New Bitcoins come into existence through mining. Most people who have done any research on blockchain technology and cryptocurrencies know this. I mean, it’s not that hard to understand, right?. There are a bunch of warehouses out there with computers and fans running 24/7 to pump out those beautiful new Bitcoins into the world. Pretty simple?
Unfortunately, even within the crypto community, there is a pretty staggering lack of understanding of exactly how mining works. The cryptography, block times, block rewards, difficulty adjustments, etc. What are they? Why is a block time ten minutes instead of five? Or twenty? Why do block rewards decrease over time? Why do we have to wait until the year 2140 to mine out the maximum supply of ~21 million Bitcoins? Or, most importantly, why is mining so f*n important to blockchain?
While the technological and cryptographical elements of blockchain are, without a doubt, fascinating, the economic elements are certainly just as, if not even more so, groundbreaking. The incentive structures that may be architected around micro-units of value contribution (i.e. tokens) issued through a predetermined value contribution reward schema (i.e. mining algorithm) will change the way companies are founded and products are launched. The boundaries between the roles of developer, investor, user, and consumer will be broken down. The definition of what “marketing” is may very well change.
Cryptocurrency companies, in their current state, spend a lot of time emphasizing the power of blockchain technology in changing their businesses. This rhetoric is not only being used when talking to investors, but end-users as well. The sad truth is that, at no point in history (that I can think of), has a (consumer-facing) company succeeded by shoving their tech stack down users’ throats. The end user doesn’t care. They care about whether or not a product will make their lives easier, through solving a problem, or increasing the efficiency, or decreasing the cost of something that matters to them.
Blockchain, in comparison to more traditional Internet-era technologies, does not necessarily aim to increase efficiency or decrease costs (although it should still be working to solve problems). Instead, blockchain revolutionizes production relations. It allows for a redistribution of the value created by a product, service, or company to those who made it happen (which is not limited to just founders and investors!)
In the case of Bitcoin and Ethereum (both Proof of Work coins), tokens are issued to miners who utilize their computing power to process transactions and secure the blockchain. In most ICOs today, tokens are issued to team members (who develop the product), investors (who make sure the company has enough capital to operate), advisors, and the company itself. Most of these ICOs claim that their tokens will have world-changing use cases (hopefully allowing their lawyers to sign off on classifying them as utility tokens!) for which the masses will need to purchase vast quantities of their tokens to spend. Unfortunately, aside from some exchange tokens such as Binance Coin (which has a great use case within a fully-centralized system), there really aren’t many successful examples out there.
A lack of utility for the thousands of “utility token” ICOs is, in my opinion, one of the main factors that has led us to the current bear market. Too many ICOs with grand visions, not enough results. Too much roadshowing, not enough research and product development.
I think it’s important to note that I do believe in the future of utility tokens. However, the current barrier-to-entry of the crypto market (getting my dollars, yen, or lira converted into tokens and then transferred into the product where I want to use them — all without losing my private key!) makes this very much an upstream battle.
During this crypto-winter, however, we have started to see some interestingprojects emerge. They have risen and fallen in months, if not days or weeks. Most are highly controversial. Regardless, they are incredibly important for us to study and learn from, as I believe they just may represent one of the biggest trends we will see in crypto since the launch of the ICO.
That trend is… behavioral mining.
In May of this year, a new crypto exchange was announced. The exchange was called FCoin, founded by the former CTO of Huobi, Jian Zhang. When FCoin launched, not many people expected much out of it. The “who’s who” of the exchange world seemed to have long been determined, made up of the Chinese giants Binance, Huobi, and Okex, along with the Korean Bithumb and HK/BVI-headquartered Bitfinex.
Every company has their own “0 to 1” struggles they have to deal with, chicken and egg dilemmas of needing something to attract customers, and needing customers to attract that special something. For exchanges, that something is liquidity. We trade on Binance or Bitfinex because of their large order books, and relative ease of being able to buy and sell however many of whatever token we want without crashing the price. With such strong competition, FCoin would need something different… something new to attract users to their product…
And hence, the concept of transactional mining was born.
Transactional mining, on the FCoin platform, worked as follows:
For every $1 you spend on transaction fees (which occur whenever you buy or sell an asset on the exchange), you receive $1 in FT (FCoin’s platform token). FT was immediately tradable against USDT, ETH, and BTC pairs. These tokens were printed by FCoin, with 51% allocated to their “mining pool” and 49% allocated to the company, team, and investors.
To sweeten the deal, FT token holders were eligible for 80–100% dividends paid out in Bitcoin based on the cumulative transaction fee revenues of the exchange each day, which, during FCoin’s peak, was thousands of Bitcoin.
It didn’t take long for the volume of the exchange to explode, and, with it, the value of the FT token, going from pennies to almost $1.30 at its peak. The transaction volume of the exchange, within weeks, was #1 in the world, with daily transaction volume of what probably overshadowed the GDP of quite a few smaller countries. Users flocked to FCoin en masse, and FCoin, it seemed, without spending a penny on marketing, had solved its liquidity problem and overthrown the other exchange giants.
Or had it?
Obviously, FCoin was not without its controversy. While many hailed it as a work of creative genius, sure to overthrow traditional exchanges, most (smarter people?) saw it as a disaster waiting to happen. As Changpeng Zhao (CZ), CEO of Binance stated, this was nothing more than a masked, expensive ICO, and it wouldn’t last for long.
Additionally, the FT token was blatantly a security, and the company did not try to cover up that fact. Daily dividends were listed front and center on the website, and users were promised they would be able to use their tokens to vote on the future direction of the company.
Of course, the most blatantly, in-your-face, obvious issue with the exchange’s design was its absolutely ridiculous transaction volume. We’re talking $5B+ USD a day. It was clear to everyone that most (nearly all) of the volume on the exchange was fake. Bots trading back and forth with each other to “mine” FT, often using the platform’s poorly designed referral system (which initially paid out 50%) to recruit themselves and amass profit.
FT tokens were mined quickly, and the diminishing returns which came from being one or two weeks late to the party were massive. It didn’t take long for the token to head to $0, the users to leave, and the platform to become not much more than another chapter in the crypto history books. The team tried to save their brand by launching new coin after new coin, FI, FOne, and a handful more… but it was too late. The game was over.
While many people write FCoin off as a failed business model, or even a pyramid scheme or a scam, it poses many questions. The most important of which include:
- Why was the “transaction mining” business model able to gain so much attention so fast?
- What caused it to fail? and
- What could FCoin have done differently that might have saved it?
We will get back to these questions later. But first, let’s take a break and play a quick game of dice…
EOSBet — if the devil was a game designer…
There aren’t many more appropriate use cases for blockchain and cryptocurrency that I can think of off the top of my head than gambling.
- Cryptography allows for verifiable odds, ensuring that the player is at all times certain of his chance of winning or losing.
- Crypto payments ensure that the company which created the game never have to worry about chargeback or fraud, nor do they have to deal with those pesky gambling licenses, banks, currency settlements, yada yada yada…
- Thanks to crypto, anyone can play these games, anywhere, regardless of the laws or restrictions in their home countries.
It is no surprise then, that games utilizing cryptocurrencies for gambling have been around since the early days of Bitcoin, and grew with the advent of Ethereum and smart contracts. Many of these gambling applications had respectable revenues, in the thousands or even tens of thousand dollars per day.
Until recently, when two very important events collided which changed the crypto-gambling landscape forever.
The first was the launch of EOS, the first true generation-3 blockchain, able to process transactions near-instantaneously, which is of paramount importance for DAPP design. The second was proof of the power of behavioral mining as shown by the, what many would call, failure of the FCoin exchange, as discussed above.
That’s right, FCoin, despite its flaws, proved the potential of behavioral mining algorithms (trading is a behavior) to cold-start (0 to 1) a new product, and EOSBet saw that.
In EOSBet, the user chooses a number (i.e. 51), and “rolls the dice” (in reality producing a random number from 1–100). If he rolls under that number, he wins; if he rolls over, he loses. The game has a 1% house advantage, meaning, thanks to the law of big numbers, the game developers will, over time, have a profit margin of 1% of the total amount bet on the game.
This game design is exactly the same as previous blockchain-based dice games except for two things:
- It is decentralized and FAST (it takes around 3 seconds for a transaction to clear) and
- Every time you roll the dice, a new currency called BET is mined at a 10:1 ratio (i.e. bet 10 EOS, get 1 BET) and immediately distributed after every roll to the user.
Additionally, there is a referral system that pays out 0.5% of winnings to whoever introduced the user to the game.
#1 is certainly important (thanks EOS!) as, without a 3rd-gen blockchain, the player would either be forced to deal with the risk of a centralized wallet on a gambling platform or wait 1–10 minutes for a transaction to clear on Ethereum (which would break with EOSBet’s transaction volume).
But, #2 is what really turned the DAPP world on its head, and EOSBet, weeks after its launch, is currently doing revenues of 1M+ EOS, or $5–10M USD a day.
“Why?”, you may ask.
Well… if you’re going to lose, you might as well get something out of it, right? In a traditional casino, that would be comps. (I lost but at least I got a free buffet ticket!) In EOSBet, it is BET Tokens, which, like FCoin, give 100% dividend rights to token holders.
Note… dividends are proving time and time again to have a huge impact on crypto products. For reference, google memes related to FOMO3D/P3D and “getting those divis!” Dividends made FOMO3D, not the jackpot!
I.e., win or lose, the gambler still has the potential to earn money back based on the dividends issued based on house winnings as well as the potential future value of BET tokens themselves. (Note: FOMO3D also succeeded by giving back the house edge to players).
If the devil created a game, EOSBet would be it. The game effectively combines:
- Gameplay addiction mechanics
- Gambling addiction mechanics, and
- Crypto speculation addiction mechanics.
God save us all…
Will EOSBet share the same fate as FCoin? This remains to be seen. As of now (early September), it is still going strong at over 1 million EOS bet per day.
Are FCoin and EOSBet scams? Pyramid schemes? Lucky breakouts? Or is this the beginning of what may soon become a trending, yet controversial, new business model? (who remembers early debates about free-to-play games?)
Could FCoin have survived and thrived with some slight tweaks to its algorithm design?
How exactly do you design a “behavioral mining” system for a product? And should you?
Stay tuned for Part 2 to find out…
In the next part of this series, I will discuss a theoretical behavioral mining framework for blockchain-based applications.
BitGuild’s mission is to revolutionize the global gaming industry by creating a platform for a brand new class of games that live on the blockchain. Blockchain games completely redefine the relationship between players and developers by facilitating full and true ownership of in-game assets, cheap & safe item trading, cross-game compatibility of items & currency, and more.