COVAL: Movable Value

Movable Value in the Crypto Token Age

Value in the abstract is an interpretive concept. There is intrinsic value that is dictated by many standardized and accepted variables that make up the fabric of culture and the gears of economies. Precious metals, FIAT and virtual currencies, electricity, scarce resources and products, rare collectibles, human skills, medicine and health services, time, art and many other things all represent value in some form. There is also value that any one individual may apply to something that is on the contrary void of value from the perspective of others. The world revolves around concepts of value and increasingly the notion of “movable value" is becoming paramount in the context of ownership, control, trust and markets.

Just as broad and global markets exist, we are seeing smaller ecosystems with their own incentive economies becoming more prevalent as well. These systems cater to certain groups of people who have invested their attention and/or monetary income and often operate in silos which is both intentional by design but also can be unintentional and a result of technical, administrative or economical limitations.

The importance of movable value may reach the same pinnacle of expectation as free access to information and basic Internet access. As people are realizing and even demanding more flexibility and exit paths into external systems and the broader markets, it may become critical to the health of legacy systems to adapt. On the contrary, limited movement of value is commonly leveraged as a business strategy which is a captive design meant to control users, their data and their many currency types (monetary, social, attention etc) in ways that primarily benefit the system and the entity that runs and owns it more so than the users themselves.

This is typically acceptable since the illusionary freedoms and conveniences provided by services such as social networks and online utilities from Google and others are considered to be a fair deal and the deeper issues of privacy and ownership are not a high priority to most people. Younger generations are also not necessarily going to latch onto the idea of righting the ship as they continue to grow up digitally saturated by today’s normal tit for tat relationship with Internet services and the brands that they are attracted to. Unless these future generations start to get frustrated with the limitations that are placed onto their valuables and become more aware of the negative impact, then they may start demanding flexible systems that support movable value. Cryptocurrencies and tokens may be the catalyst for this, however splintered development is creating a similar situation where we have blockchains that are not interoperable with each other without additional complex systems in place. In time, the cryptocurrency space should normalize around the winning protocols and networks and reduce these early frictions.

A new breed of platforms and technologies have emerged once again to level and flatten the digital landscapes that we all frequent. Much of the work being done today is based on prior art and what has driven this aggressively forward in particular is the rise of Bitcoin and the underlying distributed ledger, PoW consensus algorithm and decentralized network model. Bitcoin has been a wake-up call to the world of finance and many other industries that are now reviewing their own systems that are in need of modernization and upgrading them with similar concepts as Bitcoin. If nothing else, this is what Bitcoin has achieved. The absolute focus to rethink how systems are constructed and how these systems can remain relevant and competitive on a global scale.

This is not to say that “blockchain" is the solution to all problems. The unfortunate side-effect of times like this where there is a sort of cambrian explosion of innovation and motivation is to over-hype and hyper-implement the new shiny magical thing that everyone is talking about. The reality is that these are very early days. Not only are many people looking at the wiring under the board for the first time in decades, but we are now inventing and reinventing (often times needlessly) full replacement engines with new approaches that can disrupt legacy systems. Haste often leads to waste but the writing on the wall is clear. An upgrade across the board is happening and over time and through many iterations we will learn from this process and evolve the infrastructures that run the world. Ultimately, we will end up with at least some level of significant improvements to how the world functions as a machine for movable value.

Circular, Sharing and Collaborative Economies

It should not go unmentioned that a change in how people work, start businesses, make products and collaborate is reverberating around the world. The emphasis is on efficiencies and sustainability across many industries and how the products and services within them are manufactured and provided. This isn’t just about environmental impact or financial opportunity but also of cultural and personal lifestyle impact.

The convergence of these circular economies with the emerging decentralized technologies, especially those that cater to cryptocurrencies and value tokens, will create a new level of interoperable ease and streamline movable value systems. “Creating money out of thin air" is never meant to be a positive phrase but this is essentially what will happen often as cryptographically trusted tokens representing value (or eventual value) and utility within these new economies will become pervasive and relied upon. But there are problems ahead, still.

Token Overabundance

The spectrum of cryptocurrency spans from the original Bitcoin and the well-established Ethereum and a few other longstanding Bitcoin forks such as litecoin, and then stretches out long and wide to include the plethora of independent altcoins (forks of Bitcoin and Ethereum) and meta-layer crypto tokens (created on top of Bitcoin and Ethereum). Since it is so easy to create these “currencies" there is an abundance of them with purposes ranging from absolutely none to more legitimate uses for protocol/computing and service fees. Speculation is inherent in all cases and drives trading on open markets primarily on centralized exchanges and to a lesser extent on more decentralized exchanges which are largely experimental and less performant but offer less risk and more ownership and control.

As these trends continue, there could be a situation of token overabundance. At what threshold does overabundance occur is unknown and the forecast is itself speculative and hinged on certain conditions to be present in the future. For example, the aforementioned note about centralized and decentralized exchanges is relevant here. Getting a token listed on one of the centralized public exchanges typically requires that the token meets some base criteria first. There are also usually high fees involved as well. A token can be removed from an exchange at the discretion of the exchange owners which could be quite detrimental to users who are invested in the token and its associated economy, community, services etc. This is why decentralized exchanges and p2p value transfer systems will be very important moving forward. Expect to see the rise of decentralized movable value solutions supplant centralized services like cryptocurrency exchanges in the next year or so.

Additionally, as more tokens are introduced into the market there needs to be more advanced metrics available beyond the basic market cap, volume and inflation rates so that deeper understanding and value assessments can be made for each unique token. Flat perspectives will not work as tokens move from speculative markets to utilitarian markets. I won’t delve into this topic here but it is one example of how an influx of token economies can cause new complexities that we are ill-equipped at handling presently. In the future, new coordinated efforts of economies large and small will need to coalesce and funnel accurate market value metrics upstream. The future of trusted data oracles will be crucial.

The overabundance issue, if it is one at all, could be alleviated by pegging a token to a parent currency and forgoing the extraction of any given economy’s independent price indicator for that token at the time of moving into broader economies and instead inherit the parent currency’s market price (dependent on ratio). In exchange for this swap guarantee, the token is essentially freed to move into new markets. This would be an opt-in stopgap solution similar to how Loyalty Points in Reward Programs are difficult to move into other programs or trade with others in a p2p manner without steep costs involved.

People will often be a part of multiple ecosystems with their own economies and tokens. Therefor, pegging tokens to a parent currency could be one logical way forward to lessen the complexities that token overabundance might create. There would still be many parent currencies as a class above many tokens but certainly much less than the anticipated explosion of token based economies which themselves could contain even smaller economies and sub-communities within them. When tokens can be easily created and applied to granular elements within these layered economies, it becomes necessary to think differently and have foresight of the various effects, both good and bad, that will result. If it feels unrealistic, just consider how everything from memes and hashtags to domain names to local town voting registrations can all be tokenized with the advent of these new blockchain related technologies.

Risk Aversion

Going further into the concept of tokens having a parent currency should include the topic of risk aversion. Creating a token, though easy to do today, does come with potential downsides and baggage. Volatility is a normal and persistent occurrence for any cryptocurrency or token due to the vulnerability of market manipulation by traders and speculators. Since these markets are small and the currencies are often not widely distributed as very useful, fungible or dependable forms of “money", risk is inherent. Even within a strong and well structured small economy, bad actors or other circumstances can cause wild fluctuation in the unit price of these types of currencies. Having a peg to a parent currency can reduce these occurrences especially if the parent currency is pegged with many children currencies and their associated economies because that theoretically imbues value and fortifies the parent currency. This is because trading activity would happen on the parent currency and not directly on the sub-currency tokens. The parent currency acts as a shield, letting the tokens have their own separate local market value unaffected by these other externalities.

Likewise, if a crowdfunding event is the genesis of a new cryptocurrency, which has been very common recently in the form of crowdsales or ICOs (Initial Coin Offering), then this is an open invitation for participation by those who would not normally obtain the currency and are largely interested in speculating on the future price with the goal of making a profit. This introduces an artificial layer to economies that are intended to be cleanly focused on a targeted and relevant community of people. These “investors�? also create noise not only in the market but also in the community as they may try to extract information that can assist them in creating buy and sell orders on exchanges. The total amount of tokens issued could also be too concentrated within a pool of these outside investors if other preventative measures are not taken to limit an ill-proportioned token distribution.

If this is difficult to imagine, consider a future example where a small town or city creates a community currency to coincide with local investments in the revitalization of a historic district to attract tourists and businesses. This currency may be used to help fund the projects related to restoring the district and soliciting small businesses to open shops and restaurants as well as tourism services. In return, those who hold this new currency in the form of a crypto token could receive discounts and special offers or even a share in profits that the city makes from any new revenue over a span of time.

Though the above example is not a common use case today, it could be something that becomes feasible and normal in the future as community and complementary currency implementers choose to upgrade to blockchain-based crypto token technologies (most use more traditional banking software architecture). Not only would it be awkward to have people from outside the community owning the currency to speculate on, but the point of the token would be largely lost and instead the community might have to manage the side effects of this scenario which could end up costing money which is counter-intuitive.

If this local community currency was instead pegged to a parent currency such as COVAL’s, those who are opportunistic traders and speculators could just focus on buying the parent currency and have less motivation to own the community’s token. If the token becomes useful and valuable within the community as intended, then the parent currency could in parallel increase in value as a result. The local token could exit the community (possibly with an applicable fee determined by that community) by being converted to the parent currency and be sold on the open market for other crypto or FIAT currencies.

ICO Alternative

Similarly, a typical project involving the development of new technology that has a team looking to raise funds via an ICO may be at risk of violating SEC laws and be fined or worse. There are nuances and grey areas but risk is certainly present. These types of crowdfunding campaigns should be carefully considered. Even if a financial success, an ICO can be a negative experience for a project’s team. Many projects and businesses fail and this can anger some of those who funded the project. The project or company could shut down but shutting down a cryptocurrency or token is not easy to do because of the nature of the decentralized blockchain technology that most tokens are created with. The risk of class action law suits or just negative comments on social media etc can be daunting for the team that accepted the funds and will be pressured to deal with this “angry crowd" for months or longer. The tokens are out there and to people who bought them, they are real and in their pockets. If it becomes useless and devalued, that relationship with the tokens will persist as will any negative emotions. This is unlike simply donating money to a project or cause. Even with Kickstarter, if a product you help fund does not get built or fails in some other way, you are not left with this “token thing" that you hoped would be useful and valuable.

Instead, a project can create their token with an existing parent currency (but not distribute it right away) and work on giving it utility and purpose. The team could invest in themselves by buying the parent currency and anticipate it increasing in value as they become successful over time. This may not provide the upfront capital that the team feels they need to become a success, but they are still free to solicit funds from accredited investors, friends, family, incubators, grant proposals, sponsors and so on. You know, the harder way. The team could consider an ICO at a later time when they are confident with what they have built up to that point and allowing their existing investors to participate in such a token sale earlier than the public as way to offer some ROI. They could require that the parent currency is used to buy their tokens in this ICO (or at least give a favorable ratio). This would create new demand for the parent currency (which the team would presumably own) and potentially provide some side profit to help the team extend its runway.

Since it is often the case that a team needs to pivot or restructure their original plan, this path of due-diligence, patience and iterative progress will earn the team respect and reputation points. Receiving a large amount of money upfront, especially when the funders are not considered true shareholders (those who expect accountability and decisions that keep their interests in mind), has a tendency to de-motivate teams or use the funds irresponsibly and take risks, even if they were well-intentioned in the beginning. This can lead to longer periods in the dark “pending launch phase". This is not across the board true but it is a concern to consider and should be avoided.

This approach of leveraging a parent currency and delaying an ICO until the project is more matured removes the ICO stain that comes from the attitude of some founding team members that I refer to as “Crowd Capital Entitlement�?. Raising funds from motivated people without a clear ROI and instead leaning on the fact that speculative markets are the main interest of most ICO funders is an abuse of the technical capabilities of tokens for fundraising and takes advantage of the current lack of aggression by the SEC against ICOs. Just because you can, does not mean you should. And the SEC can retroactively investigate ICOs in the context of fraud or money-transmitter laws that may have been broken based on their interpretation of the token sale (the only interpretation that matters). And don't think that setting up foundations and companies in other geographic regions and jurisdictions gives you full protection from the reach of US government agencies.

Towards The Token Culture

Tokens created on distributed ledgers and blockchains are powerful trusted units of value that can be applied to anything as a vehicle for moving that value around. Some are settling on the fact that the tokens themselves may actually be the killer feature of blockchains hiding in plain sight. They empower and they enable. Tokens are the simple atomic bits that flow through cryptographically generated append-only distributed databases and become the pulse of movable value networks. Tokens can be the atomic unit of your project or company.

It is feasible to envision how tokens will be prolific expressions of anything that holds any type of value. From loyalty reward points to API credits to music access to video game items to social actions and so on. A token may be bound to all of these and much more. As the networks evolve to allow for deep interoperable capabilities between blockchains, there will be no valid excuse to not provide and support systems that are borderless and allow tokens to permeate networks and traverse throughout the world. Business models that choose to hold on to their silo strategies will struggle as new open systems that cater to the demands of the token culture take over the incumbents as more relevant and fair systems that foster new ways to succeed and not at the detriment of the people who use them.

In this future, we will need a plethora of tools and services that offer trusted forms of efficiencies and assurances to overlay these networks and provide users with positive ubiquitous computing experiences.