Startup Cryptosystems

Zero to One

How do you get someone to help build something you think should exist in the world? Usually, you pay them. What if you haven’t got much money, or not as much as you like - how do you get someone to work without paying them? Usually, you let them own what they create.

That statement may raise the hackles of hackers who are wary of manipulation, and rightly so. “If you just build my business idea, I’ll give you a whole 5%!”

Still, owning what you create actually works to motivate people, and it’s not always a con game. This incentive is one of the reasons homeowners often come out ahead, for instance: you’re far more likely to do an odd job or two on the weekends if you own the place, and over the years several hundred small maintenance jobs greatly improve or preserve the value of the place. To take another obvious example, if you’ve ever started your own company, there you are working like a dog on the weekend, because you own the thing.

And giving your employees stock really does work to get everyone working harder and better, as startup founders periodically re-discover. Ownership, as Niran Babalola says, changes your mind. It makes you believe.

Tokens as Money, Shares, Commodity

This fact lets us understand, in a common-sense way, the use of cryptoassets. New blockchain startups almost always invent a token, a sort of in-house currency that can be used as a resource to accomplish various tasks on the app. Often they just want to sell it. People buy these tokens because they will be scarce resources, and as more people want to use the app, the tokens will appreciate in value.

However, if you want to get people to help you make the app a success, tokens are not optional, and they won’t be sold just to make a buck. The token can give voting rights, and the token can be given to early backers instead of stock (there may not even be any stock to give).

Using tokens to reward supporters (including yourself) has several advantages over traditional stock or options. First, you can be paid “genesis tokens” before the main token is even made. You don’t have to wait for incorporation or whatever, as with stock. Second, like stock, the token appreciates in value if the underlying project succeeds, and like stock, no one minds if the early participants (founder, employees) get a bit extra. Third, unlike stock, you don’t have to wait for these things to vest.

The first and third are important points. If you can reward anyone at all who works on your project, even if you haven’t got much money, then potentially you can attract a diverse swath of talent, as they are available. This could turn into an on-demand economy of talent, where we actually get paid fairly. That makes building a new company much more flexible in terms of cooperation. And, if you get paid tokens immediately, we as workers can be much more flexible with time. We don’t have to hang around waiting for options to vest: we can move from one project to the next fluidly. We’ll be motivated to join whatever project looks most likely to succeed and which we can help succeed. The opportunity cost of joining a project lessens, and we can work on more projects.

This is better for us and better for the world, and there’s more to say about how this is better for the world but that will have to wait.

When the token is used in this way, to reward early supporters and then to let them run the place, cryptotokens function something like stock, something like money, and (hopefully) something like a commodity.

Ideally, as you start working on a project, you’re rewarded precisely, fairly, proportionally, for the value you create it. You make it, you own it.

In that way earning tokens is like mining for gold, a commodity. If you get there early and help open the place up, you’ll benefit by being a first mover, but not disproportionately. You earn what you dig out of the digital ground with your own two hands.

(Of course, not just digital ground: right now a good deal of the cryptocommunity’s thought is directed toward figuring out how to verify physical contributions and non-code work, so that all of it can be rewarded with cryptocurrencies.)

Automating Token Awards

The need to reward people precisely for their work suggests automating token reward: you do the work, you’re automatically rewarded. I think that cannot happen.

If you could automate the recognition of value, then you would automate the creation of the whole damn project. And then there wouldn’t be a project, just an already-existing SAAS commodity, like landing pages are today. Creating something new in the world means creating something we don’t yet know how to program computers to do.

If you try to automate recognizing and rewarding value, you are going to wind up with an easily-gameable system, or a boring product.

(Note that the Status project has created Commiteth, which will automatically reward code contributors, but this also relies on bounties being assigned beforehand, proportional to the worth of the bug or feature.)

Programming Founders

Here we come to the point of this essay. Several existing blockchain projects (such as Colony or Boardroom) are making it easier to use tokens to run projects, but my impression is that they work better to govern existing projects. I am happy to be corrected if wrong.

No project, however decentralized, will get off the ground without some sort of core team. And to achieve this flexiblity I’ve described, the core team must, from the start, reward supporters, and they must fairly evaluate contributions, since this cannot be automated.

That means the core team must incentivize themselves to judge and reward fairly. The core team’s function as arbiters, talent-show judges, must outweigh their functions as developers, writers, and so on. Only then can they effectively harness the talent of the crowd.

Instead of attempting to program a machine to recognize and reward value, we need to program founders to do so, and of course cryptoeconomics is all about programming people. If we can incentivize project founders to incentivize everyone else, then new projects will start being created even more quickly, and the average quality should increase.

This is a sort of first-mile problem. You need a cryptosystem to build a cryptoproject: a Startup Cryptosystem.