I know some of this may seem idealistic or unreasonable, but if we’re going to raise the bar for integrity on ICOs, we may as well set our sights high.

Caveat Emptor: When I started writing this post a couple months ago, my lofty ideals had not been dragged through the shark-pit that the ICO space has so quickly become. I have been humbled by the process of seeing just how hard it can be to stay true to high ideals for maintaining integrity.

NINE WAYS TO RAISE ICO INTEGRITY

I’m going to skip over some pretty basic things, like making your project open-source, sharing your smart contract code publicly, getting it security audited, and such. And I also want to specifically note, we are not doing an Initial CoinOffering, but an an Initial Community Offering, because Holo fuel is crypto-accounting-based not crypto-coin-based.

1. Measure Actual Demand for Your PRODUCT to Scale Your ICO Supply

It’s tempting to believe all those buyers of your coin are banging down the doors to get your product. Some surely are. However, the fact that people will buy a poker chip to play with should not be confused with having found the early adopters for your product. In fact, if these two things are distinct, how do you know there’s actually demand for your product at all?

I’d suggest it is possible to find ways to have your early adopters pre-commit to your product, not just purchase gambling chips. Doing this seems more reasonable for measuring demand than a token they may ditch before you ever get to launch.

In our case, we want to know who will run P2P apps that can be built on Holochain. So, we launched a crowdfunding campaign to sell Holo hosting boxes, and tickets to dev trainings or hackathons where people build Holochain apps. In each case, a purchase shows us someone who will either host and run apps, or build them. Our token supply is then scaled to support a host/dev ecosystem of that size (times a growth multiplier) over the first year.

It was quite surprising to see how much demand there is for what we’re building. We became Indiegogo’s #1 trending project in about 6 hours. We raised $90K or 40% of our goal in the first 24 hours. Unfortunately Indiegogo’s legal team then delisted us because they were uncomfortable about our project being connected to cryptocurrencies. Even while hidden from being displayed on their home page and category displays, we still met our $200K minimum goal in just 78 hours. I’m excited to see what happens when our ICO launches and people realize that buying from our Indiegogo campaign is what unlocks more token supply each day!

A crowdfunding campaign may not be the best way to demonstrate demand for your project, but I’d suggest you find your own way. How might you find sponsors or customers willing to put up front money for use of your product? If you don’t try, how do you expect to separate mere gamblers from your actual early adopters? How will you test if you actually have a market for your product or identify how to communicate with them?

2. Seek the Crowd, Not Just the Funds

My last post covered why this is an important orientation to be rooted in if you want to reach your crowd of actual users and early adopters, not just crypto speculators. If your sale doesn’t last long enough for regular people to get in, then you are not getting your real stakeholders on board, for example, when your offering sells out in 30 seconds.

What if you were to code an escrow account that gathers all the purchase bids, maybe caps them so no one could buy more than 10% or so, and then transfers coins to accounts pro-rated by what portion of the actual bids they placed. This would at least allow everyone to get something, rather than sell out in one block to the people paying the highest gas prices.

In fairness, this isn’t easy to do. When we tried to implement that approach in Ethereum, it did not prove feasible to do on chain. We had to split the work across multiple blocks because of gas limits, and it gets expensive really fast. We considered taking the calculations off-chain from Ethereum to Holochain, but decided it may be too early in the review of our own security model to expose all the funds for our ICO as such an early real-world test case.

Given how easy this kind of computation is to do on Holochain, it was quite a wake up call about how little practical computation smart contracts can actually do, and how immature most of the state-channel/off-chain integration systems were. So we all get to watch as some people trading pictures of kitties brings the world’s global computer to its knees.

In the end, we opted for a simplified approach of reserving part of the token supply that your Indiegogo purchase unlocks for a brief time. This way big crypto whales paying higher gas fees or leveraging automated processes can’t just swoop in and take all the tokens in our sale. Regular people — hopefully our real early users — get a reasonable amount of time to set up a crypto wallet and decide if they want to buy the token supply they unlocked.

3. Be Radically Honest

For me, there’s something wrong about the incongruence of seeing people scramble for “easy ICO money” while setting up themselves up as a non-profit, charitable foundation. I’m sure some groups truly do have noble motives to foster good things and a good community with their project, but much of this approach just seems like legal shenanigans.

Everyone is guessing about the legal status of most things happening in this space. Nobody knows for sure how cryptocurrencies or fundraising by crypto will end up getting treated legally. There are very few places with actual regulatory frameworks designed to enable ICOs and regulate decentralized currencies.

Therefore much of what is happening is rhetorical positioning, and may get determined retroactively. Equity. Commodity. Utility. Security. Regardless of what you call it, it may end up getting based on how, when, and whether you delivered what you promised. It can be tricky to cut through the red tape from lawyers to try to just “tell it like it is.”

In order to use accept cryptocurrency in an ICO and have bank accounts where we can deposit the money, we have to gather KYC (Know Your Customer) information for Anti-Money Laundering laws. Unsurprisingly, banking turns out to be one of the more challenging things to do if you’re a crypto company (Monopolies like to protect their turf.).

Even if it means scaring people away from our offering, I feel the best thing to do is be as truthful and straightforward as possible. It’s best if they walk away now rather than get angry later because they didn’t want what we’re actually providing. We try to make it clear what we’re actually doing, even if it doesn’t match the typical crypto-anarchist political ideals.

For example, Holo fuel has transaction fees to sustain the infrastructure and app ecosystem. People immediately assume centralization — that transactions come through us, or that we’re party to every transaction. We’re not. In fact, we don’t even receive copies of every transaction. They’re distributed around the DHT so a bunch of people have them, but without a global ledger, we’re not holding them all.

Even though we know many cryptocurrency people are likely to have a negative reaction to these fees, it is actually the responsible thing to do in our design. So we’ll just have to bite the bullet and re-explain (in forums, chats, emails, etc.) how our currency is actually less-centralized than most cryptocurrencies, even with transaction fees.

4. Deliver Substance Beforehand — Show Don’t Just Tell

Cryptography and decentralized computing is some pretty dense stuff. Many people seriously involved in the space don’t have a solid technical understanding of what’s going on under the hood in crypto projects. Certainly, most people thinking about participating in an ICO are in no position to differentiate between the real deal and smoke and mirrors.

So, even if your tech plan is solid, having a team that can work together and produce results is a whole other thing. Bringing complex tech from design, to build, to usability, and then into widescale adoption is something far more tech startups are failing at than succeeding. Before asking people to fund you, can you deliver something — a proof-of-concept, prototype, or alpha release? It doesn’t have to be bulletproof yet, but it can demonstrate you have a team that can at least get something across the finish line.

Remember, if you don’t limit your ICO to accredited investors who can afford the risk, then you’re asking regular folks for their cash. It’s only fair that you and your team put some skin in the game too. A white paper plus some marketing materials and angel funds for expensive ICO lawyers is not what I’m talking about. Have your team do some work for which their payout is in the same currency created in the ICO.

We held our first hackathon for people to build things on Holochain in March 2017. Six months later we finally felt ready to call something an Alpha release, and we expect to have many dApps and a handful of currency systems built on Holochain before our Holo fuel for hosting next-gen crypto apps goes live. We put years of design and a solid year of software development into our platform before asking people to purchase our hosting credits.

5. Don’t Take it All Up Front

Some ICOs almost accidentally raised hundreds of millions (like Bancor or Tezos), others (like Filecoin or EOS) targeted raising half a billion or more. They have argued these figures are justified because they have to raise everything up front. But actually, that’s just a design decision they made. And if you raise that much money, you’re going to have to devote a significant portion of your attention to protecting and managing those assets.

If you can’t structure your crypto infrastructure with incentives that pay for maintenance of the infrastructure, maybe you haven’t found a sustainable design yet. How can you include a revenue model for the infrastructure so everything does not need to be taken up front, without compromising the values of decentralization people seek in crypto systems?

Holo is sustained by nano-transaction fees on the micro-transactions used for hosting services. We do this without centralizing transactions, records, or enforcement. In fact, we don’t even have copies of all transactions (although the network as whole does). The pattern of mutual enforcement ensures that when a large enough transaction fee has accrued in someone’s account, nobody will do the next transaction with them until they pay it.

As someone who has been designing a wide variety of types and structures of currencies over the last decades, I see many viable approaches for building in a revenue model to sustain the infrastructure. What if software updates carried similar rewards as mining blocks? Shouldn’t a currency reward the people maintaining the software and security as well as those running the hardware?

6. Establish a Reasonable Cap

Once you’ve designed system updates and maintenance into the operating revenue of a currency, then wouldn’t it make sense to limit how much you raise up front? Why create unnecessary risks in managing funds, failing to deliver, getting beat to market, or having a security flaw in your early designs which leads to complete loss?

Doesn’t it make more sense not to get greedy and to cap the ICO at a reasonable amount to launch your system plus a little extra runway for unforeseen obstacles? We expect to have our systems operating within 6 months, so we’re capitalizing our first year, just to be safe. Extra capital can be used as reserves to liquidity and backing for the currency.

Once you’ve included a way to generate sustaining revenue, and you don’t have to raise all future capital in one Token Pre-sale, then you can set a responsible cap on your ICO. Having hundreds of millions in cryptocurrency may seem like a dream come true, but it can make you a target, or disrupt your team and become as much a problem as a solution (look at Tezos).

Even though we are arguably providing a solution which encompasses everything EOS (now in the billions) and many other huge ICO campaigns have promised, we are capping our sale around €25 million. This helps us stay focused on delivering the goods instead of gambling on crypto markets with other people’s money.

7. Minimize Risk of Being Considered a Security (for Everyone’s Sake)

Many people know about the Securities and Exchange Commission and the fairly tight regulation of investments in the U.S., but most countries have laws to protect people from being defrauded by people selling bad investments. The criteria for defining a security are complex, but one significant dimension is about risk. The more you can protect your ICO participants from risk, the better off everyone is.

Disclaimer: I am not a lawyer. Do not consider this to be legal advice.

Typically selling equity in a venture puts it directly into the class of being a security and a shared risk. Many groups are focusing on selling utility tokens with a clear usefulness, or commodity tokens with some kind of clear value. There’s a framework some law firms have developed as general guidelines for navigating these categories.

In our ICO, we pre-sell hosting credits. Participation is simply a pre-purchase of hosting services for P2P apps — an item with actual utility in a $200 billion dollar hosting market. Our cryptocurrency functions like when you buy $20 of credits at a stock photo web site and spend a few dollars on rights on different photos, and the site uses this to determine which photographers get paid.

Holo sells hosting service, which gets provided by various hosts, who get paid in internal currency for their computing power. So, in order to lower risk, rather than just creating speculative coins, we are using a business model with an established precedent in a rapidly growing industry, and leveraging traditional accounting methods augmented with cryptographic immutability.

If you run a HoloPort hosting box, build an app, or install Holo software on your own server, you are a direct participant in generating value in that ecosystem. Because these participants provide direct value, rather than primarily relying on investment in value produced by others, our hosting credits might not be deemed a security.

Another significant way to reduce risk is to shorten the timeline between ICO and the launch and use of the goods/services you’re offering. Additionally, you can define clear and direct benefits, services, products, or rights that people are purchasing (rather than speculative collective upside of future value). Also, you can limit your sales to “qualified” investors (people rich enough to take such risks). Or if you’d like to keep your ICO accessible to normal folks, you can limit purchases to small, low-risk amounts. Combining all of these approaches significantly lowers everyone’s risks.

Are there creative approaches you can take to reach and serve a broad enough audience that your real fans and early adopters can participate? How might those approaches let you access people in the U.S. and other places with restrictions on securities?

8. Better Currency Design and System Dynamics

I’ve written about this elsewhere, but I don’t think enough people are questioning fundamental currency design and dynamics nearly enough. Cryptocurrencies don’t just have to be speculative tokens detached from any real-world value. They don’t have to be coins magically created from nothing.

No matter how cool your idea is, the lid on the success of your future crypto platform comes down to how well you designed the currency that powers it. If it doesn’t move value to the parts of the network which sustain it, it will die. If it doesn’t create the right flow dynamics, it will become imbalanced. Great tech that is only accessible to the ultra-rich, or the ultra-techie because of what it takes to buy into the currency that runs it, is not actually great tech at all.

What’s worse, although blockchain claims to be a decentralized platform, most blockchain systems use either Proof-of-Work or Proof-of-Stake as their consensus algorithm with incentive rewards to nodes providing those proofs. Both of those algorithms are actually approaches to centralizing power and control. In both cases, the rich get richer. It’s no accident that Bitcoin, not even 10 years old, is already more centrally held, issued, and controlled than the national currencies it sought to replace.

The problem here is most everybody assumes there’s basically just one way to run a cryptocurrency, and people have no idea the hundreds of choices available which fundamentally change the patterns of value and wealth in your currency ecosystem.

Holo fuel is not coin- or token-based, instead it is run on massively scalable, double-entry crypto-accounting. Holo fuel is never created from nothing, every credit is accompanied by a balancing debit. This has two interesting side effects:

1) There is always a stable net supply of ZERO credits in the system.

2) Holo starts out in debt for the amount people bought from the ICO and we will literally have to produce 100 times the value we received in economic activity to repay that debt.

Holo fuel is backed by the computing power of the people offering hosting of P2P crypto apps. We will set the price at ICO launch to a benchmarked set of distributed computing tasks at a fraction of the cost (probably 1/10,000) to run on Ethereum. For the hosts providing computing, Holo fuel is also partially backed by outside currencies that were used to purchase credits, so hosts can redeem the credits they’ve earned to pay their bills.

Since the supply of the currency is bound to provide computing power and grows with the capacity of the network to provide it, the value of this computing power for hosting services provides a stable center of value for the currency. There is virtually infinite demand for computing power, so, with or without exchanges, both fairly stable demand and convenient liquidity for meeting that demand already built into Holo fuel. You can’t prevent speculation, but you can design your currency so that the tail doesn’t wag the dog.

Holo fuel is designed to have a rapid rise in value and spending power and then largely stabilize in value to support and encourage active spending and use instead of hoarding. We’ll see how successfully our design pans out — but it will not be just normal crypto speculation tokens.

I’d like to challenge everyone in the crypto space to move beyond just crypto-tokens created from nothing (which is what “fiat” issuance actually means). Instead, imagine new ways your currency can be issued, held, linked to other value and reputation, and tied to reliable real-world value to strengthen and stabilize its value.

9. Accountability

Did you know there are ICOs spinning up with no team members visible, fake team members, or stolen identities? For starters, have a visible team of real humans connected to real world accomplishments and failures, that responds on social media which is also connected to other real world humans. Let’s start with knowing who we’re holding to account.

Provide a clear design of what you’re delivering, a road map to get there, and approximate timelines. Everyone understands timelines and strategies can shift. Be public about that when it happens too.

Be responsible for how much money you accept. Have a way to make value you’ve produced visible. This is more than than the value of your token, but the functioning of a mature crypto project. As mentioned above, the Holo organization’s negative balance makes it quite clear how much was taken in and where we stand in the process of returning 100 times that original value to the community.

Navigating the strange and complex variety of logical contradictions emerging in the ICO space can feel challenging. One way people try to hold a project to account is to issue a bunch of tokens to team members that vest slowly so that they have to stay in the game to create long-term value. ICO rating forms seem to imply if team members don’t have to wait a couple years to vest, then you are just some kind of dump scam. When speculative tokens are the only way of creating a currency, this makes some sense.

Isn’t the point of an ICO to self-capitalize a crypto project? Why wouldn’t you want a project to use the tokens as their own capital to replace the cash costs of paying their team. Does it actually make sense to sell more tokens, putting other people’s money at risk, to just keep value locked in the team’s accounts? Of course, when value comes from artificial scarcity, you want to keep the team from dumping their tokens and crashing the currency. How about a slow release plan? Let them draw salary type equivalents for period of time.

What ways are you taking accountability for ensuring the value of your offering, and for how much your community has funded you?

Conclusions

The ICO space may seem fresh, new, and exciting, but it is also full of scams (whether by intent or by accident). If we want to keep this space alive and maintain the possibility for projects to gain access to creative capital, we need to raise the bar.

There are many sites out there doing ICO listings, reviews, and ratings. It seems some may just be leeches attached to an ecosystem with crypto-cash flow. It’s really hard to tell what kind of due diligence is really getting done, or how well equipped they are to even do it.

When we filled out the listing forms, there was simply no room to communicate anything innovative — no place to explain how our currency or supply actually worked. ICOs have been around for like 10 minutes and they’re already cookie-cutter, fill-in-the-blank projects. I want room to invent and discover the better ways of doing this than the few patterns that have emerged so far!

As we’ve spoken with experts and potential “advisors” in the space, some didn’t like our process. They thought the “small” numbers in the crowdfunding campaign made it hard for the big players to take us seriously. They wanted to push us straight to taking from VCs, when we took this path to connect us directly to our user community and limit the influence of VCs.

In any case, don’t think that doing an Ethical ICO means easy money. It takes a strong moral compass to steer clear of the patterns already emerging in the ICO space, but that may be what it takes to not compromise your integrity, accountability, or relationship with your community. I mean, lawyers are practically in the business of making sure you’re not accountable, and protecting you from the risks of being held to account.

At this stage, I can’t know for sure we’ve avoided all the missteps. In fact, there have been a few times we’ve had to backtrack and do things over again in new ways. But I’d like to think we will at least stand out from the crowd a bit for having tried so hard to get this right. I hope people will still be figuring out all the things we’ve done differently for many months to come.

What do you think of our choices? Do you see any major missteps?

What ideas do you have about how ICOs should work that would make things cleaner, clearer, and safer for all?

Photo by Gwendal_

The post Launching an Ethical ICO appeared first on P2P Foundation.

Every week new ICOs are riding the wave of the crypto craze.

Billions of dollars worth of investments this year… Yet many don’t know about the darker dynamics fueling the process. Why is so much flowing into these offerings? Could it be that exchanges can’t cash out the bitcoin whales so they need to dump into new coins just to diversify holdings? And bonus for them if they can seize control of enough of a coin’s supply to manipulate its value.

$30 Million raised in 24 seconds… Hundreds of millions in an hour… An ICO sold out in a single block of transactions… The whole Ethereum network bogged down by preemptive, over-gassed transactions… One thing we know is those ICOs as a crowdfunding tool are challenged in reaching much of the crowd of end-users for their product — whales are jumping into small pools where they can exert massive influence.

Yet, fundamentally, there are good ideas hoping to grow. And good people, hoping to support and benefit from good ideas. Can we establish a healthier pattern so that the possibilities inherent in decentralized currencies don’t collapse under the weight of over-regulation, and burnt-buyer-backlash?

If we don’t raise the bar of integrity for ICOs ourselves we’ll lose the opportunity to establish stable footing for them to continue. I think we need to challenge a lot of the assumptions that are already hardening in this immature ICO space, including the structure and very nature of the cryptocurrencies being used.

What makes an ICO approach responsible and ethical?

I’ve read the criteria from various rating sites. What stands out to me is their weird blend of obviousness and blindness. Obviously, having a revenue model and demand for your product still applies to crypto projects. Blindly, everyone pretends the clumsy first-gen, global-ledger, burn-the-planet (proof-of-work) approaches are here to stay. ICOs to build data centers just to mine near hydro-electric dams are ranked quite highly.

In other words, I don’t believe you should take these people’s advice. And frankly, you have no reason to take mine either. As a builder of blockchain alternatives, I’m completely biased and focused on the next generation of tools. Yet aside from these varying perspectives about the future of decentralized technology, I believe there’s some common sense about making better ICOs that we can identify.

(And a legal disclaimer — I am not a lawyer, please do not construe any of this as expert legal advice.)

The first question everyone should ask if considering an ICO: Is this ICO primarily a tool to reach money, or to reach people?

Don’t be lazy and say “both!” Even though it is a form of “crowd” — “funding”, there’s an easy way to tell if the operation is tailored to one goal or the other. If you sell out in 24 seconds, or even an hour or two, then it’s pretty clear you were structured for money — not participation. If you can tell yourself the truth about your actual priorities, that should change the shape and structure of everything about your ICO.

It sure looks like there are some pretty sketchy projects pretending to do something useful that will really just abscond with people’s money. And that’s going to bring down the regulatory hammer on everyone. In fact, while this blog post was sitting in drafts waiting to get published, and the SEC started rattling swords, China and South Korea both banned ICOs, and have then steered toward regulation instead.

For the Money

If your ICO is primarily about getting money, I believe you should consider full-compliance with securities laws in the jurisdictions you are selling. Register your offer. Get regulated. That’s exactly what those laws are for — preventing people from getting fleeced by investment offerings they are in no position to evaluate.

Buzz-kill, right? Aren’t ICOs exciting because they sidestep government regulations?

That’s certainly true of ICOs, past and present — I propose a different future.

For the People

ICOs don’t have to be about gambling on the value of some volatile cryptocoin. I’m convinced that it’s possible to design for value stability and to offer clearer kinds of returns. A truer path to thread this needle may involve doing the work to overhaul what you’re offering in order to reduce unnecessary risk, and actually attempting to engage actual, long-term users, not just short-term speculators. I also see ways to structure so that there is greater accountability for funding received and for delivering results.

There are law firms working on frameworks for ICOs, categorizing rights vs. equities and all that jazz. Others will tell you to start a non-profit foundation in Switzerland and pitch your coin sales as if they are donations. Although masquerading as a non-profit may be easier, it won’t build long-term trust with your user-base nor with regulators. (let’s tell the truth: a cryptocoin by any other name will still be as volatile.)

Look, it’s your lawyer’s job to cover your butt. However, when we are building truly decentralized, peer-to-peer systems, we’ve got to cover each other’s butts — in how we design, build, and fund. We can’t afford to take an us vs. them stance against our users in any part of the process. We are them. They are us. If you build in systemic inequities at the funding stage, there’s no reason to believe they won’t be there in every stage of operation.

A House Built on Sand…

Cryptocurrencies don’t have to be worthless tokens with their only value determined by gambling markets. Please see my previous post on Responsible Cryptocurrency Design if you want to understand what else is possible.

Fundamentally, you can’t make your ICO more responsible or valuable than the currency underlying it. And frankly there are some weak-ass cryptocurrencies out there which are really just digital poker chips that waste a lot of electricity.

I know it’s heresy to say some of what follows, but it must be said. Please do the whole community a favor of making the extra effort to improve the field of ICO approaches.

Elements of an Ethical ICO:

This post has gotten long enough, so I will just share some of the questions I’m grappling with:

• Truthful: How could you structure for the most straightforward, truthful representation of your product and intention to your crowd? Cryptography and decentralized computing are hard enough to understand without being buried in marketing spin.
• Measure of Demand: People buying a coin does not prove they’re interested in using your product. How can you separate demand for your product from demand for poker chips to gamble with?
• ICO on proof not theory: How can you help people determine if your idea is possible, and if your team has the chops to build it? What can you build before an ICO as a show of good faith?
• Don’t take it all up front: Can you design your currency to avoid needing to grab all funds in a single initial raise? How can you enable expansion in a manner that’s responsive to future demand and growth?
• Reasonable Cap: Given the prior question, what is a reasonable amount to raise to deliver your first round of solid results? Can you structure so that your cap expands based on true, up-front interest from users of your product (not just the coins)?
• Fair balance of power and wealth: If your thing is so darn cool, you’ll already have all the advantages of being the earliest movers and shakers. How can you structure the distribution of power and wealth to make it a good deal for latecomers as well?
• Not a security: Can you reach more people by ensuring your offer is not interpreted as a security? Might this let you access people in the U.S. and other places with restrictions on securities? Can you offer a clear and known value, not just odds in a betting market?
• Embedded Value: Can your currency be connected to reliable real-world value to strengthen and stabilize the market for it? Would value stability allow cryptocurrencies to move into more mainstream use for a productive economy, not just a speculation market?
• Accountability: Are there ways to take accountability for ensuring the value of your offering, and for how much your community has funded you?

I’m really not trying to rain on your ICO parade. Let’s keep the party going! But that means that, as geeks and crypto-practitioners, we’ve got to raise the bar! Wasn’t at least part of the point to not get dragged down the path of corruption with the rest of the financial industry?

Remember, we started building ICOs to solve real problems with our current financial systems. Duplicating these problems (or worse) in crypto-space fails to accomplish that goal.

These kinds of questions must be asked and answered by more groups doing ICOs. SPOILER ALERT: I’ll offer some answers for all of them in my next post on the trials and tribulations of Launching an Ethical ICO.

This is part two of Arthur Brock’s three part series —. Part three will be available on the P2P Foundation Blog within the next week. 

Photo by ellen reitman

The post Toward an Ethical ICO appeared first on P2P Foundation.

I’ve been thinking a lot about how to make ICOs really solid, ethical, lasting sources of good. However, at the heart of an ICO is the “C” — the cryptocurrency which is being offered. How can we really get to ethical ICOs when cryptocurrencies themselves aren’t ready to serve mainstream needs? [This is the first of three articles about getting to ethical ICOs.]

’Cause let’s tell the truth — cryptocurrencies just aren’t safe for everyday use by normal people and businesses yet.

I’m not talking about double spends, or 51% attacks. I’m not talking about inaccessible UI, and impenetrable language. I’m not even talking about poor key management or device security. While those are substantial issues, more fundamentally, most people simply can’t take huge risks with the value of money. The crypto-roller-coaster is certainly fun for some people, but it is not a ride for those who can’t afford to lose what they invest.

Crypto trading markets are not currently meant to be very accessible. The risks seem vast and incomprehensible. Most cannot analyze code (think of DAOhub, for example) or tell from a whitepaper who’s blowing smoke and who can deliver the goods. There’s too much news to track and too much insider information to be connected to.

Crypto whales can jump into smaller coin pools and play pump & dump games to manipulate prices. If you aren’t one of those folks shaping the market, then you are probably one of the suckers hoping to get lucky instead of screwed. And so far all we really have are trading markets. There’s no substantial economy using cryptocurrencies yet. All this nonsense market cap stuff is just people trading one kind of poker chip for another.

I know that paints a pretty dark picture. Many will want to point to the long-term upward trend of the few giants like Bitcoin or Ether, even in the face of economists who think those bubbles are bound to burst. I wonder what happens to them when the next generation tech comes out that transcends proof-of-work, proof-of-stake, consensus, and blockchain itself? How long will those bloated energy hogs — already centralized under the control of very few mining pools — stand against truly resilient, low-power, fully distributed alternatives?

It Doesn’t Have to Be This Way

It is not fundamental laws of physics or laws of computation which has us repeating the toxic patterns in the crypto-space that have corrupted global financial markets — concentrating wealth and power to the few, and manipulating volatile boom/bust cycles. We are simply repeating the problems of the past because of our failure to see real alternatives.

The designers of blockchain may have understood cryptography, but it looks like they didn’t learn the basics of currency design or weren’t willing to challenge the dysfunctional patterns of our financial system.

Cryptocurrencies do not have to be gambling tokens created from nothing. They can be responsibly connected to assets, promises, or real-world value. They don’t have to re-create all the speculative money problems that they were supposed to be solving.

In fact, the whole crypto community understands currency design so poorly that they have practically redefined the word “fiat” (from Latin, meaning spoken into being from nothing) to mean national currencies. This fails to notice that every cryptocoin so far is also spoken into being from nothing. (Hint: Here’s how you can tell, ask yourself, “Who gets debited when someone is credited with newly mined coins?” If the answer is “Nobody,” then you know it is fiat.)

Optimizing for Medium of Exchange

National currencies enjoy monopolies propped up by mandatory tax in the currency and legal tender laws. Essentially, this makes life almost impossible without using a national currency. This compulsory monopoly should be easily crushed by cryptocurrencies if we had good ones — fast, cheap, interchangeable, decentralized. But we’re still stuck in the monopolistic mindset of money.

We’ve collapsed a bunch of different functions into money that actually can and should be reconfigured in many ways: medium of exchange, store of value, unit of account, and token of status.

Monopoly Busting Rule: Don’t try to be everything to everyone. Currency design should be optimized to be a medium of exchange or a store of value, but not both. These two traditional functions don’t actually play too well together. If you optimize a currency to be a good store of value, then people don’t want to spend it. They sit on it, and no activity in the mainstream economy takes place in that currency. One of the ways to optimize for circulation, is various forms of “demurrage” (almost a kind of hoarding tax) which create a kind of hot-potato effect to keep the money moving. It has to be easy to spend, using familiar tools, with minimal overhead.

What if we gauged the success of a cryptocurrency on its level of integration into the daily productive economy of how work gets done? If the only measure of a cryptocurrency’s success is its market price or market cap, then we won’t have cryptocurrencies that people will want to use for every spending. And if they stay so volatile, then many people simply can’t rely on them for everyday survival. When we have cryptocurrencies with stable values over time, we’ll see many more businesses being willing to accept them, and more people willing to participate and spend them.

However, the design principles for a value stable currency are rather different than the ones employed in current cryptocoins. Some of the characteristics you need when optimizing for value stability are:

• Dynamic supply — that can expand and contract based on real market behavior and demand
• Sufficient supply — not too scarce, not too plenty, but just right
• Strong internal value — a strong spending sink with clarity about the currency’s value in obtaining it

Given today’s cryptocoins, this may seem like a pipe dream. But it’s not really as hard as it may seem. Imagine a currency backed by an asset which can pretty easily be delivered by a loose network of providers who accept the currency in payment for: electricity from solar panels, computing power from idle computers, rides from passing drivers, stays in empty bedrooms, etc. A currency tuned to kilowatts or computing power would have a strong enough internal value to serve as center of gravity and common economic need.

For a sufficient supply which can expand and contract, I only know of one form of currency issuance that fits the bill: Mutual Credit. One of the strange things about mutual credit is that the net supply is always ZERO. It uses double-entry accounting type transfers which always have an offsetting debit for every credit. Positive and negative account balances always balance each other.

The active supply in mutual credit is controlled by managing credit limits. If you use an algorithm to tie people’s credit limit to their recent earning history in the currency (with some tweaks to prevent gaming), then their credit expands when there’s demonstrated demand for the value they sell, and it contracts when there’s not. We get at least some kind of breathing — expanding/contracting effect — that we were looking for.

Finally, you’d need to build an interface that connects this Open Value Network (electricity, computing, open source hardware, etc.) to outside demand. People could buy the crypto-credits, denominated in kilowatts or kilobytes, with outside currencies which the providers would be able to use to cash out for the services they provide that back the value of the whole system. Special reserve accounts would need to be created for this cashing in or out, operating as a very limited type of exchange focused on the asset providing the center of gravity for value.

To implement this we’d have to abandon the cryptocoin token-centric approach for a crypto-accounting, user-centric approach. Luckily there’s a blockchain alternative called Holochain that makes this kind of thing pretty straightforward to build.

Whew! If you’re not used to detailed currency design discussions, that may have sounded like a lot of unfamiliar words. Hopefully it’s enough to paint a picture of a viable alternative approach to cryptocurrency.

Optimizing a Store of Value

People with excess cash should be able to easily convert from medium of exchange currencies to other cryptocurrencies, optimized to be stores of value. It is only fair to share this as a counterpoint to the medium of exchange currency design above, however, as often happens, this blog post is getting too long and I will need to make it a separate post to give it the space it deserves. Suffice it to say that it is designed to move slower and to be correlated to real world value which grows not because of speculation or perception, but because of actual growth of the asset itself.

As a simple example, imagine a tree-banking currency designed to invest in sustainable growth of tropical hardwoods — as long as there are humans building things, it is likely that hardwoods like teak will be valuable. Imagine converting to tree-banking credits which employ people to steward rainforest and replant zones and sustainably harvest hardwoods. There are many other kinds of examples where invested inputs grow in physical real-world value just by staying invested — these make optimal configurations for store of value currencies.

I have a Dream!

Imagine a world where cryptocurrencies have risen to new levels of common usage and integrity. Where global and local economies are rooted in peered value networks with peered governance, far outside the spheres of mainstream politics and easy access to mutual capitalization. Imagine easily transferring resources where they’re needed without being gouged by foreign transaction fees, ATM fees, wire fees, delays, and paperwork.

I think a major step toward this dream becoming a reality is networks of value-stable, asset-backed crypto-credits rooted in designs like I described above.

We’re working on some of these now, to be built on holochain.

Stay tuned!

This is part one of Arthur Brock’s three part series — Toward an Ethical ICO. Parts two and three will be available on Medium within the next two weeks. If you’d like to get them early, sent to your inbox, request the PDF.

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