The Bitcoin Model for Crowdfunding

Bitcoin is not just a protocol or money, it’s a new business model for Open Source Software. Prior to Bitcoin, you had to raise money, write software, distribute your product, build a business model, and work towards liquidity. Angels, VCs, salespeople and bankers guided you the entire way, through a maze of tolls and controls.

The Bitcoin model for crowdfunding dispenses with everything except the software:

  • Write software to power a completely distributed network in which any node can participate anonymously.
  • Allocate scarce resources in the network using a scarce token – an “Appcoin”. Users need this Appcoin to use the network. Owners of scarce resources get paid in Appcoins.
  • Pre-mine or early-mine Appcoins and keep some non-threatening amount. These are shares of your company, equity that will appreciate in value if the network is adopted.
  • Give network operators the ability to collect new Appcoins in proportion to their contribution. Route a small fraction of each transaction output to the developer foundation (Mastercoin does this). These revenues are used to pay for operations, and bounties for ongoing development.
  • As network usage increases, so does equity value and revenue. 
  • Anyone can buy Appcoins, anywhere, anytime, anonymously. Ship your code, ring the IPO bell.

This is true crowdfunding – get funded by your users in proportion to their usage. Reward early adopters, network operators, and developers with upside.

In economics, the artificially scarce token used to allocate scarce resources is called “money.” So Bitcoin is crowdfunded OSS to run an Economic network. Now, a new generation of Appcoins can be created as open source software, crowdfunded into existence, and go public on day one. They can run networks where Bitcoin may not work, or where separate funding and compensation is needed.

The Tor network is slow because it relies on volunteers to relay traffic. Anytime we see a line, the product in question is underpriced. Let’s crowdfund a Torcoin – users of relays will pay in Torcoins and operators of relays will get paid in TorCoins. Founding developers collect equity when TorCoins are first mined and sold. Non-founding developers and network operators are paid revenues from newly mined coins and transaction fees.

Can we just use Bitcoin instead of Torcoin? Isn’t money supposed to be fungible to all use cases? Perhaps not – Bitcoin’s transaction speed is too slow for a dynamic network allocating bandwidth – 10 to 60 minutes is far too long to negotiate with a relay. And payments have to be anonymous. So a fast-clearing (Fastcoin can clear a block in 12 seconds), fully anonymous (likeZerocoin) variant is needed.

What else can we allocate in a network? NameCoin is already working on Distributed DNS. Can we build a striped, encrypted, high-availability data store using Boxcoin which pays for disk availability? Can we build a caching infrastructure using Cachecoin which pays edge nodes with un-used resources to cache large, static content? A DDoScoin used by web servers to throttle incoming browser requests? A PKIcoin that provides a global, un-assailable encrypted and anonymous messaging network? Are there more applications, like Bitcoin, that map to the real world and bypass network resources altogether? 

In a world of numerous Appcoins, easy to create, integrate, and crowdfund, what’s the role of Bitcoin? 

Bitcoin itself will be used as the currency of choice in many cases, when its slow transaction clearing and pseudonymity are not issues. And most of the world’s resources are not networked software which can benefit from its own Appcoin.

Some Appcoins may just be a protocol layer on top of Bitcoin to explicitly reward the creators, operators, and early adopters of the Appcoin’s network. PKIcoin may only be a financial incentive,  security outsourced to the Bitcoin mining pool, with entry / egress to PKIcoin through Bitcoin. In the cases that the Bitcoin blockchain is insufficient, such as Torcoin, Bitcoin will still be a reserve currency of sorts for moving into and out of Torcoin. 

Bitcoin is more than money, and more than a protocol. It’s a model and platform for true crowdfunding – open, distributed, and liquid all the way.

Thanks to Balaji Srinivasan for helping think through many of the ideas in this post. It’s really at least half his work. If you don’t follow him on twitter @balajis , you really should).

36 thoughts on “The Bitcoin Model for Crowdfunding

  1. Spending Appcoins allows one to use the service, and the incentive for contributing resources to the service is Appcoins.

    Since there is no incentive to run a node for anyone who does not want to use the service, why not run a node for your own use and dispense with the deliberate inefficiency of the coins?

    • Cryptotokens in general are fungible for one another and using the Master or Counterparty protocols one could trade them for BTC or LTC or whatever from your wallet with tiny transaction costs automatically as you generate “mining” revenue in the app-specific token for providing network services.

  2. What a fascinating idea! Toward the end of you post you start to expand your thinking beyond open source networking applications. I’d like to hear more. How would you use a digital currency to support end user software that is free and open source? If you were starting OpenOffice now, for example or Ubuntu? How would you both enable support of the project and keep the energy and ethos of open source?

    • Hi Shawn. The people @Ripple Labs got the answer on your last question. I guess. From an interest in Bitcoin, I tumbled myself into Ripple and got overwhelmed by the view on what they are setting up right now. And most of all it’s open sourced, extremely well documented. Bitcoin opened the door, but I think I’ve seen behind that door a very new castle right now being build on Rippled – a new and fascinating network of modern financials …

  3. Exactly. This must be tormenting some VCs as it changes the model a bit, i.e. they don’t need VC money (at least not initially)

    Ethereum is also in that same segment, opening soon. It might be the largest raise yet.

  4. There could be another interesting application for funding political campaigns. But for niche applications, which would want to use bitcoin, isnt it harder when the current proof of work is harder to achieve without using specialised hardware.

  5. Great overview. Arrrr…. I’d also point out the importance of having merchants that allow the currency to be spent. Trading on an exchange alone isn’t going to be good enough and you end up with huge spreads. It’s also been debated as to whether or not a shorter block time would be problematic at a larger scale due to latency. Certainly when you’re talking about 12 second block times the amount of orphans goes up as does wasted energy and restricting the geography of the nodes that can effectively participate. More here:

    http://bitcoin.stackexchange.com/questions/1863/why-was-the-target-block-time-chosen-to-be-10-minutes

  6. What an innovative idea. Infact I believe this is exactly what tagcoin is doing. It’s an app specific coin. Also if you think about it, Auroracoin (Iceland) is a similar idea where they premined 50% to give to Icelanders.

  7. Good article, you have everyone talking and thinking.
    My question is “how does this get started from 0?” At the start, only insiders will have the coin. Take the Tor example. Only people hosting servers have the coins, and the coin miner. They can exchange files all they want. Me, as an outsider, comes along and I need one file for myself. How does that work?
    Do I have to setup a server, and let it run overnight, then get my file?
    What if this is for work, and they don’t allow that sort of trading?
    I am not asking to be pessimistic, just saying there are snags to work out, so keep thinking.
    Would someone have an OSS coin exchange? Most of the Bitcoin failings are not the protocol, it is the exchanges. The companies keeping the coins are the weak link in the system. (Huge opportunity right there people!)
    Paying real Fed backed money for coins in an exchange sounds like a good idea. The problem then becomes can a corporation “buy” or kill an Open project, app, or network by buying all the coins? The RIAA could buy all the NapsterCoin and shut them down much cheaper than hiring lawyers.
    I like the ideas, there are some big open questions to answer.

  8. This could be the model for building liquidity on an organized exchange. Imagine if Mt. Gox would ahve paid liquidity providers in an appcoin.

  9. What happens with users that use the service without actually providing value to the network (90 9 1 rule)? Under this business model, how could this users be acquired, since they won´t be having the appcoins incentive, and how different apps providing similar services to similar markets can build a strong differentiation from each other?

  10. I’ve been thinking about this same concept for a while now. I think the key is that coins that are created by these distributed services have to be purchased on an exchange to allow users to benefit from it.

    Take your example of Boxcoin. Imagine Boxcoins are generated (rewarded) by miners b/c they are offering up storage space. They then take the coins and sell them on exchanges at whatever they decide it’s worth. They control the supply. Customers then have to purchase these coins to store data in the Boxcoin network. This creates a natural market of supply and demand. In addition to direct purchases of storage space using the coin, you could also charge a storage maintenance fee by using demurrage (introduced by Freicoin). Demurrage rate can be calculated based on how much is stored and will be deducted from the wallet automatically. Once the wallet (storage box) balance reaches zero, it will be trimmed from the network. Demurrage also discourages hoarding and will force miners (storage service providers) to sell their coins at a price determined by supply and demand.

    • You said “Customers then have to purchase these coins to store data”. Why go to the trouble of exchanging money for Boxcoin?
      Why not exchange money to store data?

      You are letting me give money for something that may not have value, or can not be exchanged back into another coin or money. Am I buying anonymity online?

      Here is a solution for a problem no one has. Answer the “why” question. Why would I use coin over the money I already have and use every day?

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