Tuesday, March 20, 2018

Proof of Credit - Part 1 - Problems of ICO's

Problem: Cryptocurrency funding is backwards.

It's hard to fathom a future where cryptocurrencies are not foundational to advanced economies.  Cryptocurrency can excel humanity into a bright future, but initial coin offerings (ICO's), and other funding models that reward resources before establishing quantifiable market value, are inefficient.  ICO's are the wrong tools for efficiently advancing humanity.  
For starters, ICO's:
  • Reward speculation before proven utility.
  • Maintain mostly pyramid funding structures.
  • Prey on investor ignorance.
  • Provide poor means of recourse in event of poor performance or broken promises.  
  • Pollute value signaling infrastructure from efficiently allocating resources to truly valuable projects.  
  • Lack metrics which invariably results in inefficiency.  
Risk isn't a penance endured ensuring ascension to wealth.  Risk is for suckers and should be avoided.
More grievously, It's immoral to justify greed with another's gambling problem.  Platitudes like "it's a free world" doesn't imbue individual action moral when preying on ignorant individuals.
Risk anywhere in the cryptocurrency ecosystem harms the ecosystem as a whole and inhibits future capital from entering the system.  Lowering risk is a sign of maturing and efficient ecosystems.   The cryptocurrency community's solution in raising funds cannot delegate risk to large, inexperienced communities while maintaining maximal benefit.
We also cannot defer investing advice to so-called experts and prophets who have always proven dubious in allocating resources.  We should never trust such mystics in corralling larger audiences into sound investments without empirical proof.  
In short, we must do better than the ICO funding model.  
The problem is simply said: We have a measuring problem.  It's nearly impossible to predict the utility of human action.  We don't know how valuable newly created services are, thus we don't know how to efficiently allocate sufficient resources to valuable services in large lump sums before proven utility.  The Enlightenment taught humanity that measuring is our objective friend and serves as the foundation for future progress.  
Excluding ICO's and considering the rest of cryptocurrencies' tools in our arsenal, can we better measure the value of services and efficiently allocate resources?  

The Human Solution: Exchange

The proven means humanity knows to solve generic value measuring problems is exchange.  The more knowledge garnered from exchange the more measurable value becomes.   The diverse voices of a market through exchange are our best known means of resource allocation and value discovery.  An open, honest, efficient, and transparent market is humanity's highest reflection of the realities of intricate economies.   If these systems work correctly and allocate reasonably, human labor becomes more efficient.  As human labor becomes more efficient the whole world becomes richer.  
The cryptocurrency community's first goal should be solving this measuring problem.  The century old tool we have to solve such problems is exchange.  
A market judges a business's value by understanding its quantifiable features.  Traditional institutions do this with metrics such as price to earnings and price to sales.  The cryptocurrency contribution to service value measurement is tokenizing services which provides higher resolution insights over Wall Street traditions.   As business functions are identified and tokenized, a market can judge objectively service value.  This enables investments to choose with greater precision.

Proof of Credit

Any future solution should follow a few principles:

  • -As a service's value is proven, its total value, its "market cap", should expand through the expansion of useful services.  
  • -An expansion of services should be accompanied with an increased issuance of tokens representing work done by services. The service's token's value should expand proportionally to the the increase of useful work.  
  • -An overvaluation of a token should directly result in the expansion of the service so that the service utility and token value reach proper market equilibrium.  Inversely, an undervaluation should result in the contraction of the service.  
  • Services must not raise extravagant sums of money before market proven service value.  
  • -A crypto token's value should not depend primarily on speculation.  
  • -A crypto token's value can be backed by services that consume the service tokens.  
  • -Value is relative.  Service tokens must be transferable and tradable.  Trade enables relative value discovery.  
The concept of creating tokens when completing a discrete service is what I'm calling "proof of credit" (PoC).  In PoC, service token value is not established before bootstrapping a service.  Instead, a service allows the market to price the value of tokens generated by the service.  The "credit" part refers to tokens issued by fulfilling services.  The agent completing a service, the worker, would receive a token as a credit. This credit can be used for future services that consume the token.  
For those familiar with Bitcoin's proof of work (PoW), proof of credit would aim to replace the issuance function of PoW with the action of service.  Unlike ICO's with PoW, where users horde tokens in hopes of future utility, a PoC ecosystem would motivate users who perceive a service as valuable to assist in fulfilling valuable service.  If a service can appropriately reward effective service fulfillers (aka "workers"), service fulfillers would be incentivized in expanding services.
Under the current system of ICO's, token are largely created before establishing that token's service, which leads to while speculations unrelated to real world utility.  Worse, under Proof of Work, tokens are created using indirect means, vast hashing farms in the case of Bitcoin, that have little to do with the function of the service itself.  
Why can't services issue tokens at the time of completing services?  Tokens created by the act of completing a service then would be backed by the utility of future functions by the service itself.  

2 comments:

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