Fade Worldcoin, Optimism Is The Better Bet (Cryptocurrency:OP-USD)

On July 24th, yet another cryptocurrency made its way to the market. The highly polarizing Worldcoin (WLD-USD) officially launched on Optimism (OP-USD) as early ecosystem participants were airdropped the new Worldcoin token. With a $23 billion fully diluted market capitalization as of article submission, Worldcoin currently has the 6th largest cryptocurrency valuation in the entire crypto market. In this article, we’ll look at who is behind Worldcoin, how the network works, the tokenomics of Worldcoin, and some of the major concerns that have been expressed with this project.

Background

Worldcoin was developed by a US-based organization called Tools for Humanity and is governed by a “memberless” Cayman Islands-based non-profit called the Worldcoin Foundation. The founders of Tools for Humanity are Alex Blania and OpenAI CEO Sam Altman. Worldcoin’s mission is to provide a “proof-of-personhood” Digital ID system that is borderless and privacy-preserving. According to Worldcoin’s founders:

If successful, we believe Worldcoin could drastically increase economic opportunity, scale a reliable solution for distinguishing humans from AI online while preserving privacy, enable global democratic processes, and eventually show a potential path to AI-funded UBI.

The rationale behind this kind of system is due to the belief that growth in AI will further obfuscate humans from bots. From where I sit, this is actually a fairly valid concern with AI-generated deep fakes potentially causing major problems in the future. Authenticating human activity does actually make some sense in theory. The UBI component of Worldcoin comes from the founders’ belief that AI will also displace human workers as technology reduces the need for human labor in the future.

How the Network Works

Worldcoin has been under development for roughly 3 years. So far, the protocol has a little over 2 million unique users. Most of those users have been amassed over the last 2 years while the project was in beta. The way users create their Digital ID is highly polarizing within the crypto community and with privacy groups due to the use of biometric data.

When a user wants to generate an ID, they have to download the World App and find a physical Worldcoin orb that is operated by contractors. Worldcoin’s developers are aiming for 1,500 operational orbs globally by the end of the year but so far there are roughly 150 live orbs. Through an iris scan with the orb, the user creates a proof of personhood ID that is linked to a secret key that is stored on the user’s device. Following the creation of this Digital ID with Worldcoin, the user is then eligible for Worldcoin tokens that are airdropped directly to the wallet address.

Tokenomics

While it’s already one of the largest coins by fully diluted market cap, the circulating market cap is actually ranked sub-100 at a little over $255 million. Of the 10 billion total supply of Worldcoin tokens, just 112 million are currently in circulation. This means the circulating supply of Worldcoin is slightly above 1%; which would be one of the smallest circulating supply percentages in all of crypto. Given how recent the token launch was, this microscopic circulating supply might not be terribly surprising.

However, the vesting schedule shows there is significant anticipation of token unlocking over the next 3 years:

The rate of emission in this coin is dramatic. According to Token Unlocks, the 12-month emission from the current circulating supply level is over 1,080%. This means that growth in adoption of the coin and the Worldcoin protocol must rise with issuance or the price of Worldcoin is susceptible to declines, possibly large ones. The emissions don’t slowdown in twelve months either.

By July 2026, 6.5 billion Worldcoins will be vested and all of the founder/investor coins will be unlocked as well.

Source: Token Unlocks

Of the 10 billion Worldcoins, 13.5% have been allocated to the founders, 9.5% are for private investors and 2% will be held in “reserve.” The investors include some of the big name venture capital firms that we’ve seen in many crypto projects through the years:

Source: Crypto Rank

a16z is one of the more notable VC firms in the entire crypto industry and participated in all three funding rounds. I should also note the original $25 million funding round had roughly a dozen additional investors beyond just the ones I noted in the table above.

But the main takeaway on this point is Worldcoin has significant VC interest even if the allocation from total supply is under 10%. That those tokens are vested within three years from launch is something prospective buyers should consider before diving into this coin. The scalability of Worldcoin seems dubious given each Digital ID requires physical presence at a limited amount of orbs. If the project fails to scale, the investor-held coins are at greater risk of coming to market shortly after vesting which would further depress the coin’s price.

Major Concerns

Given the nature of how the biometric data is collected, there is a fairly clear privacy concern with this project that goes beyond anything I’ve come across in crypto to this point. To join the network, users allow a Worldcoin representative to scan their eyeball with an orb. From the iris scan, a unique hash is created to make a Digital ID on the Worldcoin network. The iris scan is said to be destroyed following the hash creation though it is possible for Worldcoin to store the scan if the user chooses to allow it.

According to the white paper, this system utilizes zero-knowledge proof technology to verify proof-of-personhood without jeopardizing the privacy of the user at the verifier level.

In practice, the way this would theoretically work is by simply proving the user is a human without the verifier getting access to biometric data or any personally identifiable information. However, there are still legitimate privacy concerns with Worldcoin orb iris scans. Users have the option to store an encrypted version of their biometric data with Worldcoin to streamline future upgrades and system improvements. According to Worldcoin:

If a user opts-in to image custody, images are stored on an encrypted hard drive in the Orb before being uploaded. When a user does not opt-in, images are only processed in memory, and they never go through the hard drive. Furthermore, images for users who opted-in have a second layer of encryption via a public key of the server to make them irretrievable in the unlikely event of a compromised Orb.

The fact that biometrics can ultimately be stored with Worldcoin means the data is potentially at risk of malicious actors trying to access it. Even though the Digital ID isn’t linked to names or standard KYC information, this is still a potential long-term security problem. In the privacy deep dive, the developers of Worldcoin acknowledge that additional verifications of Digital IDs that have already been created are likely needed down the line. And this gets us to another major concern with the entire project.

The model is already facing viability challenges because verification of humanity so far only happens at enrollment. This means a new user can create a Digital ID with a scan of their iris at the orb and then pass their details off to another entity. For instance, there is allegedly a secondary market for Worldcoin identities already; which means single users can possess multiple Worldcoin IDs through straw buying. It probably goes without saying, but this would defeat the entire purpose of the network.

Finally, Worldcoin is marketed as a permissionless network but I view that claim has debatable if not bordering on false. In Section 8 of the terms and conditions, Worldcoin clearly states that it will suspend users if Worldcoin believes the user is engaging with the network for prohibited usage or to comply with government authority binding orders. Furthermore, Worldcoin states in the privacy notice that services can be geo-blocked based on the IP addresses of the users.

Reasons For Optimism

I believe the token economic model for Worldcoin has quite a bit of price risk due to both the nature of the coin’s distribution and the 3-year vesting schedules for the coin’s founders and early investors. However, poor token economics don’t necessarily mean the protocol itself will fail. In the event that Worldcoin succeeds as an authentication system that can adequately distinguish human actions from bot actions online, the better way to get exposed to that idea may be simply by betting on the native assets of the blockchain networks rather than on a protocol coin with poor token economics.

In the terms and conditions, Worldcoin acknowledges that network fees go to the blockchains not to Worldcoin:

Interactions with the blockchain also incur a network fee. The network fee is charged by and paid to the blockchain network, not to us, for facilitating any interactions.

While Worldcoin started as a Polygon (MATIC-USD) protocol, at coin launch the project migrated to Optimism; a competing Ethereum (ETH-USD) scaling chain. According to Worldcoin via Dune Analytics, there have already been roughly 930k World App wallets created just on Optimism:

However, despite the 2 million stated protocol signups by Worldcoin and the 930k World App wallets on Optimism, just 227k wallets are actually holding the Worldcoin token on Optimism so far.

It’s still early, but my read on that is Worldcoin may be more viable as a Digital ID system rather than a monetary system. However, another possibility is that early adopters in beta have already lost interest.

Summary

I’m entirely unconvinced Worldcoin is going to survive as a Digital ID system. Furthermore, I believe the token’s economic structure is poor and the vesting schedule of Worldcoin will prove damaging to whatever value the coin has three years from now. The primary concern for the coin itself is that Worldcoins are distributed without requiring any actual productive output. In my view, that puts the coin a perpetual risk of being sold as “UBI” recipients on the Worldcoin network claim their tokens and cash out for something else.

As a Digital ID system, I see a variety of concerns there as well. Those range from questions around user privacy, orb scalability, and the purity of the Digital IDs themselves due to secondary markets for login credentials. To be clear, I think this project is dead on arrival. However, if you believe it has a chance, you’re probably just better off buying OP.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.