This year so far has seen an incredible upswing for cryptocurrencies and the entire blockchain industry. This also increases the pressure on companies to enter the token economy.
Realizing the true value of crypto tokens
The token economy is complex. Projects decide the number of tokens to be issued, the issuance rate, and the amounts to be made available. In addition, the biggest challenge is to define a concrete use case for the token.
With the number of ICOs on the rise and interest in blockchain and cryptocurrencies rising, projects should therefore review their current token economic models. They should then evaluate whether their tokens truly provide value to ecosystem participants. Without utility, not only will token prices likely fall, but the project will also abandon one of its best assets.
Crypto markets were fueled in the last couple of years by public interest in non-fungible tokens (NFTs). Also, the increasing acceptance and popularity of decentralized finance (DeFi) products in the blockchain community has further fueled this trend. Initial coin offerings (ICOs) have also increased again. Well over 300 ICOs have been carried out so far in 2021.
As capital continues to flow into the industry, more and more projects are under pressure to launch their own ICO. In addition, they are looking for ways to launch their own crypto token. The aim of the token is to raise funds to advance projects. While the public eagerly awaits the “next big ICO,” it is important for investors and companies to understand that not all ICOs are created equal.
Although it may be obvious to most, it is important to understand that the projects differ not only in terms of their seriousness and potential. What token buyers may not consider in an ICO is the utility of the token itself. Token holders believe that a successful project will result in an increase in the token’s value. However, these buyers are often confronted with harsh reality, as such connections are not as clear-cut as initially assumed.
Several years after the ICO mania of 2017, today there are clear examples of successful crypto projects that unfortunately have not been able to translate their success to the price of their crypto token. But why? And how can that happen?
Bad token economy can endanger good projects
First it should be defined when exactly a token is a failure. If a token is released for which there is little to no demand, no use case, and no use – then one can clearly speak of a failure.
In this case, these tokens merely exist. They are mainly held by the company responsible and by speculators. They hope that the commercial success and increasing popularity of a project will lead to increased demand. Accordingly, the price of the underlying token would increase.
Explanation of Tokenomics
It is also important to have a basic understanding of the concept of tokenomics. First, it is a combination of two words – token and economics.
In the crypto space, tokens are just another word for cryptocurrencies or crypto assets. They stand for all cryptocurrencies except Bitcoin or Ethereum. Economy is generally defined as the way in which a society uses its limited resources to produce, distribute and consume goods and services.
So, tokenomics is the way in which the participants of a given blockchain use the underlying token to control the distribution of goods and services. It is precisely in this area that many projects fail after the issuance of a token. So, if it is not precisely defined how a token can support the economy, one wonders to what extent the token itself is relevant at all. If no benefit is defined, what exactly is its purpose?
An example to clarify the crypto tokens
Suppose a video game company is already selling its players monthly subscriptions for access to various online worlds. In the Fiat system, these subscriptions are billed to users monthly. The debits are made automatically via the credit card stored with the provider.
With a blockchain subscription, the game maker could issue a token with a lifetime of one year. This allows the token holder to access their online world for a maximum of eight hours a day. Players would then have an incentive to keep this token for their entire lifetime. Assuming they want to play the game for a full year. The token holder could lease their token to the community. As a result, he earns interest if he is not able to use the token.
Funds raised during this time could be reinvested into the gaming community or the token economy. This further strengthens the token economic model. An example of such a protocol is the IQ protocol. It is the ultimate “plug and play” model for the token economy. Because it enables every project to easily convert its offers to a blockchain-based subscription model.
Add utility to the crypto token
This means creating a token ecosystem where token holders have an incentive to hold the project token for reasons unrelated to price speculation. Token ecosystems that are designed so that token holders can use the tokens to buy and sell goods and services or earn interest have a higher probability of success in terms of adoption and price appreciation.
As mentioned, the problem with many token economies is that the project token ultimately serves no purpose. At best, the project will oblige its users to purchase its crypto tokens before providing products and services. However, such a model also offers no incentive for users to hold the tokens. Instead, it creates an annoying intermediate step that users must overcome every time they want to avail a certain service.
Many people may remember going to a fair or town festival as children with their friends or family. For these events, attendees must purchase individual tickets before they are allowed to enter. Once inside, the ticket price dictates the type of experience the shopper would have. A ride on the Ferris wheel? Two tickets. A slice of pizza? Five tickets. dart throwing? Four tickets. These tickets worked well within the system, but once you leave the faire, they lose their value.
In the crypto world, the blockchain is the fairground and the tickets are its tokens. And how can a project organize its economy in such a way that the participants can continue to enjoy their time at the fair?
Quite simply: regardless of the token phase (before or after the ICO), the projects must ensure an appropriate development of their token economy.
Sebastian KHL Berquet | CFO & Founder Crypto Nights Holding Limited
