Defensive Equity Crowdfunding

Take a look at this Ethereum contract. It’s a classical pyramid scheme with a 3x return, it has a nice web site and even uses BTCRelay, so you can enter the game with Bitcoin.

What’s interesting about it is that the contract takes a fixed 10% fee that goes straight to the owner. I’m all for contracts that charge fees, but the problem is that nothing prevents somebody from copying the contract and setting the fee to 9% and so on.

It’s a classical high competition scenario where all profits get competed away. The incentives are perversely anti-content-creation because you can save the entire development costs and focus on the stuff that actually matters: Brand and network effects. Unlike IP, these are moats that work even in the Ethereum world.

The rest of the article will assume a general Ethereum smart contract that does something useful, not a pyramid scheme.

So, what could we do about it?

My idea is to let contracts issue tokens that (smart-contractually) entitle the owner to a share of its fees. I’d call it “Defensive Equity Crowdfunding”, though that’s somewhat inaccurate.

Somebody who is motivated to copy the contract could first check if it would be cheaper to buy shares. After all, copying is cheap but not free and “customer acquisition costs” are still a thing.

The contract needs to follow some issuance model. I’d suggest exponentially increasing the price with the number of tokens issued. As the price of tokens increases, it will reach a point where copying becomes the better option. However, at this point a couple of objectives have been met:

  1. The contract/creator made at least some kind of profit.
  2. The contract/creator can put that money to work and establish its brand (or anything else that might qualify as a moat).
  3. The contract/creator potentially made a bunch of new friends who would rather not see their profits competed away and therefore help in promoting the contract.

The last point only applies partially, because somebody who wants to copy the contract might as well buy shares as a hedge against losing the race1. However, points (1) and (2) still do apply.

It’s not really a solution to the problem of high competition - only moats can temporarily “solve” the problem - but I think being as inclusive as possible from early on, thus turning your contract into a natural focal point, is a good practice.

For more complex DAOs, ownership might not be good enough, as owners would also like to influence decision making. I heard Futarchy was kinda good at that.

  1. If the copied version turns out to be popular, they get the upside, while having payed only a fixed amount for a share of the upside in case the original contract turns out to be popular. ↩︎