Coinbase co-founder: Appcoin and the dawn of decentralized business models

Over the past few years, venture capital firms and institutional investors have poured more than $1 billion into digital currency companies. Then, over the past four months, something strange started happening. A number of blockchain-based projects have raised a combined $250 million, but none of that money came from venture capital firms. So, what’s going on?

The answer is App Coins.

The financing method of these projects is to create their own "app coins" and raise funds through crowdfunding. At first glance, this looks like a new way of raising funds, just like a normal company issuing and selling stocks to raise funds. But if you look closely, it is much more than that.

There are some key components of these application coins:

1. They are the currency used by the app itself.

2. Contributors of application coins are rewarded with these application coins, and the rewards are very accurate.

3. These application coins can be easily converted into fiat currencies (such as US dollars).

For example, Storj is a decentralized file storage system. Similar to Bitcoin and Ethereum, the network has no central operator. The project raised 910 BTC, equivalent to $500,000, through their application currency Storjcoin. Storjcoin allows you to buy storage space on the Storj network, and vice versa, if you contribute your computer storage to the network, you can earn Storjcoin. If you buy or earn Storjcoin, you can buy storage space on the network. If you think the value of Storjcoin will increase, you can hold them, or convert them into your local currency (1 Storjcoin is currently about $0.11).

This is not only a new way to raise funds, it also creates its own economic ecosystem. More precisely, it is a brand new business model: a decentralized business model . In this model, there is no company with a central controller, and all participants share ownership and contributions. The realization of this business model relies on the combination of the Internet and cryptocurrency.

Other projects that have adopted this model include:

1. STEEM, a decentralized version of Reddit where participants are paid for contributing news and content.

2. Augur is a prediction market where participants are paid for predicting the outcomes of events.

3. IPFS is a decentralized file storage system whose native application token is called Filecoin.

4. Even Ethereum and Bitcoin themselves, people are paid to contribute computing power to process transactions. Ethereum initially raised $18 million worth of Bitcoin through a crowdsale.

One thing you’ll notice about these “projects” or “applications” is that they are truly decentralized software protocols. Protocol is a fancy technical term that means: it’s a standard language that enables a group of people on the Internet to work together on a specific problem. There are long-standing and popular network protocols, including HTTP, SMTP, SSL, etc.

As Albert Wenger points out, historically, it has been difficult to incentivize the creation of new protocols. This is because: 1) there is no direct economic incentive between the creation and maintenance of these protocols; 2) it is difficult to make a new protocol popular, because of the classic "chicken and egg" problem. For example, our email protocol SMTP, which has no direct economic incentive, did not develop smoothly. Later, because Outlook, Hotmail and Gmail used it and built real businesses based on this protocol, the SMTP protocol became widely used. Therefore, the very successful protocols we see tend to exist for a long time.

Now, someone can create a protocol, create a native app coin, and keep some of the app coins for themselves and the future development of the project. This is a good way to incentivize creators: if the protocol is successful, the value of the app coin will rise. But what happens if the creator gets too greedy and holds too many app coins for himself? Since the source code of the project is open, people can copy all the code of the project (called a "fork") and restart the exact same network.

(The value of network users increases with the size of the network)

In addition, AppCoins can help solve the classic chicken and egg problem. To illustrate this problem, we can use Twitter as an example. In the beginning, the value of being a member of the Twitter network was very low, few people were using it, and there was no content on Twitter at that stage! Now, Twitter has hundreds of millions of users, and people have found value in it. In other words, the value of participating in the Twitter network will only increase when more people participate.

So, how do you get people to join a brand new network?

Give participants partial ownership of the network . Just like equity in a startup, the earlier you join the network, the more valuable it is because you get more ownership. Distributed applications pay contributors through their application coins. And application coins (partial ownership of the network) have the potential to appreciate in value. This is equivalent to miners in the early stages of Bitcoin.

That is to say, in this model, when the popularity of the network is not high, you have a stronger motivation to join.

This model has been used by startups for years to attract employees to a young company, and now decentralized applications are also using it to incentivize potential users around the world to participate in these applications.

This will make it easier for networks to grow. In the past, networks have solved the chicken and egg problem in various ways: Reddit had members attract users by posting before they would continue to use the platform; Facebook started by recruiting Harvard students to grow its network, and there are many other examples.

Bitcoin and Ethereum were the first to use this model to bootstrap currency/transaction networks. The same model is being used to bootstrap other networks.

Imagine what would happen if projects like Twitter, Wikipedia, Facebook, Reddit, or Uber used this model from the beginning? Instead of a centralized company, the software protocol would replace the centralized operator, and all creators and contributors in the network would own the network. Instead of network contributors who were once like worker bees (such as Uber drivers), they are now more like owners of the value network they create.

This decentralized business model can be described as: X does not require a central network operator X. Uber does not need Uber as a company to control the network of drivers and passengers. Reddit does not need Reddit as a company to centrally host and create the platform. Facebook does not need Facebook as a company. But there will still be businesses supporting these networks through value-added services (e.g., Uber's automatic payments or driver background checks); in short, no single company can "own" these networks.

Of course, it’s still very early days, but AppCoin and this new decentralized model could mean a lot to the world:

Businesses based on network effects will start with decentralization first

1. This is like some of the “internet first” businesses in the late 90s and some of the “mobile first” businesses in the late 2000s.

2. Access to capital will be more equal because anyone around the world can contribute to a project. As a global blockchain, a project launched in Africa is no different than one launched in Silicon Valley.

3. On the other hand, investing will be more equal. Everyone will participate according to the same investment rules.

4. So, first blockchains gave us internet money, and now they are giving us internet assets.

5. The future of corporate law looks like a mix of lawyers and coders.

It’s worth noting that this phenomenon isn’t limited to any single blockchain. Some projects have built their own blockchains (e.g. Steem). Others have built add-on protocols on top of major cryptocurrency protocols (e.g. Bitcoin’s Colored Coins, and Ethereum’s Augur). However, we’re likely to see more and more application coins built on blockchains like Ethereum.

The growth path of the number of AppCoins may mimic the development path of applications in the App Store: it will be slow in the startup phase and then grow exponentially.

Just like web applications and mobile applications, there will be thousands of application coins, and eventually millions. Of course, like all applications, many application coins will have no actual value, some will achieve some success, but only a few applications will achieve huge success.

The upcoming wave of decentralized applications will be accompanied by the failure of many Internet companies. There will be more failures like The DAO. Some of the projects I listed in this article may eventually fail. Some people will focus on the financial elements of this wave in the short term, calling it Stock Market 2.0 or Wall Street 2.0, but this is far from the case.

This is the biggest and most important trend I have seen in the digital currency space in recent years. It may give birth to the first killer application.

Think about the major protocols that exist in the world today and see how much public benefit they have created for us: HTTP gives us access to Internet data, SMTP gives us email, and SSL ensures the security of data transmission. Decentralized protocols and application coins will open a mechanism to bring us more successful protocols. This means more innovation in the world, and consumers and businesses will have more and better choices.

Thanks to Chris Dixon, Fred Wilson, Brian Armstrong, Dan Romero, and Juan Suarez for reading this article and providing feedback.