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Civic’s token illustrates why companies masquerading as tokens will fail

Quick Take

  • Civic is an identity system founded by Vinny Lingham in 2015
  • In 2017, the company raised ~$33m in funds through an ICO
  • Civic is now down 96% from its all-time high, now trading at half its ICO price

Civic, the identity system founded by Vinny Lingham in 2015, is a notable example that serves as a strong case against many of the flawed token-based approaches that have been pursued. Vinny, a bitcoin advocate dating back to his previous gift card company Gyft, raised a 2016 seed from blockchain investors to “secure SSN,” without any explicit goals to incorporate a token or blockchain at the time.

The company raised ~$33m in funds through an ICO that looked like the world’s most bizarre nightclub line: in it, tens of thousands of participants were placed in a queue and randomly allowed access to purchase CVC tokens priced at $0.10 each, regardless of when they joined. Of the one billion tokens, 33% were sold in the ICO, with another 33% retained by the Civic team, 33% to incentivize the community, with 1% left over for running the sale.

I imagine that the conversation between Vinny and his engineering team went something like this:

Vinny: Team, we need to put this on The Blockchain.

Team: Err, come again? We can just store this stuff locally or some distributed system that doesn’t need a chain of blocks.

Vinny: Sounds good, let’s use Blockchain and raise an ICO.

Team: Wait, what?

The token question was always a bit of a mess. The Bitcoin Oracle stated over and over again in 2017 that the CVC token, initially issued on Ethereum, was a temporary placeholder until the launch of Rootstock, a smart contract platform implemented as a Bitcoin sidechain.

The question of why Civic, a centralized company that had an existing mobile identity product, needs a token is an excellent question. It was answered at first in an 18-page whitepaper, which spends more time explaining 50,000-foot views of the digital identity industry and how blockchains work than covering the specific utility of the CVC token.

Diagram from the original Civic white paper explaining how the system works

In this case, as seen in the diagram, the original CVC token vision was to create utility through its use as an “ecosystem token.” In the Civic ecosystem, the places where circles exist are examples of places where the CVC token is “used as a form of settlement between participants to an identity-related transaction within the Ecosystem.” If you’re not trying to deceive unsophisticated retail investors, another way to think about it is just that the token is used for payment.

Even if their platform is useful, the question every ICO team should be asking is still outstanding: why use a proprietary token for payment when a fiat-backed token (more stable), bitcoins (decentralized money token), or just dollars (simple) suffice? The white paper presented 4 extremely compelling reasons:

It can be used across any number of jurisdictions, retaining a single uniform method of settlement.

nods head, thinking “Bitcoin can do the same thing.”

Using a blockchain-based token makes it possible to perform settlements automatically and irrefutably within a smart contract

nods head, thinking “Bitcoin, Ethereum, and a number of other existing public blockchains allow for this too.”

Having a unique, specialized token for accessing identity services provides stability and shields the Ecosystem from extraneous considerations that can make other cryptocurrencies volatile

Oh man, this is just great. Forgetting that all unpegged cryptocurrencies are money (some more liquid than others, like gift cards), it’s unclear why this is even intuitive (or went unquestioned by so many). Fortunately, we can see empirical confirmation that Civic’s team aren’t token engineering alchemists who’ve figured out the holy grail of price stability: Civic is down 96% from its all-time high, now trading at half its’ ICO price.

Chart courtesy of OnChainFX

It makes it possible to manage incentives in a way that drives Ecosystem effects for the benefit of all participants in the Ecosystem

This is the most substantive bullet. Civic, like many others, believes that the token allows them to “manage incentives” to solve the bootstrapping problem early-stage startups often face. However, in practice, “managing incentives” looks a lot more like “give away tokens to try to bribe people into building stuff with our technology.” Let’s call this the Token Engineering Reality Distortion Field (or TERDF for short).

Another generous reading of why Civic kept so many of the generated tokens is that they can use the value of those tokens to subsidize the cost of KYC verification, which then makes the service more appealing to prospective partners (given the increased number of users on the platform). For those who think I’m kidding, in a September interview, Vinny implied that why the giveaway-based growth model that nearly bankrupted PayPal could work:

Paypal got it right with the whole $10 free if you invite a friend, and it nearly bankrupted the company. They managed to crack the chicken and egg problem doing it that way.

In an earlier blog post titled “Why Tokens are Eating the World” (a play on Marc Andreessen’s “software is eating the world”, Lingham explained the virality as such:

Civic has created 1 billion utility tokens that provide access to identity verification-related services in a decentralized, token-based ecosystem. These tokens represent a unit of account for the network. The bigger the network grows, the more utility in the token — and because the number of tokens are fixed (no inflation in the total supply, although they will be released over time). As the size of the network and transaction volumes within it grows, this will create demand for the tokens.

Before you think “wait, that makes it sound like the token price could just go up forever,” don’t worry, that was likely their desired conclusion. If more verifications increase demand which makes the token price go up which creates stronger network effects creating increased demand, by golly, he’s done it!

More seriously, virtually all of Civic’s ecosystem partners are traditional businesses which try to do business in relatively stable media of exchange like the U.S. Federal Reserve Note. This is the fundamental problem with CVC and other utility tokens we saw in 2017: there’s no reason to believe that increased demand for the CVC token would “drive up the price of the token” as the users accepting Civic will sell their tokens in favor of more stable assets (something analysts have more elegantly researched).

If there’s one thing we’ve learned from 2017, it’s that forcing users and businesses to purchase single-purpose payment tokens is a futile effort which creates increased friction in the product. Most recently, even the 0x protocol was forked by their largest relayer who noted that “[t]he ZRX token will be removed as well because fee-based tokens create unnecessary friction.”

If we operate under the simple assumption that things can only hold financial value for a few reasons, e.g. as a claim on cash flow, as money, or as a collectible item, it becomes clear that there’s no real reason for the CVC token to be worth much. Perhaps it represents some new proto-money-Web 3.0-driven-global-paradigm-shift in the way that we maintain and transfer value, but I’m somewhat skeptical.

Raising non-dilutive financing via ICO in a never-before-seen bull market does allow a team some liberties, in 2017 Civic marketed their “$1M Identity Theft Protection” (funds Civic was willing to spend in the event of an identity breach), pledging that the service would be “free for life” for users. This project has since been sunset in 2018.

Despite these missteps, the partnership train rolls on. Since the principal consumers of CVC tokens are retail investors, partnerships are necessary to keep the “hopium” alive. Some of Civic’s world-class partnerships include:

  • partnership with Anheuser-Busch InBev in May 2018 so that people could “anonymously verify their age with the help of blockchain.” At the Consensus conference, with the Civic app, someone of age could scan a QR code to get a beer. Why the CVC token is necessary remains to be seen, as Vinny agrees in a May interview that “you don’t have to own a Civic token to use Civic. You just need the app.”
  • A partnership with Brave in September 2018 so that users can confirm their identity in the privacy-focused browser Brave, which has its’ own separate definitely-doesn’t-make sense payment token ($BAT, or “Basic Attention Token”), which seeks to reward users for interacting with content publishers. Why the CVC token is necessary remains to be seen.

  • An un-ironic December 2018 partnership with oft-satirized project Dentacoin, an industry-specific cryptocurrency for dentists. I wish I were capable of making this up, but Dentacoin, which relies on a similar payment token and overtly gives them away needs Civic to solve their KYC problem to ensure only those adding value receive tokens. From the announcement: “The essence of the Dentacoin distribution mechanism implies that users are incentivized with Dentacoin (DCN) tokens only when value for the industry is generated.” Though the DCN token itself is useless, we can’t forget about the CVC wrench in the system. Once again, why the CVC token is necessary remains to be seen.

A full list of partnerships can be found here, but it’s worth noting, virtually all of the groups dogfooding Civic’s platform are with other blockchain projects or crypto-adjacent companies.

Speculating on exactly why this is the case is perhaps rude but necessary: it’s an open secret in the industry that tokens (virtually free, non-dilutive currency) were used to create faux momentum through optically sound partnerships in an attempt to “fake it till you make it.”

While product adoption and token mechanics feel up-in-the-air, Vinny certainly has a penchant for crisp domain names, [adding Identity.com] to their coffers in 2018 to build a “Stripe for identity” which functions like a “marketplace for companies looking to sell attestations about individuals and the companies seeking to verify information about their customers.” It’s unclear what the goal with Identity.com is, but acquiring high-quality noun domain names despite the operating business in a tailspin isn’t a promising sign.

With all of the backlash against payment tokens in 2018, Civic ended up creating a new white paper in conjunction with Newtown Partners to add staking as part of the process, which helps with the adjudication process of identity data on the system. This is another common token engineering “pivot” and one other blockchain projects have taken in attempts to create more robust value capture mechanisms.

Civic was at the nascent stages of starting a potentially successful identity startup, which could have been a boon to traditional financial services companies. The gluttony of 2017 pushed them and many others to make short-sighted decisions. Not every company needs to become a “project” and embrace the ethos of “Web 3.0. — not that Civic even comes close — Civic’s project isn’t even open-source in counter to the cypherpunk ethos of other self-sovereign identity projects.

While Civic feels directionless and the token model flawed, this doesn’t mean all attempts at creating self-sovereign identity will fail. Other token-less models are much more promising, and our potential sovereign future remains in sight.

Correction: The article has been updated to remove the assertion that Vinny Lingham referred to himself as “the self proclaimed ‘Bitoin Oracle.'” We regret the inaccuracy.