Utility token ICOs are a fad

(opinions are my own)

ICOs are shifting the business model from a traditional cash flowing business to one with a token that hopefully appreciates in value as the ecosystem grows and generates increasingly more value over time. However, Vitalik astutely points out where ‘utility’ tokens fall short and how the ecosystem needs to start thinking about velocity.

Vitalik illustrates how the equation MV = PT also means MC = TH where C (the inverse of P) is the exchange rate to fiat and H (the inverse of V) is the amount of time a token sits idle before being transacted again.


1 / V = H

1 / P = C

M/H = T/C


What happens when there is less friction (or no friction) to exchange between tokens, which is already being proven out with protocols such as 0x or other solutions? When friction decreases, and eventually goes to 0, then velocity will increase towards infinity meaning H (the amount of time somebody holds on to their currency) goes to 0. As H approaches 0, C would have to decrease towards 0 as well to keep the equation equal because M is known and > 0.

If you buy the idea that there will be an increasing number of useful Dapps and you believe that the friction to exchange between tokens decreases over time, then it is inevitable that ‘utility’ tokens will decrease in price over time. Further, the incentive to decrease the friction to exchange between tokens will increase over time because it makes little sense to hold on to 10s or 100s of tokens to use your Dapps. As price in your tokens decreases, there will be a flight to reserve currencies that provide the best store of value. Dapp creators will realize creating their own token makes no sense and will go back to the drawing board to figure out how to generate cash flows (maybe charge transaction fees in a SoV currency). Consumers will see their investments go to 0 and stop participating in ICOs. ICOs for utility tokens will become few and far between. Traditional VC will once again be the gate keepers for capital to creating great applications whether decentralized or not. Perhaps there will be new novel ways to keep the utility token ICO alive like creating a token that is tied to the price of a SoV. This will allow the crowdfunding style ICO raise, but the token would be meaningless and the Dapp would still need to figure out how to generate cash flow.

So where does that leave us today?

It’s important to note that frictionless exchange is still a while away, so this is a medium-term thesis. In the meantime, speculation will continue to prop up prices and there will still be great returns from select utility tokens.

However, if you are more concerned with the long-term vision of the decentralized movement, it makes the most sense to figure out: which currencies will be the best SoV and how do we measure SoV.

The two inputs to making a great store of value are having low velocity and extremely high demand. If increasingly more consumers want to purchase a currency that has a fixed supply base where existing currency holders are refusing to sell their holdings, then the price will increase.

Therefore, we need to measure the velocity and demand for each currency. Velocity is easy and calculable, but demand is difficult and more subjective. Ideas for calculating demand are:

- Transaction volume

- Web searches

- Address creation

- Top down exercises for various market sizes that require a SoV

Overall, I believe utility token ICOs will not be around for the long-term, or at least not the way they are occurring today. However, there will be an increasing number of Dapps or services on the blockchain that need to interact with a native digital currency. The best way for that to occur is with the best SoV(s).