Changing token models: Broken promises or a necessary innovation?

Changing token models is a controversial topic. No matter which stance prevails, the second and third order consequences will have a profound impact on the crypto ecosystem

Iconomi, an early crypto project that raised funds via token sale in the fall of 2016 recently announced it will convert its utility token ICN into a security token eICN. This will not be the first change of the token model for them; initially they planned to pay out dividends to token holders but had to abandon the plan and resort to giving it another, “interim” utility.

They are not alone in the process of changing the token model; many early crypto projects started off with tokens that would be recognised as unregistered securities, exposing founders to legal risks, including jail time. Some of these projects have since changed the token role from a profit-sharing instrument to a utility token (e.g. allowing exclusive access to the platform being built). In these cases, the value of the token changed completely and some token holders felt betrayed.

This brings us to a more general question:

Should founders be allowed to change the token model if flaws or a better model are discovered?

I argue that the dilemma is systematically important and that the crypto ecosystem needs to take a clear stance on it.

So how should the crypto ecosystem respond to token model changes?

We should remember that token modeling is a young discipline. Theoretical bases and engineering practices are being developed, but we are far from being able to say that a specific project has reached an optimal token fit, validated by a community of real users. Acknowledging that as an ecosystem we are still far from the target, should we as a collective allow, or even encourage, the crypto projects to change their token model when better ones are developed?

A positive answer to this raises further questions:

  • If such changes are to be allowed, under which circumstances? Only when the proposed model is objectively better? And how do we determine what is “objectively better”?
  • In which cases should token holders vote? Only if they have specific governance rights?

I see two fundamental approaches the crypto ecosystem can take regarding the token models of existing projects: either it supports “keeping the promise” or “free innovation”

What does each of these entail?

Pressuring crypto projects to stick to their original token model (“keep the promise”) might increase the sense of responsibility, but also kill some promising ones as collateral damage

The “keep the promise” approach requires that the project stays true to the original token model. Early projects with bad models (e.g. internal currency with high velocity) would be stuck (and left to die?). Consider the well-known example by Kyle Samani: no matter how successful a blockchain-based ticketing platform is, its token will be almost worthless if it is only used as an exclusive means of payment.

So should an otherwise successful project be allowed to fix the flaw and implement, for example, a discount token model instead? If the “keep the promise” approach prevails, such token model changes would be publicly condemned or prevented. The focus here is on the responsibility of the founding team from the beginning. It also requires educated token holders who know what they are buying into and are aware of the tokens’ value/utility drivers. These are to be kept the same. The approach is thus based on the the-token-you-see-is-the-token-you-get (TYSITYG) principle.

Allowing crypto projects to freely change the token model (“innovate freely”) might suit the big and early projects, but it may not be good for the ecosystem in the long term

The “innovate freely” approach is based on the acknowledgment that we still don’t know which token models work best and so the tokenized projects are free to experiment. This approach favors the more centralized, well-funded projects with strong communities who can make pivoting decisions in an agile way. They can copy the best practices from competing projects and hold on to their market power. What is the value proposition of privacy coins if Ethereum can simply adopt the same features? This is a similar situation to the current internet giants acquiring and copying innovative startups, thereby stifling innovation in the long term. Strong initial governance rights for the token holders are just a hindrance in that respect (remember the messy EOS vote).

The perspective of token holders would change as well; detailed studies of the current token models would no longer be absolutely necessary. Finding a great team would suffice as they would eventually figure out a token model that works (see Louis Aboud-Hogben’s piece praising 0x team, but advocating changes to ZRX). Paradoxically, the development of a trustless technology would be fully based on trust in a small number of people.

How is then crypto different from the existing startup/tech world, where we are chasing genius founders and fearing consolidators like Google or Facebook?

How should the crypto ecosystem react to this dilemma? Where do you stand on the issue?

*Note: The blog post was updated slightly to include the reference to the token model change by Iconomi. The initial version of the blogpost featured the detokenization of DigiPulse.