As I mentioned in my previous post on this subject, I have been working on an Initial Coin Offering (ICO) for a company that already has a strong business in the Identity space for fraud protection as well as boosting customer conversion rates. The premise is that doing an ICO will simply add a new line of business for an already successful business.
In doing research about the space, I have tried to get clearer about what a new token needs to do – that is to say, if it’s not a new coin or type of currency, what problem is it solving. Partly because AuthenticID is in the identity business – the focus has been on what additional levels and layers of identification would be valuable (simplistic example – if someone is buying beer in the US they need to be 21 – if they are using cryptocurrency from their wallet that is tied to their identity – the person could share their age but not their identity and that could save the step of the store checking their driver license).
Part of the trick is that for an ICO to be successful for investors, it has to increase in value, like a stock. In that sense it’s not like the newfangled cooler that was on Kickstarter where they simply had to demonstrate value – it has to do that – AND increase in value. To increase in value, there needs to be some form of “network effect” where demand outstrips supply – pretty basic business stuff.
So in the cryptocurrency world, which is by definition in the blockchain world, it’s a “non-repudiation” space – which is to say that because of the formal structure of the blockchain, there is a “handshake” to transfer the funds (ether is more formal and has a smart contract than bitcoin) so no one can ever go back and say the transfer was fraudulent. Banks and credit cards bake in a 3% “repudiation risk” fee because people can claim fraud and because the banks and credit cards promise to protect the buyer – they get the fee as sort of an insurance policy.
With cryptocurrency payments – people don’t care if they know someone who is paying them – there is no need for trust or identity by definition because it’s blockchain. It’s when they are paying someone else they need this – to trust they will get what they are paying for when they agree to use funds.
So with that background, there are three levels of security today for cryptocurrencies:
- Wallet. In the so-called “enclave” of a smart phone, you have your private key and you use something like a biometric (finger) or password to unlock/protect it. That’s fine until someone steals your phone and knows your password.
- Dual Signature. This is getting a secondary signature requirement (the same thing as when a parent has to co-sign a lease for someone with no income/job). This is extra work/friction in the transaction.
- Escrow. This is where someone protects their private key in a vault in a Swiss bank account so even if your phone is stolen – you have your private key so you might not get robbed. Lots of hassle, cost, and friction here.
So there’s lots of room for services around security and if someone wanted to get into the insurance business and undercut the banks and credit card companies in their 3%, they could do that – and even aggregate a trust score on people to vary the 3% repudiation cost – or sell that to a business to manage their own customer trust scores.
So there are plenty of places to add value – from the buying beer as a new security layer feature in authentication, to any number of flaws in the above three tiered security models, but adding a separate token to go along with the cryptocurrency is adding value AND friction/hassle when we want to remove it.
So having done all of this research now – and building an understanding of what a token is and how it needs to add value, and appreciate in value, while reducing customer friction, having read a lot of prospectus and white paper documents – it doesn’t seem like a lot of the ICO efforts underway understand this – at all. We know that some of the ICOs are going well just because there’s a ton of investment in cryptocurrency in China and they are very limited in how they can unload their investments so they are just buying up entire ICOs to drive up the demand so they can then unload the tokens – if they are ever created. In our case we already have a rock solid working product – so the incremental technical effort is trivial – we just need to distill where we are adding value.
We are just shocked at how little about this is explained in most ICOs, so we are gaining confidence that since so many of them are a sham – that when we do our ICO next month that we will do just fine. So stay tuned.