The Token Disconnect: Exploring the Relationship Between Blockchain and Financial Engineering

The Token Disconnect: Exploring the Relationship Between Blockchain and Financial Engineering

Blockchain technology has often been criticized as a solution in search of a problem. Many argue that its use cases are limited and niche, leaving us to question its purpose. It almost feels like reverse-innovation, where the discovery of a technology precedes the identification of its purpose. However, the venture capitalist class sees cryptocurrency and blockchain in a completely different light.

Venture capitalists are primarily concerned with returning money to their Limited Partners (LPs). They view crypto as an exciting new financial tool that allows them to arbitrage securities regulation. The accreditation divide, which refers to the distinction between accredited and non-accredited investors, has fueled the obsession with crypto tokens and the ICO mania of 2017.

With crypto assets, you have an asset class that behaves like a security but is not regulated as one. This has created a new financial product that resembles an option contract on a startup. Investors can exercise this option by dumping the stock on the public market, completely untethered to the success of the company. There's no need for filing a prospectus or attracting customers or revenue. It's a system that allows for immediate liquidity and bypasses the traditional Wall Street processes.

This lack of regulation and enforcement in the crypto space has led to practices reminiscent of the 1920s, such as insider trading, wash trading, and pump and dump schemes. It's almost like a license to print free money, which undoubtedly excites many LPs in large funds. The innovation in crypto lies not in software engineering, but in financial engineering.

On the other hand, when we look at the success of consumer apps and how they acquired their first 1,000 users, we find a different story. Most startups found success through just one or a handful of strategies. The key is to narrowly define your target user and tailor your tactics accordingly. Going directly to your user, whether online, offline, or through personal referrals, can be highly effective.

Pinterest, for example, started as an invite-only community. The founders carefully selected design bloggers as their first users, instructing them to invite people they knew with unique and creative minds. This exclusive community grew slowly until 2012 when the invitation requirement was removed. By curating their user base and targeting individuals with high Twitter follower counts, Pinterest was able to set the right artistic tone and create appealing content for others to enjoy.

This highlights the power of personal referral networks and the importance of considering the mechanics and incentives behind them. Traditional media also played a significant role in Pinterest's early success. Changing the computers at a conference to display the Pinterest website and observing people's reactions created a buzz around the platform.

In combining these two seemingly disparate topics, we can draw some actionable advice for both blockchain enthusiasts and startup founders:

1. For blockchain enthusiasts:
   • Understand the role of financial engineering in the crypto space. Recognize that the innovation lies in creating new financial products rather than software engineering.
   • Advocate for responsible regulation and enforcement to prevent the reemergence of unethical practices seen in the past.
   • Encourage transparency and accountability within the crypto industry to build trust and legitimacy.
2. For startup founders:
   • Define your target user and tailor your strategies accordingly. Don't try to appeal to everyone at once.
   • Leverage personal referral networks to acquire your first users. The recommendations of trusted individuals can be incredibly powerful.
   • Consider the role of traditional media in your launch strategy. It can help create buzz and generate initial traction.

In conclusion, the disconnect between blockchain technology and its perceived lack of purpose is a topic of ongoing debate. However, by examining the financial engineering aspects of crypto and the user acquisition strategies of successful startups, we can gain valuable insights. It's important to recognize the potential of blockchain technology while also understanding the importance of regulation, transparency, and targeted user acquisition strategies in building successful ventures.