Create a Great Digital Currency by Delivering Powerful Safeguards to Early Supporters of a Startup Digital Assets Ecosystem (DAE)

The native currency of a startup Digital Assets Ecosystem (DAE) cultivates credibility, liquidity, and stability by employing five powerful safeguards: Comprehension, Restrictions, Options, Pricing, and Scarcity (CROPS).



PREFACE



This is the seventh in a series of articles published on Medium concerning my vision of creating a comprehensive Digital Assets Ecosystem (DAE). In my sixth article, published on January 4, 2019, I introduced my Digital Assets Ecosystem Base Code (DAEBC). I provided two parallel arrays of five components each. One of those components is Currency, the digital asset native to the DAE. The present article examines Currency in greater detail.



INTRODUCTION



The cryptocurrency/blockchain landscape is littered with a legacy of scams and frauds. Laws caution sellers against making unjustifiable predictions of financial gain. Regulators naturally focus their attention (and enforcement actions) on hucksters who predict a spectacular profit on purchases of cryptocurrency coins or tokens.



But if sellers take care not to crow about valuation or profit expectation, then how can they attract buyers to a new digital currency?



There are five powerful strategic safeguards a Digital Assets Ecosystem (DAE) can utilize to seed and grow the credibility, liquidity, and stability of its native currency in the early stages of introduction and distribution. The safeguards are: Comprehension, Restrictions, Options, Pricing, and Scarcity for which I coin the mnemonic acronym “CROPS”.



SAFEGUARDS



1. C for Comprehension.



(A) Qualification. The DAE must comprehend the credentials of buyers by demanding KYC/AML qualification to prevent infiltrations by nefarious operators. Indeed, the credibility of a native digital asset depends in large measure on the credibility of its buyers.



(B) Education. The DAE must insist (and confirm) that buyers of the native digital asset comprehend the substantive elements of the DAE. Buyers increase their comprehension and credulity by becoming educated about the digital applications and community governance principles forming the DAE Base Code. To accomplish this imperative, the DAE may find it necessary to incentivize buyers to take the time to familiarize themselves with the relevant information.



Ordinary sellers usually obtain nothing more than a buyer’s checkmark on a boilerplate electronic clickwrap agreement. Such forms merely parrot standard language warning buyers their asset value may collapse to zero. But a good education is the best warning. Requiring due diligence and deep comprehension from a buyer ensures meaningful informed consent. Well-educated, careful, conservative, intelligent buyers are a great resource. The DAE prospers as a community by inculcating excellent human capital.



2. R for Restrictions. The DAE can deliver important comforts to early financial supporters by placing certain restrictions on the eventual public sale of the native digital currency.



(A) Insider Sales. Establish a waiting period so that DAE insiders who receive sweat equity stakes in native digital asset units are temporarily restricted from being able to resell their stakes on the open market. This restriction produces the following three comparative advantages:

(i) DAE insiders are prevented from precipitously exiting their stakes and flooding the market through "pump and dump".

(ii) DAE insiders are incentivized to provide adequate liquidity to the public market in order to support long-term price stability.

(iii) DAE insiders are motivated to achieve landmarks in the forward timeline and exceed long-term expectations for their contributions to the robust good health of the ecosystem and its participants.



(B) Killer Whales. Establish an upper limit on individual account purchases in the public sale so that no single buyer acquires a dominant position in the DAE. There is widespread suspicion that some of the most popular reigning cryptocurrencies are, each of them, effectively controlled by a handful of what pundits refer to as "whales". The DAE may be able to avert a concentration of power by implementing a restriction on the total number of native digital asset units any one account may purchase. Otherwise, it is feasible that one big player perceiving a business threat from the startup DAE could swim in and buy the entire float in the public sale — all the way up to the “hard cap”. Because insiders would themselves be restricted from immediately selling their own stakes, this “killer whale” would then be in a position to drain the liquidity pool, de-stabilize and collapse the market for the native digital asset, and, depending on governance parameters, even vote to shelve the project.



Let’s put the problem of the killer whale in context. If, for example, a viable decentralized exchange product bloomed onto the market, why wouldn’t a massive centralized exchange attempt to buy out the project to elimInate the threat of being replaced by competing technology? Such sorts of preemptive acquisitions are nothing new in the business world, where prevailing giants sometimes seek to squash disruptive upstarts. Establishing a hard cap in the initial public sale — without also placing a ceiling on individual account purchases — may therefore inadvertently set a target price for a killer whale to extinguish both competition and innovation.



Furthermore, one of the basic goals of the DAE is to establish a diverse decentralized community. Placing a limit on individual stake holdings may therefore be both prudent and wise, because it tends to ensure the native currency will be spread far and wide. Many individuals will have the opportunity to participate.



Of course, nothing prevents a killer whale from approaching a startup DAE directly and attempting to buy it privately. Perhaps countless inventions have been stopped in their tracks by their creators being induced to take the money and run. Perhaps the best solution is robust private pre-sales to friendly supporters of like conscience to insulate the DAE against unwelcome suitors.



3. O for Options. In order to attract early private financial support, a budding DAE might consider creating an alluring hybrid variety of its native digital asset in order to stimulate credulity and comfort among early private buyers. To wit, graft a sellback put option onto the digital asset. Offer the option as a hedge to early private adopters who may later exercise it to sell back to the DAE a certain percentage, say up to one-third, of the digital asset units they purchase privately prior to the public sale. If in fact a public sale is held, and a minimum revenue goal is achieved, then, upon satisfaction of those conditions precedent, an early private supporter could exercise the sellback put option if it is desirable to do so. The buyback would be funded from the revenue generated in the public sale. Obviously, however, everyone will hope the public sale produces strong and stable pricing, so no one will wish to exercise such an option.



4. P for Pricing. The DAE must set a price for its native digital asset. Setting a price serves two important purposes.



(A) Compliance. Rather than yield to temptations to spout gratuitous hypotheses about market valuations or profit projections when seeking to sell its native digital asset, the DAE in its early stages can instead distinguish itself quite responsibly by simply deciding on a certain selling price per digital asset unit. Indeed, a price that is set simply by decision makes no attempt whatsoever to convince consumers the native digital asset is "cheap" for some alleged market reason or is a “good investment” based on emanations from a crystal ball.



(B) Capital Needs. By setting a certain selling price per digital asset unit, the DAE serves the practical purpose of seeking to raise capital for its needs. In the early stages of the DAE, when there is no broadly established valuation credibly attached to the native digital asset, the DAE cannot reliably purchase necessary products and services with its nascent currency. But if a DAE formulates a budget based on its projected capital needs, then the DAE can decide the quantity of native digital asset units it is willing to bargain away in exchange for a corresponding amount of usable capital.



5. S for Scarcity. The DAE can permanently cap the total number of native digital asset units ever to be issued. Satoshi Nakamoto's creation known as Bitcoin has an ultimate ceiling of 21 million BTC. Indeed, structured scarcity appears to be a commonplace practice in the digital assets marketplace. Scarcity does tend to eliminate the risk of inflation generally associated with the creation of additional units. Early private purchasers of a new digital asset would therefore have the comfort of knowing their stakes will not be vulnerable to future dilution. But let’s not misread scarcity as being synonymous with shortage. Perhaps a later article will address that particular dichotomy.



In summary, a startup digital assets ecosystem ought to refuse to engage in speculations as to valuation or profit expectation prior to any public sale of its native currency. Instead, commit to powerful consumer protections which tend to bring great coherence and integrity to the native digital asset. It remains to be seen who will be sensible and smart enough to engage in best practices and adopt discipline over expedience.



Dane Keller Rutledge



If you find this article interesting, then please consider sharing it with your friends and please tap the claps button as many times as you wish. And, if you like, please have a look at my related articles on Medium as listed below. I greatly appreciate your interest.



Recent articles by Dane Keller Rutledge:

"Creating a Comprehensive Digital Assets Ecosystem (DAE)" (October 24, 2018)

"Fundamental Human Constituents of a Comprehensive Digital Assets Ecosystem (DAE) (November 5, 2018)

"Giving Free Gifts to Stimulate Initial Interest in a Digital Assets Ecosystem (DAE)" (November 16, 2018)

"Cryptocurrency is in a Downward Spiral: Will a Phoenix Rise?" (November 29, 2018)

"Can You See The Future? The Rise of Machine Learning" (December 7, 2018)

“The Digital Assets Ecosystem Base Code (DAEBC)” (January 4, 2019)



CAUTION/DISCLAIMER: Please do not take any of what is written in this editorial as legal advice (or, for that matter, as advice of any kind). One should always seek advice of one's own legal counsel and/or other relevant professionals.



Copyright 2019

Dane Keller Rutledge

All rights reserved