After officially reading 100 white papers (took about a year), I have concluded that there is a way to differentiate good tokens from bad ones. There are generally two kinds of white papers in the market, ones that are blockchain projects or forks of the former like decentralized storage or decentralized internet, and ones that are customer and consumer interface focused using existing blockchain solutions like mobile wallets and the Uber for [insert the industry]. I call the latter “Consumer ICOs”.
Without taking any thunder from blockchain projects, I want to specifically focus on Consumer ICOs, which still can be good investments if you know what to exactly look for. Skipping the problem, solution, technology, marketing and token sale mechanics, the token design and tokenomics sections are important sections and yet, would be and potential token buyers don’t fully understand.
1. Token Design
Token designs and descriptions of token designs are confusing at first sight requiring careful study. Overtime you can find a common pattern to all of them. The following points describe common elements found in great token designs.
1a. Actors, the More the Merrier!
Actors are potential users of the token. A token design should describe at least two actors. For example: customer, merchants and platform. One mistake token designs make commonly, is having their platform or internal team centralize the tasks of the token. Considering the last example and an action like promoting a product, a better design would source the promoting to the community instead of the company directly paying for it. Adding on to the first example there would now be 4 actors including the promoter.
1b. Actions, What Can Actors Do?
The reason why having more actors matter is because the more ways an actor can use the token (which is called an action) the more stable the token becomes. It’s important to list out the actions of each actor in a simple diagram. The following outline describes in summary from the first example of what actors can do while expressing how the token is circulated.
- Can buy token on the exchange
- Can buy token from platform directly
- Can buy tokens from merchants
- Can buy product discounted with token
- Customer earns tokens as cash back
- Can earn tokens in exchange for products or services
- Can sell tokens to customers
- Can gift tokens to potential customer or as rewards
- Can use tokens to list products on the platform
- Can use tokens to promote products on the platform at a discount
- Can earn tokens by promoting products
- Can earn commissions by promoting products
- Can sell tokens to merchants or consumers
- Can declare cash back to potential customers
- Can earn tokens by referring other promoters to the platform
- Can earn tokens for listing products
- Can earn tokens from merchants for enabling the promoter network
- Manages cash back rules
- Can sell tokens to customers
1c. Everyone Should Win!
In order for an economy to prosper, it should be clear how each actor could possibly win, including the platform. In the outline above the customer can win by getting products at a discount and getting cash back. Merchants can win by earning tokens which they can sell, increasing their customer base by listing their products and covering more by using the token’s promoter network. The promoter can win by earning commission from product promotions as well as additional commissions set by the merchant. The platform can win by earning from the listing fees, promoter fees, replenishing its reserves and selling back to customers.
A lot of white papers either cover very little on the economics of their token or don’t include documentation on the subject at all. As a potential token buyer, I actually reach out to each project manually and ask if they can provide documentation. From my conversations with these projects, I can conclude that economics was not even considered. Common models like proof-of-stake and proof-of-work are fine if you are a currency, but if you are basing your token off of these currencies and are creating an ecosystem, economy, community, [insert your term for group of people] you should additionally describe how the token itself can potentially prosper. If you are unfortunate of not having someone in your team with an economics background, the following points can help you get started in addressing potential issues your potential community may ask.
2a. Rate of trade is the primary objective value of a token
If the earth stopped rotating, it would mean the eventual end of the life. If a currency stopped being used, it would mean the eventual end of a country. If a token stopped being traded it would mean the eventual worth of nothing. If you agree with these statements, than we can conclude that the value of a token depends on how often it is traded (or rate of trade). This rate of trade is an objective measurement that should be considered when valuing a token.
2b. Exchanges are designed for speculation
Token values can also be speculative. Since values displayed in let’s say an exchange is an average of speculative values over time, it is still speculative. So we can conclude that the value of a token in an exchange is not an objective value of measurement. While speculative value may seem like a negative connotation, it can also be rephrased as a potential value. The mistake of most token authors is trying to make their speculative value into an objective value. If a token is pegged to any fiat, it gains stability but loses any potential value because the speculation is removed. People would only buy a stable coin if it’s discounted for as they need it and the token loses its rate of trade.
For example the value of a creative designer with branding experience varies between you and the next person. If that designer said that he/she charges 1 X-Token, in your head you would make the conversion to USD (or any fiat). However another person could value that completely different. The cost of any persons worth is ultimately speculative and can drive up or down that persons value.
2c. A token can gain potential value with more practical use cases
Continuing with the same example, if the X-Token can be used for other services like data encoding, web development, it would imply an increase in rate of trade. Use cases like paying the rent, employee salaries, electric, groceries are example of practical use cases. In these cases a person wouldn’t need to exchange the X-Token to get what they want and that’s a good thing. It doesn’t reduce the rate of trade, though you are not trading it for another currency, you are still trading it for goods or services performed. A token with an N amount of use cases would inherently stabalize.
2d. Pegged tokens loses its potential value
If that same designer explicitly said that 1 X-Token was $300, the token would instantly lose its potential value and it would be tough for the designer to change their value even if they grew in experience over time. Since X-Token is now a kind of stable coin, a person would only buy the token if they wanted a design done. This means the X-Token would also lose its rate of trade. Even if there were more use cases, the value of X-Token would still be worth $300.
If you are looking to do a serious token sale, It’s important to spend extra time working on your token design and tokenomics. Because of the rise of scams, token buyers are more savvy than last year. White papers should include as much information and be clear to help convince consumers to purchase your token.