To Token, Or Not To Token Discussion with AJack Du Rose and Christina Frankopan

up next we have Jack from colony in conversation with Christina Frank a pan and Jack's talk is called to token or not to token that's a mysterious name I think Christina needs to make do just like that I think first off I need to offer an apology to Mary father I had promised that I would be wearing full Shakespearean garb for this but I couldn't find the codpiece this morning so I had to just abandon the whole idea so you know we're gonna be talking about really when you should have a token when you shouldn't have a token I feel like maybe this is a topic of conversation that is somewhat below a lot of the OGIS that I see in the audience here but hopefully it'll be useful anyway so yeah where do we start Christina well I'm assuming everyone knows who you are but and seems unlikely just very briefly I'm Cristina Frank a pan and I'm a venture partner with fabric VC among other things and I like to work with technologists to support their projects not just in finding them funding but also on their operating side as well so that's who I am but maybe just want to introduce yourself yeah and I am Jack Burroughs I am with to say that CEO of project called colony which is probably heard Aaron speaking earlier on today platform for decentralized organizations there he is yeah great yeah let's do it so and maybe I can just give a bit of and we can give them an outline on what we're gonna do is we the token or not token that's the the title of this is the question or billion dollar question depending so what we're gonna would the way we thought we'd go through this is is to sort of discuss should you do a token and then could you do a token and the context for those two things and then what what should you do if you can't or shouldn't do a token where does that leave you the sort of a general point that we've discussed at length is what in fact would the perfect token look like and how can you try to design that we wanted to just contextualise a little bit some of our disclosures and biases we're going to talk a lot of crap about tokens and I know times might sound quite negative but we may sound slightly cynical because precisely because because we're very bullish on the future of tokens and we believe that they will be transformative it's just that there is a lot of crap out there and we want to try and encourage people to do it right so there are a few other disclosures Jack that you might want to mention including well we're both invested in tokens yeah both personally love cheeky token purchase also we as a project intend to sell a token at some point in the future when we have a main net deployment of our protocol so definitely up on tokens but yeah we'll get into under what circumstances okay so let's start with should you do a token so what is the best practice for whether you should from the point of view of of the actual token design I do really need a token not you personally but does one really need it right yeah so I'm just going to actually offload this to somebody else who has who's put this very very well this fella is it gonna show up on here where are we no oh dear we got the screen yeah there he is so this this is my golden he's an engineer at consensus it's my guy spends a lot of time working on TC RS in fact he might have invented the TCR I'm not sure anyway he has got something which is called Mike's cryptosystems manifesto and I think a lot of projects who've been working in this space for a while will they've kind of come to the same conclusions but he really put it very very eloquently indeed so I would share that with you to sort of contextualize everything we're going to talk about so a token must work as a necessary element of a self-sustaining system which is a public utility token is a necessary element of a system if the use of any other in its place would damage the system's normal functioning so this was a question which was used to be posited as why can't you just use ether why can't and and now even more so why can't you just use die wouldn't that be better system is a self-sustained is self-sustaining if it would continue to function normally in the indefinite absence of its creators so it is it is it actually you know fully open source fully decentralized it's just gonna keep on running even if its founders disappear which is kind of important given these things that we're building have that property that they can literally outlive their creators and a system is a public utility if it's permissionless rent-free and does something useful so there we are that's that's kind of the context and this is I think what I very much agree with is the the kind of fundamental properties that are tokens you have if it's to be sold and included within a protocol otherwise I think there are fewer rationales for it and just to further contextualize that I'm referring specifically to things which are sort of utility tokens and which are fungible good could you maybe explain how your thought process internally at colony came to the how you came to the decision that you had satisfied those conditions and and how you decided when or whether or not to do a token sale in that context sure so certainly in the very early days of the project it really wasn't clear whether it would even be possible to issue a token because what we're trying to do is something I guess quite tricky in that we're trying to have a token which sort of represents ownership of an organization and sort of behaves like equity in that organization of course equity is the most security issue you can possibly have so how do you create that without it being a security and as a necessary component within the system so that was kind of our starting point and because we didn't know we started off by by allowing our very first investor to be purchasing something that we created called a safety which was a sort of precursor to the wildly popular saft subsequently which basically enabled you to purchase tokens or equity whichever the whichever the company ended up ended up raising and then really it was just very much an iterative process of getting to the eventual system design that we had in which it is a functional necessity and which was sort of really an avoidable right so when we were discussing this we were thinking in terms okay should you do a token the first hurdle if you like then would be do you really need one and does it satisfy these criteria that we've just discussed the second one then the next hurdle is is about money so should you be doing this for the money under what circumstances and under what criteria should you impose on yourself to to to be raising money and and how much this is this is where we start to get cynical because them people we've seen people raising too much certainly for their stage of development and and I think we both feel quite strongly that that is a Faustian pact and I think maybe it would be useful to share some of the things that we've seen and why that is not necessarily helpful yeah so having money when you don't have any money definitely feels like it's just this completely unalloyed good having more money allows you to do more stuff but indeed if you have too much money then it comes along with a whole load of other baggage especially when that money comes from Krypto things like OPSEC you know are you spending your whole time worried that lots of other people know that you have just received a lot of money which is practically in cashing in your head treasury management like you suddenly go from worrying about your project to worrying about the fact that you've got tens of millions of dollars that you need to make sure stays safe and within your company and it's not subject to the vagaries of the market what else do we know what I wouldn't underestimate how much stress that causes a huge amount of stress and indeed we've seen it go wrong several times without mentioning projects but I'd either just through management systems are just bad timing and so on so that it's causing projects an enormous amount of stress and pressure as well right so you've gone from two dudes in a bedroom you've just got 25 million dollars in ether which is then just doubled now you've got a whole bunch of people and your telegram group saying when moon when Lambo yeah this feeling of enormous pressure even though you've basically got little more than an idea to actually start really delivering hard on that but in practical terms you just just doesn't work that way you can't just throw 50 people at a problem and hope it's gonna get solved it is a process of building a team building in operational processes talking to customers understanding whether what you're building is something that's useful and gradually getting yourself towards project product fit and building the team around that and then when she do start to feel like you're getting a product market fit then you can start pouring on the cash and that's when you need the cash you absolutely don't need it before it's just a distraction yeah I think there's another aspect to that that we've seen projects running into difficulty which is kind of cultural delusion that comes with building out those teams before you've achieved a product market fit before you've got sort of operational approach versus and an intentional process towards culture of your organization I think I think that has been a big problem for many of the projects that's a second to and indeed also kind of parasitical elements that start attached to you either because they know they've got enormous amounts of money or power or indeed the potential to receive enormous amounts of money almost throughout there are there are more of them in our experience at least yeah I mean so so raising money is does not equal success I know that sounds that sounds incredibly negative and obviously if you have no money today and you're eating beans and you're working on an open source project it's it's difficult but it's a bit of a britney spears project you know you don't want to end up there shaving your head because you've got depression from running a two hundred million dollar project right because what's what's raising you know insert number of million dollars now it's really just creating a huge obligation to a bunch of people that you're going to be delivering a return on that even if ostensibly you're saying that this was a donation or this was a contribution and really there's no promise of return of course that is implicit yeah and the other aspect of that that we discussed is is that it encourages also short-term thinking and and that's something that we would have liked to try to get away from what we've seen in public equity markets for example where you have sort of quarterly reporting and constantly feeling like you have to be delivering on some fictional targets when actually sometimes you need time to brittle down and and and focus on your project and without the pressure of having to yeah when moon right and I think that there's this kind of mold that is revealed from the short something and I think this is also as a community has been hard to really understand how to use token sales in a nuanced way like you know because to begin with you know a project would like sell 90% of their tokens upfront and that was the end of it there's no possibility of future fundraising the team would really retain you know a very small proportion of the tokens and fortunately in most of those cases for the project's the you know prices obviously be through at least has gone through the roof since then so they're probably fine but you know it's not so clear that now that would be the case so if you're giving yourself really the only and only only a single opportunity to raise money as a company you risk undercapitalized I'm sorry over capitalization in the short term especially if you are two dates in bedroom but then massive undercapitalization later on you know there was a huge bet going on there that the underlying token is going to increase in value if you compare really any current project with with the exception of EOS protein to to something that has actually achieved product market fit and grown as a company something like slack for instance which has now raised 1.2 billion dollars you see that even for what is you know ostensibly a fairly straightforward product far more straightforward than a lot of the kinds of things that people in this room are thinking about there is a massive capital requirement once you you know start to really need to pour on the fuel for growth absolutely agree so how much you raise when and and what and the timing I think is very important even if you've passed that first obstacle of needing a token and even if you've satisfied the obstacle of needing the me how much she raised I think I think that is made more difficult by the fact that we are still in quite and I mean this is areas maturing very rapidly but I think we're still in a very immature we have very immature approaches to the idea of valuation in the space what network value really means mostly I mean people are discussing and being very analytical and intellectualizing more network value means and you can make as many models as you want about it but a lot of it let's face it this finger to the wind and more related to what you can raise them then perhaps what fundamental valuation is certainly for the stage of development of many bricks and token valuations are far more nuanced than equity valuations would be anyway right because there's no single model almost every project has their own slightly different spin on things it's hard to come up with a common value for all of those yeah and I think another another thing is that actually it's still very niche community so it's just simply the number of eyes there are many eyes open-source eyes on the technical side looking at things and there are increasingly let's say financially specialized eyes looking at valuation models and how we think about valuation in this space but compared to public equity markets for example obviously we're a smaller community but but in terms of the analytical power actually anchoring ideas of what fundamental value looks like or should look like and and really scrutinizing what assumptions are made in those kinds of financial models our valuation models if you like I think I think there's still a limited but growing group and I think we still have a way to go before we can say that there's a robust ecosystem of of checks and controls about about how we're thinking about it so so let's say that one has satisfied oneself of the need for a token and the need for money and got a sense of how to approach the valuation how much to raise the other thing we talked about is is in terms of should you do token or not is are you legitimate and can you satisfy legal and regulatory requirements and and sleep at night without fear of being shipped off to in an orange vest so you you are well known as one of the experts in this space having taken from many how do you how does one satisfy oneself that one is legitimate and does it matter well yeah this this really does fit into there whether whether you can in fact do a token sale and getting to the point of being a it seems very very straightforward and in fact I suppose it is very straightforward to sell the token you create a sale contract and you entreat people to send NEFA to it but in terms of doing it really well there's there's a huge amount more to it's super complicated and super expensive increasingly expensive I think I heard recently actually is cheaper nowadays to do an IPO than to do an IC o---- which seems absolutely mental but I can well believe it I mean the legal fees alone if you have got the capabilities within your team to in a designer token such that it fulfills all of the requirements we talked about that Mike specified you you not only have to achieve that but really if you want to raise money with that token you also somehow you need to magic it into being capable of accruing value capturing value somehow whilst also not being a security quite tricky so there's a huge amount of legal work that needs to go into to that design process and you know you're looking at a minimum of six figures but I know you know a number of teams that have spent seven easly I continue to do so because the the ongoing burden of doing these things even slightly wrong at some point can just continue to accrue I mean on just on the other side of should or could you do it in terms of legitimacy and and satisfying and being compliant you know some of some of the aspects that that are well known ie have you've got a live product or should you be waiting in terms of timing to do something until you have a live product that is actually an important question in terms of the legality of right well we get really deep into the weeds of security as regulations there which I'm happy to go into yeah so the ones that people usually concern themselves with are obviously the US securities laws because the SEC are known for their global reach and actually the u.s. securities laws which they seem quite marketing with but they're relatively easy to understand what you apply yourself to them and they are it is possible to to overcome those but as I mentioned not without substantial amount of legal work so just in brief the the Howey test which is the one that most people are worrying about states that the the security is an investment of money in the common enterprise with the expectation of profits from the efforts of others and most usually you can't if you're trying to solve taken which is going to accrue value avoid the investment of money or with the expectation of profits like you want to keep those things so really you've got common enterprise and efforts of others that you can look to try and break and fortunately cryptosystems provide us with various different approaches to achieving that but you know it's different in each case in our case we believe that it breaks both common enterprises and efforts of others prongs of the Howey test but yeah it's it's very much on a case-by-case basis and it requires sort of a lot of work around the specifics of any given protocol yeah and even notwithstanding that there remains some marginal element of uncertainty in the sense that there's all different in there difficult to engage I think the point on that really is that it will it will impact the design not a may impact that not only the design of the token economic systems but but possibly also the design of the sale to err token sale if one is to do that there's another element about whether you should do a token that I think is actually incredibly important and I think we agree on this is is it ethical actually to do this and I think in the community so far mostly ethical elements or moral decisions around whether or not a token should or could be done have been sort of self regulated so there's and those discussions in the community have mostly been discreet and quiet but I think bring these questions out into the open so when we're talking about the ethics of whether you could or should do it it's not just a question of whether you have got valid token economics that satisfy those criteria or whether or not you need the money maybe there have been cases where people have raised more than they need and there is a moral dimension to that in the sense that there are many unsophisticated investors in this unregulated market who have and may continue to lose money on that and I think we need to question as a community whether that is a good thing and how we have we start thinking about reaching standards or a kind of level of morality that we felt more comfortable with yeah and that's this really difficult right because you know we're expecting this to be a community that grows we're expecting it to you know be welcoming to new people and also I think by and large we want token sales to be a force for good in the world in both as people purchasing tokens and those that sell them so I think that so there's a really big an unsolved problem there as to how we provide appropriate self-regulation and signaling mechanisms to and to enable people to sort the wheat from the chaff I mean I think part of that problem is is a task for everyone in the community to improve communication and education of of the general investor because there is an asymmetry of information for people perhaps in this room or investing by definition know more about what they're doing then then welcome all the woman on the Clapham omnibus ooh yeah who's been persuaded to do in January this year right but the likes of probably everybody in this room was having almost everybody they knew in January asking them what's what's a good token to buy what's that an upcoming ICO that I should know should know about all these people that never showed any interest before January basically every person I've ever met so I think I think you know it would be nice to see an emergence of standards and in terms of how we think about what's what's ethically correct in terms of whether or not one does it taken and how much one raises indeed and then maybe moving on to the like can you actually do it even if you satisfied that you're a great Corp you know community citizen and that this token is needed for the world and that you're raising the exact right amount of capital you are the perfect self regulator in that case yeah can can you actually can you actually do it can you achieve it so how do we think about we talked about the legal aspects and and so on but what about other aspects of the legal environment kyc AML but also think banking for example some of the the problems that one might encounter that make it difficult to actually achieve this and maybe we could talk very briefly about the market context as well in terms of can you can you actually achieve this right sure so I mean there's over the course of the last well I'm slightly more than 12 months now but particularly with the focus on on last summer a huge number of projects huge number of money flowing in in a largely unstructured way often just publicizing a contract address and having either sent to it a lot of those projects now have faced some significant difficulties as a consequence of doing either way because they have got massive massive amounts of money they need to be able to do something with and there is not a bank that will touch them in some cases you know even the most well-known projects in the space have had their banking withdrawn from them and left with you know employees to look after and a very very difficult and stressful situation to deal with so that's even though if we believe they're tokens on our securities which in the right context they can not be you don't technically need to do kyc and AML and ideally given that we all like enjoy these kind of decentralization maximalist positions practically if you want to be able to deliver on a product and you want to be able to deliver on the promise that you you set out to achieve you need to toe the line a little bit and if you want to get things like banking if you want to deal with right regulated financial service providers you need to do KYC naml you need to be able to prove that what your source of funds is so that's you know it's a huge problem and an Associated problem I might add is also working with qualified auditors and accountants I've heard many stories of auditors who are just like we frankly we don't know how to account for this on your balance sheet we're not going to include balance sheet right and that is even if you've done KYC naml because frankly the it's it's not worth the risk and they don't have the technical expertise within these firms large as they may be to to expend the effort to go to the bother within their compliance departments to understand whether whether they're dealing with people who've contributed to you know money laundering for terrorist organizations ya know so I wouldn't underestimate that so that's something one needs to think through before one actually does it because there's no point ending up with mountains of ether if you can't actually do anything with it yet maybe it's worth talking about some of the alternative strategies because you know token sale there's token sale strategy even if you've got a token but you can also go an airdrop route right so tokens do not necessarily mean token sales and or at least public token sales RI cos you know there's you know see what Definity did recently which is shying away from the public token sale certainly until they're they have a main net deployment and and instead air dropping to some people of the community which I think was probably a politically necessary because they'd spent so much time hyping up the fact that they were going to be doing a token sale at some point that I think they may have been lynched had they not they delivered something to the community so yeah air dropping is is one way of going about it Danny is still challenging because you've got problems with civil attacks and that's why coin lists are providing their service but even then Minh to the skies and they really had a huge problem with with with people creating spurious accounts I wish I think has been solved now but it nevertheless is a problem people will try it even if there is a kyc process to go through you could also do it by sort of dropping indiscriminately so if it's accounts whether it be just buy it to all if they're in McCain's or perhaps proportional to the amount of e that are in those if you that approach you've all got a bunch of that crap yeah yeah yeah yeah absolutely that's the problem with that is the indiscriminate means indiscriminate right but also you could be targeting just people who have already purchased tokens of something that you think it's kind of in the same ballpark could be as you say you know perhaps if you're a game project you might think well who's got the most corrupt circuits is I'm gonna I'm gonna send some token to those guys or engine coin or whatever it may be yeah it can be useful under our circumstances I think that's that's true so so there's a kind of so what we've discussed is the kind of hierarchy of should you could you and and how to there's more to it as well as the different kinds of ways that you could distribute tokens I mean Bitcoin had got a fairly good way of distributing tokens right without doing a token so that seems to have worked out well for everybody so protocol doing its thing do some work for the protocol get paid that's quite nice but you know what we were on the con the context of can you so just to talk a little bit up about the market environment I mean I think that is an important aspect so it is definitely harder to have a successful token sale in the current market for obvious reasons than it was six months ago why there's a little less appetite and we have seen that not for good projects not for good projects no but but certainly if you if you if you're not well established and well known in the keys there's no there is there is a little less appetite I think I think one has to be aware that some projects go into it and are not successful and usually they're not the best ones but even very good ones I have seen have have have failed to succeed and so that is obviously a function of the team but also the market environment market sentiment and a whole number of other things like allergies to the regulatory uncertainty and so on so can you will depend also on a month I think a little bit then you know the other just to kind of close up I think we've got a few more minutes and the other thing we had discussed was what what should you do if you can't or shouldn't or don't satisfy any of these conditions or not enough of these conditions to to do a token which through whichever route what should you do and how can you ensure the success of your project through other means right in many cases almost seems like the better question is B do really need to do a token and because I think is I think we've made clearly it's kind of a hassle there are definitely much easier ways of going about fundraising now perhaps it was easier in the past so so what are the things can you do I mean obviously could raise money from VCS right that's what they're there for it kind of goes against the grain of the whole sort of decentralization of venture capital or whatever it was that we were thinking this was useful for but I don't think he completely has to so I think that probably sophisticated are accredited investors of VCS whatever you want to call them should be the people to put the first money in and I think in the Platonic ideal of an ICO which I definitely want to see happen would be the funds received by the founders of an ICO they should be quite within their rights to go and spend it on lambo as if they're anyone really really I I think it's probably quite impractical but Aston Martin's or aster Martin's if your answers yes sure because the the token sale should have been able to happen once the platform was live and deployable to Manman you should be able to get more than enough money to be able to make that happen and then when she bought your product you're ready to sell it to the world sell it your money is revenue you do what you want with them I suppose the practical reality of the fact is that the in order to make a lot of these systems work in order to really find out whether they're doing what you set out to do you need it to be on main net because the economics just aren't going to work otherwise so practically I think that's very unlikely to happen but I'm hoping there is some sort of lower bar that we can we can get to people having actually deployed something that's that's working and usable before their token sale happens and and then it makes it less likely to be a security and it still keeps open the possibility for people to participate in these project fundings or token purchases and get the same benefits without quite the same crazy level of speculative risk I like that that that the idea of a project being justified to to get its Lambos just in that context that I would say there are increasingly VCS entering this space as everyone knows and they are more and more willing to to to invest at those early stages either through equity or otherwise and and I think that's I think that's actually quite healthy for the system despite as you say this idea that we want to move away from them because I think it does help to give checks and balances and to provide some discipline early on giving some runway well yeah as I said earlier on in the very early stage is really hard to know whether you can even sell a token or whether it's appropriate to so selling equity is quite good because you can have that convert to tokens at some point in the future if you think that this is in fact gonna be a completely tokenized system and the company will ultimately be pointless or you could just do with a safety type agreement or some more sophisticated thing that's probably imagining I mean the other the other one thing one can do if you can't talk shouldn't raise that do a token is is just widdle buttoned down the right and live on beans that's that's the old-fashioned way is the old-fashioned way and we've got projects that are doing great things on that basis like OB DB who did this crazy thing of having a completely working product that developers could go and use their decentralized database before even raising venture capital money which is amazing by the way there were many of the big projects now the many of the ones who raised money in the last 12 months or more who were doing that for years beforehand by the way so and actually come a long way the other the other thing that one can look at and again I think this is also an emerging important part of the ecosystem is platform partnerships right and like ecosystem funds ecosystem funds both the graphic grant funds but also we're seeing some of the projects developing their own incubation platforms either through grants or direct investment in projects which utilize their platforms yeah and insofar as I mean the one limitation with a lot of grant type programs is that they that's not really a way to fund a business a lot of people are often wanting to create something they just going to create returns they're you know looking for something that's going to behave like a company but a grant is not a way to to fund a business necessarily so hopefully I'd like to see more projects in the space creating sort of longer term incentives for people to be building with their protocols so that we have fewer tokens perhaps and provide the sort of sort of as a revenue stream almost I think that's going to be quite an interesting aspect and and I think again as a community I'm also quite interested in the idea of cross-pollination between those platforms and projects so that you could sort of pick a mix and yeah that's one of the key promises of ethereum really god bless the theory on that note I think we may have time for one question but I don't know I think we're getting assured off the stage with one question one question my questions that was definitive for me okay this looks like it's gonna be a hard question an operation that uses two tokens one which for example its utility is to drive governance of the network of the other and I'm wondering whether there are projects like that whether you guys thought about or seeing that in order to be able to have an actual token with some utility that is pre active functional chain interesting I mean I mean yes possibly a it's really oh do you mean whether it would constitute a security or whether it be i-i've seen some of those dual token I mean basically that's what well maker has right they have like Mao as a sort of governance token ish and then Daiso and then also gnosis has no and I forget what then is it Wiz I forget what I think it was renamed so there are a few sort of dual token model things out there whether a token that's issued and it's got functionality in a certain context it could be possible certainly if it's predominantly used for the governance of that protocol I mean that's kind of what that token in any given colony is for is for its its internal governance I think it largely depends on the specific circumstances around that yeah I mean obviously for an investor's point of view that I can a level of complexity both on the regulatory legal side and and from an analytical side which is not to say the one can't or shouldn't but I'm yeah I mean it can be done it's one of those annoying questions where the answer is it depends yeah so so there we there we go I mean let's try and build some good tokens yeah [Applause]