Brilliant or Dumb? Traditional Companies Eye Cryptocurrencies

With cryptocurrencies struggling to recover from a major slump, you’d expect well-established companies to avoid the cryptocurrency and blockchain landscape altogether. Instead, companies with well-known products and services are considering proprietary cryptocurrency.

In May, Facebook said it would form a blockchain group and was interested in creating its own cryptocurrency “to allow its more-than-2 billion users to facilitate transactions without government-backed currency.”

Facebook is one of several “centralized” companies looking at decentralized technologies. And like everything that has to do with blockchain and cryptocurrency, their initiatives range from brilliant to absurd.

The Rise and Fall of ICOs

Initial coin offerings (ICO), whereby a company issues its own digital token on the blockchain, are one of the hottest and most controversial topics surrounding cryptocurrency. Anyone from investors to enthusiasts can purchase these tokens with cryptocurrencies such as Bitcoin and Ether. Blockchain startups use ICOs, also referred to as “token sales,” to fund their projects.

The basic proposition is that once the company develops and launches its application, users will need tokens to access its features or purchase services. Issuers usually encourage people to purchase tokens by selling them at discounted prices during the ICO or promising that, like Bitcoin and Ether, their value will increase in the future as the application rises in popularity and its user base grows.

ICOs raised more than $5.6 billion in 2017. But many of the projects that launched ICOs were abandoned or turned out to be outright scams, leaving buyers with a bunch of useless coins and creating a general sense of mistrust toward ICOs and the companies behind them.

Established Companies Launch Their Own Tokens

This has not prevented established companies from engaging in token sales and cryptocurrencies for different purposes. Depending on the goal, traditional businesses can issue their own cryptocurrencies to decentralize their business models, raise new investments, or launch new blockchain-based services.

Some companies are transitioning to a full decentralized model. One example: Telegram declared last year that it will launch Telegram Open Network (TON), a blockchain-based version of its messaging app. TON will be supported by its proprietary cryptocurrency, Gram, which will enable payments and various applications on the platform. Since TON is fully decentralized, owners of Gram tokens will also be company shareholders and have a stake in the growth of the platform.

Whether Telegram is moving in the right direction is hotly debated. The company canceled its public token sale because it had already raised $1.7 billion from private investors, which raises doubt over how decentralized its end product will be.

But regardless of whether Telegram will serve as a successful example, the move toward tokenized models has its proponents.

In-App Payments

Launching a proprietary cryptocurrency doesn’t necessarily require a company to decentralize its entire business model. Some companies use them to expand their applications and offer new services and features to their users.

An example is the messenger app Kik, which raised $100 million in an ICO for its crypto-token Kin last year. Unlike Telegram, Kik will not port its entire application to the blockchain, but users of the app will be able to use Kin for in-app payments. Beyond payments, the company believes Kin will let it build an ecosystem that rewards developers financially without having to rely on advertising.

“Crypto-tokens can enable companies to create royalty programs in their applications, with which companies can reward their customers by giving them tokens to redeem special products or offers,” says Ji Sheng Tan, co-founder of Trivechain Foundation. Tan explains that while tokens are not suitable for all types of businesses, some industries can leverage them to enhance their business model.

“For instance, online services with tokenized models can help companies in the retail industry to engage customers in new ways,” Tan says. He names WeChat as an example of a social media platform that has created an entire economy through its in-app payments.

Kik recently launched Kinit, an independent app in which users can spend their Kin tokens on gift cards from different online stores. The app also gives the users the ability to earn Kin by completing survey and polls, some of which are sponsored by Red Bull and Swarovski. This model enables brands to engage and reward users without bombarding them with annoying ads.

Per Cheddar, Facebook has said it will not launch an ICO and is more likely to launch its cryptocurrency through an airdrop: a process in which the company gives tokens to users for free. Although the company has yet to declare the full details of its crypto plans, in-app payments is a use case it’s already shown an interest in, and it can be a boon to users and companies that rely on the platform for their daily business.

Established Companies Can Succeed in Crypto

Since cryptocurrencies are limited-supply assets, their value rises as demand grows. But part of the challenge every blockchain startup faces when launching a new application is attracting users to their platform. Without enough users to circulate the token, it will quickly lose its value to the detriment of holders and issuers.

This is a problem that companies such as Facebook, Kik, and Telegram won’t face. They already have strong user bases, which means there will probably be no shortage of demand for their tokens once they integrate them into their applications. Though its ecosystem is still in development, Kin has already claimed the No. 1 spot on the list of most active tokens running on the Ethereum blockchain.

FaceCoin, or whatever Facebook plans to name its cryptocurrency, also has a great chance of succeeding. The company already allows payments through its Messenger app, but only when connected to a debit card or PayPal accounts, which is not an option for a large portion of Messenger’s 1.3 billion users. With a lower entrance barrier, cryptocurrencies enable more users to make peer-to-peer payments through Messenger, which could make Facebook’s token the most popular cryptocurrency once it launches. And contrary to centralized in-app currencies, cryptocurrencies let users buy or sell them on decentralized exchanges and other digital marketplaces that are unrelated to their native platforms.

Blockchain startups also have a trust problem. Numerous failed blockchain projects have made investors reluctant to purchase a coin backed only by a flashy website and a white paper that promises to solve a problem without solid proof of being able doing so. In contrast, an established company already has a working business model and teams of developers and executives with track records of delivering on their promises to create and run online applications.

Blockchain Isn’t Right for Every Company

All of this doesn’t mean you should trust every traditional company that embraces cryptocurrency. In fact, many companies have tried to use the hype surrounding blockchain and cryptocurrencies to raise funds or boost their shares.

Last December, Long Island Iced Tea Corp., a company that had been suffering from declining sales, changed its name to Long Blockchain Corp and its shares soared over 289 percent. The company declared that it was looking to partner with blockchain companies but had little to say about the details of its plans and what blockchain had to do with cool beverages. It later became evident that two months before the company’s meaningless pivot to distributed ledgers, Nasdaq had threatened to delist it because its market capitalization was too low. The name change had merely enabled the company to stay afloat for a few more months.

Another example is Kodak, which saw its stock value jump 60 percent after declaring in January that it would be launching its own blockchain platform and cryptocurrency, KodakCoins, to manage ownership of digital and enable photographers to sell their work and receive payment on the blockchain. But critics and investors remain skeptical about Kodak’s decision; some accused it of using “blockchain” as a buzzword to revive its declining performance.

Blockchain is not a solution for all centralized companies, and anyone planning to invest in any sort of cryptocurrency tied to a traditional company should conduct their own research and due diligence.

“There’s an ongoing debate about whether blockchain is applicable to every business and product,” says Alexander Tkachenko, founder and CEO of VNX Venture Exchange. “Using blockchain as a technology only makes sense in specific situations relating to ecosystems and businesses where there are large networks and therefore a huge network effect.”

Tkachenko believes large social networks are suitable examples, because users are directly involved in creating the platform’s content, and it’s hard to govern large networks in a centralized manner. But for smaller companies and businesses where users are not tightly integrated into the creation of products and services, it doesn’t make much sense.

“Blockchain emerged to allow people to cooperate by creating economic incentives to achieve a common goal. This is what makes blockchain and tokens so promising,” Tkachenko says.

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