Happy new year everyone! As many readers know, I’ve been actively writing about and investing in the cryptocurrency sector since early 2013. And 2017 was obviously been a pretty extraordinary year for the space. Over the past few months, there’s been so much noise about bitcoin in the mainstream media, that I haven’t felt I’ve had much to add – if anything, I wanted to play a small role in reducing the hype.
Though, I’m gratified that in the past 9 months, the world has woken up to my first true loves in the crypto world – bitcoin and decentralized apps – I wanted to begin sharing a theme I feel is underreported and comparatively disruptive: decentralized governance and voting.
In early 2016, I was turned on to a protocol called Dash which had pioneered a new form of self-funding and self-governance through Masternodes. Masternodes are an incentive system available to large holders of a digital currency – in Feb 2016, that was defined as approximately $6,000 of DASH (which is worth $1.25M today) – that pay a daily dividend in exchange for “locking” up the coins, effectively telegraphing to the broader network that those coins are “stored,” and can be used by the protocol itself for network functionality for an extended period of time.
In exchange for the dividend, the network reaps the benefits of added layers of security, stability and speed. Specifically, the Masternodes only function if they are connected to the blockchain 24/7 via a unique IP address, and serve the network as basically outsourced computing power – keeping additional full copies of the decentralized ledger on more computers across the globe (24/7), and processing transactions more quickly.
Masternodes perform one additional service: they provide each holder with a single vote in how a protocol utilizes its financial resources. Masternode protocols have a built-in deflation rate (similar to bitcoin) that typically ranges from 5-100% to start. Some percentage of the annual inflation rate returns to the protocol itself to fund projects that would be accretive to the overall platform economy. Think of it is this way: if these crypto communities are basically tribal digital governments, then each token holder is a citizen, and each Masternode holder is a Mayor or Congressional Representative.
As most of these protocols are still in relative infancy, the types of projects that are funded vary substantially. Projects regularly funded include things such as 3rd party developers looking for seed funding to build an application on top of a given platform, a community manager for a protocol looking for funding to attend a conference to espouse the benefits of a given technology, or even just a budget to pay a protocol’s monthly web hosting costs. Although there are dozens of emerging Masternode networks (listed here), I am currently invested in three: Monetary Unit, Crown and Bitsend*. As a practical example, here’s a current screenshot of Crown’s voting proposals:
To help understand the above, there are currently 9 proposals that have formally passed by the required vote threshold. There are an additional 8 proposals at varying levels of popularity. The totality of approved proposals represents 25,150 Crown tokens, which at $3.10 each is $77,965 total funding. There is a new round of voting each month.
I can’t help but be fascinated by this emerging mode of digital governance and these miniature tribal governments that are springing up across the globe. In contradistinction to traditional capitalism where the wealthy’s interests are rarely aligned with poorer citizens, the wealthy in these networks (Masternode holders) are incentivized to vote for services that improve the economic benefit of literally every token holder (citizen). As more prospective citizens recognize the value inherent in a tribal government’s tokens, they are incentivized to purchase those tokens and accordingly reap the benefits.
Meaning that while today these budgets mostly revolve around community management, application development, etc, there’s no fundamental reason why they couldn’t expand to include health benefits, housing subsidies or other governmental aid in the future. The better the benefits, the more buyers (citizens), and the better the dividend to the voting class. This is circular – with the rich/poor capitalist alignment remaining irrespective of cycle.
Further, I believe this is a more sustainable model for new protocol funding than ICOs. ICOs enable a startup crypto protocol to raise a large amount of funding pre-launch or at launch with zero information available to the prospective investor about its future utility, usage or engagement. Masternodes enable protocols to provide dividends to large supporters but also force a higher level of inflation on the broader ecosystem. In order to survive, adoption of the protocol/token holders must increase quickly to offset the high level of inflation in this digital government (or else sellers will outweigh buyers and its value will go to zero). It’s akin to a startup that must hit multiple growth milestones year over year in order to reach its next level of funding (or else go to zero).
While I expect 2018 to be an extraordinarily volatile year for cyptocurrencies, one thing is clear: what started out looking like a toy, is now the next big thing.
*I am not a registered financial advisor. These protocols are stated for informational purposes only.