Cryptocurrencies and open blockchain networks have created a new way to raise money to develop and maintain novel products and services—whether devices on the Internet of Things, new cloud services on the Internet, or even financial products and investments. This is an unprecedented form of crowdfunding that may raise various legal and policy questions. Developers and investors are eager to have answers to these questions so that they can safely take advantage of this innovative model.
How It Works
Let’s take a common web service as an example: cloud storage. The traditional model for building this service is Dropbox, which allows users to pay Dropbox a monthly fee to store their files on the company’s Internet-connected hard drives so that the files can be available anywhere. Dropbox is a private company that raised money from private investors to finance the development of the service, and the service is built on private company-owned infrastructure (e.g. server farms) that connects to the open Internet.
Two things can be different than this traditional model when an open blockchain network is employed. (1) Developers get paid differently. Instead of raising money from investors, developers can use a blockchain to keep track of a scarce token, sometimes called an “appcoin” (short for application coin). Developers can sell or give away that token to people who want to use the storage service or those who want to support its development. The sale of these tokens can finance the development or maintenance of the service, and that sale can happen before, during, or after the development of the service. (2) The service is peer-to-peer. The users of the cloud storage service, themselves, comprise the infrastructure that powers the service (there is no server farm) and individual users can be rewarded for their contributions to that infrastructure (e.g. the spare space on their individual Internet-connected hard drives) with the token.
These Tools Offer a New Way to Fund Open Platforms
A closed platform for messaging (e.g. Apple’s iMessage or Google’s Hangouts) only allows users to message other registered users of the service while an open platform (e.g. email or SMS text messaging) allows users to message anyone with an Internet- or cellular-connected device. With closed platforms necessary software may be proprietary, access may come with a fee, and various services may not interoperate (e.g. music purchased on iTunes can not be moved to Google Play if the user decides to switch from one music store platform to the other). A traditional company, once built, may not have a motivation to open up their platform.
Open platforms have proved difficult to create because it has been historically difficult to monetize them even if they become successful—by nature they are public goods. Now, however, the developers of a cloud storage service can incorporate a scarce access-token, an appcoin, into the design, distribute that token to users, retain some amount of the token for themselves, and if the platform proves popular, the token (alongside the holdings of the developers) will grow in value and remunerate the developers for providing a public good. This new model challenges the concept of equity as traditionally understood, and carries entirely different risks and rewards.
Appcoin Crowdfunding is Happening Now
Developers of these services and their potential investors are already moving to take advantage of these new opportunities. Services for cloud storage are being developed by IPFS, Storj, Swarm, and may be supported by tokens (Filecoin, Storjcoin, or Ether respectively). Services for cloud computing power are being developed by Ethereum, Counterparty, and others, while utilizing tokens (Ether and XCP respectively). Services for content-curation and attribution are being developed by Steemit, Mediachain, and others (some, like Steemit, are already supported by a token, others are not but may wish to include tokens in the future). This list is incomplete and new projects and new developers emerge weekly. Simultaneously, investors interested in helping finance applications built on open networks have begun looking at whether they can buy and hold tokens rather than take ownership interests in the firms developing these networks.
Further reading on securities law and appcoins:
Framework for Securities Regulation of Cryptocurrencies, Peter Van Valkenburgh, Coin Center
Could your decentralized token project run afoul of securities laws?, Peter Van Valkenburgh, Coin Center
The Bank Secrecy Act, Cryptocurrencies, and New Tokens: What is Known and What Remains Ambiguous, Peter Van Valkenburgh, Coin Center
Further reading on appcoins penned by notable investors and developers:
The Bitcoin Model for Crowdfunding, Naval Ravikant, founder of AngelList
Crypto Tokens and the Coming Age of Protocol Innovation, Albert Wenger, partner at Union Square Ventures
Fat Protocols, Joel Monegro, analyst at Union Square Ventures
App Coins and the dawn of the Decentralized Business Model, Fred Ehrsam, founder of Coinbase