Why Crypto Tokens Are Important

Because of the lack of a Schelling point¹ due to the hen-egg problem that most users of social networks want to be where their friends or sufficiently diverse content are, most people aren’t going to join a social network such as Steem or Minds with 1 million signed up accounts of which only 60,000 are active and ostensibly only a few thousand are distinct humans and most of the active accounts are bots or sock puppets each controlled by an indistinct human. Facebook and other major social platforms are signing up millions of users per month and these so called “decentralized” (which they aren’t!) platforms haven’t even attained 10,000 distinct active users within 3 years.

Extant “decentralized” social platforms have INSUPERABLE flaws

And that lack of sufficient interaction or suitable content is not the only reason that users leave Steem for example. Contrary to the debunked hype and disinformation, they also leave because not only are the rewards “inequitable” (in the capitalistic, free market, truest sense of the definition of ‘equity’) which was a psychological ploy by design (as admitted by the Steem white paper) from its premeditated money grab inception and the game theory is impossible to fix (if rewards will be minted from a collective money supply), but also because maximizing rewards is too complex, requires economies-of-scale, and isn’t as simple as doing what is best for building your social networks and popularizing Steem because the system was designed as a Prisoner’s dilemma as admitted by the Steem white paper (which the deleterious negative voting doesn’t resolve).

Economics dilemma of the Internet behemoths monopolization

Prisoner’s dilemmas encourage defection which is what we will also eventually see happen to freemium, bundled, subscription-based business models such as Medium (Spotify, SoundCloud, etc) and is ongoing even in countries such as Australia. Because of the relative numeric asymmetry of authorship compared to consumers of content, there’s no sustainable Coasian Theory of the Firm (c.f. also 1, 2, 3, and 4) moat for corporations to extract parasitic rents from content! This means all major social media companies must rely on deleterious advertising. They have no other viable choice.

As Vid.me’s (the no registration required to post “Imgur for video”) Co-founder’s synopsis of the failure explains that despite all the problems with Youtube (c.f. also), the Internet behemoths have a monopolistic lock on which social networks can rise to millions of users because it’s impossible to scale without an unsustainable burn rate given only the behemoths have the scale of privacy invasion and politically correct speech that advertisers demand (which for example causes censorship on Youtube). And neither tipping (c.f. also) nor unbundled subscriptions scale as revenue streams to replace advertising.

At the most fundamental level this dilemma is caused by the fact that the Internet charges host servers for their clients’ (i.e. the users’) download bandwidth, instead of charging users’ ISPs. I’m not sure if I understand the reason for this? I think it’s because there are much fewer main trunk pipes to coordinate billing than there are leaf nodes in the Internet corresponding to the ISPs (which seems to me to be analogous to selecting the lowest transaction+coordination costs in the Coasian Theory of the Firm).

Note I explained that P2P networks (aka “mesh networks”) of users serving their own content from their ISP connections aren’t scalable for economic, data distribution, and other reasons. As I warned in BitTorrent in 2008 that their design choice would lead to the net neutrality politics and dilemma we have now.

Tokenization solution

Yet due to the Nielsen's Law of Internet Bandwidth and Rifkin’s Zero Marginal Cost Society those bandwidth costs will eventually approach epsilon relative to knowledge production, so that there would really be no problem for users to pay those costs directly or indirectly in the future. But the problem is that only the Internet behemoths can absorb those costs in the near-term, which again means we’re stuck in a monopolistic deleterious advertising revenue paradigm.

Yet tokenization of a social network would enable users to pay these bandwidth costs and not even notice the relatively insignificant costs of pennies per day, because such costs could be overwhelmed by the appreciation in value of the tokens the users are hodling.

Yet it is important to point out that the DPoS, Steem, EOS model of zero transaction fees is the incorrect design (c.f. also) and also for the reasons already documented earlier in this blog.

Decentralization requires tokenization

The mainstream will not move to decentralization for an ideological reason that corporate controlled databases always become evil and must extract maximum parasitism on their users, but rather for pragmatic ones such as removing the annoying “skip ad”.

Yet because of the aforementioned economic dilemma, decentralization requires tokenization. Tokenization can fund/facilitate more decentralized development than centralized monetization (e.g. the advertising model), greater diversity of development, and greater open network effects.

ICOs are doomed centralization

ICOs are not just doomed because they infringe on the securities regulation of nation-states. ICO issuance is inherently non-transparent, corrupt, and centralizing. Every ICO involves the issuers buying tokens from themselves within some form of obfuscating scheme, so the insiders end up controlling 80+% of token supply even if they made it appear that there was a lot of participation in the ICO. With this control they can manipulate the exchanges and extract maximum profits from the greater fools who speculate on the tokens. Even if there’s a governance model to attempt to provide transparency, governance is centralization (c.f. also 1, 2, and 3) and can be gamed by the power-law distribution of wealth and power.

Another huge problem with ICOs is that I see coming to fruition my warnings last year that EOS’ own app developers would defect and extract maximum nonsense value, because the opportunity cost of selling empty bags to greater fools is greater than actually developing anything.

Let me make this simple. All the ICO-issued tokens are going end up in the dustbin of history. Only objectivized, decentralized, transparent issuance will survive as viable.

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¹ _{C.f. also which is related to the inertia of the Overton window groupthink tipping point threshold.}