The case against utility tokens

by Kazimir Dugandzic

TL;DR: We can learn many lessons from the history of how the internet became so prevalent. Success requires a single common standard for those with good ideas to build upon. For the internet it was and still is TCP/IP — for the blockchain that standard is Bitcoin.

The real-time conversation

I’ve consulted on many software projects over the years. Throughout 2017 and into 2018 I started to work on Ethereum, EOS and Bitcoin related projects. To become confident with these technologies it requires a great deal of study.

I have found that books, conferences, and long form articles are great — BUT they are only larger way points on the path to enlightenment and they can become hopelessly outdated long before they are published.

Twitter is where you can get a real sense of where the industry is going. The conversation is happening in real time. Thoughts are thrown out into the cold cruel world. Bad ideas are burned at the stake. Good ideas are criticized until they become better ones.

I want to distill the current conversation regarding utility tokens as of September 2018.

There is a strong opinion that utility tokens were a fad. The more hard line viewpoint is that they are literally scams designed to bilk newcomers of their money . The softer perception is that they was a harmless momentum due to a mass hypnosis that tokens were “the next big thing”.

The Bitcoin Maximalist view is that there is only one true blockchain that matters. It is the Bitcoin standard which includes second layer solutions like the Lightning Network. They believe that this should be the platform for any application that requires true decentralization and real security backed by the proof of work of the miners and the many nodes run by bitcoiners across the world.

The Litecoin Maximalist adds to this the need for the Litecoin chain and it’s properties as a side chain and lower cost on-ramp to all that Lighting and Bitcoin provide. Silver to Bitcoin’s gold. Full disclosure that I lean heavily into this camp.

What is utility?

There have been many great Twitter conversations this month. The bear market (especially in Ethereum ) has allowed for some sense of sobriety and retrospection. Let’s look at some highlights…

Will Pangman (CEO of AirBitz) notes that he has been convincing clients thinking about launching an ICO to build on top of the Bitcoin and Lightning Network instead.

But let’s dig deeper. Let’s look at an interesting thread started by an independent Bitcoin research known as Hasu:

This tweet caught the attention of Francis Pouliot. Francis is an economist and CEO of Satoshi Portal with a strong following. He called out the Brave project as guilty of trying to use a utility token known as the Basic Attention Token or BAT — when one was not really needed for their goals.

Full disclosure: I invested in BAT initially — but I no longer own any BAT tokens.

The thread continues…

This tweet caught the attention of Brendan Eich (The co-founder and CEO of Brave and BAT) and the heated exchange he and Francis had is definitely worth a read: https://twitter.com/BrendanEich/status/1036724148146384896

OK — but why are utility tokens such a bad idea?

Can these tokens really be called “utility” when they actually just get in the way of what users really want to do? They add extra time, effort and complexity to something that should be as easy to use as a web browser.

What is the purpose of having thousands of competing blockchain technologies or currencies each designed to only do one thing and running in isolation?

I think the financial markets might already be on to this. Many ICOs from the past year are beginning to sell off their ETH and current Ethereum prices are plummeting…

Is Chuck-E-Cheese really the business model for the next big thing?

Let’s compare this concept of multiple cryptocurrencies and blockchains to the concept of the internet

Imagine if for every website or app you wanted to use you had to connect to a different internet (because in this alternate timeline there is an internet designed for shopping, and another designed for social media, and yet another designed for sending emails, etc….)

Now imagine that every time you logged into each “internet” you had to use a different browser designed to run on that version of the internet. And each internet had a different set of rules, and bugs and new upgrades to install, and… Well you get the idea.

Today we have a common standard for how we network with the world wide web. Because of this anybody can build anything they want on it as long as they use that common standard. So it goes without saying that we need a common protocol for blockchain as well. One that all transactions can live on.

We should also look at things from the monetary perspective.

That is the flip side to this (Bit)coin. The world must always agree on a single monetary standard. It could be seashells, it could be the gold standard or it could be the US Dollar as the world reserve currency. No matter the time or place all civilizations have to agree on a common monetary standard or there is no way to transact among each other.

For more on this topic I urge you to read The Bitcoin Standard by Saifedean Ammous.

Bitcoin gives us a monetary standard with the additional properties of a blockchain standard that allows for layered solutions and an almost infinite amount of possibilities for storage and transfer of both data and value. Nothing else even comes close.

But can Bitcoin even do smart contracts?

Yes, and it’s getting better every day. Here are just a handful of the innovations that are in the pipeline, or already here:

Lightning Network

Scriptless Scripts

RSK

Liquid

How does Litecoin fit in?

Abra recently moved their trading platform to use smart contracts on Litecoin. The reason being that Litecoin offers the same exact protocol as Bitcoin, with 4 times the speed and a much lower transaction cost. Litecoin is essentially a high performance version of Bitcoin that can inter-operate with it’s bigger brother using the Lightning Network.

Litecoin is a low cost on-ramp to Bitcoin. It is a place where new features can be tested and rolled out. It is not a competitor to Bitcoin. The focus of Litecoin is to enhance Bitcoin as a platform.

Is there room for something like Ethereum or EOS?

Maybe? I think this will need more time to be discovered. There may be a need for 100% on chain non-monetary data storage that is beyond the capabilities of Bitcoin or even Litecoin. For example large amounts of data exhaust from an autonomous vehicle that can be used later for legal or insurance purposes.

Tesla is looking into just such a solution for data exhaust on it’s driver-less car platform: https://youtu.be/eYdC8ipplmQ?t=38m45s

But a solution such as this would be an add-on to the value transactions on the BTC/LTC/Lightning networks. It would serve an additional purpose outside of it — but such solutions would not require you to create a new utility token just to get these benefits.

OK — you convinced me. But why is Bitcoin the solution again?

OK one more time with feeling: Using The Bitcoin Standard allows for all blockchain applications to agree to a single protocol layer rather than trying to each re-invent the wheel. Developers can spend time on actual solutions and not building protocol layers. Applications can all be inter-operable. It is the fertile ground that will let good ideas grow. Similar to how the entire world wide web is built upon the TCP/IP protocol. Companies that embrace that now will be the ones that are ahead of the game.