In the old economy, people used money to buy goods and services. I have some cash, you have a delicious burrito, and when we exchange the two, you end up with something you want, and so do I. Something for something.
That’s not how things work in the new cryptoconomy. Instead, it goes something like this: you have some cash, and I have a “token”. The token is worthless. It has no purpose or function. There’s a big label on the token that says, “this token cannot be used for anything”. And we exchange the two, and so I end up with your cash, and you end up with nothing, and for some reason you’re happy with the transaction.
Unfortunately, this is not a hypothetical situation. This is a pretty accurate description of an “initial coin offering” (ICO) that has raised $200m worth of cryptocurrency. The company behind it is called block.one and the money raised is meant to fund the development of EOS, which is a new piece of software that can be used to build better, more scaleable blockchains. (Blockchains are a type of decentralised database.)
In an earlier post, we likened an initial coin offering to a Kickstarter campaign. Investors hand over their money, and in return get some sort of access to the product when it’s finished. The access is granted by a token that can be used with the software being developed. Block.one’s initial coin offering is different. There’s a token, but it can’t actually be used for anything. This is from the FAQs:
The EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform.
You might want to read that over a couple of times, keeping in mind that investors have spent over $200m buying these “EOS Tokens”.
The idea behind EOS is that bandwidth, computational power and storage on a blockchain network built with the software is allocated in proportion to the amount of tokens any particular user holds. So if you own 50 per cent of the tokens that exist on the blockchain, then you get 50 per cent of the storage capacity, for example.
Investors may have snapped up the “EOS Tokens” for this reason, but even then they’re on shaky ground.
Block.one is developing the EOS software, but it isn’t going to actually launch any blockchain network with it. What’s more, the EOS software is going to be released “under an open source software license”, which will allow third parties to modify it however they wish whenever they launch their own networks. Presumably that means they could exclude all of the generous souls who funded the software’s development, which is what the technical documentation hints at:
Cryptographic tokens referred to in this white paper refer to cryptographic tokens on a launched blockchain that adopts the eos.io software. They do not refer to the ERC-20 compatible tokens being distributed on the Ethereum blockchain in connection with the EOS token distribution
Block.one is a Cayman Islands company, which means there will be next to no public oversight of what happens to the money raised from the ongoing sale of the EOS Tokens. The eos.io website helpfully refers to the proceeds as “the revenue” of block.one, which will have “sole discretion” to do with the money what it likes. Some of it will go towards building “a blockchain consulting business,” which is pretty much the only real blockchain business model that exists to-date.
The block.one team includes Brendan Blumer, chief executive; Daniel Larimer, chief technology officer; Brock Pierce, chief strategy officer (and former child actor); and Ian Grigg, advisor. They may not have finished developing the EOS software, but they’ve already achieved a remarkable feat of salesmanship: telling everyone something’s worthless, and getting them to buy it anyway.
What does a crypto startup do with $230m? — FT Alphaville