TL;DR The long and short of this article is that majority of Utility Tokens as they present in the blockchain ecosystem are majority redundant, useless and/or designed to skirt regulation. In turn are damaging to adoption within a progressive digital economy. I want to be clear that this is not against all projects, nor is it against actual traders.
The Year of Money for Jam
The year was 2017, every man and his dog were releasing the next generation of Distributed Ledger Technology. Promises of “world first, infinite scalability, privacy preserving” and every other marketing buzzword one could imagine. This phase in cryptocurrency history was that of the ‘Initial Coin Offering’ or better known as ICO. All made possible by the ease of creating an Ethereum ERC20 token to give speculators something to trade in secondary markets and project teams the ability to essentially print money.
The outcome of this was wild raises, hundreds of millions, even billions in some cases going to a team of self proclaimed professionals from the pockets of everyday folk — looking to get rich. The teams looked fancy, came touting large company names, but lacked any skills* in distributed computing, networking, game theory or mechanism design. Let alone any form of business value being driven from within the ecosystem — what could possibly go wrong.
One thing that went wrong was the legality of such raises, the tokens were majority securities, so getting money for jam without being watched by the eager eyes of government entities such as the U.S Securities and Exchange Commission (SEC) who wanted to slam down the ban hammer as more and more ICOs took investors money and ran was wearing thin. As the teams fried the money attending blockchain conferences, parties or simply pretending to deliver on their promises then exit scamming.
There needed to be a plan to save the beloved ICO, the ability to essentially use prevarication (marketing) to get a significant payday with no legal ramification.
Enter Utility Tokens, they came near over night, the saviour to the ‘securities’ dilemma. It was like all project teams advisors gave them a copy of ‘The Lean Startup’ by Eric Ries (an outstanding book) and pivoted on the dime to continue the wealth generation events (WGE), a much more realistic name for ICO’s.
So What’s Wrong?
Within the collective Blockchain Ecosystem across thousands of projects there is a multitude of tokens which have been created through pretend innovation and human greed.
Utility Tokens are just one kind of these ‘tokens’, poised to offer ‘utility’ within a proposed ecosystem or project. This can be via access rights, pay to play, and whatever other methods these projects have come up with. Technically, majority do not even need a secondary token, and could use the native currency of the platform for which they are built on such as Ether on Ethereum.
The TRUTH is these tokens are just another way to undertake an ‘Initial Coin Offering’ (ICO) and skirt regulation with reverse engineered token economies used to sell pipe dreams. These tokens have ZERO network effects, are designed by overnight ‘experts’ off Fiverr, and are clearly without consideration of market analysis, technical viability, and or user experience.
These tokens continue to be sold through questionable marketing practises including technobabble, pretty websites and fancy illustrations— and seemingly all proclaim to be the next bitcoin, as if bitcoin was dead. Oh and don’t forget these comparison charts, perfect for the uneducated speculator to find a hidden gem (I am not serious, do not follow these charts).
The absolute stark reality is, that 99% of these ‘utility tokens’ are not useful in their ecosystem at all, and simply add another layer of friction to the underlying business process.
What Is Needed
There is currently another shift in the capital raise industry pushing for what is known as Security Token Offerings (STO’s), which gives these unsavvy speculators a legal piece of the pie. However there is a reason why ICO, Utility Tokens and STO’s will continue to fail and why a change is needed, not just in getting legal ownership when trading such new assets but for longevity of the idea past the initial raise running dry. What is the magic sauce you ask? Its simple really, something any normal business has to ask themselves a million times over yet is displaced when it comes to blockchain projects…
- Business Value Creation: Revenue
You just laughed right? Same, I have been for 2 years as I watch project teams lie through their teeth on how they will have the best payment experience, most market share, most users. None of which take stocktake on the other players or understand the complexity of cryptocurrency transactions if the technology isn’t abstracted correctly. We need to see project teams really spend time on VALUE CREATION. Answering questions on how will the business turn a profit — to be able to continue to innovate past the known.
All raises to date are fundamentally the same, they offer a team, an idea, and a bunch of technical dreams to achieve the use case. These teams present the idealistic world of decentralised authority, open source, all that good stuff. The opposite of how the real world survives.
However without money coming in the door to maintain such projects, considering the thousands of others out there doing EXACTLY the same thing, these utility tokens offer no value. Once the initial raise money runs dry, if the network effect is not significant enough to generate continued fee revenue which Bitcoin has put out to the year 2140 when it moves to just a fee based model… how will it all survive. The simple answer is that it won’t.
At the end of the day we just want “milk that tastes like real milk”, in reference to a great Australian Milk Ad from many years ago. Fair dinkum, realistic project’s that are transparent like the technology, and have really considered the intended network effects and how they intend to survive the test of time — at least in theory.
The economics of such is not easy, however we need to go back to basics. It’s time to be value creators, not value manipulators.
*Of course not all, but majority
Thanks for reading,
Benjamin Hall (Senior ICT Systems Analyst)