“Cryptonetworks” can help us build a more competitive, innovative, secure and decentralized Internet. “Tokens” (also known as cryptocurrencies or cryptoassets) are integral to the operation of cryptonetworks. As we design new laws and regulations in this emerging space, we should keep these concepts in mind, beyond the financial aspects that are today’s primary focus.

In recent months, there has been untold attention paid to cryptocurrencies, blockchains and the coming of the “decentralized web” or “web3”. And, given the rise of the cryptocurrency markets (over 1500 coins, with a total market cap of $370B as of today) and the recent boom in token-based fundraising (including a healthy dose of scams and shenanigans) there is increasing regulatory and legal attention being paid to the sector, and rightly so.

This is a profound, and confusing, innovation. As John Oliver so aptly put it last week, it’s “everything you don’t understand about money combined with everything you don’t understand about computers”. Basically right.

At USV, we’ve spent the better part of the past five years exploring and investing in this space, and now have roughly a dozen investments touching it in one way or another. As we have watched the technology and market evolve, alongside the public discourse, we feel its important to reiterate why we think this technology is so powerful and important, and contribute to the ongoing collective learning about how it works.

While much of the focus, especially in the context of regulations, is on the financial and fundraising applications of cryptocurrencies, our interest continues to be on the potential for cryptonetworks to provide digital services, such as computing, file storage, social applications, and more.

You might ask, why is it important to have another way to provide digital services? We already have lots of websites and apps that do that today. The reason cryptonetworks are an interesting addition to today’s digital services is their core architecture of decentralization. Just as the original internet gave us a decentralized layer on top of the telecommuncations network, which resulted in untold innovation, cryptonetworks are a decentralized way to provide digital services. Chris Dixon has a great post exploring why this is important, including the historical parallels to the original internet.

The decentralized architecture of cryptonetworks has the potential to address many issues in today’s tech and business landscape, including information security, market competition, product innovation, and equitable distribution of gains from technology.

Imagine, for instance, if the owners or users of Amazon/Google/Facebook/Reddit/etc. were able to “fork” the product and launch an identical competing copy, if they didn’t agree with the direction of the company? And imagine if all of the users of & contributors to a web platform also had a direct, monetary interest in the success of that platform, that reflected their own contributions as community members? This is how cryptonetworks work, since they are essentially open-source, mutually owned & operated web platforms. Each network’s cryptocurrency or “token” acts as the internal currency, incentive mechanism, and “binding agent” for the other processes that help the platform function. And further, the internal data structure of cryptonetworks, the distributed ledger or blockchain has unique properties that can improve privacy and data security. See also, Steven Johnson’s recent NYT piece exploring these ideas.

With that as context, it’s important to walk through how cryptonetworks function, and importantly, how tokens function within them — especially given the growing regulatory scrutiny around how tokens are created and traded.

The deck below (full size / downloadable PDF) is meant to help explain this. While it does touch on some public policy goals at the end, it does not attempt to make specific, detailed recommendations. The main takeaways should be (a) cryptonetworks are an important new innovation in how digital services are delivered, (b) tokens are fundamental to their operation, and (c) as we design new laws and regulations in the space, we should keep (a) and (b) in mind as guiding concepts.