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ICO by Design

In the annals of blockchain, 2017 will perhaps be remembered for the explosion of Initial Coin Offerings (ICO) that defined a popular characteristic of the technology to support the design of business models that are underpinned by a digital token. Borrowing their title from IPOs (Initial Public Offering), ICOs are propositions toward micro digital economies that use a bespoke cryptocurrency which follows terms and rules to produce value. In the flood of white papers, https://icotracker.net/past recorded 951 offerings in 2017, a noticeable increase from the 42 that were recorded in 2016. This cascade of ‘tokenomics’ presented an interesting opportunity to think about how blockchains, and in turn the development of DAO’s, allows a wide range of people to think about business models in a new way.

Following a Block Exchange workshop organised with Digital Catapult in December, that introduced the primary principles of blockchains to 50 participants from the Edinburgh / Scotland tech community, we invited them to spend a short time thinking about the opportunities for ICOs in sectors in which they worked. The interest for me was to see how easy it was for people from different technical and creative backgrounds to work together to identify value constellations which were decoupled from a state produced fiat currency, to allow them to think more radically about how value can be produced through a virtuous digital economy.

ICO by definition

Working with Dug Campbell, founder of Scottish Bitcoin and Blockchain meetups, we borrowed on established definitions of ICOs to help frame discussions in small groups:

Investopedia introduces an ICO as “An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.” https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp

In his blog post, during mid ICO fever, William Mougayar goes further to explore the mechanics of viable tokenisation and describes a token as “a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.” https://medium.com/@wmougayar/tokenomics-a-business-guide-to-token-usage-utility-and-value-b19242053416

Particularly focused on describing the necessity for ‘product/market fit’ Mougayar takes time to describe three primary tenets for a token: its role, its features and its purpose. Using these three key terms, Mougayar maps six ways in which a token can operate toward the economics of an ICO. From the ownership of a token that provides the 1) Right to vote, govern and/or access to the product, to 2) Value Exchange that is produced through the transactional nature of each micro-digital economy as members earn, spend and buy. 3) The Toll, is a useful function that produces economic value through a ‘pay-to-use’ model but is equally valuable in the design of smart contracts, a token can have a 4) Function in becoming a member of a unique network, a vital incentive in the onboarding process, and developing the critical mass required for an economy to flourish. Understanding how tokens become 5) Currency, how transactions are processed (preferably as frictionless as possible) but allow value to flow across the network, and toward 6) Earnings, which according to equitable distribution, allow profits or benefits to be shared across the economy.

If the design of the ICO is successful then the utility of the token will have perceptible value to each and every stake holder. In our presentation to participants, Dug and I used the Neuron Network video that explained a well-developed design for the tokenization of healthcare for patients by doc.ai.

The Task (30mins)

Simplifying Mougayar’s principles to the following questions, we asked the groups to design an ICO for a particular sector / community:

What role does your token have in defining…

• A right to use the product?
• A reward for carrying out work in the system?
• A toll for accessing the system (pay-per-use)?
• An incentive to help onboard new customers or improve the experience for customers?
• A currency within a closed ecosystem that provides frictionless transactions?
• A way to distribute earnings (share in the upside – profit, benefits)?

Furthermore we encouraged groups to map the ‘actors’ in the network: people, data and things, to consider how data / value will flow between each party to provide a service and to consider what data each actor needs to know, and what they don’t need to know.

Of the five tables of around ten participants, there were mixed confidences in responding to the challenge. Some tables benefitted from members being part of blockchain and bitcoin start-ups who had a grounding in the principles, others were less confident and only had the Block Exchange workshop that used Lego to make tangible the basics of blockchain thinking.

Nevertheless, most of the tables made the leap of faith, and teams were able to identify how tokenization could map and balance reciprocities within a community. Solutions were proposed for how renewable energy could be produced, managed and traded from Scottish Islands, how creatives, consumers and secondary producers could license and benefit from cultural media, and finally how tokenization could reboot the UK housing crisis beyond the simplicity of ownership and renting toward life-long flexible investments in accommodation and shelter.

Takeaways

• Groups tended to benefit from a social and economic context from which to extend an idea; the energy or music industry.

• The role of tokens supported the values of multiple members associated with each economy (producers, consumers, distributors, investors).

• Because tokens are intimately bound to the production and preservation of value within a sector and network, the design of their utility becomes more creative.

• The specific role of tokens was difficult to identify within the short time frame.

Looking back / forward

As a designer, I’ve always found it hard to introduce business models to creatives, principally because I am neither a scholar of business, marketing or economics, but secondly because artists and designers have a very intimate and distorted idea of what value is. As the producers of ideas, products and services they are often far too close to their product to understand why it is valuable, to whom it is valuable and how to value it. Often taught in educational systems that encourage sole production, resulting in grades and exhibitions that are assigned to individuals, young creatives are highly solipsistic and whilst very social, are not trained to design value for collaborative networks. The ICO by Design challenge, whilst brief, opened up a series of opportunities to begin to see how the design of Tokenomic systems requires every member in a network to find value through the flow and utility of its tokens.

Now under the microscope for representing elaborate Ponzi schemes, ICOs are a valuable jumping off point for communities to think beyond the limitations of state fiat currencies, and whilst doubts remain about the appropriateness of blockchains in every instance, their thinking processes are useful in disrupting the models of power that purvey traditional models toward the production of value.

Thanks to Dug Campbell and Ella Tallyn for their invaluable input.
The event was also covered by IoTUK and perspectives on the Block Exchange method edited through this blogpost and video: https://iotuk.org.uk/the-block-exchange/