Crypto: Harnessing Labor and Wealth to Produce a Product
Which is what corporations normally do
While many consider the true purpose of corporations is to mistreat customers, pollute the environment and trample on the workers as they pursue unholy profits and eventually achieve world domination (thank you Hollywood), the actual reason they have existed for centuries is that they have proven to be an effective method of harnessing labor and wealth, with the goal of producing a product or offering a service.
They allow for the efficient investment of excess wealth to address an economic need.
The other two popular methods of organizing humans are government and non-profits, which normally address social needs.
Those societies that have embraced corporate law combined with free markets and private property rights have experienced higher levels of wealth creation and greater advancements in the standard of living compared to those societies that have not.
It appears to work.
A corporation is a legal entity. Among its many benefits, it enables aspiring entrepreneurs to raise funds when bank loans are not possible, as the corporation’s legal structure allows for partial ownership of the company, namely shares, to be issued in exchange for those needed dollars.
The corporation, or more specifically, the CFO of the corporation, is responsible for keeping track of which investors own how many shares of stock. There is literally a ledger, the “capitalization table”, a database that records this shared ownership information.
The raised dollars are used to grow the company, to realize the entrepreneur dream, and hopefully, to produce an ROI for the investor proportional to the risk.
Give the risky nature of this investment, the initial share price tends to be quite low, increasing later as the company grows, develops products, acquires customer, hits milestones, gains market share, etc.
Note that the share price of these new, private corporations is not determined by a public market, but instead, is negotiated for each funding round.
Let us work through a simple example.
A new company (Doge, Inc.) is created by submitting incorporation papers to a state, usually Delaware. You know, the state that is smaller than most counties.
With a similar stroke of a legal pen, Doge Inc. creates a stock plan out of thin air, initially creating one million shares of stock (this can always be increased later). The founders set aside 20% (200,000 shares) aside for themselves.
Thanks to a good idea and a good team, the CEO convinces some private investors to purchase 10% of the company (100,000 shares) for $200,000, establishing a valuation of $2M, corresponding to a $2.00 share price.
At this stage the founders and seed investors both have allotments of stock.
Six months later, thanks to progress and a CEO with good comm skills, the company raises another $200,000 in exchange for just 5% of company, increasing the valuation to $4M, and establishing a new share price of $4.00.
A mechanism exists for follow-on investment, for more to invest at a later, lower-risk stage.
For a privately held corporation, the share price tends to change in steps, corresponding to the most recent funding round. It is not until a corporation is public, trading on a public exchange, does the share price “float”.
It should be noted that per SEC rules the ownership of private stock tends to be very controlled, limited to “accredited investors”, (i.e., wealthy people), and the company knows who the investors are.
While this method of raising capital and organizing labor has worked well for hundreds of years, something new has come along.
The New Crypto Way
Involves an immutable blockchain and its associated crypto token. The primary purpose of the blockchain is to serve as a ledger of ownership for the token, replacing the corporation capitalization table that keeps track of who owns how much stock.
With the token replacing the stock itself in terms of enabling the exchange of wealth, i.e., investors receive tokens exchange for dollars.
The assumption being that the blockchain and its associated token is associated with a useful product or service that will address an economic need.
In the case of Bitcoin, the product is the ability to quickly transfer relatively large amounts of wealth, anytime, anywhere.
But in some respects, Bitcoin was an accident. Ten years ago, no one was suggesting that the Bitcoin blockchain would replace corporations, no, the evil libertarian plan was to create a government independent money.
So instead, consider the Helium Community (which is real)
The Helium Community is not a corporation (sorry Delaware), as there is no CEO, board of directors or stock. But it is an organization, harnessing labor and wealth to create a product, a non-proprietary global RF network, a 5–15 mile wireless extension of the internet. Compared to 5G or WIFI, Helium promises to be long range, low bandwidth and the devices using it will enjoy exceptionally low power consumption, possibly enabling a new market of useful products.
One challenge is that such a network will require the production and deployment tens of thousands of hot spots in the U.S. alone, strategically located proportional to population density.
Another challenge being that until the network achieves a minimum rollout level, covering perhaps 50% of the U.S. population, consumer device manufactures will not commit the millions of dollars required to develop the low-cost products that could use the network.
But without the availability of these compelling consumer products, who is going to spend the many millions of dollars required to rollout the network?
And perhaps most challenging, how to convince thousands of people to locate a Helium hot spot in their house, connected to their internet, consuming their electricity, all while potentially giving them brain cancer? (last item not really true).
If this could have been accomplished using the traditional corporation organizational model, it probably would have already happened. There is nothing new or proprietary about this network, no new technology required, and completely based on open-source protocols.
It starts with a clever idea, with the publication of the Helium white paper. Check that box.
This attracts the attention of early investors, who provide the seed funding in exchange for an initial allotment of the Helium tokens, called HNT. This seed money is used to develop the blockchain software, to develop the first Helium hot spots, pay salaries, etc.
The founders also set aside some HNT tokens for themselves, and for the Helium organization.
Note the similarity to the corporate startup model….
All of this token allocation is transparently locked-down in the immutable Helium blockchain. As is the formula for all future HNT allocations.
Unlike corporate stock which has no limits on creation, once such token allocation is defined, it cannot be changed. The future HNT token supply is limited and known by all.
Now that the Helium blockchain is up and running, just about anyone can buy and sell the HNT tokens at an exchange, you can do this today at the Binance.us exchange. Unlike with corporate stock, there is no SEC requirement to be an “accredited investor.”
With private stock, the share price is periodically established in a smoke-filled backroom (or perhaps during a zoom meeting), whereas the price of the HNT token is transparently determined solely by supply and demand, as determined by the crypto exchange(s).
Per the token allocation rules embedded in the immutable blockchain, HNT tokens are initially rewarded to those who deploy a hot spot, thus providing an immediate financial incentive for many to spend their own money to purchase a $600 Helium hot spot, to deploy it in their house, etc.
And thousands are.
Of course, this only works if the value of the HNT token is above zero, which it is. Which raises the interesting question, why does the HNT token have a non-zero value? Who is buying it, providing the demand to counter the supply, the hot spot owners, or perhaps the early investors, who are cashing out?
The answer is probably more investors. Those that were not able to participate in the seed round but believe that the HNT network has room to grow.
Once again, similar to the corporate startup model.
The positive feedback loop has been turned on. As new investors buy the tokens, pushing up the price, there is more incentive for people to buy and deploy the hot spots, more incentive to develop the devices that will use the network, etc.
Not all that different from the share price of a startup corporation increasing as it grows, as the perceived risk diminishes.
Ultimately the purpose of investing in corporate stock is for the company to be profitable, so that the shareholders receive a dividend. So how does this work for crypto? The key difference is that unlike stock, there is a fixed supply of crypto tokens, hard coded into the blockchain. In the case of Helium, the potentially millions of deployed devices will have to pay in HNT in order to use the network, with the owners of the hot spots on the receiving end. As the network grows, as more devices are deployed, there will be more demand for the finite supply of HNT, pushing up the price of the token.
Thus, potentially rewarding the founders, the seed investors and the early buyers of HNT tokens.
Kind of like what happened with Bitcoin. Or Amazon stock.
As the Helium organization is not selling a product for revenue, a key point is that their only financial stake is the tokens they initially set aside. It is in their best interest that the price of the tokens continues to increase, allowing them to sell the tokens as needed to pay their salaried, to fund future development, etc.
Another key point is the absolute requirement that the blockchain be immutable. If it is not, and the rules can be broken, investor interest would plummet, sending the price of the token to zero.
Not all corporate startups are of equal quality, and the same is true for crypto-currencies, but for those that still think that all crypto currencies are just a pyramid/ponzi like bubble just waiting to implode, perhaps it is time for you to think outside of the traditional corporate box.
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