Utility token possibilities, and where they can not work

“I alone cannot change the world, but I can cast a stone across the waters to create many ripples.” – Mother Teresa

OK, lets start at the start.

Sean Coates wrote a brilliantly simple piece on how we should look at tokens, back in 2018. Link at the bottom, and I’m going to quote some lines here too. AS did Nigel Feetham - link also at the bottom.

The use of physical ‘utility’ tokens has been recorded since Roman times. Interesting anecdote from Nigel:

“Perhaps the oldest is the ‘Roman token’ (or spintria), which according to one theory, was invented to pay for services forbidden to be paid for using official currency with the emperor’s portrait on them. The tokens ‘utility’ was driven by high demand for the world’s oldest profession that could not be paid in Roman coinage. Of course, with demand comes supply and a form of payment (tokens) was created. They were apparently so popular that ‘tokens’ have been found as far away as Roman Britain. The functionality of today’s cryptoassets (or tokens) are coded into the relevant smart contracts; the ‘Roman tokens’ had distinctive pictorial representations. Try checking one out with a Google search.”

More recently we have seen tokens in arcades (where their purchase was often incentivized with discounts etc.), travel - such as the NYC subway, and in casinos. Also, in Italy as an example, “‘Telephone tokens’ (in Italian the ‘Gettone telefonico’) became a popular alternative to currency for smaller transactions until they ceased to be used. Other uses of tokens evolved in many countries as a means of payment for goods or services and some are still in existence today (vouchers).”

Which brings us to the modern digitally transferrable token, built with blockchain technology. And first we should differentiate between crypto coins and tokens:

So, here's the deal: crypto coins have their very own blockchain (e.g. Bitcoin), while tokens are created on an existing blockchain. Basically, coins are like digital cash, meant to be used as a digitally transferrable currency, while tokens are more like digital assets representing ownership (NFT’s for example) and / or used for transactions within a specific blockchain - think Bored Ape Yacht Club.

Now, to clarify further, there are security tokens and utility tokens. In general, security tokens indicate an entitlement to ownership, and hence SHOULD be controlled by securities laws. I say should, because here is where it gets murky. Most ICO founders tried to skirt around these regulations by setting up in far off countries, with little regulation, or transparency. (Hence the more recent rush to regulate by authorities.) Or, they try to pass security tokens as utility tokens. But here’s the thing. You can’t run with the hare and hunt with the hounds. By that I mean, either you are bound by securities laws, or you pay appropriate tax on the income - because that is what this is. Income. A lot of founder have tried to take the best of both worlds. Setup off shore where they can skirt these defining laws under one entity. Then they second local entity which offers service to the first entity, and gets rewarded handsomely. Every ‘expert’ I talk with suggests that this is the way to do it, but then adds the caveat that accounting and legal advice should be sought. Gray at best I think.

What about this; Complete transparency. Set up, for instance, an Irish business. If you offer security tokens, then abide by those rules. If utility - like regular rewards crowdfunding for example, pay sales tax on the income (Vat here). You do lose a high percentage, but in the medium term at least you have everything set up correctly and fairly, with nothing to fear. And maybe the industry needs this. I’m sure it would be appreciated by more mainstream adopters?

Anyhow, I digress. In short - Utility = a function, and is technically a sale. Security = ownership, and is bound by securities laws. By and large. Metacade is a recently launched utility token which is an excellent example of utility within an ecosystem in the gaming world. However you can see how volatile the price is:

Disclaimer - we never ever give investment advice. This is just for analysis only!

So, the message here is clear here. Tokenization is plagued with volatility, and from the sins of our fathers. But let’s not throw the baby out with the bathwater.

So, the future?

This is six trillion dollar question. As mentioned before, NFT’s. in my opinion, are only suitable in very niche circumstances. So, I see the future of tokens much as the utility was in the analog world. Think the casino that used tokens, or chips. But why would anyone use them? There needs to be an incentive, I think, beyond functionality. The arcades used to incentive their use - buy more and you get a relative discount over using cash, for instance. I think there is a place that this is more mainstream - beyond gaming, and a few novelty art projects.

And there ideally needs to be a second upside - i.e. increase in value. That’s easier said than done. But that’s why I’m stripping the notion back - well beyond the first digital tokens. Back to first principle thinking. And that’s where I find guaranteed functionality and ground level value as being critical.

How could this apply to with our theoretical platform?

Exactly as it sounds. Tokens could be used to back crowdfunding projects, and x or y amounts could be released, or mined, as the projected progresses after the campaign. These first tier tokens, in turn can increase in value as the platform becomes more widely used and adopted. Think used for backing projects, and offering in (part) payment for the development of the project after funding. All with the possibility of increasing value.

I think this is a good start, but it would need more around that functionality. The ‘Why’ needs to evolve, so it becomes more than just a fad. Let’s delve into that in chapter 5…

By the way, we’ve just closed a Kickstarter and an Equity Crowdfunding. I’ll give insight next week on these as well…

Thanks again for reading. I hope you continue to get something from the newsletter.

If you have any other ideas / thoughts / feedback, feel free to drop me a line on [email protected] - I’d love to hear your thoughts around this.

Until next week, and chapter 4, Go n-éirí leat!

Derek.