Coins are Networks and Crowdsales are their First Killer App
Our team has been quite bullish on Ethereum since we began building the Bancor Protocol on the platform last August. As time goes by, it becomes increasingly clear why: Ethereum may be the first blockchain with a killer app.
We are a team of seasoned network application developers, and after years in the crypto-space we’ve come to see money as a network that offers its users different applications. Social networks, for example, have seen their share of killer apps: profile page posts, news feeds, media sharing and discussion groups, to name a few. Money can be seen as an economic network, where value is transferred rather than information. Globally, this is done through different forms of money (currencies) which are interconnected through exchanges. This global network also has various popular applications, that can be generally categorized as follows:
As experienced product developers understand, in order for a product to gain traction and justify switching costs, a new solution must provide significant advantages to the end-user, relative to the existing available solutions. We usually hear of this as the 10x better rule. To understand how this might play out in blockchain vs. traditional currencies, the following table features notable blockchain and fiat solutions for the same application categories, and lists the unique advantages each solution puts forward for the different applications of money.
The first killer app of any new technology validates it, and unfortunately, we have yet to witness a clear blockchain “killer app” (except, maybe, the buying and selling of coins, which is probably why some still believe the whole ecosystem is a pyramid scheme.) Clearly, blockchain-based solutions for the applications of giving, trading, lending and betting are advantageous only in very specific, and often controversial use cases, while also carrying material disadvantages such as added complexity, risk of a lost key, compromised guardians, extreme price fluctuations, regulatory uncertainty and limited worldwide adoption. By contrast, it is increasingly clear that blockchain solutions for financing applications have significant advantages over the available fiat-based solutions, which is why the recent momentum in ICOs should not come as a surprise, and why many view this category as the first blockchain killer app. Vinay Gupta lays a strong argument for the huge potential and profound implications of blockchain crowdfunding in this fantastic talk.
Interestingly, we are witnessing blockchain financing gaining momentum primarily on Ethereum. The reasons seem quite obvious.
First, financing involves issuing a new currency. Every share of a new company is currency which can be issued by the board of directors, under very specific terms. While Bitcoin has several competing third party layers for issuing tokens, Ethereum has a standardized solution at the blockchain level.
This leads to the second advantage, the ability to set complex terms. All money applications typically require simple, straightforward agreements to be successful. The one exception is financing engagements which require custom contracts with a variety of protections, governance structures and detailed profit-sharing models. Ethereum is currently the only available smart-contract blockchain which can easily accommodate this level of customization.
Third, smart-contracts enable a new breed of networks and applications that are token-based, crowd-financed, interoperable, decentralized and open-source. This is probably the reason why Ethereum blockchain adoption by developers is second to none. This presents an undeniable success signal that Vitalik and team should be quite proud of, as it was also an important indicator of Bitcoin’s initial momentum, and many other successful platforms we know, such as iPhone and Facebook.
Blockchain financing involves issuing transferable tokens to participants. On Ethereum, the ERC20 token standard has emerged as the most widely adopted and useful contract standard to date. We, at Bancor, are proposing a complementary standard — “Token-Changer” which defines a set of APIs for exploring convertibility, querying prices and executing token conversion through a smart-contract. We believe the Token-Changer standard is required for the future growth of blockchain financing as it establishes a clear standard for smart-contracts to act as “automated market-makers,” and streamlines token conversions for users across the entire Ethereum ecosystem. This opens an entirely new horizon of possibilities for convertibility, utility and viability of existing ERC20 tokens.
You can read our “Token-Changer” EIP228 proposal here: https://github.com/ethereum/EIPs/issues/228
We plan to use this standard for the Bancor Protocol, which provides continuous liquidity and asynchronous price-discovery for ERC20 tokens, irrespective of their trading volume and with no requirement to be listed on an exchange. You can read more about it and review the code on our website at https://bancor.network, or watch our presentation from the February EDCON in Paris.
After decades in startups, tens of financings rounds, a few acquisitions and a couple of wind-downs, we are beyond excited to be a part of the wave of innovation we expect to see unleashed by the crowd through blockchain’s first truly killer app, decentralized financing.