The Rad Menace’s Intro to Cryptocurrency

Hi. My name is the Rad Menace and I’m a business nerd. Business models fascinate me. Ever since I came across crypto it has dominated my thoughts. I’m not trying to sell you crypto, rather I believe these new fangled business models are game changing. Due to the US gov having both thumbs up it’s ass, the crypto rules are not very well defined by law. Many of the articles out there are either filled with technical jargon or trash price predictions. Because of this, I’ve decided to put crypto into terms other business minded people might understand. This industry is broad and this article is a 10,000 foot view, so I guarantee there is an exception to anything I say, but I’ll attempt to explain how to look at a cryptocurrency as a company.

What is Cryptocurrency?

Cryptocurrency is somewhat of a misnomer because it is not exclusively currency. Cryptocurrency in itself refers to a new fangled standardized internet “token” based on the creation of blockchain databases. This is the first time something can represent finite ownership over the internet without a middleman. This is a game changer. Some people call crypto “the internet of value”. It is important to note that not all crypto tokens create their own blockchain, some are built on the back of another blockchain. Dapps (decentralized applications) can be built on a chain such as Ethereum and release their own token. Generally speaking, these tokens are used to pay for whatever services the Dapp offers.

Since the creation of the internet, the biggest issue has been piracy. Ownership of something digital over the internet was impossible because the files could be copy / pasted and shared. Companies found the only way to combat this was to have a centralized authority who decides who owns what. A few examples include Bloomberg machines that are needed to view their proprietary data, buying videos on amazon that must be viewed on their platform, buying music that must be listened to via iTunes, or PayPal moving money from one user to another. The issue with this model is that any of these middlemen could change the rules on you or go out of business, and you could lose the files you purchased through them. With crypto, these centralized authorities are no longer needed. The underlying blockchain technology makes sure the ownership of your digital data can’t be forged or duplicated, and since it isn’t owned by the middleman, you can take your files to another platform easily.

Anything could be turned into a crypto token, such as stocks, bonds, art, cards, data, computing power, data storage, news articles, ect. A bunch of bored nerds have built lots of intriguing infrastructure around these tokens and this concept and there is a ton of innovation coming out of it, which has brought in investment money as well as a lot of scams. The Crypto ecosystem wasn’t planned out by some large corporation, rather it was built by the bored nerds just because they could. A few of the innovations coming out of this ecosystem include the blurring of the lines between cash and liquid assets, the idea of digital commodities controlled by no one party, and fully decentralized autonomous organizations with no need for a leadership team.

Cryptocurrency currently has its own parallel financial system built to accept these “tokens”. When you buy one, you are buying a unique digital token which can be owned and traded. You don’t necessarily have voting rights, like when you own a stock, instead you own a piece of the company’s product. The product can vary widely and there is no telling what new ideas will come out in the future. Many crypto startups require you to use their token to purchase whatever service they offer and pay their “employees” with this token. This creates some interesting supply and demand dynamics. Long term, the crypto financial system and the traditional financial system will merge. Even longer term, many things in the real world will also be imported to the token system.

If this ecosystem sounds confusing, it’s because it is, and it’s still developing and evolving. There are many factors that differentiate cryptos but I’m going to focus on three: How the company is governed, where do new tokens come from, and what is the company’s product.

3 Factor Framework for Analyzing Crypto Companies

How is the Crypto governed?

A Cryptocurrency’s governance structure defines who makes the rules for the crypto token or the company. These rules can define anything about the algorithm or the company, such as who produces new tokens, how many tokens are produced, or specifics about the blockchain.

• Centralized model: These cryptos have a person or organization behind them creating the rules generally running it like a company. An example of this is the crypto company Ripple or Facebook’s Libra. While Ripple has a tradable token and you pay for usage of the ripple network using this token, the centralized team holds most of the token and has total control over the algorithm, how much of the token is produced, and what the company does. Ripple also does all of the processing of the code to run the crypto and its blockchain, leaving a single point of failure. Another example is a company that releases a crypto as a funding mechanism, but the token itself does nothing special. This type of crypto will most likely be regulated as a stock but only time will tell.
• Decentralized model: These cryptos are not necessarily controlled by any one party, and instead are owned and controlled by the users and producers of the token. These decentralized cryptos give the user and investor confidence that a company won’t try and change something that is a detriment to the system. An example of this is ethereum. While ethereum still has a centralized team working on projects and upgrades, they do not produce the new tokens or process their own code. Instead, anyone with 32 ether and a desktop computer can run the ethereum blockchain, acting as the employees while getting paid in ether. These decentralized cryptos will most likely be regulated as commodities.
• Decentralized Autonomous Organizations: This is a subsect of decentralized Cryptos companies and they are totally autonomous. This means the company doesn’t have a leadership team, anyone can join in and do the work, and the rules are exclusively based on code. The original example of this is bitcoin. Bitcoins blockchain is voted on based on processing power, and people are paid in bitcoin to perform this work. These will most likely get regulated as a commodity as well.

Where do new Tokens come from?

Cryptocurrency companies create new tokens through a variety of mechanisms. This category is closely linked with it’s governance structure. This could be compared to the federal reserve who decides when to print new US dollars and who receives them. Some companies mix several of these options together.

1. Crowd sale (Centralized): this is essentially an auction, where a company sells the token to the highest bidders. Companies generally use this as a funding mechanism, raising money to create their product or fund operations. Companies that sell crypto this way may be regulated as a stock, similar to raising money via a class C stock with no voting rights.
2. Mining (Decentralized): mining is a process of verifying the blockchain based on computing power. New tokens are created and rewarded to the miners based on the amount of computing power they added to the system.
3. Staking (Decentralized): staking is a process of locking up a certain number of tokens and receiving rewards or punishments for system uptime and downtime. This process requires less computing power than mining because you have something at stake if you have downtime.
4. Other: who knows what new forms we will see over time.

What is the Crypto’s Product?

There are an unlimited number of uses for Cryptocurrency and blockchain databases. Many products out right now directly compete with each other. Like any other network, the network effect will consolidate these products into a monopoly or an oligarchy market. This is in no way an exhaustive list, it’s simply an overview.

• Currency: the easiest product to fathom is a currency. Since cash can’t be exchanged over the internet, we have to rely on companies like paypal connecting to a bank connecting to another person on PayPal connecting to their bank. For international transactions this process is even more difficult. The most famous example of a currency is bitcoin. This model has historically seen the most fraud, where someone holds a crowd sale of a currency that does nothing special and walks away with the money.
• Processing power: the second largest Cryptocurrency is Ethereum and their product is processing power. Ethereum is essentially a decentralized database that is constantly checking whatever code is written on the ether tokens. You can write any kind of simple or complex code and have it automatically executed by the blockchain. The catch, you must pay to access this processing power using the ether token.
• Moving money quickly and cheaply: the third largest Cryptocurrency is Ripple. Ripple allows you to exchange money from any currency to any other currency almost instantly for a low fee. You must pay this fee using Ripple’s token.
• Stable coin: stable coins attempt to emulate the price of an underlying asset. Facebook’s libra did this by making a basket of currencies and assets, while things like tether attempt to keep the price at $1 usd.
• Decentralized finance: the newest trend in crypto is known as DeFi. These cryptos automate normal bank functions, such as lending, insurance, investing, ect. Once again, you pay for their service using their token.
• Non Fungible Tokens (NFTs): These tokens are identifiers that allow you to hold a unique item on the blockchain. Companies use this to store, prove and verify ownership of an item in the real world over the internet. Things such as art and land are already being stored on the blockchain.

There is way too much to simply explain in an article. The crypto ecosystem is still evolving. Looking at the three factors of governance structure, token creation, and the company’s product, you have a framework with which to analyze these new business models. Keep your eyes peeled for new articles.

Signing off for now, stay rad.

The Rad Menace