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Crypto is broken.

Satoshi Nakamoto’s bitcoin white paper envisaged a fairly-distributed unit of currency that could be accessed by anyone.

Yet the distribution of subsequent cryptocurrencies has increasingly favored a small cohort of deep-pocketed venture capitalists and industry insiders who have perfected predatory tokenomics that guarantee obscene returns at the expense of later investors.

Token allocations can be ‘worth’ billions with the right VC firms, market makers, and exchanges — centralized authorities incentivized to extract as much money from retail investors as possible, while returning little in the way of real value.

Decentralization, the core ethos at the heart of the bitcoin white paper, is now primarily an elaborate illusion created by these token projects to escape the wrath of regulators. It’s an illusion perpetuated by the creation of Swiss foundations, the purpose of which is often simply to legitimize the outsize influence of VCs and insiders through ‘governance votes’ — which are themselves foregone conclusions.

Venture capital is not inherently bad. But venture capital is, at its heart, supposed to be a game of poker in which the investors are professional players — educated gamblers who may lose a single hand, but whose read of the game over the long run gives them a vital edge.

Venture capital firms are not supposed to be the rake.

Worse still, firms invested in a specific protocol have no incentive to support projects that directly compete with their existing portfolio — leading to stagnation instead of innovation. Ethereum’s success, for instance, can be directly attributed to its first-mover advantage and entrenched interests, if we can agree that the state of blockchain technology has significantly advanced since its debut.

As predatory tokenomics have evolved, it has become harder and harder to find projects and teams that espouse the values that inspired Nakamoto. 

But buried beneath the avalanche of multi-billion dollar valuations for unproven protocols, there are still a few pragmatic decentralists who believe that cryptocurrency and blockchain technology can be an empowering force for good… and who act accordingly.

Crypto is broken. But it doesn’t have to be.


What is ‘pragmatic decentralization’?

Human systems gravitate toward some degree of centralization in almost every endeavor.

And that’s a good thing. Leaders need the opportunity to lead. Volunteers need the chance to serve. 

The progression from decentralized networks to somewhat centralized networks is a feature of human existence. Conversely, there are very few examples of centralized networks handing back authority and power to the masses (politicians and social media kingpins have a lot in common).

Consider a functioning representative democracy that centralizes taxes and the social benefits they are ostensibly designed to fund, like schools, roads and defense. Such a system needs leaders, planners, and people to execute the plan. This is healthy and desirable. 

And generally, a centralized structure like a representative democracy contains safeguards to prevent the accumulation of too much power by any individual or entity.

Yet in the United States, for example, these safeguards have been weakened over the last half a century by the powerful and the rich. Instead of term limits for legislators, we have a gerontocracy in which the incumbents refuse to relinquish their hold on power. We have a politically-appointed Supreme Court that erodes accountability to the people. We have an executive branch that has recently taken an expansionist approach to its legal authority.

An effective network comes with checks and balances. (The US Constitution is one of the most extraordinary documents in history, precisely because of its deference to this fact.)

But politics, media, economics… in fact all of the bedrocks of a functioning society have trended toward over-centralization for years. The internet, once considered a potentially democratizing force for good, has devolved into a highly-controlled environment in which a few unelected corporate officers wield almost unimaginable power over the algorithms that feed us information and shape our daily lives. 

Like late-stage communism, in which cronyism and corruption terminally infected the increasingly-centralized halls of power, late-stage capitalism is proving that there is a limit to the lifespan of an economic system that concentrates power in the hands of too few.

Total centralization is strangling society. But total decentralization is not the answer.

Instead, we should look to pragmatic decentralization as a guide. A macro philosophy that (unlike communism) celebrates the best creative and entrepreneurial efforts of the individual, but that (unlike late-stage capitalism) doesn’t cement political or economic control with any one person or group.

Pragmatic decentralization acknowledges that humans need to centralize their efforts to achieve common goals, but that over-centralization results in ‘common goals’ becoming the goals of those who hold the reins of power.

To continue with the example of the United States’ political system, we are likely looking at a 2024 presidential contest between Donald Trump and Joe Biden — a contest few want to see, but that centralization of power has made almost inevitable. The common goal desired by the majority (younger, less polarizing candidates) has given way to a centralized goal (the preservation or reclamation of power by aging candidates and their lobbies).

Tokenized economies hold the potential to speed-run decentralized governance experiments at scale, as we consider what the practical elements of pragmatic decentralization actually look like. 

But as mentioned, the crypto industry has run straight into the centralization trap and its alluring promise of riches and power for the few who make it there.

To summarize: Bitcoin emerged as a response to centralized banking failures in 2008. But instead of disrupting the established order, the financialization of crypto has simply duplicated economic centralization, albeit with different characters at the apex of the pyramid. 


Koinos: A decentralized alternative to predatory layer-ones

In early 2020, TRON founder Justin Sun and his exchange Poloniex, aided by Binance and Huobi (representatives of which both claimed to have been duped by Sun) executed a ‘hostile takeover’ of the STEEM blockchain that resulted in several key members of the development and communications team resigning from Steemit, the company behind the chain.

Those team members vowed to create a decentralized alternative to existing blockchains that would be immune to hijacking by wealthy or nefarious individuals or entities.

Having witnessed the issues that caused the acrimonious STEEM affair firsthand, they intended to build the smart contract-compatible blockchain that they would want to build on themselves.

It would solve multiple problems relating to governance, power, cost, upgradeability, environmental issues, and accessibility, with the ultimate aim of empowering developers to give people ownership of their digital lives.

  1. It would be free to use
  2. It would be immune to hard forks
  3. It would specify time, rather than money, as the opportunity cost for token holders
  4. It would not be susceptible to 51% attacks
  5. It would be upgradeable at the smart contract level
  6. It would not require intensive power usage
  7. Developers would be able to use the languages they already use
  8. The initial token distribution would be 100% decentralized, equitable, and available to all
  9. No ‘pre-mined’ tokens would be allocated to the team, or to any other entity

Instead of raising hundreds of millions of dollars to build this blockchain, the developers simply sat down and did it, using their own capital and time. And two years later, the Koinos blockchain was deployed to mainnet.

For a six month period beginning in November 2020, anyone with a CPU could mine the KOIN token, which had an initial supply of 100 million tokens. The launch of the mining period was detailed in Cointelegraph, the largest cryptocurrency-focused publication in the world, as well as on Hacker Noon and the BitcoinTalk forum.

Decentralization of the network was not an afterthought, and it’s not merely a promise. It already happened, and it’s both irreversible and permanent. Any tokens owned by the developers behind the Koinos blockchain were mined or bought, like anyone else, without any head-start or early advantage. 

The following data from Etherscan predates the transition to the native KOIN token, but illustrates that the distribution of the ERC-20 prior to mainnet was far more decentralized than some projects:

Koinos Top 100 KOIN token holders
Worldcoin Top 100 holders

Koinos has now been running for almost a year uninterrupted, having launched on the auspicious date of November the 5th, and dozens of projects and developers have worked to deploy NFT collections, a decentralized exchange, wallets, and other infrastructure on the chain:

Current projects include:

Meanwhile, the Koinos community is growing rapidly, with over 10k followers on Twitter and highly-engaged Telegram and Discord groups.

For a deeper exploration of the blockchain itself, see the Koinos website and the Koinos unified white paper.

 


Key challenges for a decentralized layer one

Remembering that crypto is broken, it’s important to note that the response to crypto is broken, too.

Legislative responses to emerging financial technology have been slow and partisan, while the SEC, under Gary Gensler, has undertaken a broad and comprehensive attack on the industry that lacks finesse or precision.

The result of the lack of clarity surrounding the legality or status of crypto assets is a hostile environment for US-based projects wishing to build within the industry, as well as the exclusion of US persons from investment opportunities.

While this situation is perhaps now changing, with court victories for Ripple and actual progress toward legislation in Congress, the de facto understanding in the US is that any crypto-based project in which a centralized authority both issues the tokens, and is responsible for the ongoing health of the project, is likely a security (per the 1946 Howey test).

However, as discussed, some degree of coordination is generally necessary for human beings to actually accomplish great things. Crypto projects are no exception: Which is why many of the more significant layer-ones and layer-two solutions have several things in common.

  1. The issuers of the tokens are often the developers of the blockchain and their associated companies or entities.
  2. These entities tend to issue tokens to early backers and venture investors, as well as to their own teams, as a way of funding the development of a tokenized economy and ecosystem of associated projects, as well as to pay themselves for their sweat equity when the token becomes available for purchase to outsiders.
  3. Entities will often ‘gift’ tokens to ostensibly independent non-profits (foundations) which are tasked with redistributing these gifted tokens to encourage development and activity on the blockchain, in an attempt to decentralize authority after the fact.
  4. Projects may also airdrop tokens to early users, once again in an attempt to decentralize after the fact.

This model has been financially lucrative for many project teams and their investors, as well as for some percentage of speculators. However, it has become increasingly predatory as it essentially guarantees early investors, market makers, exchanges, and project teams outsize returns with little or no risk.

It should also be noted that with hundreds of millions, sometimes billions of dollars, in the bank through a token launch before a protocol is fully-developed or has a thriving ecosystem, true development of an actually-useful blockchain and ecosystem essentially becomes an obligation after the fact as well.

It could be argued that the continuing absence of killer applications for the technology is a direct result of the fact that instead of developing products that people want and use before raising money, the crypto industry has reversed that paradigm — giving participants much lower incentives to create value, since the wealth is already banked.

The challenge, then, for anyone wishing to upend this model, is significant.

  1. Developers and their associated entities, in order to comply with the Howey test, cannot issue tokens to themselves or their investors.
  2. They cannot be responsible for the ongoing health or promotion of the blockchain they create, for the same reason.
  3. They are competing against technology backed by exceptionally deep-pocketed teams of developers, marketers, promoters etc.
  4. Actual use of the technology will have to drive user adoption, rather than elaborate marketing and substantial business development teams.

In practical terms, this has meant that the team behind the Koinos blockchain has favored maximum decentralization and has avoided engaging in activities that could potentially be perceived as contrary to the spirit of the Howey test — including centralized business development and marketing.

Instead of their business model being the issuance of tokens to reward themselves, the team formed an entity — Koinos Group — which has an entirely different model. This US-based private company aims to build the ultimate SaaS platform for Koinos, empowering developers to build and monetize Koinos applications, but it is not responsible for maintenance or promotion of the chain.

As evidenced by the various social media accounts and community resources dedicated to the Koinos blockchain, community members are constantly reminded that if they want to secure centralized exchange listings, they are welcome to contact centralized exchanges… if they want to build on the Koinos blockchain, they are welcome to build and solicit advice and support from other community members. And if they want to promote or market the chain, they are welcome to do so themselves.

While team members have vocally pronounced their support for decentralized and open source technology, Koinos Group will not and cannot act as the central authority for the blockchain, as this would directly contradict every effort the team has made to comply with their understanding of the law as it stands in the USA.

 


A voluntary, community-led Koinos Federation to coordinate resources

Many crypto projects attempt to decentralize after the fact by creating a non-profit Foundation charged with promoting their native blockchain.

We propose the opposite.

Since the Koinos blockchain was launched in an entirely-decentralized fashion and ‘belongs’ to the community, we propose the creation of a Federation; a voluntary, community-led effort to coordinate some marketing, promotional, and awareness-raising activities for Koinos, thus combining the critical elements of a decentralized protocol with some of the more positive aspects of a centralized organization.

Given that many of the entrepreneurs building on the Koinos blockchain are small teams (or solopreneurs) it should not be expected that they possess the multi-disciplinary skills, or time, necessary to build each piece of their business from scratch.

Organizations that help businesses and entrepreneurs grow have been around for decades — think a specific trade organization such as the National Association of Realtors, or a more general one such as the Chamber of Commerce.

These organizations provide support, expertise, grants, networking opportunities, legislative lobbying and more. 

A sample mission statement for the Koinos Federation might be:

The Koinos Federation exists to promote awareness of the unique benefits of the Koinos blockchain, and to support the developers and projects building on it.

The Koinos Federation will:

  • Create and maintain a repository of knowledge capital including brand materials, messaging, marketing support materials and other promotional and educational content for use by any member of the Federation.
  • Manage and train community mods in building out positive and productive social networks
  • Direct developers and entrepreneurs to complementary services and providers of services who can support them in their development efforts.
  • Reach out to service and infrastructure providers (such as exchanges, hardware wallet providers, market makers, influencers and news media) to secure integrations, listings, partnerships, promotional activities, news stories etc.
  • Promote (and potentially moderate) community involvement in the various Koinos-specific social media and discussion groups, such as Twitter, Telegram, Discord, etc.
  • Help developers to share resources and libraries, and potentially accredit developers who demonstrate specific knowledge of the Koinos blockchain.

 


 

Koinos Federation membership

For the first 6 months, all developers, community members, and project founders are invited to join the Koinos Federation at no charge, so long as they commit to amplifying the positive messaging we hope to generate about the Koinos ecosystem.

In the future, revenue-generating projects may be asked to contribute to the Federation to support eventual operating costs. However, since there are currently no meaningful operating expenses there is no current need for membership fees.

All Federation IP, marketing materials, docs and more are freely available to the community.

Formal membership benefits will be announced as the community gets behind the Federation.

 


Who are the volunteers behind the Koinos Federation?

The Koinos Federation is entirely driven by community volunteers who receive no payment and no tokens for their efforts.

As the organization grows, we intend to formalize governance, a registered corporate entity, elections to the advisory board and more. 

However, for the first few months it remains simple. A group of people who are putting their time and expertise into helping the Koinos Federation get off the ground, and building awareness of the Koinos blockchain.