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Do Crypto-Token Sales Make Sense for Open-Source Projects?

(@ntmoney) | Published on September 4, 2016 at 15:52 BST
Opinion

Nick Tomaino is an early stage investor at Runa Capital and a former business development specialist at blockchain startup Coinbase.

In this op-ed, Tomaino highlights how open-source developers have been incentivized historically and how this colors the ongoing discussion about applying blockchain-based 'crypto-tokens' to this use case.

idea, confusion

Spurred by Union Square Ventures partner Albert Wenger's recent blog post, there's been lots of discussion about crypto-tokens in recent week.

This has led to excitement and skepticism about their ability to incentivize open-source developers to create and maintain protocols.

However, as Runa Capital has funded a number of developers who have created and maintained thriving open-source protocols, I wanted to shine some light on this approach in the context of how open-source developers have been incentivized historically.

This article focuses on both why a crypto-token issuance may make sense for some, and why it might not make sense for others who are served well by existing business models.

Nginx

Nginx is open-source server software used by more than 30% of websites on the Internet, and we were the first money into NGINX Software, Inc – the company that commercialized that project. But when we invested, Nginx creator Igor Sysoev was a brilliant developer that didn’t have any experience running a business.

We helped Igor and team put together a business strategy, hire a sales and operations team, and grow the business.

Now, Nginx is a thriving company with millions of dollars in revenue and a growing suite of products. The company monetizes by providing professional services, as well as premium products including a load-balancer that has been widely adopted by many of its open-source users.

MySQL

MySQL is open-source database software widely used by enterprises and developers globally. We were also early investors in MySQL creator Michael "Monty" Widenius and the team that founded MariaDB Inc – a company that provides professional services and products that enhance the MySQL experience for customers. MariaDB also sells an enterprise license, which many of their large customers prefer to use over the open-source version.

Similar to Nginx, they’ve had lots of success with their business model and are now generating millions in revenue from hundreds of customers around the world.

Both these projects have succeeded by raising venture funding and monetizing by charging for value-added services around the protocol. There have been many other open-source projects that have worked similarly at even bigger scale.

RedHat, Hortonworks, and MongoDB immediately come to mind.

Screen Shot 2016-09-02 at 10.15.06 AM

A good approach for some

That begs the question, "Does it really make sense for open-source entrepreneurs to issue crypto-tokens?" After all, these companies have been built around open-source projects by selling premium products and professional services.

For the developers behind the projects above, the crypto-token approach would not have made sense. These protocols were widely used by businesses and there were very clear ways to make money from their business customers.

While the crypto-token approach may not make sense for some, there are three clear reasons why a crypto-token approach likely makes sense for your open-source project.

If all three of these apply, then a crypto-token sale may be for you:

  1. You’re launching a protocol for consumers and need a hook . Crypto-token based products benefit from the network ownership effect. The network ownership effect describes a network where the value of the users' ownership increases in addition to the utility of the product when new users join. The secret weapon for bitcoin has always been the passionate user base, which is a product of the network ownership effect. If you have a consumer-focused protocol that would benefit from wildly passionate early adopters, a crypto-token issuance probably makes sense for you. When users are also owners, they act more like salespeople than customers and this can be hugely valuable to long-term success.
  2. You’re in digital currencies for the long-haul . Crypto-token raises are long processes that require an in-depth understanding of crypto-economics and patience. Crypto-tokens can be launched on a new blockchain (eg: Steem) or on top of an existing blockchain (eg: Storj). The tokens are generally required to use the protocol, so public key infrastructure must be embedded into the protocol in some way. This is a complicated endeavor that requires deep interest in digital currencies (at least for now, until the tools to make the process easier are built).
  3. You want to focus solely on the protocol . Some would rather have their heads buried in the weeds of the code and the community, rather than spending time trying to scale a business team and sell a product.

New horizons

Overall, I’m excited about the ability for crypto-tokens to incentivize developers to build protocols and think they make sense for consumers who don't want to deal with the traditional processes required to build a company.

This approach has worked great for bitcoin and ethereum, and there are a number of others that will follow.

I further think that for many developers, the traditional way to create and maintain a protocol will continue to work well. We're not likely to live in a world where crypto-tokens are the funding mechanism for all open-source protocols, but rather a world where both types of open-source funding mechanisms exist and thrive.

Yet, it's important for developers to think deeply about whether or not a crypto-token sale really makes sense.

This article originally appeared on Medium and has been republished here with the author's permission. Minor edits have been made for style and clarity.

Idea image via Shutterstock

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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