Nearly every cryptocurrency is surging in price, and startups are racing to get in on the gold rush. One of the most ambitious and unusual attempts comes from Kik, an eight-year-old Canadian company that makes a chat app popular among teens.

Kik announced last week that it hopes to build an ecosystem equivalent to China's dominant WeChat, which encompasses many social commerce functions. (In fact, WeChat parent company TenCent is a Kik investor.) The endeavor will rely on a new digital currency called Kin. Built on top of a blockchain known as Ethereum, Kin will mimic the decentralized infrastructure of better-known Bitcoin.

Does it really make sense for a messaging app to launch its own cryptocurrency? Well, that depends on how you see the future.

The Promise of Blockchains

As it turns out, the technology underlying Bitcoin and fellow cryptocurrencies isn't only useful for creating digital gold. Blockchains work because every action or piece of data is documented and distributed to every other network participant. This eliminates the need for a central authority to validate that Alice really did send Bob five tokens, or that Alice updated her profile to say that she's in a relationship with Bob, or whatever other parameter is specified by the protocol and application being used in a given scenario.

Instead of a single database on a single server serving as the "source of truth" and guaranteeing the validity of any particular transaction or state change, the decentralized protocol is what generates the guarantee. Underlying that social logic is complex math -- it's impossible to fake a change on the blockchain without high-volume collusion among the network participants.

In theory, the benefit of decentralization is that no one has to trust any single group. All information is publicly validated and shared. In practice, it doesn't quite work like that -- cryptocurrency communities still have to rely on core development teams who define how the protocols work, and they still have to watch out for collusion among miners. Both issues have been contentious in the Bitcoin and Ethereum communities.

Even with these constraints, cryptocurrencies accommodate far greater freedom than fiat currency or private centralized entities. The nature of cryptocurrency is that a person's tokens cannot be taken from them unless they're coerced to give up their private key (which acts a bit like a password).

What's In It for Kik

Online advertising is increasingly dominated by the duopoly of Google and Facebook. Even a hot company like Snapchat can be hammered on the stock market for failing to grow fast enough to compete at their scale.

If Kik can figure out a business model that does an end-run around advertising, it may be able to thrive without gaining more and more users. Creating its own currency, and its own economy based on that currency, may enable Kik to opt out of the arms race -- and enter a different one where it perceives a greater advantage.

Kik has 300 million registered users, but its growth is reportedly flat, and the management prefers to emphasize engagement. "Over a quarter of a billion messages are sent on Kik every day," the company stated in a white paper related to this project. "On average, Kik users spend 37 minutes and send 55 messages daily on the platform."

In announcing the Kin initiative, Kik CEO Ted Livingston implicitly framed the project as a form of opposition to Facebook, the dominant player in social communication. "If left unchecked, a few private companies are poised to exercise absolute authority over the digital services everyone uses, effectively eliminating consumer choice on a global scale," the company said. Google's search and email products, as well as Apple's App Store, also come to mind.

Of course, like WeChat, Kik could accomplish most of its stated goals using normal money. Critics have suggested the company isn't doing so because "initial coin offerings," in which developers sell their newly minted tokens to any available enthusiasts, are trendy at the moment. In practice, ICOs function as a regulation-free way to take on capital, though the lack of scrutiny may not last for long.

Cryptocurrency expert Peter Todd wrote, "Frankly, I think most of these ICO's [sic] are transparent attempts to raise money while avoiding securities regulations," adding that he thinks there is a "very high risk the SEC will put a lot of people in jail over this, and the ethics of many of these schemes are very dubious."

A Kin Token in Every Wallet

In a post on Medium, Livingston envisions that Kik's Kin system will be similar to its existing in-app coin experiment:

Once we have established the new cryptocurrency, we will create demand for it by encouraging people to earn and spend Kin within Kik, which is used by millions of people every day. Since 2014, we have experimented with a digital currency called Kik Points, which allowed people to earn points by watching ads. They could then spend those points on digital items, such as stickers or emoji.

Despite its intentional limitations, Kik Points saw a transaction volume three times higher than Bitcoin's. As the default currency inside Kik, Kin will go far beyond Kik Points by allowing people to participate in an economy based on buying and selling stickers, hosting and joining group chats, creating and using bots, and much more.

He added, "While Kik will initially be the only service using Kin, our ultimate vision is that our chat app will be just one of thousands of services in the Kin ecosystem." Livingston also described the process whereby Kin tokens will be disbursed, setting off a virtual cycle:

Each day, using an algorithm that reflects each service's contribution, the Kin Rewards Engine will divvy up a set amount of Kin among all the services in the ecosystem. We think this mechanism will provide a powerful way to compensate developers and creators without relying on advertising. In time, it can create a network effect: as the daily reward increases in value, more developers will join, there will be more Kin transactions, Kin itself will become more valuable, and in turn the daily reward will be worth even more.

The inaugural Kin white paper provides more detail:

60 percent of the total supply of Kin will be secured in a smart contract, allocated to the Kin Rewards Engine, and introduced into circulation as periodic rewards. The rewards will be distributed among ecosystem partners and the Kin Foundation.

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.

A newly created Kin Foundation will manage the cryptocurrency, while Kik will maintain control of its eponymous chat app. The two entities will be free to collaborate and coordinate with each other. Kik also wants Kin to spread outside of its own walled garden, and says that the Kin Foundation will provision a portable identity system for users.

According to the white paper, "Users wishing to transfer Kin into and out of the Kik application will be able to do so by interacting with the public Ethereum network," although "[u]sers interacting with Kin inside Kik will have a more managed experience." Kik touted its ability to offer greater ease-of-use for regular people, compared with other blockchain projects.

Blockchain Landmark

Regardless of whether Kik's Kin catches on, it is the first mainstream startup with hundreds of millions of preexisting users to introduce those users to the world of blockchains. This marks a significant milestone for Ethereum, reinforcing that traditional VCs are willing to watch while their millions are bet on its success.

Prominent venture capitalist and Kik investor Fred Wilson wrote, "Kin will power a digital economy inside of the Kik app. With millions of users, Kik will drive mainstream consumer adoption of Kin, establishing fundamental value for the cryptocurrency. By natively integrating the Kin wallet into the app, it will instantly become one of the most adopted and used cryptocurrency wallets in the world."

Reporter's note: Thanks to Wong Joon Ian, Neeraj K. Agrawal, Peter Van Valkenburgh, and Preston Byrne for helping to untangle the world of blockchains and IPOs.

Published on: Jun 9, 2017