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Posted on July 20, 2018Updating the Coinbase Bug Bounty Program
Coinbase is the most trusted place to buy, sell, and manage cryptocurrency. The protection and security of our customers’ identities and funds is our top priority. We’re constantly making improvements to our security posture, including ongoing updates to our HackerOne Bug Bounty Program.
We’ve come a long way from our first program at the start of the company when we were paying bounties in bitcoin from coinbase.com/whitehat, to our initial move to the HackerOne platform in October 2014, and our most recent update to our program last fall. This update is our fourth major iteration, and it includes:
- Changed report evaluation from mechanism-driven to severity-driven
- Expanded (quite considerably) the legal assurances we provide to security researchers engaging with our program
- Increased bounty payouts
Severity-Driven Report Evaluation
This update provides a new methodology and greater level of detail on how we evaluate reports. We hope that this can provide a repeatable, fair, transparent, and published reasoning for determining bounties.
We have changed our assessment methodology to move from being mechanism driven (e.g., XSS or CSRF) to being severity driven (e.g., improper access to sensitive information or ability to manipulate account balance). This change aligns the size of our bounties to the potential consequences that an unaddressed security vulnerability could have on Coinbase and our customers.
The change is described in length in our HackerOne Bug Bounty Program, so we only provide a brief summary here.
Coinbase awards bounties based on severity of the vulnerability. We determine severity based on two factors: Impact and Exploitability.
- Impact describes the effects of successful exploitation upon Coinbase systems or customers. We make this assessment primarily by examining the effects of exploitation on confidentiality, integrity, or availability of underlying systems. Vulnerabilities that require considerable response and remediation or could result in reputational damage are also considered to have greater impact.
- Exploitability describes the difficulty of actively exploiting the vulnerability itself. We make this assessment primarily based on the prerequisites for exploitation, including level of access required, availability of information critical for successful exploitation, and likelihood of alignment of required factors outside the attacker’s direct control such as social engineering requirements or timing requirements.
Expanded Legal Assurance to Researchers
The program update also includes more specific guidance on our Program Policies. The biggest change we’ve made to our policies is expanding and articulating the legal safeguards we provide to security researchers participating in our bug bounty program.
Security research plays an important role in safeguarding the privacy and security of everyone who uses modern technology. As such, it is equally important for technology companies to play an active role in safeguarding the rights of individuals to tinker with, investigate, and probe technology systems.
We have updated our Program Policies to provide strong assurances to researchers that we support and explicitly endorse their efforts to make Coinbase more secure. We have included an explicit promise not to legally pursue any researcher for activities undertaken in good faith under our Bug Bounty Program policies.
We’d like to give a shoutout to Amit Elezari’s #legalbugbounty project and Dropbox for raising the bar for bug bounty programs. Crafting a good program is made significantly easier when other strong examples exist, pushing standards higher.
Best in Class Bounty Levels
As digital currencies surge in value and relevance, so does Coinbase’s appeal to attackers. Given that environment, it is important we stay best in class when it comes to our bounty payouts. We want to ensure we are appropriately incentivizing white hat security research and doing our part to provide a compelling return for a researcher’s time and effort.
Our bounty update simplifies bounty tiers and provides higher rewards for many common vulnerabilities. As mentioned above, Coinbase awards bounties based on the severity of a vulnerability, not the mechanism or vulnerability class. In addition to explaining our process for evaluating the severity of a vulnerability, we also believe that researchers deserve to have concrete expectations on the bounties for a particular severity level. For each tier, we’re giving examples of reports that would fall into the category.
Critical ($50,000 minimum bounty)
- Remote Code Execution
- Ability to arbitrarily manipulate account balances
High ($15,000 minimum bounty)
- User Authentication bypasses
- Privilege escalation allowing unauthorized access to sensitive data or funds
Medium ($2,000 minimum bounty)
- CSRF impacting non-critical settings
- User de-anonymization
Low ($200 minimum bounty)
- Leakage of lower sensitivity information such as name or email address
- Potential phishing vector that Coinbase has the ability to mitigate
We are actively hiring across the board and invite you to take a look at our open positions.
Updating the Coinbase Bug Bounty Program was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on July 13, 2018Coinbase is Exploring Cardano, Basic Attention Token, Stellar Lumens, Zcash, and 0x
We are exploring the addition of several new assets, and will be working with local banks and regulators to add them in as many jurisdictions as possible.
Today we are announcing that we’re exploring the addition of the following assets to Coinbase:
- Cardano (ADA)
- Basic Attention Token (BAT)
- Stellar Lumens (XLM)
- Zcash (ZEC)
- 0x (ZRX)
We are making this announcement internally at Coinbase and to the public at the same time to remain transparent with our customers about support for future assets.
Unlike the ongoing process of adding Ethereum Classic, which is technically very similar to Ethereum, these assets will require additional exploratory work and we cannot guarantee they will be listed for trading. Furthermore, our listing process may result in some of these assets being listed solely for customers to buy and sell, without the ability to send or receive using a local wallet. We may also only enable certain ways to interact with these assets through our site, such as supporting only deposits and withdrawals from transparent Zcash addresses. Finally, some of these assets may be offered in other jurisdictions prior to being listed in the US.
As part of the exploratory process, customers may see public-facing APIs and other signs that we are conducting engineering work to support these assets. While we cannot commit to when or whether these assets will become available at this time, we will provide updates to our customers about the process and what they can expect via the Coinbase blog and Twitter.
Going forward, you should expect that we will make similar announcements about exploring the addition of multiple assets. Some of these assets may become available everywhere, while others may only be supported in specific jurisdictions.
Frequently Asked Questions
Q: Can you tell me more about these assets?
You can find information on the assets being explored at their respective websites:Q: Why explore these assets at this time?
In evaluating these assets for exploration, we relied as much as possible on the criteria in our published Digital Asset Framework, but found that many of the criteria required communication with external parties to fully evaluate. Regardless, here’s what we found notable about each of these assets.Cardano (ADA)
The Cardano protocol was created by Charles Hoskinson, one of the co-founders of Ethereum. Cardano’s Bitcoin-like Settlement Layer (CSL) mainnet is live and it has a functional wallet for its built-in ADA cryptocurrency. It has also taken a different technical direction from other blockchains on several axes, like its Ouroboros proof-of-stake algorithm, its use of Haskell, and its focus on formal verification. While Cardano’s Computation Layer (CCL) is not yet live, the project has published long-term roadmaps, has shipped working software, and appears to have a growing community.Basic Attention Token (BAT)
The Basic Attention Token (BAT) is the internal token of the Brave browser. The initial purpose of the BAT is to allow advertisers to pay for user attention when they view ads via Brave, but it can potentially be used as a general digital currency for Brave user interactions with arbitrary websites. Brave announced that they have recently passed 3 million monthly users and are in the top 10 list in the Google Play store in more than 20 countries. More than 18,000 verified publishers are using Brave across 4,500 websites and 13,500 YouTube and Twitch streamer accounts. The CEO of Brave is Brendan Eich, the inventor of Javascript and co-founder of Mozilla and Firefox, and the company is funded by Founders Fund and Digital Currency Group, among others.Stellar Lumens (XLM)
Stellar is an open-source protocol for value exchange developed by Stanford CS professor David Mazieres, Rust language author Graydon Hoare, and Jed McCaleb. Lumens (XLM) are the native asset of the Stellar network. Stellar’s consensus protocol is different from proof-of-work in that it allows and requires individual nodes to choose the set of other nodes they trust as a group (a “quorum slice”) to give them accurate information about the state of the Stellar network. Stellar allows for the creation of anchors that can issue assets, use bridge servers to interface with existing banks, and follow Stellar’s compliance protocol. Initially funded by Stripe, Stellar’s board members include Khosla Ventures partner Keith Rabois, Stripe cofounder Patrick Collison, Wordpress founder Matt Mullenweg, YCombinator President Sam Altman, MIT DCI head Joi Ito, and AngelList founder Naval Ravikant.Zcash (ZEC)
Zcash is a cryptocurrency which uses recent advances in cryptography to allow users to protect the privacy of transactions at their discretion. The distinction between Zcash’s “transparent” and “shielded” transactions is analogous to the distinction between unencrypted HTTP and encrypted HTTPS. In both cases, the unencrypted/transparent version of the protocol allows third parties to see metadata associated with the communication or transaction, while the encrypted/shielded version protects this information. The Zcash protocol has been live since 2016 and the development team has published technical improvements that may reduce the memory consumption associated with transaction privacy by 98%.0x (ZRX)
0x is an open protocol that allows ERC20 tokens to be traded on the Ethereum blockchain. ZRX is the native utility token of the 0x protocol, and several dozen independent projects have been built with the 0x technology, including relays and decentralized exchanges with tens of millions of dollars in collective transaction volume to date. The project has shipped a number of tools for developers, including Javascript, Solidity, and Web3 libraries, and has mostly adhered to the roadmap outlined in their whitepaper.Q: What is the status on adding Ethereum Classic (ETC)?
We are underway with engineering work to add Ethereum Classic (ETC), and it is proceeding as planned. We are making this announcement so that we can begin the next phase of work to explore adding more assets to the platform.Q: What is the status on adding ERC-20 assets?
We announced our general intention to support ERC20 assets in March. The BAT and ZRX assets are the first specific ERC20-based assets we are exploring for addition to the platform.Q: How will you decide what countries to launch these assets in?
Regional support will depend on a case-by-case analysis that looks to legal, compliance, and other factors that are relevant to that jurisdiction. In some cases, you should expect certain assets to be available in other jurisdictions before coming to the US.Q: Does this mean Coinbase has deemed these assets to not be securities under a particular country’s laws?
No. That legal analysis is ongoing and will vary by jurisdiction. As we only plan to launch assets which are compliant with local law, some assets may only be available in specific jurisdictions.Q: Why is this just an exploration, rather than an announcement that Coinbase is adding these assets?
In an effort to be as open and transparent as possible, we’re announcing that our teams are exploring the feasibility of supporting these assets. This is consistent with our process for adding new assets. But unlike Ethereum Classic, which is technically very similar to Ethereum, these assets will require additional exploratory work that may result in one or more of them being listed only in specific jurisdictions, or not at all.Q: Which Coinbase platforms will support these assets?
We have not made this determination at this time, but we hope to offer support for each asset across the widest variety of products in each jurisdiction.Coinbase is Exploring Cardano, Basic Attention Token, Stellar Lumens, Zcash, and 0x was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on July 10, 2018Bar Raisers At Coinbase: If You’re Not A Hell Yes, You’re A No
Coinbase has come as far as it has because of the talented, passionate people we attract. I’ve written before about the importance of hiring the right people. In this post, I want to share how we’ve introduced a bar raiser program at Coinbase, to help us raise the bar with every hire.
Hiring the wrong people is a risk factor for companies of all sizes, but it’s especially significant for companies going through hyper-growth. A common failure mode of companies at our stage is to have the quality of hires slip as the pace of hiring increases. This may sound like an obvious mistake, but it’s the default state without a conscious effort to prevent it.
Here’s why:
- There is so much work to do as a company goes through hyper-growth that teams feel overwhelmed — the pressure to hire is enormous (we’re swamped!)
- You have people interviewing candidates who themselves are brand new to the company and haven’t had time to absorb the culture and hiring bar.
Most companies hire by focusing solely on skills, and hiring decisions are made unilaterally by a hiring manager. At Coinbase we’ve taken a different approach.
Candidates are screened for both skills and meeting our values (having a match on just one is not enough to be hired) and a qualified “bar raiser” with veto power is included on every hiring panel — the hiring manager does not have unilateral power to hire.
You can think of the bar raiser as an additional check and balance on the process. Our hiring process is designed to (occasionally) miss out on a good candidate rather than make a bad hire — we’d prefer a false negative to a false positive
And though we give bar raisers, who have been trained around our values, a special veto power, we ask every person who works at Coinbase to take responsibility for raising the bar.
How do you know you’re a hell yes?
When making a decision on a candidate, we coach hiring panel members to ask themselves questions like:
- Did I leave the interview with more energy than when I went in? Did I leave inspired?
- Did I learn something from this candidate?
- Is this person much better than me in at least one area?
- Could this person start adding value right away? Would they take work off my plate or create more work for me?
- Does this person raise the average at Coinbase? Does them starting Monday make me want to work here more or less?
If the answer to any one of those questions is “no,” or even “maybe,” then we ask people on the hiring panel to round down to a no. In other words: for us, if you’re not a hell yes, you’re a no. And when you know that every person who made through your doors was hired with a “hell yes,” your company becomes a very exciting place to be.
This isn’t the only way to grow a company, but it’s how we’re growing at Coinbase. To learn more about a career at Coinbase apply for a position here.
Bar Raisers At Coinbase: If You’re Not A Hell Yes, You’re A No was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on July 2, 2018Coinbase Custody is Officially Open For Business
Last week, Coinbase Custody accepted its first deposit. Today, we’re proud to announce that we’re officially open for business. Over the coming weeks, we’ll continue on-boarding a set of world-class clients that includes leading crypto hedge funds, exchanges and ICO teams.
Coinbase Custody’s mission is to make digital currency investment accessible to every eligible financial institution and hedge fund in the world. We’ll achieve this by striving to become the most trusted and easiest-to-use crypto custody service available. Coinbase Custody is a combination of Coinbase’s battle-tested cold storage for crypto assets, an institutional-grade broker-dealer and its reporting services, and a comprehensive client coverage program.
Crypto asset security
Over the past six years, Coinbase has pioneered leading crypto storage techniques and is currently responsible for the custody of more than $20 billion in crypto assets. Coinbase Custody builds on this expertise to offer a brand new, independent solution for our institutional customers. This new cold storage system has undergone rigorous penetration testing and cryptographic design review, and we plan further, regular third-party examinations to ensure the platform’s ongoing security.
Coinbase Custody’s unique features include:
- On-chain segregation of crypto assets
- Split, offline private keys that require a quorum of geographically distributed agents to use cryptographic hardware to sign transactions
- Multiple layers of security
- Robust cold storage auditing and reporting
A custody offering through a regulated, institutional broker-dealer
Coinbase Custody leverages the expertise and systems of our partner Electronic Transaction Clearing (ETC). ETC is a SEC-registered broker-dealer and FINRA member subject to regulated financial reporting and independent audits.
What’s coming next
Coinbase Custody provides secure storage of crypto assets for institutions in both the US and Europe. Before the end of the year, we hope to bring this offering to Asia as well.
Additionally, over the coming months, pending regulatory notifications, we’ll be focused on building the features and services that our institutional clients want.
- Support for more crypto assets
Coinbase Custody currently supports BTC, ETH, LTC and BCH. We plan to continue adding support for new assets and will offer regular updates. - Flexible access to funds
On top of Coinbase Custody’s cold storage, we will add secure, segregated hot wallets and scheduled withdrawals for maximum flexibility. - Crypto-first features
Longer-term, we’re already thinking about how to securely enable our clients to participate in the crypto ecosystem through proof of stake and distributed governance. We look forward to partnering with our clients to bring these features to market.
As crypto continues its maturation as an asset class and more institutions enter the space, Coinbase is committed to delivering products and services that are tailored to their unique needs. Coinbase Custody delivers the trusted storage service that our clients need to fully immerse themselves in the potential that crypto assets provide. We look forward to delivering more offerings over the coming months.
Get in touch
If you’re an institution looking to store or trade crypto assets, we’d like to hear from you. Please sign up here to receive more information.
Coinbase Custody is Officially Open For Business was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on June 29, 2018This Month in Crypto
This Month In Crypto: SCOTUS, Facebook, South Korea, and more
A curated selection of meaningful moments in June, for investors, institutions, policy-watchers — or just the crypto curious
Supreme Court acknowledges Bitcoin for the first time
In a dissenting opinion to WISCONSIN CENTRAL LTD. ET AL. v. UNITED STATES, Supreme Court Justice Stephen Breyer wrote: “Perhaps one day employees will be paid in Bitcoin or some other type of cryptocurrency. . .Nothing in the statute suggests the meaning of this provision should be trapped in a monetary time warp, forever limited to those forms of money commonly used in the 1930’s.”Federal Reserve Bank of St. Louis adds historical crypto data
Drawing data from the Coinbase Index, FRED added four series on the prices of different cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, and Litecoin. “The price data are updated daily and span from as early as 2014 to the present.”SEC Corporate Finance Director says Ether is not a security
In public comments at the Yahoo Finance All Markets Summit, William Hinman, the director of the SEC’s division of corporate finance, said that, “putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”Stanford launches a blockchain research center in collaboration with Ethereum Foundation
Run by Dan Boneh and David Mazieres, the Stanford Center for Blockchain Research (CBR) aims to “support the thriving ecosystem by developing new technologies needed to advance the field.”Federal employees are now mandated to identify crypto holdings
House Ethics Committee says employees who work in the executive branch who own crypto must now disclose it. (The disclosure rules are for those whose holdings exceeded $1,000 at the end of the reporting period, or if income produced during that time exceeded $200.)Facebook lifts ban on crypto advertising
Reversing a previous ban on all crypto, Facebook updated its policy to allow ads for crypto and related content. Advertisers will need to be pre-approved and the company will continue to prohibit ads that “promote binary options and initial coin offerings.”South Korean government takes steps to federally regulate crypto exchanges
In a move that signals increasing support for the blockchain ecosystem, the Korean Financial Intelligence Unit announced that it will be supplying the same level of oversight and customer verification procedures to crypto exchanges (enhanced Know Your Customer and Anti Money Laundering protections), as it currently has for other financial institutions. See this Cointelegraph story for deeper context on South Korea’s stance on crypto.This Month in Crypto was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on June 28, 2018Coinbase is coming to Portland
As part of our plans to continue expanding and grow, Coinbase is opening its newest office in Portland, Oregon.
We explored a variety of different U.S. cities, and we were inspired by Portland’s incredibly talented, innovative open-source and blockchain communities. We also appreciate the city’s commitment to providing equal opportunities for all, as it mirrors our values at Coinbase.
The potential of cryptocurrency and blockchain technology is energizing a passionate group of people around the world, and we know those people are not all centralized in Silicon Valley. We signed a 7-year lease on the new Portland office and renovations will break ground in the coming weeks.
Our new Portland office will host a variety of business-related functions. We’re hiring right now for roles focused on customer support, finance, compliance, IT and HR, and we expect to add up to 100 new jobs to the local economy this year alone.
We’re excited to find people who are excited about the future of cryptocurrency, and who want to help Coinbase achieve its mission of creating a more equitable and open financial system for the world. That’s why we’re eager to expand to cities like Portland, where best-in-class talent from across the community will be critical to our important mission.
For more information visit: https://www.coinbase.com/careers?locale=en-US
Coinbase is coming to Portland was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on June 18, 2018Transition to Coinbase Pro
On Friday June 29, we say goodbye to GDAX and hello to Coinbase Pro. To take full advantage of this upgrade, we recommend you start using pro.coinbase.com now.
Coinbase Pro is a new interface built on top of the existing GDAX trading engine that has been designed with the needs of the active trader in mind. No action is necessary from you right now, but please note that after June 29, you will not be able to access gdax.com. After this date:
- Any balances in your GDAX wallets will automatically be shown on Coinbase Pro
- Any trading history on GDAX will automatically be shown on Coinbase Pro
- Accessing GDAX.com after June 29 will result in being redirected to Coinbase Pro
GDAX API Integrations:
- There will be no disruption to the gdax.com API during this time. GDAX APIs will continue to function until December 31, 2018.
- We encourage Coinbase Pro users to begin migrating their API usage away from api.gdax.com to api.pro.coinbase.com.
Coinbase Pro is currently live and we encourage all users to update their bookmarks and try our upgraded trading experience today.
If you need additional assistance with this transition, please see our FAQ for more information, or contact Coinbase Customer Support at (888) 908 7930.
Transition to Coinbase Pro was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on May 17, 2018The Playful Paradigm Shift
The world of Non Fungible Tokens is going to redefine how we create, share and exchange value
The famous Cryptokitty BugCat In typical fashion, the most recent innovation on the internet took the shape of meme-able cats. These purely digital cats, called CryptoKitties, are much like the types of cats you see across social media — cute, quirky and shareable. The difference with these CryptoKitties, compared to the videos and images of the digital cats we’re used to, is that you could own them, breed new ones and sell them for real money. The meme became valuable, and more value lead to more memes.
Non Fungible Token (NFTs) are a standard defined by Axiom Zen (the creators of CryptoKitties) and refined with the help of others in their Ethereum Improvement Proposal labeled ERC721.
At the highest level, NFTs are a new form of crypto-collectible, a sound digital good that is:
- Uniquely identifiable
- Provably scarce
- Programmable
- Publicly accessible by default
- Censorship resistant
- They are distinguishable and you must track the ownership of each one separately.
They can represent ownership in many different types of assets. Ranging from physical assets like houses and artworks, to digital assets like CryptoKitties and memes to intangible “negative value” assets like loans and burdens. In general, all houses are distinct and no two kittens are alike.
Why they’re important
The key innovation of NFTs is that we now have a way to ascribe ownership of native digital assets — things that only exist purely within the digital realm, or at least originate from the digital realm—that can be owned outside of centralized services and repositories.
NFTs let you tokenize arbitrary information (media), and importantly track ownership of that information. Information and value now perfectly meet.
NFT = [Information + Owner + Creator] = Value
Imagine being able to see the market value of a meme as it spreads across the internet, the value of your tweets or Instagram posts, the value of a news article or the value of your identity itself — that’s what is made possible by NFTs.
It’s important to note that ownership of NFTs does not exclude anyone from viewing or reading it. It is not capturing the information and hiding it away, it’s is capturing the information and letting it find its value and relations to all other information on chain.
User Generated Value
The internet lowered the cost and efficiency of information distribution at scale. Email eclipsed letters, websites and social media eclipsed newspapers and Netflix eclipsed TV. Critically, the cost of production was also reduced by an order of magnitude, and the internet and social media platforms enabled an enormous long tail of user generated content to be produced by anyone with access to a computer or phone.
Historically, the value of this content to the user rounds to 0. They may see the accumulation of social capital, audience and brand, but if they produce content on Instagram that content belongs to Instagram, and there’s limited portability of that content and Instagram accumulates any residual value from the content.
With NFTs, there is a viable path to users being able to produce non-0 value digital assets at scale. Because NFTs allow for the tokenization of any arbitrary information (media), that media can be scarce, and it can be owned by the creator. We will have user-generated value.
This value is freely transportable between platforms. Data becomes decoupled from the user experience and platform that it originate from. It’s value can accumulate, and the user is the ultimate owner of that value. With assets and data that’s public and portable, products can and will have to focus on end-user experiences that are differentiated. They can’t rely on proprietary content to keep users engaged on their platform. In an NFT enabled world, I could go to NFT-Instagram to create a post that mints it as an NFT, and that NFT can be viewed on any platform in the world.
This will have profound effects on the internet and how information is created, shared and exchange. It will now be ownable, investable, composable, staked on, tracked for provenance, bought and sold and most importantly—creatable by anyone.
User-generated value is a way for anyone who has access to a computer or smartphone to EARN their way into cryptocurrency.
The blockchain now enables value to be created, tracked and exchanged freely around the internet. Everything you have ever created online can now become a crypto-collectible that can move freely across the internet and be tradable.
The “Marketplace”
OpenSea.io and RareBits.io are two leading NFT marketplaces What’s interesting is that the term “Marketplace” is both accurate and a little misleading. These marketplaces can directly facilitate the buying and selling without the typical headaches that come with fulfillment, distribution and operations. Because these assets are on the blockchain, they are transferred at extremely low cost, and without the need for the supplier to give permission to do so. It’s simply up to the owner to decide if they want to sell or not.
These marketplaces actually resemble digital asset brokers or exchanges. They are fully integrated marketplaces that can seamlessly broker and exchange the assets being bought and sold. They don’t rely on anything other than the blockchain itself.
The importance of the emergent use of the word “marketplace” in this context cannot be understated—it signals that we have unequivocally entered the utility phase of digital currency.
This seemingly small detail is a seismic shift in the perception of cryptocurrencies. People are not buying and selling these objects for pure speculation or profit. It is people looking to buy digital assets for it’s novelty and being able to play games and have fun with them. These objects are being bought and sold for the sake of the object itself. Cryptocurrency is one step closer to becoming invisible.
Sides of the NFT Marketplace
Buyers
People who want to buy, own and use NFTs. Given that it’s possible to see all the NFTs available on the market, it is likely that buyers will be able to put buy orders in an auction format on “unlisted” items. The owner may or may not know about it, or even want to offer their NFT for sale — but it won’t stop people from being able to signal their interest. If the buyers are using decentralized exchange protocols to submit the orders, it’s likely that wallets will be able to surface the going price of the item to the owner and notify them.
We will see continuous auctions form on NFTs. Imagine Ebay, but you don’t have to actively list what you own to see the going price.
This is huge. We’ll have trustless, liquid markets where anyone can make an offer for what you own (even if you’re not actively selling).
You will know what the going price is for their unique asset whether you like it or not. You’ll know the buyer’s offer is legitimate since it’s signed, all you’d have to do is click “Accept”.
Sellers
People who want to sell the NFTs that they own. They may have created the NFT, earned it, or bought it.
As mentioned above, the owner of the NFT doesn’t have to list their token for sale to receive buyer interest. For a particularly sought after token it may have many standing buy orders competing in an auction to buy it.
If the NFT is in fact particularly valuable or sought after, the seller may elect to offer fractional ownership in the asset. This would make the Non-Fungible Token now Fungible again 🙃.
There’s now a viable path to the long sought after solution of fractional ownership of artworks, songs, Kanye tweets and even identities.
This could be done by wrapping it in an ERC20 token, or using curved bonding mechanisms. The seller could choose to maintain majority ownership of the asset or they may choose to liquidate most of it on the market.
There will be governance involved in the management and actions that can be taken with the particular NFT.
Investors/Speculators/Market Makers
Create a tradeable index of CryptoKitties using the Set Protocol Financial Primitives:
Protocol based financial services that any token holder can access.
Speculation is a critical function of a healthy economic system. Financial primitives are a technical means to construct financial tools and instruments that help provides liquidity to the market and allows for institutions in the industry to manage their risk.
Because of the existence of native value on the blockchain, you can assemble financial services in a completely trustless manner and at low cost. With decentralized-exchange protocols supporting NFTs, it will be trivial for any platform to add direct buying, selling and trading of these assets.
It’s feasible that the first consumer adoption of open finance will start with NFTs.
You’ll be able to take out a $2 loan using your Cryptokitties as collateral. Asset managers will also be able to create tradable indexes of particular NFT attributes or a particular category of crypto-collectibles that make it easy to get easy exposure to that asset class as opposed to having to buy, sell and manage thousands of different NFTs yourself. Professional Cryptokitty breeders could even construct options contracts to hedge their risk and lock in a price.
Crypto-Finance is going to get super weird, super fast. It will be playful and well designed. These products are arising from tech and games first, finance second.
Once again the adoption of this crypto-tech will be predominately retail driven. You probably won’t see financial institutions trading Cryptokitties anytime soon.
Suppliers/Generators
Suppliers = centrally created crypto-collectibles. Cryptopunks (left) and Cryptobots (right) Suppliers: professional collectible creators, virtual world builders, game makers, meme factories, artists, musicians
Generator platforms: enable user generated value. Platforms that let anyone create NFTs. This is where the world information meets the world of value at scale. We could see the following categories emerge from NFTs:
- Social networks: own your social media posts. They will also be interoperable between platforms. NFTs themselves can also post and own a social media presence. I’d highly recommend reading about the Facebook for Cryptokitties.
- Avatars and Sovereign Identities: use NFTs as a means to develop and maintain an identity. You use your NFT as a username, or avatar in a game. Valuable identities can be fractionalized and governed by multiple parties. Identities are also easily tradable via marketplaces. People don’t tokenize themselves in actuality, but their output is what is tokenizable, because the output will likely be digital.
- Status and Reputation: receive a specific NFT that proves you were at a particular event. Democratized access to data that is freely available removes a notion of status. For better or worse, NFTs introduce scarcity and status back into the digital world. This can also be extended to more practical examples like degrees and accreditations.
- Meme economies: create, fork and trade memes. Earn a real return for creating a viral meme.
- News and information: individual facts, stories, articles and studies can be stored, linked, owned and staked upon. We could see the emergence of Wikipedia type platforms that can utilize stake weighted NFT trees and Composables.
- Playbor (Play labor): the lines between work, crypto-games and gambling will continue to blur. The output that is produced will be owned by the producer, instead of by the platform. I.e. you will own your social media posts and personal data instead of Facebook.
- Composables: ways to link and create new NFTs with other tokens. E.g. deposit 5 $ABC and 12 $XYZ to create a sword for a particular game. Or having your Crypto-avatar own certain collectibles. If you sell your avatar you sell the collectibles with it.
There is a cost to mint NFTs, which would make it to produce information at scale. In the short term, this may prevent subjectively low quality information proliferating at scale. It’s also a barrier to entry into the system, since users will have to own Ether to be able to mint NFTs (assuming that the platforms don’t foot the bill).
Developers
OpenSea Developer docs The platforms that allow for the usage of NFTs will be a considerable driver of the demand and therefore value of the particular assets. If World of Warcraft suddenly let you use your Cryptokitties as avatars, and the attributes of your Kitty led to certain characteristics in that game — you’ll see demand shift on certain attributes based on how the developers program that game. There will also be multiple platforms utilizing the same assets in different contexts. A Cryptokitty that’s worth owning in World of Warcraft might not mean much in Fortnite.
The developer ecosystem is critical to the success of NFTs and peripheral technologies at large. As Chris Dixon notes, decentralized platforms need to go through two phases of product-market fit:
- Platform-Developer fit: developers and entrepreneurs continually experiment and collaborate to build out the ecosystem and technology
- Platform-User fit: the businesses and products that utilize the platform find a market of end users.
The platforms and products that cater to developers by making it easier to build and experiment with NFTs will have a greater chance of finding platform-user fit.
There are multiple infrastructural pieces that are going to be required to support an interoperable NFT ecosystem:
- NFT metadata standard: an open standard for creating, sharing and displaying NFT metadata.
- IPFS / NFT protocol: generalized protocol for storing NFT attributes and resulting metadata on IPFS. A way to decouple the metadata creation and storage of metadata from centralized entities. If Cryptokitties fails you won’t be able to see your precious cat. An interesting solution to this could be the deterministic generation of images/media based on an NFTs attributes
- “Pingback” protocol for NFTs: an automatic notification sent when an NFT is used in another context: this would enable creator/owners to more easily participate as their unique work propagates the dApposphere, and also build rich provenance that could be meaningful for UX and marketplace value [Credit to Jesse Walden for this idea]
- Ability to rent: reversible collectibles in the same vein as reversible ETH. Let holders define a min/max holding period for the ownership to be transferred. Would allow for someone to use your gun in a game for a certain period of time.
- Generalized interfaces for NFT functions: e.g. Having a celebrity avatar own and feed a Cryptokitty in Decentraland
- Generalized DEX support for NFT functions: for example let competing buy orders battle it out over the breeding of a particular Cryptokitty.
Other components of the marketplace
Toshi is a wallet that lets your store and use your NFTs - Wallets: people need to keep their collectibles somewhere. Right now wallets like Toshi let you hold and view your collectibles, but in the future marketplaces and apps may also let you hold your collectibles natively. It’ll be interesting to see if the majority assets are stored in generalized wallets like Toshi or within the apps, gamplatforms that use NFTs.
- Curators: with a massive long tail of tokens there will be a need for curators (both centralized and decentralized) that rank, sort and associate NFTs for different contexts and purposes. This could range from digital art galleries pulling together a collection or a games website ranking the best Cryptokitty attributes for battle in World of Warcraft. Curators will often double as marketplaces.
- Dapp Stores: the dapps and and services that you can access vary based on the tokens you hold in your wallet. It’s likely that Dapp stores will morph and customize to you and show you the dapps you can use with your various assets.
Where to from here?
Anything that has value will eventually be captured (or revealed) by blockchains. We'll realize that there was value in places we didn't know existed. We'll discover just how valuable some digital behaviors are to society.
The Non Fungible Token standard has resulted in the creation of crypto-collectibles (sound digital goods) that are easily created, used and exchanged across the internet. Blockchains and the internet inch that tiny bit closer.
In the 6 months since Cryptokitties launched, a rich ecosystem of platforms, protocols and tokens have emerged that will come to define the internet of value, and will likely be an critical factor in the utility phase of digital currency—where people are using cryptocurrency technology outside of the purposes of speculation and investment, but for the utility provided by the technology.
That utility right now is cute cats, games and digital artworks… but it will begin to precipitate all forms of digital goods and information—leading to the discovery of new mediums, use cases and platforms that will shape cryptocurrency and the internet back to the power of the user, where they control the value they create, freely carry it around the web and exchange it at will.
NFTs make the value of information and behaviors more granular’— and thus reward every step and modification in line with its real value — instead of rounding (usually down to zero) or being captured by the platform.
Since behaviors can be programmed into the token themselves, those behaviors will be measurable, provable and therefore effectively valued by the market. Creating a variation of a meme, calling out falsities of a news article or retweeting may actually result in tangible value. Right now, all of these behaviors are valued informally and are therefore imprecise. Any value that is captured isn’t interoperable between platforms, my Reddit karma doesn’t mean much on Twitter.
NFTs, combined with other token standards and financial primitives bring us one step closer the promise of a more democratized value system — one of the initial promises of the internet, and once again it’s started with digital cats.
Are you building in crypto? Say hi to Coinbase Ventures.
Want to help build an Open Financial System for the world? Apply to work at Coinbase
Thanks Oliver Wallace, Todd Goldberg, Jayson Hobby, Brian Flynn and Emre Tekisalp for feedback.
Thanks Ben Jennings, Jesse Walden, Denis Nazarov, Balaji S. Srinivasan, David Farmer and Ali Yahya for conversations and thoughts that influenced this piece.
The Playful Paradigm Shift was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on March 5, 2018The Emergence of Cryptoeconomic Primitives
The building blocks of a token-based society
At some point in the past 6 months, you may have read or heard the terms “Cryptoeconomic Primitives”, “Financial Primitives”, “Crypto Primitives” or just “Primitives” being used in relation to some projects in the cryptocurrency space. The usage of these terms has varied, and some debate has occurred in attempt to clearly define exactly what some of them are.
Broadly speaking, I think there are two categories of primitives being talked about in the cryptocurrency “Crypto” space. The two types of Crypto Primitives are:
- Cryptoeconomic Primitives
- Category Primitives: e.g. Financial Primitives (post coming soon™), Governance Primitives (staking, voting), Token Primitives (NFTs, RFTs, ERC20), Regulatory Primitives (securities protocols) and so on.
In this post I’m going to focus specifically on Cryptoeconomic Primitives.
Some Background
To help us understand what these Cryptoeconomic Primitives are, it’s helpful to know some definitions it builds on top of:
- Token: a programmable blockchain asset
- Protocol: a clearly defined set of functions and behaviors
- Mechanism: a system of parts working together in a machine; a piece of machinery.
- Primitive: well established, generic building blocks. They are designed to do one very specific task in a highly reliable fashion
- Incentive System: denotes a structure motivating actors as part of an organization to act in the interest of the organization
- Cryptoeconomics: the combination of cryptography and economics to create robust decentralized P2P networks. Cryptography is used to prove things that happened in the past, and economic incentives are used to encourage desired properties to hold into the future¹. Code and economics are intrinsically interlinked.
Defining Cryptoeconomic Primitives
With these definitions in mind, we can go ahead and define what Cryptoeconomic primitives are:
Cryptoeconomic Primitive:
Protocol based incentives systems that are uniquely enabled by tokens. Also referred to as “tokenized economic games” ².
They enable the coordination and allocation of capital to achieve a shared goal via the use of various economic and cryptographic mechanisms.
A Cryptoeconomic Primitive should be a self-sustaining system, and its intrinsic token must be a necessary element of that system³. In other words, it shouldn’t require anything other than itself to function and the removal of the token would cause it to fail or work less effectively than the system with a token.
A Cryptoeconomic Primitive should result in the predictable coordination of a set of actors (whether it be humans or machines) towards some specific shared goal or outcome. This can include predictably failing in certain situations and knowing limitations.
To find some examples, look no further than the bustling category of Curation Markets: which is a field of primitives that are specifically designed to curate information and reduce information asymmetry⁴. The most notable primitives are Token Curated Registries (TCRs) and Curved Bonding. Both share the same goal to incentivize token holders to curate information, but differ in behavior and output: Token Curated Registries give you a binary outcome (i.e. is this thing “in” or “out” of the registry) where as Curved Bonding systems give you a gradient score of the relevance of something.
These two primitives alone are serving as the foundation for multiple consumer applications, protocols, and platforms that utilize curation markets on their own specific vertical or use case:
- AdChain (where TCRs originated )uses TCRs for maintaining a list of domain names accredited as non-fraudulent for advertising purposes
- The Ocean protocol uses both TCRs and Curved Bonding in its decentralized data exchange: TCRs are used for the list of participants and Curved Bonding is used to rate the relevance of data.
- Relevant uses Curved Bonding in its social news reader app to create an “Open Quality Metric” for curation
- Messari uses TCRs to create a decentralized Self-Regulatory Organization that lists legitimate tokens and cryptocurrency projects.
The AdChain Platform uses a Token Curated Registry to maintain a list of domains that are verified as non-fraudulent. It’s important to highlight some of the existing projects using these primitives because it shows just how important they are to the ecosystem at large. With these two alone, we are seeing broad use cases become possible across a wide range of industries.
Outside of Curation Markets, some other examples of Cryptoeconomic Primitives include:
- Prediction Markets: incentivized coordination and allocation of capital to correctly forecast future events
- Stablecoins: incentivized coordination and allocation of capital to maintain the stable value of the stablecoin, usually relative to some measure (E.g. 1 USD)
- Geospatial Markets: incentivized coordination and allocation of capital (e.g. self driving cars, beacons, any infrastructure or object) throughout the physical world and prove its location.
Design is famously lagging in the cryptocurrency industry. This is because it’s hard—products that can be used by everyone have to simultaneously balance the complexities of the entirely new design paradigms of cryptocurrency with the newfound utility that it enables. Shared standards like ERC20 and ERC721 make it easier to create consistent experiences across multiple products and use cases. The same holds for primitives. The benefits of a highly reliable, predictable and known building block is then being able to design reliable, predictable and known user experiences—in other words, intuitive.
Unlike the creators of blockchains and blockchain-based protocols — who can own the open source networks they created via the token — it is unlikely that the inventors of Cryptoeconomic Primitives will be able to capture the complete value of their creation in the same way. This is because the primitive will likely be independently instantiated as part of another protocol or system. It is a ‘building block’ after all. For the inventors, it will be up to them to utilize their creation in a protocol/network/platform and likely compete with other people using their same invention. The traditional problems of open source economics may apply to Cryptoeconomic Primitives. Luckily, there’s multiple projects that aim to solve that exact problem (most of them ironically using curation markets).
The whole is greater than the sum of its parts
“This is called an “emergent” property of the whole, by which parts and whole differ because what matters is the interactions between such parts. And interactions can obey very simple rules.” — Nassim Nicholas Taleb
Each of these primitives are interesting on their own, but mixed and matched together they are fascinating. The combination of Primitives will enable the creation of protocols and systems that weren’t possible prior to their existence. These emergent systems will be greater than any of the individual primitives on their own. With the continued explorations of existing primitives and invention of new ones, we will undoubtably see rapid, compounding utility—where we can experiment with all permutations of existing primitives, tokens and protocols to create new primitives tokens and protocols to infinity. What does compounding utility look like in practice? Let’s look at what’s happening with some Financial Primitives:
Can't wait to take out a @DharmaProtocol loan to buy more @CryptoKitties, trade @dydxderivatives options contracts to hedge breeding risk and trade @SetProtocol indexes of various kitty attributes to get broad exposure. This is the open financial system I've been waiting for.
The ability to play each of these Financial Primitives off each other increases the utility of each individual primitive and leads to a total value add that’s greater than the sum of all of them put together. New building blocks means new types of things that can be built. It also means there’s probably a whole field of specialization in just the combination of them.
This is exactly the case in the longstanding world of Cryptographic Primitives, the combination of primitives to create security protocols is a specialization in its own right—this will likely be the same in the cryptocurrency field, Cryptoeconomics is only just getting started.
The emergence of Cryptoeconomic Primitives is an early sign of maturing knowledge and infrastructure in the cryptocurrency industry. The continued advancements and definitions of these primitives makes it increasingly easy for people to design consumer applications that are uniquely enabled by blockchain. You don’t have to be an expert in cryptography, economics and game theory to start creating Cryptoeconomic systems— you just need to know how to read a spec and implement. Consumer applications are coming and they’re coming fast.
“[Money] it drives the world, for better or worse. Economic incentives drives entire swathes of human populations to behave” — Chamath Palihapitiya
Here’s the thing, a Cryptoeconomic Primitive lets you easily instantiate a new human-computer organization out of the box. If you wanted to go off the deep end, you could go as far to say that they are quantifiable building blocks of the internet hive mind. With tokens and cryptocurrencies, the internet hive mind is now tangible. It can allocate capital, an intangible force that drives the tangible world. These Cryptoeconomic Primitives will inevitably contribute to the rewiring of how society functions at large. The blockchain enables new levels of sovereignty to control your own value, and likely other aspects of your life like identity. But it also comes with irreversibility, so once something is deployed it’s extremely difficult to undo—so we best proceed with a healthy dose of caution. Like any tool, it can be used for both good and malicious purposes. We should do everything we can to make sure it’s only used for good.
The chasm is soon to be crossed, and we should be prepared for what’s on the other side.
Thanks to Reuben Bramanathan, Siddharth Coelho-Prabhu, Connie Yang, Felix Feng, Adam White, Peter Horne, Julian Borrey, Ben Jennings, Fred Ehrsam, Dai Hovey and Linda Xie for reviewing early drafts and helping shape this post.
At Coinbase we want to see new Primitives and their tokens flourish. If you are interested in creating the place where tokens are accessed, used and exchanged in the future, apply to join us.
What are your thoughts?
Do you think Primitives mean something else? What are some other examples you’ve come across? How do you see them developing and taking shape over time? Let me know your thoughts on Cryptoeconomic Primitives and lets kick off some more discussion!
Want to start building your own Primitives?
I’d highly recommend Trent McConaghy’s in depth post on token engineering and example Crypteconomic Primitives, or “Token Design Patterns” as he calls them:
Towards a Practice of Token Engineering
Coining a new word?
Cryptoeconomic Primitives is 9 syllables and a bit of a mouthful. It could be useful to coin a new word like Crymitives, CPrims or something else. H/T to Dai Hovey on this idea.
People you should follow in the world of Cryptoeconomic Primitives.
Huge hat tip to everyone in this list for pushing the space forward and for work you’re doing on Cryptoeconomic primitives and beyond.
- Simon de la Rouviere
- Mike Goldin
- Rhys Lindmark
- Maciej Olpinski
- Elaine Ou
- Ned Scott
- Slava Balasanov
- Matt Condon
- Trent McConaghy
- Denis Nazarov
- Jesse Walden
- Luke Duncan
- Jorge Izquierdo
- Dimitri De Jonghe
References:
[1] Cryptoeconomics 101— Nick Tomaino
[2] Curation Markets Update: 28 February 2018— Simon de la Rouviere
[3] Mike’s Crypto Manifesto—Mike Goldin
[4] City Walls & Bo-Taoshi: Exploring the Power of Token-Curated Registries — Simon de la Rouviere
Things I read that influenced this piece:
- How to Make Bonding Curves for Continuous Token Models—Slava Balasanov
- Fred Ehsram’s Thread on Curation Markets
- Token Lexicon—Billy Rennekamp
- Cryptoeconomic Primitives Circle #1— Rhys Lindmark
- Jesse Walden’s tweet on Primitives/Mechanism’s/Protocols
- Early UIs for curation markets—Jesse Walden
- Digital Pets That Don’t Die—Elaine Ou
- Trent McConaghy, Ocean Protocol: Cryptoeconomic Primitives + Mapping Humanity’s Plan To Self-Actualization—Rhys Lindmark
- Cryptographic Primitives—Wikipedia
- Basically the whole Crypto Canon by Andreessen Horowitz
The Emergence of Cryptoeconomic Primitives was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Posted on November 2, 2016How to Raise Money on a Blockchain with a Token
We’ve now seen several multi-million dollar crowdfundings done on a blockchain. Projects are raising money through the token model: selling the native token needed to use their corresponding networks (Ethereum’s ether, Augur’s Rep, IPFS’ Filecoin, and others).
What is the token model?
For the basics on how this token model works and why it’s powerful, you can read my introductory post. I’ll refer to these tokens as protocol tokens in this post — a more accurate name to what others and I have called “App Coins” in the past.
When considering raising money through a token, a few common questions arise:
- Should we consider the token model?
- How do we perform the token sale?
- Is this legal?
I‘m going to share current approaches and then offer ideas on future approaches using increasingly decentralized, on-chain methods.
Should we consider the token model?
In short: if your project has a network effect, yes.
While tokens serve many functions, the biggest benefit to the token model is that it provides the economic incentives for your network to get off the ground and overcome the classic chicken and egg problem. In other words, it gives all users of your app the ability to own a little piece of your network, incentivizing them to start using it at the start. This gives it a higher chance of success with a lot less capital needed.
How do we identify the network effect in our project?
In some projects the network effect and token model is obvious. For example, the network effect of Uber is the growing network of riders and drivers. So the token model for a Decentralized Uber and dUberCoin is pretty straight forward: make dUberCoin the native token of the Decentralized Uber network and reward early riders and drivers with more of it at the start.
Bitcoin was the first example of the token model: early miners could mine bitcoin of unclear value at the time — now worth ~$65,000 per block — using just a laptop. While that’s no longer possible, it attracted the initial miners needed to bootstrap the network.
It may take a little work to think about what this would look like for your project. My hunch is that a surprising percentage of current and future businesses fall into this category since most businesses rely on some kind of network effect.
It’s important to recognize what the network (or networks!) within your project are. At the moment many “apps” are really a bundle of a few things. For example, a food delivery app like GrubHub is really a bundle of: a network of restaurants and consumers, another network of restaurant advertisers (for sponsored placement in the app) and consumers, and a thin end-user client “app” that sits on top of these networks. Each of these networks could have their own token. It’s also possible some tokens don’t fully encompass all elements or what feels like the full value of a project. For example, Augur’s Rep token allows you to participate as an oracle to the prediction markets of the network and get compensated for it, but doesn’t take a cut of all transactions in the network.
Different thin clients to the Twitter network These underlying networks and their user interfaces will get unbundled and re-bundled. We will see a bunch of different interfaces to the same blockchain-based networks in the same way there were a bunch of different Twitter clients early on and there are a bunch of different Bitcoin/Ethereum wallets today. Similarly, we will probably see a bunch of different networks and their tokens under the hood of what feels like a single end-user “app”. WeChat is a great example of this: it has many different networks in one UI.
WeChat’s many networks in one UI How do we perform the token sale?
There have been two major types of fundraising through protocol tokens:
1. Pre-release sales
Pre-release sales have historically been most common and can be conducted in fiat, digital currency, or some combination. Examples include Ethereum (pre-sold ether for bitcoin), ZCash (pre-sold ZCash for fiat in a traditional equity fundraise from angel and institutional investors). They occur when a project needs money to develop and test a protocol to get it off the ground. Importantly, this means the protocol’s native token also has not yet been created, so IOUs for those tokens are being sold, not the token itself.
Augur pre-release sale 2. Post-release sales
Post-release sales are increasingly common. While they can be conducted through a central escrow agent, they are increasingly being conducted through a smart contract on the Ethereum blockchain which accepts crypto and atomically pays out the new protocol token. A recent example is the FirstBlood project. They occur when a project has launched an initial version of their protocol and corresponding token and wants money to continue its development. The project can then use digital currency raised to fund the continued development of the project.
Sales conducted on-chain through smart contracts couldn’t really be done before Ethereum, which is why they are a newer concept. I think this style will become the most common over time. Ethereum.org has a simple tutorial on how to code one up. You can also create your first basic token in 15 seconds using The Token Factory.
Pre-release sales make sense: it’s hard work to get a well-thought-out and tested protocol off the ground. Just like a startup, funding is often needed to get to an initial release. However, there are problems with these pre-release sales: we’ve gone off the blockchain and there’s now an IOU for a token that doesn’t yet exist. We also now need some kind of legal entity to accept these initial investments (more on that later).
A potential approach to get the early funding benefits of a pre-release sale with the reduced trust required in a post-release sale is as follows:
- Create your protocol token as a standard Ethereum (ERC20) token, but just release to the blockchain the standard functions needed to create the token and have it fit the ERC20 standard. At this point none of the “hard part” of writing the protocol has been done. Said another way, you modularize the development of the protocol such that you just release the standard token functionality (send, receive, basic accounting) on-chain as the first piece of the protocol developed, with the rest to be completed later.
- Use the digital currency raised to fund further development of the protocol.
Basic Ethereum token functionality, in code This approach avoids the trusted/centralized “IOU” portion of pre-sales by giving token purchasers the token itself, even though the protocol is not yet complete. It obviously has its risks: projects funded this way could never come to fruition, like any early project. But the forces in the world from both sides are clear: developers want to be able to raise money to create new protocols and people want access to these new protocol tokens as early as possible. The two will converge and stabilize in a way where developers and future users can fund projects to a minimum viable product more easily.
How much of the token should we sell and how should we distribute the funds raised?
Different approaches will make sense for different protocols.
The current norm is setting aside 10–20% of the protocol tokens and selling the remaining 80–90%. A small portion of tokens set aside immediately goes to the core developers of the protocol to recognize their work to date, with the majority set aside to fund future work. This gives the project two sources of funding: the funds raised in the initial sale, and the ability to sell or disburse the tokens held back in the future.
How these allocations work is evolving and taking ideas from traditional companies. An early example of this is ZCash, where there is a “Founder’s Reward” that looks like the 4 year vesting schedule you’d typically find in a startup.
Whether or not these rough allocations make sense remains to be seen. A typical startup has the opposite structure: typically 20% (not 80–90%) of a project is sold in its first funding.
And therein lies a key point in the early stages of protocol tokens. We have yet to hit a situation where the combination of funds set aside in the initial sale and tokens held back have run out — yet. This is a close equivalent to running out of cash and the options pool in a typical company. Ethereum, for example, hasn’t hit this bump yet because 1) it’s young and 2) the price of ETH vs every fiat currency has, more or less, been on the rise, making the ETH the Ethereum Foundation set aside last longer. As a result, we’ve never seen the idea of multiple fundraises as is common with startups. Running out of funds for future development seems likely, as work on these protocols is never really “done”, although they may mature and change less over time.
Some combination of three things will happen in the future as a result:
- Protocols will hold back more than 10–20% of the tokens in the initial sale. This allows for more cushion to fund development. In a scenario where these funds are not really needed, token holders could vote to distribute or burn those funds so all token holders get an even share of that value back.
- The companies who have built value-added services on top of these protocols will directly pay for or themselves work on the protocols in the future. We’ve seen some of the major internet companies like Google, Facebook, and Apple do this with current core internet protocols. The Bitcoin Foundation is an early example of this: industry members had paid memberships which funded core developers.
- The users of these protocols could agree on mutual dilution. This is a way of using the protocol to raise funds for further development, much in the way that everyone in a startup will dilute themselves to create more options for new employees. This requires reasonably-functioning decentralized governance. Something similar was proposed by Vitalik when the Ethereum foundation was running low on funds, but became unnecessary as the price of Ethereum climbed. I’m not aware of this being done yet in practice, but I think it will become more common in the future along with the first two points.
Is this legal?
As with most legal questions, it seems the answer is: it depends. This model is new and largely untested. The most important question is whether or not it will be considered a security under US securities law. Some approaches to the various properties of a token which make it feel more like a security (thus riskier) and others which make it feel less like a security (less risky).
One example is is the amount of functionality of the token. If the token is only a vehicle to pay out a portion of profits it feels more like a security. If it allows you to uniquely use and access a network with a specific utility it feels less like a security. Another factor is the marketing around a token. If it’s marketed as generating or even guaranteeing profit, it feels more like a security. If it is marketed as serving a specific utilitarian purpose, it feels less like a security.
We are currently working on an simple legal framework to categorize the level of risk associated with different approaches along with top lawyers and industry groups like Coin Center. We hope to open source this framework in the next few weeks as part of our goal to advance the decentralized application ecosystem. This post will be updated at that time. Coin Center, a non-profit industry policy group, published a good longer form report on this in January.
Legal structures used to handle funds raised
Most groups who have raised funds through a token sale create some kind of entity to handle the funds raised. The most common structure at the moment is setting up an (often Swiss) foundation. This foundation has some governance, much like the corporate governance you’d see in a normal company, which determines both the initial and ongoing distribution of funds raised. This is what Ethereum has done, more or less. Many C corporations in the US are searching for a good structure at the moment.
A simple answer here may ultimately be the best one: don’t create an entity at all. Allow the token holders to vote on the disbursement of the funds raised to develop the protocol in a decentralized governance style.
Pulling it all together
To tie up a few of the ideas mentioned in this post, here’s what doing all of this on-chain without the need for a central controlling entity might look like:
- For launch, the community and core developers suggest an initial allocation of the tokens which is baked into the protocol. Crowdsale smart contract is released and raises funds; sets aside for future protocol development.
- As time goes on, token holders (not just a central company or foundation) can vote on how to distribute the funds set aside for development.
Contributors can be individuals or even a series of C Corps who have bank accounts to pay rent, salaries, and other costs, as long as funding decisions are done through decentralized voting or similar. This is the case with Maker DAO — they have a few small companies and a series of individuals who are funded by the community. There is a risk personal liability enters where central liability fades here, but my gut is that lessens with reasonable decentralization.
In all likelihood there will be some kind of core group making recommendations to the community which, if things are progressing reasonably, will be backed by the majority of token holders.
This approach replaces the need for a central foundation, company, or entity with decentralized governance. As we’ve seen in Bitcoin, Ethereum, and other protocols, it’s early days for decentralized governance in the realm of software protocols and there will be a lot of hard work and learning to do. However, given the nature and goals of most decentralized protocols, this probably produces the best outcome for all involved long term.
At GDAX we want to see new protocols and their tokens flourish. If you are interested in creating the place where tokens are accessed and exchanged in the future, apply to join us.
Thanks to Alex Felix for supplying graphs and Martin Koppelman (Gnosis), Andy Milenius (Maker DAO), Will Warren, Brian Armstrong, Dan Romero, Jarrad Hope, Joey Krug (Augur), Chris Dixon, and many at Coinbase for contributing to the ideas in this post.
I gave an early live presentation of this at the Silicon Valley Ethereum Meetup.
These are ideas and should not constitute or substitute for legal advice.
How to Raise Money on a Blockchain with a Token was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
