Leveraging the True Power of Tokens for Early Stage Projects

TLDR; Nowadays, projects that launch ICOs often sell utility tokens that not only give owners access to their products/services on the Ethereum network, but also enable and maintain network effects around their services. Most of these tokens have yet to prove their use case; still, they garner the attention and resources the projects need to develop and grow. That’s a new powerful tool for projects — but we believe that it could be better exploited.

Indeed, we think that the kind of attention (hype) and resources (big money) these projects attract are not the most suited for early-stage ventures. Current token designs focus on figuring out the appropriate token issuance policy to make them attractive to investors and maximizing the correlation between the value of the token and the effective adoption of the project. However, by focusing on these characteristics, tokens designers are trying to protect a network effect based on a product that does not yet exist.

We believe that projects that are still being developed and have yet to be proven as sustainable need a different token design and distribution mechanism that leverages the incredible coordination power created by tokens. This is why we are starting a discussion about tokens that would be more suitable for early-stage projects: Contribution Tokens.

Contribution Tokens coordinate and reward a focused audience, including but not limited to: platform testers, advisors, part-time contributors, bug hunters, and smart investors. Once the product is proven, the Contribution Tokens would be converted into more strictly-defined “utility tokens” (i.e. tokens that will have specific, predefined, use case(s) in the project that will be developed after the crowdsale). Those utility tokens maintain an appropriate value, but also secure and incentivize a strong network effect.

Projects leveraging Contribution Tokens will therefore reward and incentivize early contributors in a way that is healthy and appropriate for early-stage, risky projects. Once proofs of success are shown, incentivization structures can be readjusted and directed towards mainstream investors and users.

VariabL will launch on September 12 its open Alpha. We will reward contributions during the alpha through VariabL Contribution Tokens.

We need resources and attention to build engines ready for production, not the fuel — money and hype — to launch our prototypes to the moon

At VariabL (formerly StabL — proper announcement will follow in the coming weeks), we have decided from the very beginning to avoid classic ICO models for raising funds and generating hype. We believe that a token launch at a large scale would mislead investors into believing that our promising, yet early-stage project has solved its main challenges. We are realistic in our research and goals, and wish to promote transparency between our expectations and reality.

We have been working for more than 1.5 years on stable tokens and derivatives with the StabL project, Our objective has been to steadily build a mechanism for such stable tokens, through iterative development based on market feedback, validating and adjusting the many legal, technical, and market assumptions we make in our private white paper.

To be intellectually honest, the VariabL team cannot, as of today, commit firmly to a solution that would be extensively described in a white paper, as it would rely on too many assumptions regarding evolution of the technology, market validation, and the regulatory environment.

With this focus on constantly iterating on our product, we have encountered challenges many other blockchain entrepreneurs will face. By deploying our VariabL derivatives trading platform on testnets and running alpha tests, we were able to gain insights from traders. Our incredible community identified problems we had previously overlooked, enabling us to refine our product and adapt accordingly.

We believe that the real value of a project is not of an idea or a theory; it emerges through the team’s ability to formalize and iterate on complex concepts and to learn with trial & error. This includes testing different models, listening to feedback, adapting accordingly, and moving quickly.
To accelerate the development of projects like ours, we need a skilled and focused community of contributors that will enable us to learn and prove faster.

Martin’s tweet reflects our opinion that projects using cutting edge technology need more skills and knowledge than money. Also, focus is critical, as the infinite curiosity of the ecosystem begets too many rabbit holes.

Our needs there consist in a focused, skilled and well coordinated community that shares our values and challenges our vision: users, advisors, testers, bug hunters, smart investors, engineers, economists, financial analysts, hedge fund managers, field experts, entrepreneurs, marketers, and designers.

The true value of tokens for Early Projects: Coordination

The well-known Ethereum tokens sold during crowdsales are products that give owners access to services (like a membership or an API key), ability to work in an ecosystem (like a working permit) and/or to invest in a project : in this respect, I will call them utility tokens. But today, the services accessible through these utility tokens are not yet available. In practice, the only use case of those tokens today is speculation and investment.

However, for the project and its community, these tokens already have an underrated value that should be emphasized: they form an incredible coordination tool. Tokens offer one of the best way to help coordinate and assign a value to the attention and resources devoted to a problem. Under the current implementation, people who own tokens can dedicate resources (time, skills, money) to the underlying project. Each contribution increases the value of the project, including its tokens and ecosystem. Though tokens mainly attract long-term investors and short-term speculators, the projects gain a handful of early adopters, enthusiasts, contributors, and smart money; these latter personas are the types of stakeholders we believe early-stage projects might prefer and benefit more from.

However, current models for token distribution do not maximize the coordination effect of tokens — on the contrary, one could say that this effect is almost achieved by chance.

Current ICO projects focus on the wrong things: attracting mainstream money and hype by hiding the hard challenges.

Through tokens sales, ICO projects receive one specific type of resource — money — and a specific type of attention: speculation. This is due to the way tokens are promoted, valued and structured. Bad token designers only intend to attract mainstream investors and fill their bank accounts, which is not only unethical but also strategically dangerous.

Tokens Fundamentals are more speculative than they look…

The fundamental value of most of the tokens is based on their utility, yet owners still can’t use them, and token owners can only speculate short term or hold them in hope that they appreciate. They put their faith in narrative white papers that are in line with current hype trends and hugely ambitious in their promises. The main metric used today to value decentralized applications is the team’s ability to formalize and sell a theoretical protocol, its token distribution policies, marketing efforts, big announcements. It is not rare to see papers with no risk analysis, no technical roadmap, no legal strategy or working prototype.

This tweet reflects the sentiment that what actually matters is the team’s ability to test, implement and learn as opposed to having an original idea and a good theoretical formalization of it.

Token Issuance structure is not that important when nothing in production.

When reading up on ICOs, it is clear that everything is set so that the token distribution appears interesting to investors, as if these tokens were stocks of mature projects with low uncertainty. As an example, early adopters who buy into this network effect are guaranteed to not be diluted — what is the real value of this kind of engagement for the project ?

From a technical point of view this premature need is presented as a requirement to create a network effect, improve efficiencies, and maintain the effect on the service offered. But most of the time these networks are not yet in production. As a result, the effort spent on scaling and maintaining these networks through network effects and strict token issuance models may not be appropriate. A focus on developing the actual underlying product should be preferred.

Current ICOs are often unethical for buyers

Market manipulation
The promise of value in platforms built on nascent technology is very speculative and mainstream token buyers do not necessarily have the tools to understand what they are buying. Additionally, token markets have low volumes and the sale of those tokens is not regulated, which allow wealthy players to manipulate prices. The trading game around these tokens is not always fair, to say the least.

No legal guarantee on the implementation of the project
The speculative nature surrounding these projects’ promises of utility also clouds the legal terms and contractual obligations for teams to deliver. In other words, the token value, which is tied to future utility, is directly derived from the team’s ability to deliver — but the legal terms of most of the sales indicates that they are not required to do so! Most token sales are indeed structured as “donations”; which is not in line with the expectations of the tokens buyers…

Current ICOs generally attract wrong audience and collaborators.

Community is noisy, fragmented
Short-term speculators, long term investors, wealthy market manipulators, tech enthusiasts, development teams, etc. — hold different beliefs and expect different returns on their tokens. A community coordinated via publicly sold utility tokens is fragmented, even though tokens should be used as a powerful tool to coordinate a community around a common goal, the long-term success of the project. They own part of the Brand and Identity, but sometimes they behave more like parasites than partners. It is okay to choose your partners, everything doesn’t have to be open and public.

Once a community has been formed, you have to manage it. But when a large community has incentives that are not in line with your goals, the stakeholders spoil resources collected and little value is actually created.

Most investors are passive
Long term investors and funds invest in portfolios of tokens to gain exposure and diversification to the ecosystem. Short term investors look to profit from an under-regulated public market. The people investing resources into these projects artificially create momentum and their contributions are solely reduced to capital.

Token sales exclude important collaborators.
Because money is the only way to gain ownership of tokens, many people who’d like to contribute other resources are excluded. This means that talented people who are not willing to trade speculative assets are de facto excluded from participating to the coordination game and lots of potential talent is lost. It is true that bounties and rewards paid out in tokens exist, but they remain a secondary aspect, often flooded by speculation.

Current ICOs have bad strategic impact

Teams are tied to a specific solution
Describing a detailed solution on a paper is important to the initial development and validation of a hypothesis. However, we believe that the team should not commit to a solution, especially when they have not formalized their main hypothesis and detailed a clear plan to test them unless they believe inflexibility and inability to adapt based on validations will help them succeed.

With ICOs, the company’s business model is based on overgrowth and is ultimately unsustainable

The problem of over funded companies is well known. Starting with too much money and little market validation is dangerous — there might exist deep flaws with the project that have not yet been exposed. The DAO is a good example of how easy it is to be blinded by inspiring theories. We believe that a market validation on the short term is the best way to determine the viability of the product under current market conditions and we are committed to bring real value to our customers; we do not feel that we need 50 millions dollars upfront to achieve this goal.

Liquidity often means focus on short term
Tech startups do not immediately organize IPOs. Not only because IPOs are difficult to set up but also because being private allowed startup heads to choose their partners and remain focused on a common long term goal, incentivized by illiquid equity. On the other hand, with ICOs, liquid tokens allow for any contributor to leave. In a way, having liquid tokens is not appropriate when an early-stage project needs a community of focused partners.

Legal issues will arise
Since there are very few regulations around these new forms of capital structures, the best we can do to make sure to avoid legal issues is to remain ethical and maintain a private relationship with investors. It is not just to protect investors and be ideologically transparent and honest; it is also important for the business itself to remain protected against future sanctions from regulators.

Towards better token models: introducing VariabL Contribution Tokens

The issues described above are not inherent to ICOs and do not apply to all tokens deployed on the Ethereum blockchain. Most of them are specific to token sales but others are shared by other means of financing early-stage projects. We however believe that there’s a lack of good practice today in the way those sales are organized and marketed.

This doesn’t mean that the teams are not dedicated to the project and that they will not ultimately deliver (although there’s no guarantee whatsoever); it mostly means that most of the investors were probably not informed enough and they will not bring as much value as they could have.

Some of those concerns were already identified by other projects that have organized better token sales.

Maker

Maker is an example of a healthy community coordinated by governance tokens. First, on top of promise of a future use case for the token, Maker tokens have governance properties. And so far the team leadership has been very smart about the way they distributed their tokens. They were sold to people genuinely passionate about the project, which means that the tokens are held by community members that usually have good understanding of the project vision and goals.

All in all, they are here to see the project flourish more than to make short term profits out of the tokens. Hype has never been at the center of the project.

In our opinion, this allowed for a better focus as they took the time necessary to do things right. As an example of this commitment, the incorporation of their foundation has been a success that will impact positively their long term activities. It also gave them more flexibility to structure the project. As they sold a shared vision, they were able to fork from their white paper and change their roadmap to go towards more experimentation around a Simple Stable Token. It is the sign of a healthy company and community.

Status Genesis Tokens

Before implementing their final token sale, Status released alpha tokens called SGT. These tokens were distributed to early contributors in exchange for different kind of contributions (marketing mostly). They have later been converted into SNT, their utility token, at the time of the final crowdsale. It allowed for a better distribution of the tokens and a real reward to early members of the community.

We will try to leverage on those past experiences, with the objective to create a dedicated community around our VariabL Contribution Tokens, that will share characteristics from both those projects.

Contribution Tokens

We propose a change in tokens design for early-stage ventures; one that coordinates an inclusive and diverse community of focused contributors around the long-term success of a project; one that is aligned with the objective to develop and prove the project’s solution alongside the core team.

We call this token mechanism Contribution Tokens, and we will demonstrate an initial low-scale implementation on the VariabL Alpha trading platform. We will use this opportunity to validate, improve the idea and build out precise specs that will enable a more complex and interesting version in the future.

Contribution tokens are tokens coordinating a community that collaborates with the leading team of a yet unproved project. They are structured as a meeting point between a team’s needs and what the community can provide.

Continuously issued tokens…

They are continuously issued and distributed in exchange for contributions that are proposed and described by the leading team. Those needs can be diverse: funding of course, but also marketing, audit — debugging, UX test, translations, content creation, etc. The team will propose milestones with specific contributions required and a the “price” equivalent in contribution token.

…attributed by the project team to contributors…

The only way to acquire Contribution tokens is therefore to contribute by fulfilling those demands for contribution. Contributors should therefore be seen as active members of the project working hand in hand with the leading team to bring the project to production.

…for a limited time period…

Life duration of contribution tokens should be foreseeable for an extended period of time, fixed between a few months and several years. During this period, the Contribution tokens are illiquid and will give access to special gifts and features. We are also exploring the opportunity to give those tokens a role in the governance of the projects — which would help validate or invalidate ideas, initiatives from the team. But one the most interesting feature of those contribution tokens is that they will be converted into the future liquid asset created by the team.

…that will end with the launch of the product and attribution of the final token.

Indeed, the Contribution tokens will ultimately be transformed into another liquid and valuable asset — most likely a utility token (i.e liquid tokens that give access to a service or protocol), and could also be structured as “reward tokens” giving right to a portion of the products’ revenues if no utility token makes sense in the final product. The final token will reward contributors proportionally to the success of the project.

In summary, contributors will spend time and/or money in a highly risky project that will offer big return if successful. Until a viable business model/token design is proved, those contributors are locked together, along with the team, and cannot easily speculate on this asset. They are real partners and are 100% aligned with the leading team. The aim is to create a healthy, honest and fair way for a team to create a community of partners and incentivize its members accordingly.

We are currently maturing the idea and are collaboratively building specs for our Contribution tokens! Join the discussion and give your input!

Learn more about the initial distribution of VariabL Contribution Tokens that will start on September 8 for the launch of our Open Alpha.

Special thanks to Alex Min, Simon de la Rouviere, Niran Babalola, Brian Schuster and others that helped us write this and will be some of the first VCT holders :)

VariabL is the first Derivatives Trading Platform built on Ethereum.
It embraces blockchain technology and smart contracts to improve derivatives markets and offer decentralized financial products that are highly secure and efficient.

VariabL will develop the biggest ecosystem of traders, individuals, and decentralized applications that would benefit from these new financial markets. It is the first step towards more stability on digital assets’ markets, which will lead to a massive adoption of cryptocurrencies.

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