor buys 80% of the app coin equity in the project. Using the funds from the investment, the community supporting this open protocol grows in size and popularity, and the value of the app coin equity increases in proportion to the size of the operations. However, it eventually becomes known to the community that a single investor owns 80% of the app coin equity in the protocol and is profiting from their operations. Because the code is open source, the community could decide to modify the protocol to make the private investor’s equity worthless, effectively redistributing ownership throughout the community.

This dynamic would most likely result in a crowdfunding model almost completely replacing the larger investments of venture capitalists and angel investors. Venture capitalists would be forced to take small enough equity stakes that open source communities wouldn’t be incentivized to redistribute the app coins.

Regulation

If app coins are just equity stakes in open source protocols, should they be regulated in a similar fashion to stock in public companies? My suspicion is that, while the blockchain community would ferociously oppose regulation, app coins of the type that I described above too closely resemble financial securities for them to go unregulated.

I’ve heard many arguments about why bitcoin shouldn’t face strict regulation, and I find those arguments very compelling. However, I find them compelling because bitcoin is a cryptocurrency. And as we established earlier, if app coins function simply as an alternative cryptocurrency then they are essentially snake oil.

Still left with questions

What are app coins? I have no idea. If I had to take a stab at a definition right now, I might say that an app coin is an equity stake in an open source protocol, entitling the holder to a portion of the future profits that result from the operations of the protocol. If this definition serves as an accurate description, then app coins don’t seem nearly as good as some people make them out to be, and don’t seem nearly as bad as others would have you believe. However, it’s quite possible that I’ve overlooked an important component or functionality. And so I’m left wondering:

• Is there a way to incentivize the creation of open source protocols, allowing developers and investors to profit from their early stage commitments?
• Does an app coin have properties, attributes, or entitlements that I haven’t addressed, or is it simply the name that we give to an equity stake in an open source protocol?
• Will app coins reshape the creation of companies, will they dupe investors out of millions of dollars, or will they become just another facet in a world already filled with complex financial instruments?
• Do app coins represent a credible threat to the value proposition of current venture capital firms?

---

For those truly dedicated individuals that managed to make it to the end of this post, I’ve included one more link that I found incredibly helpful when trying to decide how to approach app coins. This Framework for Securities Regulation of Cryptocurrencies by Peter Van Valkenburgh explores many possible iterations of app coins and how we should think about regulating them. It’s long, but worth it if you’re interested.