My work on a space cryptocurrency has helped me understand that digital currencies, blockchain and smart contracts are creating an entire class of assets with new incentive structures. Those are used via decentralized autonomous organizations (DAOs).
But before I get to DAOs, let’s talk about the current batch of cryptocurrencies and why you should avoid 95% of them.
Friends who started getting into cryptocurrency in the last couple of years believe the old rules of economics no longer apply. Although I have been a vocal bitcoin
believer and holder since 2013, I don’t agree with them.
Here’s one rule that won’t change: It’s not enough to have demand for something; that thing must be scarce to have value. For example, air has infinite demand, but has little value because most people just get by breathing the air around them.
That’s partly why more than 95% of the current batch of 15,000 cryptocurrencies traded on nearly 500 exchanges are silly or fraudulent. To be clear, nearly all of the silly cryptocurrencies will head to zero and all of the fraudulent cryptocurrencies will head to zero. That leaves about 5% of the current batch of cryptos that will eventually still have value and probably increase in value in coming years.
I expect the Securities and Exchange Commission (SEC) to send cease-and-desist letters to the founders of thousands of cryptocurrencies over the next few weeks or months. Any cryptocurrency or token for which the creators received founder’s tokens or any other benefits are going to be classified as securities when the SEC looks at them. If the founders got economic and/or financial benefits but didn’t register with the SEC from the beginning, they’re probably in violation of regulations.
I imagine the SEC will give a grace period to most of them to get registered and that most of the good ones and many of the bad ones will end up being registered as securities. But there will be a lot of pain for even the best cryptos as this process plays out. I am generally cautious on crypto for the near/mid-term because of this risk and because the crypto market feels so crowded.
As we have worked to create a space-debris-cleaning cryptocurrency, we’ve made sure SKTL is not a “security,” as defined by the SEC. For example, there are none of those aforementioned “founder tokens” or any other financial benefit for the creators.
Almost all of of the 15,000 cryptocurrencies out there right now have large stakes of ownership held by each of their respective creators. On the other hand, SKTL tokens are being airdropped to the first 100,000 people with a U.S. or Canada cell phone who register at the SKTLs Airdrop Registration page, with an equal amount reserved for donations to clean up space debris and an equal amount reserved to be paid out as the space economy expands with new satellite and astronaut launches.
This is where those new incentives and organizational structures enabled by DAO start to come in. One of the reasons it’s so important to try to be empathetic as an analyst is because you have to understand incentives if you want to understand economics and financial markets. And the creation of new incentives built upon the open blockchain network of smart contracts is where cryptos — or more specifically blockchain and the smart contracts that blockchain enables — change everything.
Until cryptos enabled trustless distributed autonomous and anonymous transactions to exist, there were three major categories of finance: Ownership (equity), lending (bonds), and taxation.
That is, if you had money at any other time in the history of humankind and you didn’t want to just put it under your mattress, you either bought something with it or you lent it to someone or you were forced to give it to the government.
If you bought ownership in a business, you wanted it to grow its cash flow to create more money for you over time. If you lent money to a business, you wanted it to generate at least enough cash flow to pay you back with interest over time. And if you sent it to the government, it meant that most of it would be wasted or used in corrupt ways and that hopefully a penny or two from each dollar would actually provide some protection or benefit for society.
The incentive economy
But suddenly, as with our SKTLs Space Crypto, the incentives aren’t about cash flows or interest payments (taxes don’t go away). For the SKTLs crypto to create value, the space economy has to grow, space debris has to be cleaned up and people have to accept that a transparent and open cryptocurrency can use people’s profit motive to do social good. I talked all about this in a recent radio interview that you can listen to here.
Another example of how these new incentives are created by cryptocurrencies comes from Helium tokens. The Helium token incentivizes people to help build a 5G network. This is done by connecting a Helium mining node referred to as a hotspot to your home or business Wi-Fi network. Once connected to your Wi-Fi network, you are rewarded when the network talks to your node or when someone uses the data from your node. This incentivization system means that Helium has created a 5G network where end users are putting the nodes in place to run the 5G network instead of the wireless companies having to do that themselves. Indeed, Dish Network has partnered with Helium to help Dish reach a critical mass of 5G nodes.
During the history of mankind, economic incentives have slowly evolved from barbarism to nomadism to bartering to salt to gold to centrally controlled currencies to cryptocurrencies. And that’s exciting in its own right — we’re living through the latest fundamental economic revolution in currency. And it’s not just the currency revolution; it’s an Incentive Revolution and that’s where so much opportunity now lies.
In 20 years, these new organizational structures and incentives that create wealth over time are going to make ownership of stocks and bonds less important. Blockchain-based DAOs will compete with the traditional corporate and not-for-profit organizational structures.
This is what I mean when I say that we shouldn’t underestimate the changes that cryptocurrencies, blockchain and smart contracts are creating for our society and economy — and our pocketbooks. The investment opportunities are here for us to make a lot of wealth in coming years and decades as we figure out ways to make the world a better place through profit-motives. But don’t forget that there will be a lot of pain and a lot of losses in a lot of cryptocurrencies along the way.
Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.