Want to make money with digital currencies?
1. BUY LOW, SELL HIGH
The most obvious way to make money with bitcoin and cryptocurrencies is investment or speculation. Buy low then sell high. Short-term trading based for example on technical analysis does not contribute anything to the project concerned (this being written without moral judgment on the practice). Long-term investment requires stronger involvement in the project. The idea is to find cryptocurrencies whose value on the exchange markets will rise sharply in the future and this requires further study. This study requires time and an understanding of the technical and economic principles of a project of this type. These investors bring to the market their competence by raising the price of the most relevant projects. Although this is not directly useful to the project, price increases benefit the stakeholders involved from the start.
2. FINANCING DEVELOPMENT
In order to gain the trust of potential users, developers are forced to make public the source code of the project. The code may not be published initially and then placed under a license that does not allow the modification to provide some protection to the creator. This need for transparency means that developers are faced with the big question of open source: “How to make money by freely publishing its software?”
Answers developed over the years are for example
Take advantage of the notoriety acquired to improve his salary, Sell support by being in the best position to know the project in detail, Sell services such as the development of specific functions, Receive donations or scholarships These approaches remain valid but are supplemented by others in the case of a cryptocurrency since the “parts” generated by the system will have a value if they find buyers.
ACQUIRING PARTS BEGINNING: Mining
The creators are of course best placed to believe in their project when the value of the pieces is tiny. They can take advantage to accumulate and hope that their work past and future will increase the value. This does not only apply to developers but to all stakeholders who can advance the project.
This accumulation can be done in particular by mining. In so-called Proof-of-Work systems, mining is always easier at the beginning and then the difficulty increases with the overall computing power allocated to this task. We are talking about instamining if a large number of pieces are generated from the beginning and attributed to the members of the project. This can be viewed positively by future investors as this ensures that developers have an incentive to make the project succeed. If this distribution is disproportionate, it will hurt the future equilibrium of the currency on the markets because the prices can then be manipulated by those who have a significant share of the chips.
If it is difficult to charge the software once the source code is public, it can be deduced that the right moment is just before. The practice of generating before a certain amount of parts to sell for a fixed period of time is called ICO (Initial Coin Offering) by analogy with an IPO (Initial Public Offering) on the stock market for more traditional actions.
This approach remains debatable but has been much better accepted recently. It has the advantage of allowing the project to acquire the capital to finance a sufficiently large and qualified team to launch before the competitors to the similar concept.
Among the noteworthy ICOs are the first, Mastercoin / Omni1 in 2013, Ethereum2, Augur3, Gnosis4 and Tezos. The latter has just ended, on a record raised amount (+ $ 200 million). The amounts raised can indeed exceed hundreds of millions of euros.
ICOs can be capped or uncapped, that is, the number of pieces generated is known in advance, or not. The price may also vary over time. In the case of Gnosis, they were Dutch auctions with a decreasing price but only a fixed number of tokens to buy (ICO capped). On the contrary, for Tezos (ICO uncapped), a bonus of up to 20% was offered to first comers.
DONATIONS TO GROW THE PROJECT
Just as individuals or businesses can make donations to help projects that are useful to them or are important to them, investors may have an interest in financing work, hoping to reap the benefits later. There is certainly a problem of stowaways who will benefit without funding but this is not a major problem.
This can be done in the form of a crownfunding campaign.
An example of successful implementation of this approach is Monero’s Forum Funding System5. As the name implies, this mechanism works on the project’s discussion board. A project leader presents an idea, the amount he asks for it (in Monero) and explains why he is the right person. Milestones are established to stagger payments to milestones. Pledges are then made to arrive at the amount provided. Note that in this particular case, if the sum is not collected in time, the money paid is not returned but used at the following solicitations.
6. FINANCING SERVERS
Dash6 uses a particular architecture based on what they call Masternodes (literally “Master Nodes”). While participants in a cryptocurrency network are generally the same, these Masternodes perform special functions such as transaction anonymization and a governance system. They must be online permanently and run on high-performance servers. This results in a cost that is offset by a payment when a miner finds a block. We then speak of Proof-of-Service by analogy with the Proof-of-Work associated with minors (minors and Masternode coexist in this model). The owner of the Masternode blocks a large sum as a guarantee. There are currently more than 4000 Masternodes Dash spread around the world.
Factom7, the chain that aims to ensure the integrity of information, uses a similar mechanism but has chosen to have only a limited number and fixed servers (divided into several categories according to their role).
We can mention PIVX8 and CROWN9 among projects based on masternodes.
7. INTEGRATING FUNDING IN THE PROTOCOL
The integration of certain parameters such as inflation in the protocol, that is to say in the operating rules of the network, is now well known. Some currencies use a similar system to guarantee developers’ income, which is called a “self-financed protocol”.
Decred10, for example, reserves 10% of the reward for creating each block11 for a development fund. The distribution mechanism between the main developers and other contributors is not yet clear.
Tezos12 will allow each person with the necessary skills to propose a change in the source code and have the participants vote on it. It is perfectly acceptable for the developer in question to include a reward going to his own address. If he is considered too greedy, the vote may be against him.
Another example of funding through the protocol is Sia13. This project allows everyone to make available disk space for renting. He is then paid in the cryptocurrency of the project, the Sia coins. The originality is that there is a second type of chips, the Sia funds, numbering 10,000 (90% currently for the company behind the project). Their owners automatically share 3.9% of the total amount of hosting contracts (pro rata to the number of Sia funds owned). These tokens can be sold over the counter.
This overview briefly presented the main ways to finance contributions to cryptocurrency projects but it is likely that others will emerge in the future among the many blockchain innovations.