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Coin Wars – The revolution of decentralization

While fierce debates rage over cryptocurrencies and ICOs, many within capital markets may be missing the ultimate point: The fabric of commerce is about to be fundamentally transformed. The revolution of decentralization is upon us. Cryptocurrencies and coin offerings, along with blockchain, are the enabling means for a new economy. Will the capital markets be involved?

There has been significant wailing and gnashing of teeth over all things crypto, including cryptocurrencies and Initial Coin Offerings (ICO), and in particular the recent Bancor ICO. Charges of money laundering and criminal activity and suggestions of ignorance of how the existing markets operate on the part of those involved in coin offerings have been hurled with some ferocity.

Some of these commentaries are sincere disagreements over how the markets operate, with informed views on issues potentially in need of resolution within new structures. Some of them are invective, intended to discredit potentially competitive offerings that may significantly disrupt existing market offerings. Some appear to be associated with a misunderstanding of how these new models may operate. And some are pure, sneering condescension.

While these debates rage, many within capital markets may be missing the ultimate point: The fabric of commerce is being rethought and is about to be fundamentally transformed. The revolution of decentralization is upon us. Cryptocurrencies and coin offerings (along with blockchain and the underlying enterprise technologies) are the enabling means for a new economy.

The introduction and general availability of the Internet transformed the economy. We have seen countless brick-and-mortar stores disappear, to be replaced by online options. Less than 20 years ago, most people would not have imagined that virtually all shopping would migrate online. While the Internet revolution has transformed much of the brick-and-mortar experience, however, it still operates within monolithic workflows. But a real Internet 2.0 is finally here – a decentralized, peer-to-peer, one-to-one, one-to-many, many-to-one economy, without the need for a central organizing authority.

Monolithic Structures

Commerce has always been monolithic. Not that long ago, this meant that you needed to go to a store where merchandise was aggregated, or to a mall where many aggregators physically co-located. In the age of the Internet, it currently means the centralization of data and processing. You can buy virtually anything on and have it delivered wherever you would like. While this has provided convenience and likely a more efficient cost model for the consumer, there is still the middleman to pay: Amazon. Netflix is another example. Netflix aggregates media for your viewing pleasure. You pay Amazon and Netflix – not the creators of the product you ultimately want to consume. And of course, there is a cost for the aggregation and distribution services that Amazon and Netflix provide, which is then passed on to you.

Decentralized – Tokenized Networks of Value

Blockchain provides an infrastructure fabric for decentralized commerce. In other words, it is a decentralized network of computers. There are multiple ledgers, all validating the data, which represents transactions or other exchanges of value, and your data is protected via encryption. Coins within the network are the means of payment, which is not controlled or owned by a central authority.  There are already thousands of coin offerings within different blockchain networks, and there will be untold more created.

Let’s say that you want to start a network of value. What do you need to put it together? A decentralized blockchain network of computers that will be the fabric for the operation; a token to be the digital representation of value; a coin to be the digital payment; a community that comes together to offer products and services; and a community to consume those services – all interacting in a collaborative way. The producers and consumers still hold their traditional roles, but they are simultaneously owners of the network (if they hold coins for that network). This means that the value of the coins is associated with the value of the network. Thus there is a shared benefit.

This model is very different from existing monolithic models, due to the different technical architecture of how blockchain and smart contracts shall operate.

SingularDTV is an example of what is possible. SingularDTV is a tokenized network of value of media offerings (music, movies, comedy, etc.) built on blockchain. The SNGLS token represents the intellectual property ownership and terms and conditions of use of the product. The value of the SNGLS token is the value of the unique intellectual property of what has been created and articulated through a smart contract. There is no central authority, and the artists are paid immediately by the terms established within the SNGLS smart contract token. Thus, the token is the property and, in the case of SingularDTV, multiple coins may be used for payment.

The types of economic activity that can be created in this model are limited only by the imagination. Perhaps SingluarDTV will replace Netflix, or similar constructs will replace Amazon. Or maybe those offerings will transform themselves to get ahead of a positive destructive curve (think: Blockbuster and Netflix).

Let’s imagine for a moment, for giggles, another potential example to illustrate how this model can be deployed for virtually any value environment. You’re late for a flight and the security line is long. Visualize a security lane where you pay $.10 to every person you pass in line to allow you to move faster. The value is the ability to move faster and/or be compensated to allow others to move faster. Existing rails of commerce will not allow for such activity, but decentralized tokenized networks of value, with other technologies, will enable pretty much any model that a group wishes to participate in. Revenue transfer will be nearly instantaneous and without a middleman: no processing fees, no five-billion-dollar new headquarters to fund, and nothing needed in the middle that should attract fees.

Coin Wars – To Be or Not to Be?

The value of the coin within the decentralized network of value would naturally be associated with the value of the services or products on the network, along with the participation on the network. It is now time to pull out good-old Metcalf’s law, which originally stated that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n²). This law would also apply to a tokenized network of value while adding the value of the services or products offered. If that then is the case, a logical assumption is that there will be coin wars – that is, battles for coin adoption and dominance within the greatest number of networks possible, thus increasing the value of that coin. That could happen, and/or these tokenized networks of value may provide coin exchanges that facilitate the exchange of various coins so the value is transportable to other tokenized networks of value. SingularDTV has a coin exchange for such a purpose, and this is also where Bancor would like to come into the picture. (This portion of Bancor’s offering has not been widely discussed in capital markets, as the focus has been on the Bancor ICO exchange model.)

Bancor – Initial Coin Offering (ICO)

Much has been made of the Bancor ICO. As noted earlier, all sorts of negative press has been written about the Bancor ICO. While suggestions that ICOs are a means to launder money may have some merit (if that is the goal, however, one might want to look to Monero, which is truly untraceable, thus far – not that we are suggesting in any way that Monero has any nefarious ties), many within capital markets once again may have been missed the point – that Bancor is positioning itself to be the exchange of countless coin offerings, a coin exchange where a coin can hold one or more coins/tokens in reserve, thus creating relationships between coins.

Why would Bancor want to do that? The reason is that it expects there to be innumerable coins in decentralized tokenized networks of value. If there are millions of decentralized tokenized networks of value, it would be useful to have a mechanism to enable the exchange of coins, to enable one to participate in and benefit from any of the decentralized tokenized networks of value that you want to be part of, either as a consumer or as a services provider. And logically, the decentralized tokenized networks of value also may look to offer similar exchanges (see: SingularDTV, as noted above).

The point here is that if there are thousands, tens of thousands, perhaps more, coins available, then there must be liquidity for small cap coins – since there will be thousands of small cap (in terms of value) coins associated with small decentralized tokenized networks of value. The need for coins to be liquid so capital can flow to different networks will be a key enabling aspect of the potential future economy. Much of the sturm and drang that has been heaped upon the Bancor Constant Reserve Ratio (CRR) algorithm that is designed to provide such liquidity has come from a traditional liquidity/exchange perspective, and perhaps not from an understanding of what really is being valued and why a CRR could work.

Capital Markets Included?

Will capital markets jump into this space and provide markets for coins on an institutional basis? Coins are simply a new asset class. An asset class that is different, at least in some ways, then those that have come before, but an asset class none the less.

“None of this will ever really affect the capital markets,” some have argued. “There is too much regulation, too much specialized knowledge, too much need for high-performance service offerings, too much capital required to operate,” and on and on. Much, perhaps all, of that is true. What also is true is that the market makers in capital markets have always provided the infrastructure for the markets to operate and, therefore, are the monolithic intermediaries. If you believe that the model of decentralized commerce will come, a model of economic activity that does not need banks – at least, not in the form we have today – then you should take notice. If you believe that decentralized tokenized networks of value are an inevitability, you must believe that capital markets will be impacted. Perhaps with a view toward a changing economic landscape and regulatory environment, 11 banks are moving forward with the Utility Settlement Coin, which is a coin that will be asset-backed against fiat currency.

And, by the way, do we think that the regulators will not become enamored with a structure that would provide near-real-time transparency? The humpty dumpty problem (see: Consolidated Audit Trail) found after the failure of Lehman or the Flash Crash would not exist, as there would be near-real-time clarity of activity leading up to any failure.

Of course, this is a high-level, future vision, and there are many technological, security, legal, tax, regulatory, behavioral and other issues that will need resolution. We have all seen massive fundamental, technology-driven, economic model disruption in the form of the Internet, and many similar fears were raised at the dawn of public e-commerce. But that model of commerce was intolerant to all obstacles and destroyed many legacy business models. Will the model of decentralized tokenized networks of value be similarly intolerant to all obstacles? If the answer is yes, then the questions are: to what extent will capital markets be involved, how will the industry be transformed, and how long will it take?

Terry Roche is responsible for the FinTech practice at TABB Group. Prior to his current role Terry was Chief Operating Officer at NYSE Technologies.


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