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Kik (the company behind the Kin ecosystem) recently launched their first beta app “Kinit” on the Google Play Store. The launch received polarizing feedback with both an out-pouring of positive reviews on the Play Store, but, some tough criticisms from both the community and reporters who failed to understand parts of Kik’s strategy.

A Quick Recap of the Main Criticism:

  1. From the Community: “They aren’t doing any marketing of this launch!
  2. From the Community: “Their future plans are only to market to developers!
  3. From TechCrunch’s John Biggs: “ By encouraging usage they drive up the token price and token velocity and by launching a general beta full of cutesy imagery and text they are able to avoid the hard questions about developer adoption until far into the future. While the KinIt app is probably not what most Kin holders wanted to see, it’s at least an interim solution while the team builds out sturdier systems.
  4. From CCN: “There isn’t any business model — how will this work?
  5. FUDsters and haters: “Kik hasn’t done much since the big ICO
Over the next series of posts, I’m going to address each of these points, explain why I believe they are fundamentally flawed, and address why I think Kin’s strategy is headed in the right direction.

They aren’t doing any marketing of this launch!

One of the main points that the community is making right now, is that Kik and the Kin Foundation are not currently doing anything to promote the Kinit app. Before we dive into the reasons that this is the right decision, it’s important to remember some background:
  • Kinit is a beta.
  • “Beta” in technology projects is very different than “beta” games which are normally just early access.
  • Kinit is limited to one country currently (the US).
  • Kinit is only available on Android during the beta.
  • Kin is still testing their new Kin blockchain (based on Stellar).
Given the above, there are two reasons why Kik should not be marketing Kinit to the general public right now. # 1 — Understanding the Chasm: Heavily marketing a beta launch, especially to the general public, is a horrible idea. Consumers fall into a number of different categories in terms of their willingness to adopt new products, and their ability to be forgiving about bugs and expectation gaps.
Image result for crossing the chasm
When a startup or new product launches into beta, they focus on a “minimum viable product” (MVP) which is essentially a first draft of their product with slimmed down feature sets. This MVP often acts as the beta for innovators and early adopters to help test, refine and give feedback upon. These users are part of an early market that exists outside of the mainstream. They are used to using early, incomplete, and complicated products, and will stick with the products even if there is a lot of friction or frustrating bugs. (Chances are, if you are reading this you are in the ‘Early Adopter’ category. Because crypto has not yet “Crossed the Chasm.”) After that early market group, you reach a point called “The Chasm.” This is the gap between early adopters and a mainstream market. “The Chasm” is tremendously challenging for products and startups to cross, and it often ends up being a fatal point in the growth trajectory of most startups. Beyond “The Chasm,” most consumers expect a complete, polished, easy to use and easy to understand product. These mainstream users don’t know anything about wallets or private keys and they’ll abandon any app that has simple bugs, including:
  • Frequent typos or grammar issues.
  • Poor layouts.
  • Auto-rotation glitches.
  • Issues with SMS/2FA.
  • Overlapping text.
  • Poor support on certain devices.
Not to mention that they’ll be far less forgiving on things like the amount of surveys, and amount of offers they want to be able to redeem on a recurring basis. Mainstream users are picky. Unlike early adopters (you) they don’t have emotional, ideological or financial connections to a product. They will look for any excuse to churn out and never use your product again. They also cost more to reach as you often have to educate them on the purpose of the product. #2 — The Leaky Bucket: In marketing, when we advertise to new users and try to get them to adopt a new product this is called our “marketing funnel” — the “marketing” that most people talk about is usually paid advertising that takes place at the “awareness” level of the funnel.
When looking at the effectiveness of a campaign, we take detailed measurements on a marketing funnel (I won’t get into these here, but if you are unfamiliar with funnel metrics I can highly recommend Andrew Chen’s post on “How to Create a Profitable Freemium Business.”) The most important factor to understand is that we pay out at the top of the funnel, but we profit from the bottom. Think of it like trying to fill a bucket at your tap. You are paying for the water coming out of your tap, but, you are only benefiting from the water that goes into the bucket. But, if you drop any water from the bucket, it goes down the drain and you can never put that specific drop back in your bucket. If your bucket has no leaks, then this isn’t a problem. But, your bucket does have leaks.
Related image
All product buckets do — but the goal is to minimize the leaks. Right now, when someone discovers Kinit the leaks are:
  • 100% of users who use iPhone.
  • 5% of users who use an Android device running versions older than 4.4.
  • 100% of users outside the US.
  • Users who are frustrated by bugs.
  • Users who can’t SMS verify.
  • Users who don’t feel there are enough surveys.
  • Users who don’t feel there are enough redemption rewards.
  • New landing pages which are still being optimized.
  • New onboarding flows which are still being optimized.
  • Lack of churn mitigation and reengagement from the app.
  • and many more.
Paid marketing funnels are tough for free apps, and so they need to have an air tight funnel. You may be thinking “Yeah, but, I hear of developers who get $0.50 — $2 cost per installs when marketing their apps so Kin should just go buy 1M users!” and while that is true, it doesn’t account for retained users and it isn’t viable at this scale. Paid marketing has a tremendous challenge wherein the larger the audience you try to reach, the less cost efficient it becomes. While getting 10,000 installs for $1 — $2 a piece is trivial, getting 1M installs using paid marketing channels is likely to cost more in the order of $7 — $12 per install at scale. (Math post to follow later in the series!) This matter is made worse by the fact that on average only 33% of users retain on apps after the first 30 days. This means Kin could be effectively paying $21-$36 per user (excluding gift cards) which would be a terrible strategy. $1M spent on partnering with established developers, apps that are growing and have higher CPAs due to freemium models, and partnership teams is going to go a lot further than 300,000 purchased users. The goal of Kinit is to act as a central wallet point within the Kin ecosystem, and so as the ecosystem grows users will naturally be on-boarded to the app. #3 — Kik is spending money on acquisition: Lastly, it’s important to realize that Kik IS spending money within their marketing funnel. They are just spending it in the “engagement” / “retention” part of the funnel rather than on awareness. The gift cards within the Kinit app are currently having their cost compensated by Kik. I’d hazard that the compensation is around the 75% mark. So even if we assume that a user only receives one $5 gift card during their entire beta, then that means Kik has spent $3.75 on making it easier for that user to earn the gift card and retain the user. Takeaways & TL;DR:
  • The app is a beta, and not ready for a picky mainstream audience.
  • Advertising to a mainstream audience before your product is ready for them makes it MUCH more costly to advertise to them in the future.
  • Spending money on awareness campaigns is wasteful until you iron out your conversion funnel.
  • Paid acquisition marketing (at the awareness stage of the funnel) is effective for small businesses. When trying to scale a company to tens of millions of users it loses efficiency and requires a much higher RoI margin that a free app like Kinit doesn’t have.
  • Kik IS spending money on marketing, by compensating the cost of user gift cards in Kinit. This is money spent at the engagement/retention phase of a marketing funnel, which is by far the most cost effective stage.

Curious what all the fuss is about? Check out the Kinit app where you can earn and spend the Kin cryptocurrency every day! [thrive_leads id=’3175′]
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Metcalfe’s Law

Unless you work in the telecom industry, you may never have heard of “Metcalfe’s Law.”

And rightly so, as Metcalfe’s law is a simple and obscure mathematical observation relating to the impact/reach of a telecommunications network.

The law states that the potential of a network is simply the number of nodes squared, or mathematically:

n2

All this means, in its basic form, is that the network is more valuable the more people that use it.

For example, if you had a phone that could only call one other phone, then that network has a low value, as there are only two possible connections. Phone A can call Phone B, and Phone B can call Phone A.

If you add an extra phone to the network (for a total of 3 phones) then your total number of connections doesn’t just increase by one. Instead, if you have phone A, B and C you can now have connections:

  • A calls B.
  • B calls A.
  • A calls C.
  • C calls A.
  • B calls C.
  • C calls B.

So whereas a network of two phones had 2 connections, a network with 3 phones has 6 connections. This compounding growth curve is represented on a graph by the equation. The growth of value in a network scales exponentially, giving us what we call “the network effect.”

How does this work outside of telecom?

While it may make sense for a telephone network (or computers on the internet), how do we apply this to systems outside of telecoms?

My favorite example involves currency and gift cards. But before we dive into that example, we need to define a few terms. When we think about the world of gift cards, there are two types: “closed-loop” and “open-loop.” They get their name from broader concepts which can be applied to financial systems.

Closed-Loop Financial Systems

Closed-loop financial systems are ones in which the flow of money is controlled and can only be earned or spent in certain places.

For gift cards, this is like buying a gift card for a specific company such as McDonald’s.

You give $10 to McDonald’s, they give you a gift card valued at $10, and they know you can only spend it at McDonald’s.

Another example would be something like tokens in an arcade. You’ve purchased the tokens, which are the closed-loop currency, and can only use them in that arcade. Outside of the arcade they have very little value.

In fiat economic systems, we don’t really have any examples of a 100% closed-loop financial system. The closest we come is the Chinese Renminbi/Yuan which is a controlled currency. The Chinese government works hard to prevent Yuan from leaving the Chinese financial system, although it still does leak out through various black market channels.

It’s important to remember that closed-loop (and open-loop) aren’t categories. They are a sliding spectrum.

Open-Loop Financial Systems

On the other hand, open-loop financial systems are when money can be entered into a system that is not controlled. The most open example of this is any national currency, when you buy into it you are free to spend it anywhere in that country and can often find places around the world to easily accept and exchange your currency.

But, when we talk about gift cards, “open-loop” refers to a gift card that can be redeemed at multiple locations. One such example might be a gift card you can redeem at any store in your local shopping mall, or, if we want an even more open-loop card we’d use the example of pre-paid Visa gift cards, which can be redeemed just about everywhere.

Once again, as we can see, there is no example of a financial system that is 100% open, and there are multiple levels of “openness.”

Applying Network Value to Gift Cards

Now, let’s assume that I have four different financial instruments in my possession:

  1. A $5 bill.
  2. A $5 gift card to Einstein Bro’s Bagel Co.
  3. A $5 gift card to Starbucks.
  4. A $5 Visa gift card.

At first glance, if we were asked which of these is the most valuable, it might be tempting to say “Trick question! They are all worth $5!” But, given what we now know about how networks are valued, we may take a different approach.

When we think about selling these items, we instantly know that the $5 is the most valuable, because we would never sell a $5 bill for anything less than $5. The underlying reason for this is a $5 bill can be used anywhere and so we don’t discount it at all.

As for the rest of the cards, let’s take a look at what they are worth on second hand networks. If we go over to GiftCardGranny.com, we can look up the value of the different cards.

Einstein Bro’s Bagel Co.

When we look up the gift card at Einstein Bro’s Bagel Co. we can see that the average giftcard for their store is selling at a 35% price discount:

This means if we attempted to sell our $5 Einstein Bro’s Bagel Co gift card, we’d probably only get $3.25 for it.

Why? By exchanging $5 of an open-loop currency for a closed-loop currency, we are restricting the number of places we can spend it, which makes it less valuable. So the supply and demand of “people who want Einstein Bro’s Bagel Co gift cards” and “people who have Einstein Bro’s Bagel Co gift cards” is out of balance, and thus, sellers must compete on price discounting to get their money back into the open-loop.

Starbucks

So, by this same logic then, we may expect to see that our $5 Starbucks gift card is worth about $3.25 as well, right?

Instead, the average Starbucks gift card is only 13.56% discounted, meaning our $5 card is worth about $4.32.

Why the difference? When we look at these cards as “networks” we have to remember how we apply Metcalfe’s law – the number of nodes matter.

For gift cards, these nodes are:

  1. Starbucks locations.
  2. Number of people who want Starbucks.

Simply put, there are more Starbucks than Einstein Bro’s Bagel Co locations, and more people who prefer Starbucks to Einstein Bro’s Bagel Co. Therefore the network has more nodes and is more valuable.

Visa Gift Card

At this point, I think we all know what to expect:

The average Visa gift card trades at a discount of only 0.75%, making our $5 card worth roughly $4.96 – because it has a wider network with more nodes. More freedom for spending, more demand for buying.

The Value of Our Cards

So that makes our final value list:

  1. The $5 bill (Worth $5)
  2. The Visa gift card (Worth $4.96)
  3. The Starbucks gift card (Worth $4.32)
  4. The Einstein Bro’s Bagel Co gift card (Worth $3.25)

Applying the Law to New Economic Systems and Crypto

Now that we have an understanding of Metcalfe’s Law, it would seem to suggest that we could simply count the number of nodes or transactions within an ecosystem and accurately get the price of a currency, right?

Many folks who are far better economists and mathematicians than I am, have tried (with varying levels of success) to apply this model to cryptocurrencies; and while many models fit backtests [Read: Issues with Backtesting], they fail to accurately predict the growth of a cryptocurrency based on either its number of nodes (users) or the number of transactions moving forward. (Although many of them are really awesome models).

Why is this?

There are two main reasons for this:

  1. The original Metcalfe’s Law is designed to only measure the maximum potential value of a network. It does not measure the current or actual value.
  2. The original Metcalfe’s Law is designed to measure all nodes within a system at an equal value.

So while the general trend of “Network Transactions2” is historically true, this is more likely a matter of correlation, and not causation.

Different Transaction Values:

As we saw in our gift card example, not all nodes are of equal value or strength – and this is especially true of transactions in a financial network.

For example, here are four transactions:

  1. I transfer $5 worth of Bitcoin between two wallets.
  2. I transfer $500 worth of Bitcoin between two wallets.
  3. I purchase something worth $5 using Bitcoin.
  4. I purchase something worth $500 using Bitcoin.

We can’t assume that these transactions have all added equal value to the network. In fact, we could debate if the first two added any real value at all.

The two remaining purchases were value within an ecosystem, but, at very different scales.

Different Node Values:

If we want to think of nodes in terms of network services/participants rather than transactions (which would be useful if you are applying the model to something like the Kin Ecosystem) then we can look at a different case.

Imagine two developers add Kin into their app:

  1. “Developer A” has 1,000 daily active users (DAU) who love using their product, have an emotional connection to it and think it is an important part of their daily lives.
  2. “Developer B” has 500 DAU. They find the product useful, but in a solely functional manner.

In looking at Metcalfe’s Law we couldn’t equally weight these two systems, in fact because of the emotional component it wouldn’t even be fair to count the 500 DAU as 50% of the 1,000 DAU, as users with a strong emotional connection will pay more for something than those using it solely for function.

How do we solve for this?

That’s something I don’t have the answer to, and never will – at least not as a concrete formula. Metcalfe’s Law simply isn’t designed to predict the future price of a currency or network, primarily because to do so requires us to do complicated weighting and individual investigation for each node that makes it prohibitive.

How would we approach it? For us to evaluate the worth of a network I think we need to take into account:

  • The number of nodes.
  • The weight of that node compared to others within the system.
  • The value added by that node’s transactions.
  • The emotional weight users have to that node, measured by engagement KPIs.
  • The number of users on that node.

So, if Metcalfe’s classic law of n2 gives us the upper-bound value score of a network, then what we need to do is weight each node on some form of distribution and discount or increase the value of each node from there. In the end, we should end up with something that is a fraction of n2.

For a cryptocurrency like Kin, this might end up being something like:

((N1((f)(a)/2)+N2((f)(a)/2)+…+Nnth((f)(a)/2))2

Where:

  • Nnth is each individual node, represented by a count of N=1
  • f is the bell curve score of each node based on the value added to the network (solved as f(x) = y1 + ((y2-y1)/(x2-x1)) (x-x1)).
  • a is the bell curve score of each node based for user engagement, based on user engagement over number of users. (Same bell curve scoring as above).

 

Walking through the challenges

In this model, we take each node and give it a starting score of 1.

We then take their scores for “user engagement” and “value added” and grade them on a bell curve against all other nodes, giving us a weighted score for each. We then get the average of those scores. For example:

If N1 was the best node for “value-add” then it gets 100% or “1” and if it was a leading node for “user engagement” then it may get an 80% or “0.8” score for that.

We take the average of those two values and we get 0.9. We then discount the value of N by multiplying it by that weight. In this case, since the node started at “1” it is now a score of “0.9”.

We repeat that process for every node within the system and then we add up the final scores, after this we then square the sum of our result.

That will leave us with a number that is some sub-fraction of the classic n2 rule that is probably a more accurate predictor of the value of our network.

Does this really work? Is it accurate?

No, not at all. There are probably a number of issues with both my assumptions, and with the actual math equation. I’m not a mathematician. The point here is more to illustrate that in order to adapt Metcalfe’s Law, we would need to come up with complicated weighting mechanisms which makes it unrealistic to accurately predict the value of a currency.

The math gets very complicated very quickly, and the needed variables become almost impossible to measure.

Wait, so you are saying that we can’t predict the price of a crypto with Metcalfe’s Law?

Yes. Sadly, the goal of this article is to help you realize that Metcalfe’s Law is a mental model designed to help us think about measuring and growing value. It’s not something that we’ll likely ever be able to adapt and apply as a predictive tool.

At best, we’ll be able to adapt it in a way where we can accurately backtest/backfit data within acceptable bounds, but it likely won’t be a good indicator of raw price.

At the end of the day, Metcalfe’s Law won’t tell you the future price of your currency, but, understanding the principle of more nodes in a network equaling more value is important.

While many folks have created very complicated variants of Metcalfe’s Law to try and apply it to cryptocurrency and other financial systems, the only thing that has remained true is the simple n2.

Metcalfe’s Law is a theory. It’s a guideline to help you understand that networks grow value in a compounding and non-linear fashion. It wasn’t designed to predict the price of a network – the only thing you need to takeaway from Metcalfe’s Law is that if you want your cryptocurrency to be worth more, then adoption of earn and spend opportunities are the key.

TL;DR:

Metcalfe’s Law is about how “network effects” create compounding value. It will never be usable as a forward looking price predictor. But, it’s an important concept to understand in economics.

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One of the great debates in blockchain centers around what it means to be decentralized, whether it’s a necessary trait for the application you’re developing, and how a blockchain’s centralization should affect the regulatory status of the cryptoasset(s) running on top of it. While many followers of the blockchain space would identify as decentralization ‘maximalists,’ touting the utopian anarchic virtues of their favorite project, others would argue that centralization is a sliding scale, and that none of the major blockchains in production today are truly as decentralized as they claim to be. Take Bitcoin, for example, where the world’s longest-running and most valuable blockchain has one-third of its hashpower consolidated under one mining pool operator, Bitmain, nearly putting one multi-billion dollar entity in control of the protocol.

Or take two of the other top 10 cryptocurrencies by market capitalization, XRP and Stellar, which have been criticized relentlessly since their inception, for adopting federated Byzantine fault-tolerant models of consensus, as opposed to the more popular ‘trustless’ Proof-of-Work (PoW) or Proof-of-Stake (PoS) models. Where PoW grants power and incentives to the users that run the most powerful machines supporting the network, and PoS grants power and incentives to the wealthiest users supporting the network, federated models optimize for network efficiency by employing ideas like flexible trust and quorum slices. While I’m not savvy enough to go much deeper into consensus theory, the short story is that decentralization maximalists typically aren’t fans of consensus models that require ‘trust’ in any specific node on the network, regardless of the blockchain’s application.

Consensus and Kin

So when the development team behind the Kin cryptocurrency, the Kin Foundation, announced several months ago that it would ‘fork’ the Stellar blockchain to use in parallel with the existing ERC20 token, and that the ONLY node operator at the outset of the new blockchain’s production network would be Kik, the chat app that launched the cryptocurrency, the crypto community’s negative reaction didn’t come as much of a surprise. While Foundation (and Kik) CEO and Founder Ted Livingston later clarified that this wouldn’t be a problem for the blockchain’s end-users because they already trust the app’s developers, and that the network would grow to be more decentralized as additional apps and partners joined the ecosystem, the maximalists didn’t want to hear any of it.

Fast forward five months, after the maximalists and some pre-sale investors have exited a large portion of their Kin position, bringing down the value of the Kin token in conjunction with an extended bear market, and the topic of nodes has surfaced once again. After the release of the atomic swap between ERC20 Kin and the token on the new blockchain was indefinitely delayed, despite already having the technical procedure developed and audited, the project’s followers wondered why. And in recent updates posted by Livingston and community manager Yoel Rivelis, it was revealed that the atomic swap won’t be cleared for release by the Foundation’s legal team until the Kin blockchain federation has assembled at least seven full nodes (operated by independent entities) to run the network. In other words, the Foundation has come to the conclusion that based on their blockchain’s consensus model, they can’t reasonably claim that the blockchain is decentralized enough to link to the ERC20 token until they have seven nodes. I’ll say more on why that probably is, in a moment.

This revelation, which comes at the tail end of a Q3 which saw several major announcements from the Kin Foundation, including the launch of the Kinit survey rewards app, the launch of Kin inside of beauty app Perfect365, and the hiring of former Twitch exec Matt DiPietro as CMO, may also explain other undelivered promises from the project.

The Liquidity

For example, a recurring problem for early adopters and followers has been the available market liquidity of the Kin token. During the token’s “distribution event,” community staff assured prospective investors that they had received indication from multiple exchanges that planned to list the token shortly after launch. The Jaxx wallet even formally announced they would support Kin (and presumably, would offer it on their built in Shapeshift exchange as well). And in the year following those statements, the largest exchange overall that has listed the token, HitBTC, only offers one trading pair, and they aren’t even Kin’s largest exchange by volume.

While Livingston claimed that the Foundation had de-prioritized listing the token on exchanges until there was a call to action for developers and advertisers to buy and sell the asset, according to the community staff, it had become a priority as early as late July. And yet, two months later, the token remains unlisted on any additional major exchanges, despite the project’s high profile and connections to various exchanges at the board of directors level.

While many high-volume cryptocurrency exchanges, both in the United States and around the world do not have very strict criteria for asset listing, other than substantial application fees (to the tune of millions of USD), others hold themselves to a high standard of eligibility based on the project’s fundamentals. Perhaps the most sought-after exchange, for its retail customer base and direct pairs to fiat currency, Coinbase publishes strict eligibility criteria (which they call the Digital Asset Framework), which include concepts such as decentralization and token utility. While the ERC20 version of the Kin asset is fully decentralized (at least, as far as the industry at large is concerned), without at least seven nodes, the Kin blockchain is not. And without the aforementioned atomic swap, the ERC20 Kin asset has arguably zero utility, as it isn’t connected to the app ecosystem where Kin is earned and spent.

The Regulators

Coinbase isn’t the only organization involved in crypto that has a problem with tokens that lack the combination of decentralization and utility. The Securities and Exchange Commission of the United States (SEC) regulates the sale of securities assets to and from citizens of the US. The SEC has recently developed a greater interest in enforcing securities laws in the cryptocurrency space, particularly with respect to tokens sold in an initial coin offering event (ICO), which is how the Kin Foundation raised their development funds. After issuing guidance on non-compliant token sales such as The DAO, and taking enforcement action against sales in-progress like Munchee, and completed token sales like Centra, the SEC has been intensely deliberating amongst themselves and other US regulatory bodies to develop a better framework for how the laws should apply to crypto assets.

https://steemitimages.com/0x0/https://cdn.steemitimages.com/DQmesqJsffFW5afTEKJk3thtZJDEGrB1MyFkwF6BKmpxvJa/image.png

William Hinman, SEC Head of Division of Corporation Finance

In June, the head of the SEC’s Division of Corporation Finance issued an unofficial statement that Bitcoin and Ethereum are not securities, and that the decentralized status of their blockchains was a key determining factor in reaching his conclusion. The SEC, which has had an open investigation into Kin’s token sale since shortly after the conclusion of the sale (alongside investigations into dozens of other tokens), is keeping a close eye on how the Kin Foundation conducts itself, and may be watching how it proceeds towards decentralizing its blockchain, and whether it succeeds in providing meaningful utility to the Kin token. Exchanges based in the US, such as Coinbase, Gemini, Bittrex and others, are likely to be wary of listing assets that may fit the SEC’s fuzzy criteria for a security token. And even if the atomic swap were achieved with only one node running the Kin blockchain, the utility of the token would remain limited to that centralized chain, therein not qualifying the ERC20 asset for real utility.

The Partners

Kin has also had a hard time onboarding major partners, as well as smaller developers in the absence of any programmatic incentives for integrating their cryptocurrency. It is plausible that some app companies, who likely follow the crypto space to some degree, aren’t sold on the idea of implementing a currency over which so much power is held by one or two entities, or which is still lacking so many of the fundamental infrastructural features necessary to make it all ‘work.’ This presents something of a ‘chicken and egg’ scenario, in which exchanges, regulators, apps and investors are hesitant to partner with a blockchain so centralized and feature-incomplete today, which means they won’t run nodes for Kin, which means the blockchain won’t become decentralized enough to unblock those missing features.

Naturally, the ‘seven nodes’ requirement raises several key questions, the first of which we (at NuFi) feel we already know the answer to.

So, why does Kin need at least seven nodes?

I’ll defer to Adam to comment on this:

While it’s important that Kin not be recognized as a security, it is also important that the network not be recognized as a Money Services Business (MSB) by FINCEN.

As we noted within “How Does the Kin Consensus Protocol (KCP) Work?” the Kin network will need a series of federated validator nodes within the network to create balanced quorum slices who can ultimately ensure >66% accepting votes in a network consensus.

So why seven?

Having 7 nodes ensures that no entity controls more than 20% of the vote. Which seems to be the magic number the Kin Foundation believes results in the network not being considered a money services business.

What is so special about 7 nodes and the 20% number?

For the Kin Consensus Protocol to successfully validate a transaction, the network must reach a consensus of >66% of votes. These votes are voted on by overlapping quorum slices, where within each one of those quorum slices a >66% or greater vote must take place.

Since members who follow a quorum slice can have their vote changed by the quorum slice they follow, it actually takes significantly less than 66% of voting power to influence the network.

In fact, if a single actor (entity or user) were to control 20% of the votes in a Federated Byzantine Agreement network (like Kin or Stellar), and all quorum slices within that network overlapped, that it is almost mathematically impossible for the network to vote the same way as the actor who controls 20%. In order to defeat the vote of the 20% actor, every other tangential quorum slice would have to cast their primary vote against the vote of that actor. If any single node within the network that is in a tangential quorum slice were instead to vote in favor of that vote, or vote to accept that vote, or to fail to vote, it would create a domino effect of quorum slices changing their votes due to the level of influence this node has.

The only other way around this would be to isolate that node (or those nodes) in a specific quorum slice, which runs the risk in turn of leaving us with disjointed quorums which result in a broken network.

Given this, anyone who controlled more than 20% of the federated nodes that were default to a Federated Byzantine Agreement network would have the power to:

  1. Always get their vote approved even if it was the initial minority vote.
  2. Hold the network hostage with fractured quorum slices.

In any scenario in which a minority entity (or entities), or a minority of the voting nodes can exercise control over the majority, the network is no longer decentralized and therefore can not be considered exempt as a money services business.

At 7 federated nodes, we are able to create interdependent quorum slices, where no one node has excessive voting power and the majority favor always plays out within these votes.

Who is running a node today?

As mentioned above, the only confirmed node operator to date is Kik Interactive, developers of the Kik chat app (and current parent company of the not-for-profit Kin Foundation). It’s possible that the two other apps that have partnered with the project, IMVU and Perfect365, are also running (or planning to run) nodes, but we aren’t clear on that.

Who will run nodes in the future, and when?

It’s possible that the Foundation has stipulated in its terms of partnership with apps like IMVU and Perfect365 that they are to run full nodes for the network as soon as they’re ready for integration, but this has never been stated. As for smaller developers and followers of the project, the Foundation hasn’t yet made it clear what the operating costs to run a node will be, and they also haven’t published all of the code necessary to get a full node running on the new blockchain. A preliminary documentation FAQ uncovered on Github a month ago estimated a cost of upwards of $2000/month for Kin blockchain nodes. So, in the meantime, Kin may need four additional major app partners to run nodes in order to achieve their goal of seven.

Other blockchains have thousands of nodes. How does the Kin blockchain have fewer than seven nodes after a whole year since raising $100 million and beginning development?

While Kin started raising funds over a year ago, they didn’t shift blockchain strategy to forking Stellar, thus needing to build their own network of nodes, until May. And because these nodes need to be sufficiently independent of each other in order to truly decentralize the network, they can’t just buy Amazon AWS instances around the world and claim decentralization. They also may be bound by what incentives or funding they can offer node operators, as the Foundation paying for others to run nodes could easily raise eyebrows over the threat of collusion. Still, with nearly five months behind them, and a major fundraise completed, it is concerning that the Foundation hasn’t yet been able to onboard more than just two apps to participate in the ecosystem, and presumably, in consensus as well.


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Recently, we published our 5 part series on “What Critics Fail to Understand About Kin.” While we firmly believe that there is a lot of unfair criticism about Kin, there are also many points that critics got right.

At the end of the day, successful projects are often successful not because of the things they do well, but instead because of their ability to identify their short-comings and work to correct them.

We already know the “5 Challenges that Kin Must Overcome to be the Most Used Cryptocurrency by EoY,” but these related primarily to technical and product hurdles.

Given that, it is important for the Kin community to know what critics have right about Kin.

#1 – Kin’s Communication is Either Confusing or MIA:

When it comes to communication from the Kin Foundation team, the community feels they have three choices:

  1. No information.
  2. Confusing and vague statements that don’t get clarified.
  3. A response of “I’ll look into it and get back to you!” that goes unanswered.

The Kin Foundation has struggled in the past to meet their deadlines and fulfill previous production promises. Rather than adjust their goal-setting practice, the Kin Foundation stopped giving updates.

There is no official resource for answers and the community has no insights or updates on:

  • The Kin & Kik Integration.
  • The KRE.
  • The Identity Layer.
  • The Atomic Swap.
  • Partnership integrations with Unity, IMVU or others.

Kin continues to operate like a private company, rather than a blockchain project with community stakeholders – and leaving people in the dark has left a sour taste in the mouth of many community members.

It’s also a misaligned behavior for a company that says its operations will one day be managed by a non-profit foundation where the community is supposed to have a strong voice.

#2 – The Community is Unkept:

Kin’s community is the overgrown garden that no one wants to love or nurture.

In the Kin subreddit, many posts, questions or requests for help are answered by the community members (when they have the information to do so) – but the content remains largely unfiltered. In fact, spammy advertisement for other cryptocurrencies, and referral links to exchanges have often sat on the front-page of the subreddit for days on end leaving the community to wonder where the mods are.

In Telegram the situation is even worse. Users frequently use Telegram to get answers on new projects they are exploring. When they come to the Kin chats, they are instead met with an onslaught of aggressive (and sometimes offensive) memes, and given misinformation by multiple sources. In fact, multiple new people have come into the Kin Telegram in the past day only to be told that Kin is crashing because it’s “an exit scam.”  (Note: The one saving grace here is if that if something is really bad and in need of moderation, you can often ping Benji and he will get to it in the next day or so).

The rare times we do hear from the community team, it’s with odd questions like:

The Kin Foundation has at least 3 full-time community managers, and yet, it’s unclear to the community exactly what they are doing. The community feels ignored and taken for granted and that needs to be resolved.

#3 – Kin Wants Free Labor:

Kin is the cryptocurrency that is supposed to be all about rewarding users who create value. Creating a rebel alliance so people can earn their fair share.

At the same time, Kin has shown on multiple occasions that they want free or underpaid labor themselves – such as with the creation of their Ambassador program, where they wanted tremendous community management commitment and content creation from their Ambassador team in exchange for prizes such as T-shirts or online badges (which are still undelivered weeks after the conclusion of the pilot program).

The team has even gone as far to float the idea of volunteer community moderators to help manage Reddit and Telegram.

It isn’t uncommon in the world of crypto to have users step up and help moderator and manage the community – what is uncommon, and in this case hypocritical, is not paying them.

In most communities, the community member moderators are rewarded with bounties paid out in the tokens they’re working for.

Given that Kin has raised $100 million in an ICO, and sits on trillions of vested Kin tokens, they should ensure they “walk the walk” when it comes to rewarding users who create value.

#4 – The Kin Rewards Engine is Broken:

The real core of Kin is in the KRE. Given that developers are essentially replacing their monetization methods with Kin, they need to be able to be dependably rewarded for their users actions.

Right now, all previously released information about the KRE is considered inaccurate and out of date and the KRE is back on the drawing board.

Kin has realized that:

  1. The KRE would cause too much downward pressure in an early market that is highly illiquid.
  2. The KRE will have challenges in identifying fraud.

There are some other problems they haven’t yet acknowledged:

  1. The KRE doesn’t give a reliable way to predict income per user action (as compared to “Rewarded Ad Views”).
  2. The KRE may open up developers to double-taxation events as it requires both receiving the token (income tax) and then selling the token for fiat (capital gain/loss).
  3. The KRE’s declining reward model, instead of a growing reward model, means early adopters win big, but later adopters will depend on the market growth matching the KRE output.

There are a number of complexities surrounding the KRE, but if developers don’t get clarity on their potential earnings, they simply won’t be willing to take that risk.

Woah, this sounds bleak, do you still believe in Kin?

After writing this article, and addressing “The 5 Challenges Kin Must Overcome to be the Most Used Cryptocurrency by EoY.” I know a lot of people are going to ask if I think Kin can still be successful.

The answer to that is, yes.

I still think they can be successful, although I am also less confident than I was before.

In order to get there, they have to acknowledge and work on correcting the challenges they face both as a team and as a product. Weak teams defend their actions, good teams correct them.

I still own the Kin I’ve purchased – but I’m certainly looking for a change in the status quo.

Why do you think these things are problems for Kin?

While I can appreciate that in any startup you need to “pick what you are best at” and cut corners on other aspects to move quickly, Kin can’t continue to cut corners on community and communication. Success in the blockchain world will depend on a strong community that supports the project, and potential partners will look at how Kin treats their community as a litmus test of how Kin would treat them.

Do you think Kin will be the most used cryptocurrency in 2018?

I highly doubt they will be able to achieve their goal of being “the most used cryptocurrency” by the end of the 2018 year – and I think Kin is going to be a long hold in order for it to be a success.

I think users who are dreaming of a $0.01 Kin (or higher) in 2018 are simply wishful thinkers. I think we have a long journey ahead of us to build a robust ecosystem.

At the same time, I would love nothing more than if the Kin Foundation proves me wrong. This is one case where I’d love to eat my words.

But, I think it is fair, healthy, and constructive for us to admit that there are a few things that critics have right about Kin.

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Missed the rest of the series? Check out “Part #1” “Part #2“, “Part #3” and “Part #4

When I first started this series critique number 5 was “The Kin team hasn’t done anything since the ICO.” A lot has happened since then, including the launch of the Kinit app, and so we’ve heard less and less of this critique over time.

Instead, a new negative narrative has surfaced that we’re going to combat, one that I call “the two blockchain problem.”

It seems whenever Kin related news gets shared around cryptocurrency communities we consistently hear:

Kin can’t decide which blockchain they’re on.

Kin keeps flip-flopping on blockchains.

There are two subtle points that people are misinterpreting here, that we should clear up.

Critique #1 – “Kin Can’t Decide Which Blockchain They’re On!”

At first, when I heard users complaining about this decision, I thought it was in reference to the migration from the Ethereum blockchain to the Stellar blockchain, and then to their own Kin blockchain. However, after taking the time to have in-depth discussions with these users, I’ve realized instead they are (surprisingly) upset that Kin is a token that lives on two blockchains.

While cross-chain projects like ChainLink and Bitcoin-to-Ethereum Atomic Swaps have been celebrated, people seem to think that Kin’s chain-duality is a negative, rather than a positive.

The Case for Two Blockchains

Ethereum Scaling

When Kin first launched, they were focused on the Ethereum blockchain, as most new ICOs and blockchain projects from 2017/18 were.

At the time, Ethereum was yet to face some of the platform’s worst scaling challenges, such as the CryptoKitties craze, and the upper bounds of Ethereum’s transactions-per-second capacity had been mostly untested.

Shortly after Kin’s launch, the Ethereum network was hammered by the launch of CryptoKitties. Seeing how few transactions were needed to clog the Ethereum network, Kin realized that they could not possibly implement their project on Ethereum blockchain in the short term.

They even went as far as to calculate what would happen if Kin were to ‘airdrop’ a little bit of Kin to each Kik user, and realized that if they did this, they would take down the Ethereum network for days.

Rock and a Hard Place

At this point the Kin Foundation knew they had to explore other options, including their own blockchain.

The challenge became that moving to your own blockchain means:

  • Losing out on existing Ethereum infrastructure like web wallets, hardware wallets and decentralized exchanges.
  • Exchanges have less incentive to list your coin, as they now have to run a node of your blockchain rather than just add a smart contract token.
  • Increased overhead, as you now need to create your own software wallets and node tools.
  • Decreased security at the initial launch of the network, as you lose access to Ethereum’s global network of validators.
  • Decreased liquidity for investors, as they can no longer easily move tokens within the Ethereum network.

We’ve seen examples of these challenges faced by other popular projects. Consider RavenCoin, a mine-able community token that launched around the same time as Kin. They’ve faced a tremendous uphill battle with their token, and even though they have a large and highly involved community, they are only listed on a few small unknown markets, have a market cap of only $39M and get less than $600k/day in daily turn over. Beyond that, a significant portion of the developer’s time is spent upgrading and maintaining software wallets, which takes away resources from their main vision.

The Decision

The Kin Foundation, realizing that they didn’t want to put their users in that position, decided to do something new. They decided that they would continue to explore other blockchains while still keeping the Kin token available on the Ethereum network, so that users could take advantage of the existing ecosystem for liquidity.

While this introduced significant confusion, especially in messaging surrounding “KIN1” and “KIN2” (Read: “What the heck are KIN1 and KIN2?“)

Critique #1 – Conclusion & TL;DR

Kin isn’t split between blockchains, and they don’t have two tokens. The Kin Foundation is focused on building the Kin Blockchain, a highly-customized fork of the Stellar blockchain that supports 0-fee transactions and high-rate TPS.

Since Kin knew that moving to their own blockchain might result in reduced liquidity for token holders, they allowed Kin to remain active on the Ethereum blockchain for trading.

Kin is not building tools to support the Kin token being used on the Ethereum blockchain. Their tools are focused on the Kin blockchain, and users will be able to move their tokens over via Atomic Swaps.

Critique #2 – “Kin Keeps Flip-Flopping on Blockchains!”

In recent years, especially in political-spheres, changing your mind has been demonized with the word “flip-flopping.”

Before we get to the Kin Foundation specifically, let’s first clear this up.

  • “Flip-Flopping” is changing your answer to a question, or your position on an issue without substance (or without meaning), primarily to take advantage of a current benefit. (i.e. lying to a crowd for votes).
  • Changing your mind is what happens when you learn new information that disproves your previous position. It is not flip-flopping, it is not bad, it is actually the most healthy thing to do when presented with new information. (In startups this is often called a “pivot.”)

To that end, the Kin Foundation has never once “flip-flopped” on which blockchain they are going to use. Instead, they’ve learned new information as time went on and changed their minds.

Leaving Ethereum

As we mentioned earlier, Kin’s decision to leave Ethereum was based on challenges around scalability.

The inability for the Ethereum blockchain to scale to the level that Kin needed for integration into their own Kik app, let alone into multiple enterprise partner apps, meant that they simply couldn’t complete their vision on the Ethereum blockchain.

While Ethereum is rapidly moving towards scaling solutions, even optimistic estimates put these as being implemented sometime in 2020, which would delay Kin’s timeline far too long.

This initially lead to Kin exploring Stellar.

Aside: Ethereum Vs Kin

It’s worth noting, that many have argued that if Ethereum won’t have scaling before 2020 then there is no way Kin will be able to create their own blockchain that will have scale.

The important distinction here is that Ethereum is trying to create a scaling system on a live blockchain, while managing a number of existing features, none of which were designed for this scaling system.

Kin, on the other hand is trying to implement scaling by building a blockchain of their own, and only having the features they want/need within it. They are two very different products, with different challenges.

Leaving Stellar

After leaving the Ethereum blockchain, the Kin Foundation began to explore Stellar’s blockchain as an alternative, due to its focus on high scalability and low cost fees. Stellar achieves those goals by using a more efficient consensus model and removing the overhead of a “Turing Complete” smart contract language, like Ethereum has.

While Stellar proved to be advantageous from an underlying technology perspective, it introduced a unique set of challenges in terms of user experience.

To create a new wallet on Stellar, a user must first fund the wallet with at least 1 Lumen (Stellar – XLM), and whenever they send a transaction the user must burn 100 Stroops (0.0000001 of a Lumen).

This meant that in order to use Kin, users would first need to purchase and load their wallets with Stellar, and make sure they have a balance of Stellar in their wallet at all times in order to make transactions.

Since most users would be using Kin via third-party apps, they wouldn’t be aware of background processes like this, and certainly wouldn’t be familiar with how to use exchanges to purchase Stellar and load it into their wallet.

This would drastically increase either the financial load on developers (requiring them to spend around $0.50 for each new account activation) or increase the education friction on new users. Either of these options would ultimately lead to less adoption in the Kin ecosystem.

This finally led the Kin team to decide they needed to pursue their own blockchain.

The Kin Blockchain

Kin obviously wanted to avoid making their own blockchain to start, as building a blockchain from the ground up is a tremendous cost and comes with its own headaches.

But, given that no other blockchain technology was ready to perform at the scale they needed without sacrificing user experience, the Kin team pivoted and decided to build their own based on a fork of Stellar.

Building their own blockchain comes with a lot of advantages. It will allow them to create the exact infrastructure that they and their partners need without worrying about third-party developers and other complications.

It also means that Kin has the potential to expand beyond their initial ambitions and offer other features in the future including smart contract support (like we learned in their recent Engineering AMA).

Critique #2 – Conclusion & TL;DR

Kin didn’t flip-flop. They learned new information, and pivoted in response.

They had to do this twice. It wasn’t their initial plan to build their own blockchain, but, now they are doubling-down on that, and this brings a lot of benefits.

They aren’t going to be changing their blockchain again.

A Final Note

There has been a lot of fuss about Kin’s journey with multiple different blockchains, especially in the messaging around KIN1 and KIN2. The fact that the Kin Foundation is a blockchain company that is willing to change course when learning new information is a good thing.

Adaptation is key to success in startups. Far too many blockchain projects seem to worry that admitting you were wrong is a point of weakness, and so they cling blindly to their statements. In the end, that will be the downfall for a number of these companies.

If there is one thing Kik has proven they are good at, it is evolving to stay in the fight. For the last decade they’ve had to continually evolve to stay relevant, and that’s something that’s foreign to most blockchain startups.

I personally believe that Kin should go all in on their new blockchain, building it first as a platform for themselves, then supporting other projects that want to live within the ecosystem, because Kik is one of the few companies with the expertise to help deliver on a project at this scale.

Whatever lays ahead for the Kin blockchain, I think it’s clear that their decision to change blockchains was the right choice for them and that many of the critics who disliked that choice were kind of like baseball fans refusing to cheer for anyone other than the home team.

There is a lot that Kin hasn’t done right to date, but, the project has an incredible potential and has shown they have the ability to bring real partners into the fold and help make crypto adoption mainstream – and in the end, that’s why we had to examine “What Critics Fail to Understand about Kin.”

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Missed the rest of the series? Check out “Part #1” “Part #2” and “Part #3

In their July 17th article covering the launch of the Kinit beta app on Android, CCN author Jake Sylvestre wrote that during his interview with Kin’s VP of Communications, Rod McLeod, he had concerns over the existence of a business model for Kinit.

After explaining Rod’s point of view on bolstering a decentralized ecosystem, Jake wrote:

Despite the app’s claims of a decentralized business model, I’m still convinced [sic] that this app will be profitable when it launches out of beta.

(Although it is clear from the rest of the article that he meant to say he is “NOT” convinced)

The first thing I have to concede here is that is quote is 100% accurate. Kinit is not a profitable app in beta, and there is a very good chance that it won’t be a profitable app when it is out of beta.

But, even asking the question of “Is Kinit profitable?” shows that there is something that CCN fundamentally missed.

Before we can discuss that specifically, we have to be firmly on the same page on what Kin is and what the Kin Foundation’s goals are.

What is Kin?

Kin, as a cryptocurrency, hopes to be the digital currency exchange on the internet for non-physical goods. It will initially distribute via the Kin Rewards Engine (KRE), rewarding content creators and network participants for the value they add to the digital ecosystem.

In this regard, Kin is fundamentally just like the US dollar, except its aim is to be used for digital products in apps and on the web.

Right now, Kin is run by Kik, the company that created it. But, the long term goal is to pass control of Kin over to the non-profit “Kin Foundation.” Kik will still be an ecosystem partner like any other developer, but, the currency, blockchain and strategic roadmap will be managed by the Kin Foundation.

This distinction is fundamental to the long term health of the ecosystem. Kik has the goal of being a profitable growing startup. Their best interests may not always be the best interests for Kin (although they’ve tried to align themselves by holding a stake of Kin and vesting it over 60 years.)

What’s the goal of the Kin Foundation?

Simply put, the goal of the Kin Foundation is “to make Kin the most used cryptocurrency in the world.

If Kin is the equivalent of the US dollar, then the Kin Foundation is kind of like the US Federal Reserve Bank. (Cue rage from crypto hard-knocks who hate federal monetary policy)

In the US monetary system, the Federal Reserve isn’t tasked with making a profit. Instead, the Federal Reserve aims to help set monetary policy, manage economic challenges of the currency, and manage the circulation and supply of the US dollar.

The Kin Foundation is responsible for adoption, development and maintenance of the Kin blockchain and the Kin Ecosystem.

As a non-profit, they aren’t looking to create a profit producing venture. Instead, their actions only need to be either self-sustaining, or even performed at a revenue loss for a short period of time if it helps the over all health of the ecosystem.

Why is this the Kin Foundation’s focus? At the end of the day, a currency is only as valuable as its use cases. If no one adopts Kin, then Kin has no value.

What Problem does Kinit Solve?

Kin is a radically new concept. With a few pillars:

    1. Reward users for value added behavior.
    2. Let users redeem their value either in my app, or in the offers ecosystem.
    3. As a developer, be rewarded by the KRE for the amount of value I create by bringing new users and transactions into the ecosystem.

This is very different from the setup that most developers know today. It isn’t about driving users to IAP purchases, subscriptions or ads, and it isn’t about thinking about monetization in terms of your own app in isolation. Instead you have to think about how to create value, retain users, and retain them within not just your app, but the larger ecosystem.

Couple that with the fact these are tokens on a blockchain, and a lot of app developers are left scratching their heads as to how this all works. That’s where Kinit comes in.

The Goal of Kinit

In previous live AMA’s with Kin founder Ted Livingston, Kinit has always been touted as “an example integration for the Kin Ecosystem.

The goal of Kinit is not to make money on the price difference between their ad earnings and the cost of gift cards. In fact, Kin has stated that they are *drastically* subsidizing the cost of the gift cards in the Kinit app.

The goal of Kinit is to show an example integration of Kin within an application, test the network, and get approval by large publishing partners like Apple.

With that in place, it is much easier for the Kin Foundation team to go to other partners and say “Hey, look. This is the kind of stuff you can build with Kin, and we know it works and we know Apple will approve it.

Kinit is an example, a demo that the Kin Foundation is happy to spend money on because it makes the onboarding to the ecosystem easier.

Kik and the Kin Foundation hold reserves in Kin, and so their vested interest isn’t in making short term revenue off of the Kinit app. Their goals are focused on making sure many developers and users adopt Kin, which has a compounding effect on the value of the Kin they hold.

Will Kinit Disappear One Day?

With Kinit being noted as a “sample” application it may seem almost inevitable that one day, once the ecosystem is more robust, that the Kin team would remove Kinit from the app stores.

However, it’s clear that Kinit has a much larger role to play long term.

In a decentralized ecosystem, one of the largest challenges is what we call the “identity layer”. Any time I open up an app that uses Kin it would have the choice of doing one of two things:

  1. Creating me a new wallet that is disconnected from all my other wallets and Kin.
  2. Finding someway to verify my identity and use a main Kin wallet without me sharing my private key.

#1 is obviously a no-go as it creates a terrible user experience. But, #2 is a challenging problem, and it’s one we continue to face on the internet, where we each have hundreds of accounts with various websites and no real central identity.

The most successful “identity layer” we’ve seen previously is the “Login with Facebook” button that Facebook strategically used to dominate the internet. Since users had a Facebook profile and were often already logged into Facebook it created an easier way to manage centralized identity.

Kin has closely watched Facebook over the years, and has always commented on how their tactic is to “copy & crush” their opponents. But, it seems like when it comes to the identity layer problem, Kin is likely to take a lesson from the pages of Facebook and create a “Login with Kin”/”Login with Kinit” for apps.

This would allow users to use Kinit as a centralized wallet to securely hold their funds for use in different applications, as well as to manage their identity across multiple applications without having to trust third-parties.

This smart play reduces the “sign-up funnel friction” in ecosystem apps, and creates a visibility loop. If users need to download Kinit to connect their apps for multiple wallets, then these apps will drive lots of downloads to Kinit. Kinit in turn becomes a top downloaded app on both app stores, and within, Kinit promotes apps in the ecosystem that use Kin. Driving these downloads to the apps that use Kin would cause them to become top downloaded apps as well, which are discovered by new users, who now need to download Kinit and thus the loop continues.

So What is the Business Model?

Kinit does have a business model. It’s not one of making profit margin off of their top line revenue, but instead, creating an example to onboard ecosystem partners and a viral adoption loop to rapidly grow the user base of the Kin ecosystem.

And that is far more valuable than $0.10 surveys.

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