Kik’s Pivot to Cryptocurrency
Why messenger company Kik launches its cryptocurrency Kin. And prepares an innovative exit.
ICOs are the talk of the town these days. At least when you’re living in Internet City. One of the biggest initial coin offerings in the making is the messenger app’s Kik launch of its cryptocurrency Kin that will happen on September 12. There is a lot to dissect here. I tried to be as non-technical as possible, to keep the piece accessible even to readers who aren’t familiar with the blockchain world. That said, some prior knowledge might be helpful.
Without further ado, let’s get right into it.
Basic Kik/Kin ICO facts
First, let’s look at what is going to happen during and after the ICO*, according to the official whitepaper
*If you’re not familiar with ICOs: they are basically a crowdfunded investment round, usually used by early stage startups, who outline their idea in a whitepaper; this goes back to the very first days when Bitcoin inventor “Satoshi Nakamoto” first presented his concept in a whitepaper
- Kik will introduce its digital currency Kin via the ICO
- There will be an overall supply of 10 trillion Kin tokens
- At the token distribution event, they’ll sell 1 trillion tokens (10% of the overall supply)
- The remaining 90% of tokens will be allocated like this:
- 60% will go into the Kin Foundation (more on that later) which will distribute them among “ecosystem partners and the Kin Foundation”
- 30% will be preallocated to Kik and be subject to a “long-term vesting schedule”
5. Kik will implement Kin as the official currency in its app. Users can use it to buy virtual goods, services, and content
6. “Over time”, they will “work to structure and form the Kin Foundation, a nonprofit organization to oversee the fair and productive growth of the Kin Ecosystem. The Kin Foundation will administer the Kin supply and the Kin Rewards Engine.”
7. At some point in time, Kik plans to open source the “majority” of its currently proprietary code
Blockchain Challenges
Before we go into the details, let’s take a step back.
One core challenge that all cryptocurrencies and blockchain services face — at least those addressing consumers—is getting traction among regular users. Many of the applications being built these days are indeed directionally interesting use cases for blockchains. However, most of them are also direct competitors to well-established internet services with both, huge userbases (and, thus, network effects and lock-in) as well as a great user experience in place. Neither can be said about the new entries — even buying the entry card, tokens, is a painstaking challenge for most regular users.
So, if you will, the startups’ bet basically is:
Users will switch to our (often horribly designed) service because we offer crypto tokens as an incentive and because decentralization is better!
It’s certainly possible to make the case for the latter part in many instances. I, for one, are generally supportive of the idea to replace centralized platform intermediaries with decentralized and (partially) user-owned networks which distribute the created wealth among their participants. How could you not? Alas, this makes for a rather philosophical differentiator. Most users mainly care about convenience. As the web’s history has often demonstrated, user experience trumps idealism.
Getting Blockchains into People’s Pockets
Back in May, I wrote:
Let me make a rare prediction: The first blockchain-based systems that will operate at huge scale (and with high transaction volume) are going to be very specific and operate on top of existing platforms. By definition, these won’t be the sexy, revolutionary fully decentralized and peer-owned systems people dream about. But they will run, at scale, thanks to their clear path to users.
In this piece, I argued that the simplest way into the peoples’ pockets for blockchains and cryptocurrencies would, theoretically, be via established networks. However, those companies usually have little incentive to decentralize themselves — or even to entertain the notion. Their business models are built around being an intermediary that aggregates all sides of a market, facilitates transactions and takes a cut. They are, by definition, central actors. On the one hand, this conflicts with the thinking of many in the blockchain community. On the other hand, from a purely practical standpoint, none of the existing platforms has much to gain from “going blockchain”.
That is, when we are talking about a blockchain-based architecture and business model as well as a truly decentralized system. Some blockchain technology under the hood, however, is a different animal. Thus, I concluded that big platforms using blockchains for some background tasks would likely turn into the technology’s first mainstream adoptions (with major transaction rates, to be precise).
What hadn’t caught my attention when writing those words is that three days prior, the messenger app Kik’s founder and CEO Ted Livingston had announced that Kik was going to launch its own cryptocurrency Kin. (Which is at least somewhat ironic since my piece covered a hypothetical cryptocurrency issued by Facebook.)
Currency and Network Effects
My major mistake back then (and a good illustration of why I usually refrain from predictions) was this: I didn’t account for the possibility of a decently-though-not-uber (pun intended) popular service, which operates in a market that’s famously tough to monetize, deciding to launch its own cryptocurrency in an attempt to solve its business model puzzle.
That is, in essence, what Kik launching Kin is. At least from a top level perspective. From there, it looks quite appealing: Kik is a messenger platform that boasted 300 million registered users in May 2016, according to Statista (there’s a caveat, hang on for a second). Once Kin is implemented in the Kik messenger, this will present the largest install base for a cryptocurrency wallet by far. In short, Kin solves the major issue of getting a cryptocurrency into the hands of people right from the start because it can leverage its existing network.
Which is important because all currencies — crypto or not — rely on networks (and therefore have strong network effects). Any new currency needs to enable actual transactions to be useful. If you own some of today’s money (fiat currency), you can walk into any store or open any website and buy whatever good or service you can afford. That’s quite practical. With today’s cryptocurrency, though, it’s not the case. The best places to spend your cryptocurrency are the darknet and Apple’s AppStore — or you make speculative investments in ICOs. There are many challenges involved if a cryptocurrency wants to become a generally (or at least broadly) accepted means of exchange. Arguably, having a sizable base of users is the biggest one (followed by being accepted by merchants, though they usually follow demand).
In that regard, a cryptocurrency which is launched on top of an existing network with a sizable userbase is an interesting proposition. Kin is, by default, going to be the largest scale cryptocurrency experiment. And conceptually speaking, there is definitely some merit to the approach: In the best case, Kik might launch a broadly distributed currency which proves useful in the real world (or at least in the world of digital services).
Pivoting Into an ICO
Now, let’s look at it from Kik’s perspective. The most obvious question is: Why is Kik launching Kin? A good starting point is the framing CEO Livingston presented in the initial announcement back in May (excuse the lengthy quote):
We’ve reached a worrying point in the evolution of the internet: more and more of our everyday digital activities — from talking to friends to ordering food to sharing photos — are controlled by fewer and fewer companies. The biggest companies use their scale to amass advertising dollars and give everything else away for free, making it nearly impossible for smaller competitors to find sustainable business models. Even if a potential competitor does break through, these companies turn to a copy-and-crush strategy, using their greater resources and user bases to stop anyone who poses a threat. At Kik, we’ve faced this problem first hand.
For now, this dynamic is arguably okay: there’s still just enough competition to keep the giants honest. But that won’t last forever. As the giants continue to consolidate power, consumers will have fewer choices and face higher costs to switch to other services. These forces could lead to a future of less choice, less innovation, and ultimately, less freedom. We need a better solution.
Obviously, such a solution is not going to come from the incumbents, who stand to gain nothing from ceding their dominant positions. So we at Kik have decided to propose a new ecosystem of digital services that will be truly open and decentralized, and which starts with a new cryptocurrency.
The centralization of power and wealth in the hands of a few platforms is a much-discussed and very real issue. Indeed, decentralized systems that give users not only a say but turn them into co-owners of the network present a possible way out. While the blockchain community itself is rather heterogeneous — ranging from crypto-anarchists to radical libertarians to more idealistic-minded proponents of platform cooperativism — at least a decent portion would certainly subscribe to Livingston’s argument. (If you were cynical, you might say: it ticks many of the right boxes.)
The following excerpt from the ICO whitepaper might be more to the point (emphasis mine):
“As a company, Kik has been searching for a sustainable monetization model that does not compromise user experience or privacy. Rather than opt for mass display advertising or the selling of consumer data, Kik has decided to adopt a decentralized organizational model. Its goal is to encourage the development of a digital services ecosystem that is fair and open. Kik prefers to be a participant rather than a landlord in this user-first economy. To foster an ecosystem that is not only open and decentralized but also more compelling than its traditional counterpart, Kik must create a series of new products, services, and systems.”
As I said earlier, messenger apps are famously hard to monetize. Kik is no different. People don’t pay for messaging as there are too many free options. Stickers and games didn’t really work for the company. Kik also bet big on chat bots but those didn’t become the next big thing either (just ask Facebook). Also, while the 300 million registered user figure sounds rather impressive, the reality is much more humble: according to the company’s ICO whitepaper, they currently have 15 million monthly active users (MAU). Whatsapp, in comparison, has 1 billion daily active users. So, as they say themselves, Kik is pretty much a company searching for a sustainable business model.
Further, it’s fair to assume that a cash injection wouldn’t hurt either. Since the company’s foundation in 2009, Kik has raised over $120 million in venture capital. The last round, a $50 million investment by Tencent Holding at, reportedly, a $1 billion valuation, dates back to August 2015. While there is no public information on Kik’s burn rate, it’s a truism that funding doesn’t last forever and, barring a profitable business, that turns into a problem at some point.
It would be unfair to call the introduction of Kin a last resort. There is certainly a potential future in which this endeavour turns into a great success story. But it’s first and foremost a pivot in search for both, a business model and liquidity. You might either regard it as a rather bold move or, if you’re more of a cynic, put it in the desperate times call for desperate measures category.
Critical Success Factor: A Tokenized Developer Platform
As stated earlier, there will be 10 trillion Kin overall, of which investors can buy 10 percent during the ICO. 60 percent of the overall supply (6 trillion Kin) are going to be managed by the foundation and distributed over time among ecosystem partners. To that end, Kin uses a mechanism dubbed rewards engine¹. That means, in simple terms: there will be APIs which third-party providers of digital services can use to integrate Kin into their products. According to official comments on the Slack channel, there will also be a way to develop services on top of the Kik platform.
This has two effects. For one, Kin will be used to incentivize developers to build services which use the currency. Also, it will turn Kik and its userbase into a monetizable platform for outside developers and creators. That is a nice twist. If you have a strong userbase but can’t find a working business model, its often a good idea to turn into a platform. This way, you leverage your users and allow others to find working business models for them. The difference between a traditional approach and Kik’s chosen path is that Kik (presumably) won’t profit by taking a cut of the transactions but by increasing the value of Kin — of which it’s going to be a major owner.
Of course, there is still a long way to go. The whitepaper showcases some exemplary services that might be implemented into Kik so users can spend and earn Kin. As of today, though, those are merely ideas and it remains to be seen if users will accept them (though it should be noted that Kik experimented with an old-fashioned centralized virtual coin for more than two years and users apparently used them quite a bit). But for Kin to become really valuable, it will take a striving ecosystem of developers and services.
Achieving that is not impossible. Within the blockchain ecosystem, 15 million MAUs are a huge userbase. This likely presents an incentive for blockchain developers to incorporate Kin into their products. And Kin might draw other developers to Kik’s platform (Kik claims to already have 100k devs on their current developer platform). It’s not an unbelievable story. Yet, it’s not reality either and fostering a strong ecosystem is hard work. Whether or not Kik/Kin succeeds at it, will eventually decide over Kin’s fate.
The ICO Exit
What is important to note is that Kik is going to remain an independent, privately held entity post-ICO. The whitepaper at no point states anything else and official statements in Slack and on Reddit further clarified that. It’s still worth pointing out, though, since I’ve seen many false assumptions circulating (which can, at least partially, be blamed on the fact that the whitepaper never explicitly mentions that fact but talks a lot about decentralization in the context of Kin and the foundation). To be clear, remaining a regular company is in no way reprehensible (though certain folks might beg to differ). However, it’s an important detail if you want to understand the whole ICO situation.
Just yesterday, Kik published the financial particularities of their ICO. From there:
We will sell 1 trillion Kin tokens for $125 million through the TDE [editor: token distribution event]. Of that amount, $50 million has already been sold in a presale, which received a 30% discount, comprising 488 billion Kin tokens (investors included Blockchain Capital, Pantera Capital, and Polychain Capital). The rest will be sold for $75 million during the TDE, comprising 512 billion Kin tokens.
That is, Kik is aiming at a $1.25 billion valuation for Kin (not Kik!) via the overall token sale (the public effectively buys at a $1.46 billion valuation). Which is quite a valuation for a brand new cryptocurrency. In all fairness, the fact that 15 million monthly active users will have it in their hands as soon as the Kin wallet is implemented into the Kik app, gives some merit to it. For comparison’s sake, Bitcoin is estimated to have 10 million users².
If Kin manages to reach the IPO’s cap, Kik’s 30 percent stake would be worth $375 million. That, of course, isn’t precisely a liquid asset. Kik dumping a major amount of Kin on the market would result in an instant price drop. Still, the implication is clear: If the ICO succeeds and Kin stabilizes, Kik will have raised $125 million and additionally own a major stake of Kin.
As a venture-backed company in the midst of a business model pivot, that would be a pretty nice outcome. And present a way to exit for Kik’s investors. Livingston spoke publicly about this option being one of the reasons for the ICO. From CNBC:
Can you name the fourth most popular cryptocurrency? It’s Litecoin and has a market cap of $2.5 billion. If Kin got that kind of valuation — and with an established community of 15 million monthly active users, it could be a currency worth more — Kik’s 30 percent stake in Kin would be worth $750 million, almost equal to the valuation of Kik’s last round. If Kin became as valuable as Ripple — the third most popular cryptocurrency today — Kik’s stake would be worth $2.5 billion.
Livingston pointed out that, in this kind of scenario, an exit via M&A or an IPO would be unnecessary for Kik. Its existing backers could simply convert their shares into Kin and liquidate them. Kik could stop trying to win advertiser dollars, if it wanted. It could simply focus on developing the community’s use of Kin and helping Kin proliferate outside of the Kik ecosystem.
So, in contrast to the nice rhetoric and PR fluff you find in the official documents surrounding the ICO (which sadly don’t even mention the current investors, a fact that leaves a bad taste in my mouth), the introduction of Kin is at least as much about naked financials as it is about decentralization and a better digital ecosystem. Don’t get me wrong: That’s nothing to be frowned upon. Honestly, it’s even quite innovative. If the plan succeeds, it’s an exit in a way that hasn’t been done before, at least not at such significant scale.
However, given the bubbly nature of the current ICO/cryptocurrency world, I’d prefer a little less fluff and more facts instead. It’s one thing to pivot and open the doors for a cryptocurrency exit. Not calling it that but selling it as an act of idealism might prove to be a good marketing strategy but isn’t as upfront as I’d prefer. Having that opportunity at all is a freedom granted by entering a largely unregulated field. With that, though, comes increased responsibility towards investors. The burden of gaining and maintaining their trust is fully on the company, as no institution like the SEC protects both sides.³ Therefore, utmost transparency is a must. Alas, that’s precisely where I find most room for complaints. (More on that in part two.)
Summary
Kik is a company searching for a business model and backed by investors who will want to exit at some point. If all goes well, Kin might solve both problems at once. It’s a big bet and we can only speculate about the odds. On a conceptual level, there are definitely things to like. An active, sizable userbase is certainly a good starting point for a cryptocurrency. But, as always, execution will matter the most and decide about the long-term success of Kin and Kik.
The key will be the formation of a healthy ecosystem around Kin and Kik. Only if enough services add value to the system, will the currency reach the desired value. If that works out, we might witness a precedent-setting example for future exits via ICO. However, there are many uncertainties on the road ahead. Some I’ve covered here, some I’ll cover in a follow-up in the upcoming days.
My follow-up piece
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¹ The particularities of the rewards engine from the whitepaper: “Every year, 20 percent of the remaining rewards allocation will be issued as periodic incentive payments, diminishing over time as the currency gains overall value. For partners, the rewards will constitute strong economic incentives for integration with the Kin cryptocurrency”
² Though I should say that this number is based on active bitcoin wallets which is a very error-prone indicator because people using several wallets and other factors.
³ It’s often overlooked that the SEC doesn’t only protect investors but also companies. In a regulated domain, the regulator’s approval acts as a sign of trustworthiness. While getting that approval means more upfront work, it also means less investment into goodwill and maintaining trust later on.
