Utility tokens & how to value them0.16

Rounding out our look at the various types of crypto assets, we conclude by looking at utility tokens. While often treated as one category, utility tokens cover a variety of uses and also have varying degrees of usefulness across projects. As such, understanding a token’s usage is important when analyzing a project.

Access tokens

The easiest utility token to understand are access tokens. This is, as the name suggests, a token which exists solely to provide access to a service or product. Examples include:

  • Cindicator: Access to Cindicator infrastructure only granted to those with ‘significant number’ of CND tokens
  • SALT: You need to hold SALT tokens to pay for membership to the platform, with more SALT tokens needed to access the more premium membership packages
  • Auctus: To use the platform, you must again hold AUC tokens

Because the tokens serve little purpose other than for payment to use the system, access tokens are frequently labelled as little more than coupons. 

Cindicator's ICO was completed in Oct 2017.

Why could platforms with access tokens not just use a normal currency or another cryptocurrency instead? There is very rarely a good answer to this, other than because they needed to create a token as part of the ICO. Many platforms have essentially created their own form of gift voucher like money, when there was no real need to do so.

Work tokens

The next type of token is the work token. This is where the token is used to reward users on a network for a function they fulfill. 

In the case of Augur, the token REP is distributed to ‘reporters’ who accurately provide the answer to prediction markets. It also prevents Sybil attacks (a Sybil attack is where a malicious actor creates multiple accounts to distort or manipulate the network), as REP has to be staked when reporting. This means that reporters found to be lying would subsequently lose their staked REP.

Augur market, where you use REP to report results.

But can't this be achieved using BTC or ETH instead of a brand new token? There are good arguments as to why Augur needs its own token, but there are many other projects using a work token which is not needed. Again, tokens were used because of the desire to do an ICO – not because it makes the most sense in the context of the project.

Governance tokens

The final major subset of utility tokens are those used for governance. Governance tokens provide holders with the ability to vote on changes to the network. 

For example, ZRX holders can vote on protocol upgrades or other changes, with this function being the main function of the ZRX token (unlike others which may combine governance with dividends, access or work features).

Brendan Bernstein
@BMBernstein

Agree here. Prices and "value add" need to be separated. A governance token can add value but the price can remain low. How?

Price isn't a reflection of the decision between all votes or no votes, but one additional vote.A marginal vote is only valuable if it can sway a decision twitter.com/KyleSamani/sta…

  • 7 months ago
  • 3
  • 15

Water-diamond paradox shows this. Water is valuable--crucial to life--but the marginal bottle of water is cheaper than the marginal diamond b/c of its impact

Codified governance may be important to protocol welfare, but that doesn't mean the token will be venture-scale valuable

  • 7 months ago
  • 3
  • 8

Governance tokens are arguably the hardest to value, as there are substantial differences in both the impact of governance changes they can force and the correlation to price. There is a lot of justified skepticism if a token created solely for governance is of any value. How do token holders benefit financially if there are no associated dividends? There needs to be a correlation to price for the token to have a purpose – otherwise the token should theoretically trend towards 0, which in turn puts the governance of the system at risk.

ICOs

The problem with many existing tokens is that they were created because projects wanted to do an ICO. The easiest way to secure funding is to create a new token, but the reality is most tokens do not confer enough rights or purpose to holders. Owners may conflate tokens with equity for now, but users will eventually realize this is not the case.

Will Warren
@willwarren89

1) Some thoughts on tokens. You can't force value into a token. Period. Grafting artificial incentives onto a token (velocity sinks or mint/burn schemes) inherently adds friction (more gas per trade) to the detriment of users. twitter.com/spencernoon/st…

  • 5 months ago
  • 85
  • 382

How to value a token

When analyzing a project, it is always worth asking two key questions:

  • Does this project need a token?
  • Does this project need its own token, rather than just using BTC or ETH?

There are very few examples of projects which can accurately answer yes to both of these.

Many projects would have been better served building the technology and integrating BTC or ETH instead, rather than both building new technology and creating a new money supply at the same time. 

For many projects, this reliance on a proprietary token will be what dooms it. Users simply won’t have the time or inclination to buy a variety of tokens just to use a service, particularly not when there are centralized competitors without such friction.

Disclaimer: I hold BTC, ETH and AUC. I have previously held CND. 

Add comment

Please Sign in to be able to leave comments.