Crypto-economy: what to look out for

Tuesday November 20 2018

By JOHN WALUBENGO
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I always hesitate talking about crypto-currencies and their economy because they always take away the thunder from the more important benefits of blockchain technologies.

However, in recent months, Kenya has become flooded with many projects launching their own version of crypto-coins and seeking public funding for them.

Typically, a project would publish a ''White Paper'' describing its objectives, top leadership, and developer teams, amongst other attributes, and eventually floating tokens or crypto-coins for public purchase at a very low cost per token.

The idea is to raise money from the public to fund the actualisation of the project objectives in what is currently known as Initial Coin Offerings (ICOs), which are like their more traditional Initial Public Offering (IPOs) in the sense that they are vehicles for raising public funds.

However, unlike IPOs, ICOs do not give you any rights of ownership, rights to vote in directors, or to access confidential company data. In other words, buying tokens or crypto-coins from the various crypto-projects like bitcoins, ethereum and others does not mean you own part of these companies.

GROWING FAST

It only means that the crypto-coins you have purchased are based on your belief that the described project will succeed and subsequently find global use or utility in a way that would increase demand for your purchased crypto-coin.

Based on the classical supply and demand economics, one would expect that increased demand for a particular cryptocurrency would naturally increase the value of one's purchased crypto-coin at some time in the future. You would then opt to either cash out on your investment at some convenient point by converting your crypto-coin into the traditional fiat money.

This simple model has led to thousands of cryptocurrencies being created since the first one called Bitcoin was launched ten years ago.

Kenyans have not been left behind and are joining the new crypto-economic environments by launching all sorts of crypto-coins in the market.

Dr David Ndii, one of Kenya’s leading economists, is on record saying that the crypto-economy is one big sham or pyramid scheme that is likely to collapse in the near future.

Dr Patrick Njoroge, another established economist and the Central Bank of Kenya governor, was initially quite sceptical about the whole cryptocurrency issue, but has recently tweeted about aspects of blockchain rather than cryptocurrencies that could be useful within the financial markets.

LOOK OUT

So where does that leave the common man, particularly in the absence of any official guidelines, or regulations on, the crypto-space?

I had previously blogged about the key issues to look out for when deciding on which crypto project to support, but since the concept is now gaining momentum, it is timely to have a summary under the following two questions.

First, What is the underlying value proposition of the crypto-project? In other words, what problem is the project intending to solve, and how does the need for a crypto-coin fit into the overall solution?

Many blockchain projects do not actually need any crypto-currencies and scammers would simply use the name 'crypto currency' in their White Paper in order to ride and cash in on the current hype.

The second question to ask is about the project leadership. In other words, what is the track record of both the management team and the software developer team behind the project?

If both the technical and managerial leadership is composed of folks who have no previous track record in the technology and financial space, then most likely you are dealing with a major scam in the offing.

These two questions would help you navigate the Kenyan crypto-space that is likely to grow over the next couple of years.

Mr Walubengo is a lecturer at Multimedia University of Kenya, Faculty of Computing and IT. Email: [email protected], Twitter: @Jwalu