One of my favorite things about the cryptocurrency / blockchain space is that our conception of “what it all means” is still very much in flux. Nic Carter just published a nice analysis of how the functional narrative around bitcoin has changed over time – (roughly) from e-cash, to e-gold, to private currency, to a reserve cryptocurrency, to a programmable shared database, and on. (FWIW, at USV, our “aha” moment was in 2013 when we started thinking of bitcoin as a protocol, rather than just a payments system). Point is, we are still figuring this stuff out as we go.
It is a particularly interesting time right now because many of the projects that were born in the ICO boom of 2017 are starting to launch — each with its own token. For example, EOS last month and Augur this month. So that means we will finally get to see some natural experiments in real-world token economics and what it takes to make a token economy work from scratch.
The launch of Ethereum showed us that cryptonetworks can be used to create smart contracts and new kinds of assets, and that an economy could develop around the creation of these assets and the execution of the contracts. Relative to the original e-cash vision for Bitcoin, the economy inside of Ethereum is narrow (not buying potato chips with Ethereum), but it is actually still rather quite broad — you can use ETH to purchase broadly useful services on the network.
The other day, someone asked me: why wouldn’t every new project create their own token, rather than using a larger existing token (like BTC, ETH, Steem, etc)? My answer was: for the same reason that some countries use their own currency: because they can. In other words, the economy is strong enough to support its own currency. Whereas other, weaker nations just adopt USD/Euro etc – they don’t have the critical mass to support their own currency. I think of this as Minimum Viable Economy. (I am sure there is a technical economics term for this)
Looking at cryptonetworks, the question, then, is: what is Minimum Viable Economy? I think the answer depends a lot on the shape of the network / economy; for example (from harder to easier):
- currency/medium of exchange use case: minimum viable economy is actually quite large, because a currency is only useful to the extent that merchants and other parties adopt it. So, for cryptonetworks aiming for a real currency use case (buying potato chips), the bar is super high.
- “narrow network” payments use case: think of a p2p payments use case like Venmo. In order for venmo to work, I don’t need every deli and online store to accept it, I just need my friends to be on it. Still a high bar, but considerably lower than “full economy”
- single-purpose network use case: many of the cryptonetworks that are launching now are what I think of as single-purpose networks, or single-purpose economies. Functional networks like Filecoin, Livepeer or 0x. In these networks/economies, there is a single market — for storage, compute, trading, etc. These networks/economies are the most unusual and new — meaning, historically, it would never have made sense to have a separate currency for buying electricity, and a separate one for buying gas, and for buying orange juice, etc. But for global computer networks operating on global universal standards, it may be that a single currency with a single market of buyers and sellers, may, in fact, work. In the single-purpose network, the Minimum Viable Economy is the smallest — just sufficient density on the supply and demand sides of the market — similar to what it takes to launch a traditional marketplace platform like Lyft of Airbnb. Still very hard to accomplish, but more akin to launching an app than starting a country.
As Dani was looking at UBI on the blockchain, we discussed this concept a bunch – at least some aspects of blockchain-based UBI resemble the currency use case – a basic income currency is only actually useful as long as it is accepted by merchants (similar to EBT/food stamps).
I am probably most interested in the third category, because whether/how it works will have the most bearing on the future of computing, web infrastructure, and application development. In practice, a lot will depend on the friction involved in transacting in many currencies (easier for computers than for humans), and on the still unknown impacts of programmable token exchange and cross-network interoperability on liquidity and token value.
Across each of these three categories (and surely more), we will no doubt be getting some lessons in Minimum Viable Economy over the coming year.