I recently left my job to manage the release of Tezos, a decentralized crypto-ledger with a native, on-chain governance mechanism. In light of the momentum around App Coins, whereby developers build specially marked tokens to power applications on an existing network (which can be converted in-and-out of the main network token), we have been asked about our strategy around App Coins. After all, the market for App Coins is extremely hot with ~$250 mm raised for a handful of projects.

Though Tezos permits the creation of App Coins, we do not focus on them. Our primary line of reasoning is rooted in what we believe to be the best way to create value in a decentralized network.

A Hypothetical App Coin

Though the cryptomarket is still in its nascence, we are beginning to see some themes for early applications. Prediction markets, identity management, and data storage are three of the most popular features people have expressed widespread interest in. Many people are familiar with prediction markets as an App Coin so we’ll stage a hypothetical of two plausible situations:

1. Tezos implements a prediction market natively

2. A prediction market is implemented on top of Tezos in a smart contract

Both solutions will create demand for tokens to pay for transaction costs because the network will have an extra, useful feature. However, the first scenario will create more demand. That is, it’s better for people who hold Tezos tokens if they can use tokens for both executing smart contracts and participating in a prediction market, as opposed to only executing smart contracts while creating extra friction to participate in a prediction market. The App Coin model creates a subtle dilution which manifests in the form of an opportunity cost. The more varied uses for the token, the lower its volatility.

Beyond dilution, there are also issues of scalability. Protocol level implementations can be optimized and integrated more seamlessly with other aspects of the protocol. An identity system, prediction market, and a file storage system can talk to each other through smart contracts, but that creates unnecessary strain on network validation. This strain disappears with a protocol level implementation.

Last but not least, poorly written App Coins can create systemic risk. In the Ethereum network, the leading host of App Coins, the programming language was designed to look like JavaScript to attract a broad swath of programmers. This might be a good model for designing a smart phone app store, where The DAO is an app that just crashes and gets 0 stars. If you transport that model to distributed ledgers, you potentially destroy hundreds of millions of dollars of market value.

The Tezos Approach

The Tezos smart contract language is generic, so “apps” will inevitably pop up. However, we will not hesitate to integrate popular features at the protocol level if they prove useful. That said, this ability does not preclude competitive market-based discovery. If, for some reason, the prospects of being upstaged by a protocol level implementation was too discouraging to would-be application developers, the stakeholders can organize and create bounties on-chain. From there, multiple implementations can be tried in parallel and the most popular may be awarded a prize for inclusion in the protocol.

We believe that we can maximize the value of the Tezos network by focusing on the promotion of two key characteristics:

1. The ability to integrate different valuable features and rules on-chain

2. Consistently executed software that developers and stakeholders can rely on and reason about

Our approach to incorporating technical features directly into the protocol reflects our commitment to these characteristics. Incorporating features as App Coins is not as seamless as protocol level integration. Prudence requires that the arbitrary computations performed by smart contracts command higher transaction costs than those required to secure a known computation within the protocol when the implementation is fixed. Reducing the number of applications as “leafs” of the protocol by incorporating the most valuable ones at the protocol level ensures greater coherency and execution of programs. Furthermore, moving the most valuable applications to the network protocol itself boosts overall network value.

In Closing

Many people have drawn analogies between the Internet and distributed ledgers. They assumed that the technological trade-offs, development technique and business models which worked on one would work on the other. We don’t think this is true. There are similarities but also critical differences.

“Move fast and break things” works when the worst case scenario is exposing private cat pictures; it does not work for ledgers where small errors can make market capitalizations fall by half. Unproven systems ought to innovate at the leaves while tried-and-true features ought to have a way to make the network more valuable by integrating at the protocol level. This is not purely for the sake of creating more valuable networks but also for ensuring consistency of execution.