The ICO Craze Contains the Seeds of an Open-Source Economy

The ICO craze over the past six months has been wild: $6 billion in non-dilutive capital contributed to highly speculative startups, many with little more than a whitepaper and a website.

Startup founders around the world have started frantically brainstorming ways to integrate tokens into their products so that they can cash in while the speculation is hot. We’re starting to see tokens shoehorned into products they have no business being in, just so the company can put “blockchain” in its name and watch the money pour in.

The current nutzo market is temporary, but the longer-term role of tokenized company funding is the subject of a lot of debate. We may decide the whole thing was a big mistake and return to good ole VC fundraising. We may also start trading startup equity as tokenized securities, rather than just the non-equity utility tokens that are being traded today.

Either of those outcomes may occur, but there’s a deeper truth to be learned by studying this weird new fundraising vehicle. It won’t look the way it does today, but within the wild speculation of ICOs could lie the beginnings of a new compensation model for developers — one that could reshape the way software is built and funded.

The Project Economy

Open-source software has come a long way since Steve Ballmer called it a “cancer” in 2001. Modern computing would not exist (or would at least look very different) without the open platforms we all rely on. While many companies contribute paid resources to open-source development, the ecosystem still relies to a large degree on the benevolent contributions of a large network of individuals. Today, unless a company decides that contributing to a project is in its best interest, those contributors don’t get paid.

But what if developers could make a living contributing to the projects they already choose to work on for free?

An evolution of the ICO framework could provide the mechanism for that to happen. Token sales fund individual projects, independent from any company or other legal entity. Many ICOs today are run by companies, but the success of the token is distinct from the success of the company (for that reason, many developers for blockchain companies are demanding tokens instead of company equity). If the project and its associated network become useful and grow, the market should value the associated token accordingly. Owners of tokens related to that network stand to benefit, regardless of company affiliation.

If we apply that concept to open-source development, the implications don’t stop at just increasing the speed of project development. With the right incentive structure, the project would replace the company as the primary organizing force for economic progress. Imagine if the Git project had been started today as a distributed application with an integrated token, which we’ll call XGT.

The project code is freely available and open-source, but is structured so that it rewards contributors to the project with XGT (like bug or feature bounties, but for everything). Each successful commit is rewarded with cryptocurrency that is independently valued by the market.

The token could be worthless, but in theory, the value should increase as the project is adopted (I don’t cover crypto valuation here, but this is a good overview).

Let’s say you’re a developer who wanted to contribute to Git. You’d look at their published list of desired features or bug fixes, and earn XGT by committing accepted improvements. Git would use a “proof-of-contribution” protocol to issue XGT based on a tangible metric like number of commits or issues resolved, or it could be divided up based on a consensus of those involved in the project (Colony’s “reputation mining” concept to solve that problem is fascinating).

You can immediately cash in your earned tokens at the current market rate, or assuming success, you can ride the growth of the network to greater returns.

Eventually, a company like Github could determine that the project is worth working on. They direct their full-time developers to build the Github proprietary interface, but they also want to make enhancements to the core project to support their needs.

So they might offer you a market premium in exchange for a portion of your compensation tokens and the ability to direct you towards issues that matter to them. The company thus has a vested interest in not only their own product, but in the foundational projects they use and the communities that contribute to them.

Let’s say that our new-world Github does as well as the original, building not only a successful enterprise but also dramatically increasing the market value of XGT. Early employees of Github do very well based on their company equity, but you, as an early holder of XGT, could stand to do even better.

In a token-based world, open-source contributors could become the most influential and well-compensated developers in the world, without ever working for a company.

The Sovereign Individual

With a token-based model, we’ll see the emergence of the “sovereign individual”, who would be able to contribute to crypto-based versions of Unix, Apache, Docker or Chef and get rewarded for doing so, completely independent of any organization.

The companies involved in those projects would stand to benefit too, but on an equal playing field with distributed developer communities. The resulting Project Economy is a collision of the crypto, open source and gig employment trends that have all been years in the making. Companies will still exist, but they won’t be the only vehicle for individual success.

More subtly, the project economy also takes huge advantage of censorship resistance, the primary benefit of being on a public blockchain. In this case, the “censors” are not authoritarian governments, but large acquiring companies with near-monopolies on startup liquidity.

The long-term options for startups and their projects are generally to either become big enough to IPO or to align themselves with the interests of Facebook and hope to get bought. Unix was marginalized for years — much longer than a traditional company could sustain it — before it became one of the core building blocks of modern computing.

Cryptoassets provide a way for world-changing projects enjoy independent longevity and to reward its contributors without requiring an IPO or exit to a FAANG company.

A couple of big challenges emerge from a Project Economy:

Turns out that hierarchy in companies is pretty effective, and organization and management of decentralized projects is notoriously difficult. For many projects, centralization is just a better option. Smart contracts can help a bit here too: governance, decision-making, organizational structure and parameters of cooperation can all be baked into the token being traded. Once you own your piece of the project, you can influence its direction or outputs to whatever degree the contract allows. Decisions won’t necessarily be consensus-driven, either. The project ownership structure can appoint decision-makers to make tough calls and drive the project forward.

Today, cryptocurrencies are only available to projects with embedded networks and associated tokens, which would exclude the vast majority of open-source projects. If a non-network-based project wants to issue an associated token, that token would likely be classified as a security and be much more restricted.

Venture investing in a project economy would have to change dramatically. VCs can still invest in companies the way they do today, participating in the upside of a specific entity in a traditional structure. Or they can invest directly in fundamental projects, betting that the project will be used by many companies or grow independent of any of them.

Or they can invest directly in individuals, taking a share of future compensation tokens. VCs often say that seed investments are mostly in the team rather than any particular concept — the project economy allows “people investment firms” to actually exist.