Token Foundry Forges Bond With Businesses Seeking Help To Tokenize

FinTech, Innovation, News | May 7, 2018 By:

Ethereum development studio ConsenSys has created a new division, Token Foundry, that provides a service that helps create, manage and market utility tokens. The company has already issued its first token for Virtue Poker, a peer-to-peer platform.

Company founder Harrison Hines talked with Block Tribune on the eve of the ConsenSys convention in New York about the venture’s plans.

BLOCK TRIBUNE: So tell me why there’s a need for Token Foundry.

HARRISON HINES: Okay, so I would say there is a lot of reckless behavior going on in the token ecosystem, or has been, for quite a while. I think it’s important to really try to change the narrative about tokens and really set a standard for how to properly go about launching these new networks and selling tokens in a way that better protects consumers, better sets up these networks for success, and also doesn’t implicate security laws. So that was sort of what we wanted to accomplish and what we kind of have built into our new platform and an approach to launching these tokens.

BLOCK TRIBUNE: What makes a business a good candidate for Token Foundry?

HARRISON HINES: A bunch of different factors go into a decision. I guess you could kind of say a portion of it is similar to a normal venture capital due diligence where you’re kind of evaluating the team, the opportunity, the traction, the product, different strategic partnerships, or unique advantages to customer acquisition or to suppliers or to scale, but then there’s the whole token and network factor that comes into it. So projects … Like, a lot of what we help with is helping design these networks and ecosystems and incentive systems, and making sure the token is properly designed and a necessary element of the system and actually has good incentives built into it to incentivize some important behavior to the success of the ecosystem, or disincentivize some bad behavior that could damage the network, so on and so forth.

We don’t mind if a project comes to us with a white paper that needs work, or a model that needs work, or we even work with projects as early as the idea stage if we like them. One important factor that is probably not super apparent is the team’s attitude. They need to be in it for the right reasons. If it’s just a project that is really just looking for a quick way to raise a bunch of money and a token sell, and not really care about actually building a proper decentralized network that’s sustainable long term, we will pass on those projects every time, but if it’s a team that really is in it for the right reasons, is really focused on the right things, that’s really important.

One other factor is they have to be open because a lot of what we’re … Like, we’re in a brand new world, we definitely have a good amount of experience in what we do, but a lot of external people do not. A lot of external people think that they’re really smart and that they know what they’re doing, and that’s not necessarily the case, especially when you’re talking about building a decentralized network powered by a token. Like, there’s a lot of … Also just on the way you go about things, the way you sell them. We have very strict rules. We don’t do pre-sales, we don’t do discounts, we don’t do bonuses, we don’t sell to speculators. So if someone’s not willing to play by our rules that we feel very strongly are the correct way things should be done, then we don’t have interest in working with people like that. So that definitely cuts our … Like, we say no to probably 99 percent of the projects we see.

BLOCK TRIBUNE: Walk me through the process. Somebody applies to you, what happens next? Are there upfront costs? Are there other considerations that they should be aware of before they approach you?

HARRISON HINES: No. There’s no upfront costs to working with us. Our fees are … They vary deal to deal, but it’s always success based, so our incentives are aligned both short-term and long term. and it’s kind of … Yeah, we usually get introductions through referrals from clients, through people in the ecosystem, through cold emails people send, and then it’s kind of similar to evaluating an opportunity in a lot of different industries where we’re doing calls and meeting the projects and kind of discussing the idea or the project and trying to come up with some high level designs for potentially how to go about building a decentralized network around that problem they’re trying to solve, or that industry, or that use case, as well as a high level token model, because before we engage and take someone on, we want to make sure that we’re on the same page about the direction we’re going with things. Like, we’re not trying to build closed systems and launch a medium of exchange payment token for an app. We only build open systems that … Like, if you’re an existing company and you want to decentralize and launch a token, sure you could be the first application on top of this new protocol, but we want it open so that everyone can build on top of this new infrastructure and really create a large network with a thriving ecosystem on top of it.

So yeah, we definitely … If we like the team, we like the project, we like their attitude and feel confident in their ability to execute, then we will do a light, “Okay, how would we go about this? What’s our potential model or network design? Let’s come up with a high level concept and present it.” Then, assuming they’re cool with how we feel it should be approached, then we would move and bring them on as a client.

BLOCK TRIBUNE: You mentioned before that you’re not into doing pre-sales or anything like that. Why not?

HARRISON HINES: Because that’s one of the main issues the regulators have, and it’s warranted. Like, they’re repeatedly said, “Even if these things are not securities by design, if you treat them like securities, then we are going to treat them like securities.” So one surefire way to treat your token like a security is to, number one, sell it using a security instrument. Number two is only sell it to accredited investors who 90 percent plus of them are only buying it for the purpose of speculating, or for investment purposes, and anything that gives the expectation of profit or makes it look like an investment puts your token at risk. So one thing that makes them look a lot like investments or gives expectation of profit is selling them to these large institutional investors at a discount just so they can dump them on the public a month later after the public sales. So it’s just a completely terrible model all round, and doing things like that are actually really damaging for launching these networks. Like, imagine if 90 percent of the taxi medallions in New York City weren’t being used and people were just sitting on them. That would not be good for the taxi medallions or the taxi network as a whole.

Also, it doesn’t make sense for investors to buy and hold these things. Like, that’s not … Imagine you just got a taxi medallion just to sit on it, as opposed to using it to either drive a taxi yourself or give to someone else to drive a taxi and earn the revenue from driving a taxi. Like, that’s what gives a taxi medallion its value is you’re basically discounting the future cash flows that you can make driving a taxi, which you can only do with this medallion, and that’s what gives the medallion value, and there’s more demand for these medallions. That’s what appreciates the price of the actual medallion, but that’s not where the majority of the value is captured, it’s captured by using the medallions.

So it’s similar to a lot of these tokens. It makes no sense to just purchase and hold them. The way to capture value with them is to actually utilize them. So we very strongly try to weed out speculators, not only because it becomes a securities risk and a regulatory risk, but also because it’s a very, very bad way to start your network if 90 percent of your tokens are just being held by people who are looking to just flip them. So we came up with something called ‘Proof of Use.’ So we actually [inaudible 00:10:24] enforce in our smart contracts that anyone who purchases tokens in the initial sell has to prove use of those tokens before they are able to transfer or sell them. If it’s a token that needs to be staked to run a node to secure the network or validate transactions, you actually have to stake tokens and run a node before any of the tokens you purchased can be transferred. So yeah, we do a lot of things to mitigate speculations, and it actually really works, and it’s way better for these networks.

BLOCK TRIBUNE: So somebody who has approached you and who is on board with what you’re doing, what position will they be in revenue wise? Do you take the bulk of revenue, and they will be in second or third position? Or how will that work?

HARRISON HINES: When you refer to revenue, what exactly do you … Are you referring to like-

BLOCK TRIBUNE: Well, I assume that the tokens themselves that are going to be used in the system will have some sort of value, so who will realize most of the value from it?

HARRISON HINES: So the most value that will be captured from these networks is the people who figure out how to utilize that token to generate value on top of these new open networks. So, for example, I like to use the example of Ethereum and ConsenSys. Ethereum is a protocol, Ether is token that powers or allows you to use Ethereum. ConsenSys is a completely separate entity, a for profit business, and all we are focused on, or that ConsenSys is focused on, but we’re born out of ConsenSys so I still feel we’re somewhat a part of them, ConsenSys is only focused on building products, services, solutions all related, or on top of, the Ethereum blockchain. ConsenSys generates a lot of value through that business model. It has nothing to do with the price of Ether, it has nothing to do with the token. This is just value that is being generated in relation to the protocol, or on top of the protocol. So all these new networks, it’ll be similar.

So if you’re asking me where the value is going to be captured, it’s network dependent, but back to the taxi medallion example, the value will be captured by the people who have actually figured out that using these tokens gives you a very good opportunity to generate value. It’s not the token appreciating itself that is going to generate the most value, it’s using that token to generate value on top of these new open systems. Those are the people that will capture value. So the thing about bitcoin and Ether, the miners are who figured it out and generated the most value, especially the early ones because there’s a decay curve and a difficulty curve basically.

So in the very beginning, the early people who adopt these networks and essentially play whatever role is decentralized or necessary to secure the network, those are the ones who really generated the most value because then the network takes off, the token is in more demand so it appreciates in price, but in those early days, the amount of bitcoin that you’re mining per miner is exponential compared to what it is now. So those early adopters of these new networks who utilize or leverage the token, if they’re designed properly to perform whatever service or role within the network, that token enables you to perform and validates transactions or dedicates computing power, or whatever it is. Those early people that are dedicating those resources and earning rewards or getting compensated for it, whether it’s in the native token, or Ether, or whatever, those are the people in my opinion who are going to really win out.

Yeah, people are just completely missing the boat with where the opportunity is. They’re so focused on just buying these tokens and speculating on them, they are completely missing that using these tokens is really where the value is going to be captured. So trying to hopefully educate people.

BLOCK TRIBUNE: Regulators have been in the news lately with differing sort of opinions about whether they’re security tokens or utility tokens. What are your instructions from them, and where do you see it heading?

HARRISON HINES: Sure, so we launched The Brooklyn Project in late last year because we saw the writing on the wall. Things were crazy, people were doing really, really not good things, and it was very clear to see why regulators weren’t happy. So we’ve worked with the community, with law firms, with regulators, over the past six months to try to develop a framework and an approach to selling tokens that would not implicate security law because we are definitely of the opinion that these utility or consumer tokens are not securities, and if you deem them securities it would ruin these networks. Like, you can’t just anonymously pay miners in a security, it just doesn’t work. So we are very confident that there will be a separate classification of tokens that are non-securities and are deemed … You know, let’s say they are classified as utility or consumer tokens that if designed and sold and treated properly would not be at risk of being deemed securities and can operate exactly as they are within some of these live networks today.

Security tokens will be a completely different class. We did enter that space and acquired a broker dealer and are approaching the security token space in a very safe and hopefully compliant way, similar to the exercise we just went through for utility and consumer tokens, but we’re very much of the opinion, and we feel that regulators have started to in their recent comments open up to the idea and express it that they also believe that there will be a certain batch or group of tokens that, if designed a certain way and sold a certain way, will be clear non-securities.

BLOCK TRIBUNE: Token Foundry for the business that it takes on, or the projects it takes on, will you be a partner with them from now until the end of time? Or will there be a point where they’re off on their own and you’re hardly involved?

HARRISON HINES: No, we will be with them for the foreseeable future because we actually use the tokens and help bootstrap the network because we understand, because we also are designing these tokens, we understand the economics and financials of using these tokens within these new networks. So we fully intend and use the tokens of each of our projects in the way they’re intended to be used to help these networks at the very early stage get these critical roles filled, and then also because we know we can generate a lot of value by doing that. So we will probably just continue to use our tokens and help these networks for as long as it makes sense.

BLOCK TRIBUNE: Okay. So outline a bit of what you will do for these projects.  

HARRISON HINES: So for … I’m going to just focus on the utility and consumer token side of things. Basically, we provide a very comprehensive package offering to these projects. Going through us is almost like a mini accelerator in a way. Like, we basically in hopefully a six months or shorter time frame help these projects based on their stage get through everything properly. So that’s in many different areas of … Or different departments. So first and foremost what’s most important is our crypto-economics division. So in there, when we work with a new project we really spend a lot of time on that aspect because if you don’t design these networks properly or you don’t design the incentive system or the token properly and actually test your assumptions in terms of … Like we do things like customer development where we actually go and interview the people who will be the users of your product or who will be the users of your token to actually understand if the assumptions that the project team is making or that we’re making are correct. So network design and token design is something that we have a full department and we spend a lot of time to make sure that these networks are designed right for long-term sustainable success.

Then we also really help on the token supply breakdown. So you could have a great token model, but then the distribution and supply of tokens also needs to be thought through to make sure that it matches up to the story. So how many are being sold in the sale? How many are maybe being bucketed for strategic partners or community and ecosystem development? Stuff like that. Then also the actual sale structure itself. All those things are very important, not only to make sure that you don’t trip up any regulatory concerns, but also to really best position this network to grow and get to the point of a minimum viable economy out of the gates. Then, unlike the technology side of things, once we design all those things, we actually do all of the work on the smart contract side. So actually developing the token contracts, the sell contracts, providing a sale infrastructure with all the built in compliance. So all the KYC/AML, like ID verification and checking. Every new user to our platform has to take an assessment test to prove that they understand what they’re doing, so they know what a private key is and why it is important to keep it safe, stuff like that.

Then, also for the contributions for each specific sale, we make each purchaser who wants to purchase tokens in that sale answer questions to prove that, one, they know what the token is and what it’s used for, and then two, that they actually intend to use them. So we will find people, if you give out the bad answer, or you answer incorrectly about why you are purchasing these tokens or how you intend to use them, you will be blocked and you are not allowed to participate in the sale. So that’s a lot on the infrastructure side, but then we also really help on the business dev and advisory side. So kind of helping from a technical architecture perspective of how to build this protocol and network, but also on the go-to-market strategy, best practices based on our Brooklyn Project standards, or just how to avoid regulatory legal issues. Then on the business dev side, we really help on growing this ecosystem. So we do help with marketing, but it’s really more like community building.

We’re not running ads on Coinmarketcap.com. We’re based on these specific projects and these specific user of that network, and that’s who the ideal purchaser of that token is. We will craft outreach strategies to specifically target those specific people. So for some networks it might be an enterprise who is the ideal purchaser of the token or user of the network. Others it might be consumers, others it might be miners who mine other networks in blockchain. So we will specifically target to try to build a community of actual people who care about your product, not just people who are joining every program and trying to flip all these tokens out and move on.

Then just introducing them to strategic partners. We are in a very unique position in the ecosystem, A, within consensus, but also the broader blockchain ecosystem. So we know almost everyone. We could really introduce you to other projects or other partners, blockchain and non-blockchain, that could really help these networks from the get-go, and other stuff like that. Yeah, we’re not just trying to help these projects to raise a ton of money and move on. Those people are very shortsighted. The real value is launching these new global decentralized networks, and if you get it right, these could be worth, not billions, but trillions eventually. So we are way more focused on helping move forward that decentralized and tokenized world vision, and not really so concerned about, “Let’s just raise a bunch of money from these speculators and move on to the next project.” So yeah, that’s a little bit more about us.