Why I’m bullish on AppCoins

In a post this week Vitalik Buterin challenges some of the objections made against alt-coins. The whole post is worth reading, but I want highlight what Vitalik says about appcoins:

One of the main attractions of cryptocurrency 2.0 is the idea of “appcoins” – protocols with a currency or token system built in, where the token system generates the emergent value to fund the development of the protocol. Having every protocol add its own currency for funding purposes may seem ugly, but the quantity of potential monetization per unit ugliness is vastly higher than existing solutions, such as making a protocol that is proprietary, charging license fees and excluding users who cannot afford to pay, and releasing “crippleware” apps in order to facilitate monetization or advertising. In the future, using emergent network assets (including non-fungible assets such as namespaces) as a funding mechanism may become the dominant business model for decentralized applications. If Bitcoin was the only game in town, none of this would be possible.

I agree. In a post last month I wrote:

There are non-obvious implications of the AppCoin crowdfunding model, both economic and legal. The current VC/Angel funding model of startups is based on the familiar NPV of expected future earnings. Crowdfunding via an AppCoin will be based on the seigniorage of a literally monetised network. In a future post we’ll discuss how to approach the valuation of such things. We will also discuss some of the favourable legal aspects of crowd funding in a manner that clearly falls outside the scope of securities law.

I promise I’ll address the subtle valuation questions raised by a funding model based on appcoin seigniorage rather than equity investment, but I just quickly want to mention a few other aspects of the appcoin idea.

Appcoins have demand that is endogenous to the services of the network protocol on which the appcoin is based (eg, anonymous browsing, in the hypothetical case of a TorCoin network). Those who are net providers of a scarce resource (say, bandwidth devoted to running a Tor exit node) will have another avenue for acquiring cryptocurrency besides running a mining rig or purchasing coin on an exchange. Those who are net consumers of a useful network resource will need the coin to use the network. Compare this to the demand to hold something like Bitcoin, which is primarily a speculative play on the view that in future a meaningful proportion of conventional payments volume will be done in Bitcoin.

I’m really not convinced of the near-term value proposition of cryptocurrency as a medium-of-exchange for physical goods, Bitcoin as the rival to PayPall and all that Silicon Valley VC jazz (is it the weather over there?). I think it will happen eventually, but this is not the space where cryptocurrency will flourish first IMO.

Cryptocurrency will flourish first in value exchange that does not involve physical delivery: Tor, Bittorrent, gambling, (crypto) cash settled derivatives like CFD’s, prediction markets, etc. In these use cases, both sides of a transaction can be handled on-block-chain with limited or no trust. In the case of appcoins, the two-way transaction is endogenous to the network itself.

Ethereum is the most ambitious appcoin project to-date, if we can describe it as an appcoin. It might be better to describe Ethereum as a meta-appcoin, where the service is a Turing complete scripting language in which smart contracts can be written. It will be interesting to see how much of the future appcoin space can be built on top of Ethereum, and how much will live independently of it. The obvious cases of Tor and BitTorrent are likely to be best implemented with their own blockchains (assuming hash-based proof-of-work is the cryptocurrency model that works best there). Use cases like settlement of financial contracts will live on Ethereum, among much else.

If the metric of success is the velocity of trade rather than the RoR of an exchange rate, then the success of cryptocurrency will be won next in the appcoin space.

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