#5 Tokenization => Equality => Innovation
How the tokenization of a business model can promote equality and efficiency.
Hi guys!
Apologies for the delay, twas’ an eventful weekend in MNIRland.
As I mentioned last week, I’m going to try to change some stuff with the newsletter.
Some weeks, if this piece is received well, instead of the normal short articles with quick summaries, I’ll opt for longer-form pieces on thoughts I’ve pondered for a while and feel compelled to put into some sort of structured format for you to enjoy.
As always, I appreciate all feedback and would love to know what you think of this format and the piece in general.
For those of you that don't know, I am very bullish on the future of cryptocurrency. Although my previous writing has talked about my views on specific events within the cryptocurrency arena, I haven't given why I hold the views that I do. Full disclosure - I am currently invested in Ethereum and a couple of other blockchains.
There are many reasons I believe in the future of Blockchain, and covering all of them in detail, I wish to would take far too long.
This piece has two primary goals:
Provide my perspective on the mind-bending stock-currency combo tokenization allows for.
Convince you adoption of the tokenization business model will lead to increased overall equality and, with it, innovation.
Before we begin, you’re probably wondering.
What is the tokenization business model?
Glad you asked! According to this Deloitte report, four conditions must be met to achieve the tokenization business model:
A limited supply of tokens or transparent supply where the schedule is available.
These tokens must be the only way to access the service of the platform.
The tokens must be easily exchangeable for fiat currencies. (US Dollars)
The tokens are tradable on secondary exchanges (Coinbase etc.)
Let's look at an example of how the tokenization model works for the decentralized music streaming service Audius and their native Token $AUDIO.
1. A limited supply of tokens or transparent supply where the schedule is available.
Because Audius tokens are minted using a smart contract, we can be sure that only 1,027,255,819 will ever exist. You can track the amount of $AUDIO in circulation because they are issued on the open Ethereum blockchain.
Audio tokens are given out to nodes for their work. Nodes at a basic level/function are computers that handle requests and serve content. When you wish to play a song on Audius, your request will get sent to the network, the network will find the node with the song, and they will send the song to you so you may play.
2. These tokens must be the only way to access the service of the platform.
$Audio tokens are currency in the Audius network. They can be redeemed to buy songs and/or stream songs.
3. The tokens must be easily exchangeable for fiat currencies (US Dollars) & 4. The tokens are tradable on secondary exchanges (Coinbase etc.)
You can buy $AUDIO by converting USD to ETH (Ethereum's Native Currency) on something like Coinbase and then converting ETH to $AUDIO on an exchange like UniSwap.
Some Quick Observations 💡
The creators of Audius pay nothing for the service's operation.
The nodes take care of the overhead (storing songs, receiving requests) and receive $AUDIO as compensation. The traditional alternative would likely be millions per year in server and storage costs.
You can benefit financially by being an early adopter.
You can only access the service by purchasing the token. As more people use the platform, demand will go up, while the supply is capped. An increase in demand with a capped supply will increase the price of the token. If you join early and acquire tokens at a low price, you can profit from the appreciation.
How is this model monetized?
Essentially, the same way many startup founders forgo a salary in exchange for equity, many Crypto founders forgo a salary in exchange for an allocation of tokens that accrue value as more people use the platform. For example, Audius founders & partners received 40% of the initial allocation of $AUDIO. However, unlike equity, crypto founders and early employees don’t need to wait until a company’s IPO to profit from their shares.
What does any of this have to do with overall equality?
Well, let's start with equality and then work our way to capitalism. One of the main drivers of economic equality in America is investments. 85 percent of Americans making over $100k invested in stocks, while 77% of those making less than $40k do not.
There are many reasons for this, the most obvious being disposable income. If you live paycheck to paycheck, you're likely not going to have money to invest in stocks.
What if your currency/payment was, itself, an appreciating asset (like stocks)?
This is where things get exciting.
Tokenization essentially blends the concept of payments and equity/stocks. $AUDIO is a platform-specific currency but shares many of the same properties of a stock.
It can do this due to its finite supply, much like a stock, but infinite divisibility, like a currency.
You can purchase a song worth $1 with 1 Audio when Audio is worth $1 and 0.001 Audio when Audio is worth $1000. If an artist sold you a $1 song when Audio was $1 you would’ve paid 1 Audio. If Audio appreciates to $1,000 that 1 Audio you gave the artist would now be worth $1,000 but the artist could now charge 0.001 Audio to keep the price at $1.
Finite Supply + Infinite Divisibility + Platform-Specific Utility = 🌈✨MIND BENDING REVOLUTIONARY STOCK-CURRENCY FINANCIAL INVENTION🌈✨
If your mind isn’t BLOWN. Let's illustrate this with Audius and its -struggling- predecessor Soundcloud.
Soundcloud’s success can be partially attributed to talented software engineers, but primarily to underground artists and their fans.
Free uploads and reposting made it a perfect place for lesser-known musicians to find an audience. Most of those early adopters who could gain fame while the platform was growing made out with a couple of thousands of dollars in streaming revenue.
On Audius, that same artist would've been paid in Audio. Audio’s value would've 10x'd as its user base 10x'd the same way SoundCloud's did.
The same way drug dealers who used bitcoin became incidental millionaires by being early adopters of a technology that served their niche. Underground Musicians could've become millionaires by being early adopters of a technology that served their niche (Soundcloud).
You're essentially allowing people to invest in a product simply through using the service. As you provide value to the platform (i.e., posting music on Audius), you receive economic ownership proportional to the value you provide.
Some organizations, such as Audius, take this literally and allow Audio holders to vote on changes to the platform proportional to the amount of Audio they have.
Back to Equality 💎
I remember being on a call with a friend talking about how insane the returns I've made on crypto have been.
To me, it signaled that this is a speculative bubble (although I don't think speculation is inherently bad) and that it was all going to come crashing down. Many of my investments doubled their value, and some 10x'd.
My friend responded with, "well, 10x returns are rare for stocks post IPO but aren't rare at all for Venture Capitalists investing in companies before they go public."
Mind-blowing realization part two: with tokenization, we all can be Venture Capitalists (VCs)
What do I mean by this? Well, for example, I've been trading stocks on Robinhood since my 18th birthday. I knew RobinHood was gonna blow up because it fit my niche: young digital native that wants to invest but doesn't have enough money to justify transaction fees.
If I was able to invest, I would've, but instead, I just used the platform, contributed to its growth by referring friends, and I'll only be able to benefit economically when they IPO this summer at a staggering $40B valuation. Their valuation, when I started using them, was $1-$5B.
Had RobinHood followed a tokenization model, I would've been able to realize the same 8-40x return on investment that traditionally has only been available to accredited investors (those with over $1M net worth) that are approached to invest.
Tokenization opens up a highly lucrative investment vehicle, early-stage private equity, typically reserved for the ultra-wealthy, to everyone.
Now onto ✨Innovation✨
I believe that almost everyone in their domain could be a very effective VC because nearly everyone falls into at least one niche where they have specific domain knowledge. Niche communities are generally what signal to VCs that a company is worth investing in.
Do you think the firms that invested $35M in Twitch actively used the service or were experts in the game streaming industry?
Most likely not, the insane adoption from what was initially a niche within the gaming community signaled to VCs that this was a good investment.
Why should VCs receive all of the financial benefits from the niche's research and decision-making?
Even more, why should VCs receive all the benefit from the dedication of countless creators simply because they don’t have enough money to invest in Twitch.
The gaming niche, much like underground musicians with SoundCloud, made Twitch a success but didn’t receive proportional ownership or economic benefit relative to their contribution.
I am bullish on Auduis's future because I am a software engineer that used to manage musicians. Its initial community consists of people similar to me, tech-savvy music fans that have some exposure to the music industry.
Almost every human I've talked to has some unique combination of experience and interests that endow them with rare specific insight into their niche. Decentralization will allow early adopters and innovators in every industry to be rewarded proportionally to the value they provide.
This will undoubtedly accelerate innovation as people will be incentivized to contribute to the growth of disruptive technologies.
When everyone can fully realize the gains of disruptive technology, they will be more likely to adopt them.
As people become more willing to adopt superior technologies, the development and advancement of the aforementioned superior technologies will accelerate.
tokenization => equality => innovation