The famous bitcoin evangelist Jimmy Song recently criticized ICO and various "functional tokens". Although this article is a year and a half late, it is worth reading. But need to be reminded: Jimmy Song is a famous "bitcoin fundamentalist", this article will cause discomfort to Ethereum fans. For its point of view, it is not necessary to take all the orders, and listen to them.
Written by: Jimmy Song, a Bitcoin developer and evangelist, known for "bitcoin fundamentalism"
For the past three years, the first token issue (ICO) has been leading the cryptocurrency industry. Some people think that the initial token issuance has become a brand new project financing model along with the growth of Ethereum, and even represents the decentralized future. However, what exactly is a functional token? From an economic point of view, what did they do and what value did they bring?
This article hopes to explain the question of whether functional tokens have practical utility and how they can get transaction fees from decentralized applications. This article hopes to show that although the first token is regarded as a carrier of value creation, it also destroys the value .
Before we officially start discussing functional tokens, we need to understand another important concept: rent-seeking Rent-Seeking .
What is rent-seeking?
Rent-seeking is the process of obtaining funds from a transaction without adding value.
The easiest way to describe rent-seeking is to tax certain activities rather than doing useful things . Imagine a typical government bureaucrat who works in the Copyright Office. They don't make any contribution to the content in the publication, just mark the relevant content, and their wages come from the taxes imposed on these publications.
Rent-seekers can make money, and they basically don't need to do too much work. As every business management consultant knows very well: there are a lot of people in big companies, and there are very few people who actually do things. This is actually the trick used by rent-seekers. They try to enter the market with a comfortable perspective that lacks natural competition, such as monopoly industries, or their transactions are enforced by regulation.
Why is rent-seeking so attractive?
The reason why rent-seeking is so popular is because it has " more money and less work, " and does not need to do too much work, nor does it have too much risk. Obviously, people like to do work with income greater than input, and the higher the income, the less the investment. That's why many Ivy League graduates like to pursue banking and finance, and although they don't have any particular preferences for these areas, they are full of rent-seeking opportunities and have enormous wealth potential.
However, for the whole society, the tragedy of rent-seeking is to create a "net negative" effect. They only collect taxes, but they do not produce any goods or services, which in turn brings unnecessary friction to society . This friction comes mainly from value creators and rent-seekers who are stealing value from people who really create value, without any productivity.
Why do rent-seekers exist?
The existence of rent-seeking is also quite strange, especially in what we call the market economy, how can we allow a drag-and-drop economy to exist in an effective market? For companies that don’t have a rent-seeking opportunity, shouldn’t they destroy companies that have rent-seeking opportunities in the free market?
If in a real market economy, it is indeed necessary to destroy those rent-seekers. But unfortunately, Western economies (or any other economy) are not real market economies, because the real market economy needs solid monetary support, which is precisely what the current Western economies lack.
The fiat currency-based economy will bring new funds to the preferred group, which in turn has an unfair advantage over others, using this advantage to establish a regulatory moat around their industry and create Things like monopoly fundamentally force everyone to use their products or services.
This situation is most evident in government monopolies, such as public education systems and government agencies , as well as large banks and large companies. Every large bank gets very low interest rates, which allows them to refinance these funds in partial reserves to get huge, risk-free returns. If these funds are paid back, they will make money, and if they don't get paid, they will get good help. These profits have in turn turned to rent-seekers. They have actually created a market environment of "positive, I win, and you lose". In fact, you can't win.
Some new funds will also flow to large companies, because the bigger the business, the lower the risk. Although large companies are not necessarily great companies, when companies are large enough, the likelihood of getting help when they encounter problems is higher. In turn, large companies have huge advantages when it comes to smaller competitors. Usually these big companies use their strong funds to buy out their competitors directly.
In essence, the French currency creates a lot of rent-seeking opportunities, because the legal currency system will create excess funds, which can find those rent-seekers that do not add value. This seems to be the reason for the existence of government and corporate bureaucracies. Bring friction to an effective market .
ICO, democratization rent-seeking!
What ICO is doing is actually formalizing the rent-seeking process. The "nominal value" of a functional token is its practical value. If you want to be a rent-seeker, you need to bet on a decentralized application DApp. How do you understand this sentence? For example, the DApp is actually limited by the token, and anyone who wants to use the DApp must hold the token. For an ICO project, instead of using the existing currency, they created opportunities for early token buyers to become the gatekeepers of decentralized applications. That is to say, these functional token holders are rent-seekers who play the government bureaucratic role mentioned above and tax those who use decentralized applications.
Obviously, if the application has the role of a rent-seeker, it will generate friction during use, and then inhibit the use of the application. We have actually seen this problem. Functional tokens have almost never been used in DApps, and it's more like a pure speculation. You can think of it as a situation where there is a group that wants to sell a rent-seeking opportunity, but finds that there are not enough transactions to prove that the rent-seeking opportunity value is so much money.
Functional tokens will almost certainly make DApp fail. This token will not make DApp more useful. It will not only lack practicality, but also bring a lot of friction in the actual application process, and then DApp has Utility . The only people who use functional tokens are the holders of these tokens, but in fact, their profit for the “taxation” of DApp transactions is very low, and the only utility consumption of functional tokens is that they are held by tokens. When people spend it, they feel that by using DApp, they can create a “feel that the DApp is useful” and drive speculative demand for functional tokens.
The question is, is this trick useful?
Use people's desire for rent-seeking
Let's take a brief look at how the ICO works smartly: ICO uses potential rent-seeking opportunities to attract buyers, just like a wolf holding a carrot to attract a white rabbit. When the decentralized application eventually becomes unpopular and the user is exhausted, the token issuer will roll out and take the money. Functional tokens make token distributors rich, but they hinder the success of DApp .
Not only that, but some ICO project sponsors will also use the Ponzi scheme/pyramid scheme to provide easy rent-seeking opportunities for those who are easy to get caught, and to attract them to make money by doing very little work. Unfortunately, the market's utility for functional tokens does not exist, so the only remaining requirement is speculative demand, which requires an unsustainable bubble as it requires increased buyer support.
In other words, functional tokens have a killing nature, and it requires more and more people who are easy to be satisfied to meet the demand, otherwise the entire scheme will collapse .
Ethereum, rent-seeking from ICO
One might say that Ethereum should be an exception to the rent-seeking game because it has always been the platform of choice for ICO's success. Ethereum has been very successful because it taxes every ICO project. Anyone who wants to create an ERC-20 token must use ETH to trade. Every ETH token holder can look for those who are eager to find The person who rents the opportunity!
In other words, the Ethereum token has done a good job because it has found more greedy and easy-going people who want to get rent-seeking opportunities and become tempted to rent a new pyramid to attract them.
ETH has successfully taxed those Ponzi schemes, and ICO is actually the next level of the Pyramid Project, or the new sucker of the Ponzi scheme, which is why so many tokens compete in this market. Because it is very profitable at the top of the pyramid plan. Every so-called DApp platform, such as EOS, TRON, etc., is basically trying to build a new pyramid, and then they can stand at the top of the pyramid, so they don't have to pay for Ethereum. Tax is over!
Again: functional tokens are just a rent-seeking tool
Functional tokens are a kind of rent-seeking tool. Because these tokens are tied to the app's access rights, they can tax anyone who wants to use these so-called "decentralized" apps. This kind of rent-seeking will create obstacles to the popularization of DApp, and is the main reason why no one uses decentralized applications.
The honest way to build a DApp is to use existing currencies such as Bitcoin, Dollars, and even ETH . However, ICO is creating its own currency and hopes to use these currencies to attract early adopters who want to obtain rent-seeking benefits. This is just another form of “Ponzi scheme”.
Last but not least, functional tokens are a kind of rent-seeking tool that will make decentralized applications fail. I hope people can realize this problem as soon as possible, the sooner the better.