Illustration: Sarah Grillo/Axios
From one perspective crypto startups operate on a new and innovative business model. From another, it just re-invented stocks. Time will tell which one is right.
Why it matters: Crypto's melding of innovative decentralized principles with longstanding characteristics of equity securities is certain to occupy regulators for years to come. In the meantime, how startups operate is continuing to evolve.
The big picture: Blockchains are creating a fluid way for people to participate in money-making enterprises, all powered by tokens — digital items that grant users rights and, sometimes, possessing special functions within a protocol.
- They are also in many ways reinventing the world we already know, something very close to equity with some some gains in efficiency and flexibility.
Flashback: When I started writing about crypto projects full time in 2017, I was struck by something very weird: None of the companies planned to take a cut of the money spent on the platforms they were building.
- One day, I was talking to a company that was making a blockchain version of eBay, and the founder was very clear that all its users would make money in various ways.
- But the company building it all would take nothing.
The company was making a token, however, and it would sell it in an initial coin offering (ICO). The idea was that sellers on its platform would have to post some token to have a "store," and buyers would use the token to buy stuff.
- If the store became popular, lots of people would want the token, and its price would go up.
- And, of course, the people who created the token had a lot of them, which they got for free. Any gains were pure profit.
This model started to change around two years ago, as tokens took on a new role.
Projects, led by Compound, the DeFi money market, started distributing what they called "governance tokens" to users on their platforms.
- Governance tokens were a lot like equity. They worked as votes over the project's future.
- If the company that created the DeFi protocol only kept 10% to 20% of the tokens for themselves, they could claim to no longer control it.
- Still, if a protocol had a billion-dollar market cap, 20% of the tokens would still be worth a lot of money.
So this was the new business model: Crypto companies were not trying to earn profits, they were trying to drive value to a token.
- Incidentally, sometimes tokens serve some additional role in the work of a protocol, and sometimes token holders vote to give a cut of revenue to token holders.
Yes, but: Wouldn't all that raise all sorts of regulatory red flags? Oh... yes. Very yes. It will play out for years.
- But it's also true that regulators could shut every crypto company down and all the crypto protocols would just keep running. It's tricky.
Flashback: That crypto-eBay project I mentioned? It quit messing with that idea long ago, but its team is still going. They aren't making anything they set out to make, but it's still all about the token.