The Discount Token model
A small intro to my favorite utility token model.
There already exist half a dozen cryptotoken designs:
- We have “currencies” such as Bitcoin, where users have balances which they can send each other and where supply is controlled (either fixed or evolving at a known rate),
- we have “revenue share” models, such as KCS,
- we have “work tokens” where staking tokens is required to perform a service,
- or even non fungible tokens (or deeds) such as crypto-kitties.
At this point of my exploration, my favorite model is the discount token model approach. The highest level definition I can think of is the following:
Owning the token will grant discounts on transactions performed using another cryptocurrency.
In the physical world, we can think of credit card points. Owning credit card points lets me purchase plane tickets at a discounted price. Another analogy is Amazon Prime. Being a Prime member grants the owner unlimited discounts on their Amazon purchases in the form of free overnight shipping.
As you can see from the examples above, there are multiple variants of the discount token model:
- Sometimes the discount is “redeemed” and cannot be used twice, or other times it can be applied an infinite number of times,
- The discount might be “fixed” (with a $ value) or a variable (% of of transaction),
- The discount may be full or partial,
- The discount may be purchased or earned (through loyalty for example),
- The discount may be constant (the calculation rule stays the same) or varies with external factors…
My favorite aspect of this model is that it is inherently never less favorable to users than it is to “speculators” or passive investors. The only real value of the token is realised when it is applied to a transaction. Anyone who has accumulated airline miles (which are discount tokens!) and seen them expire understands that. For the investor, they are at best as valuable for them as they are to the person who actually uses them. This is expressed very well by Aleksandr Bulkin in his comparison of discount tokens and utility currencies:
Consequently, an investor holding discount tokens for passive appreciation is by definition underutilizing them, only able to capture their resale value, but not the discount value.
However, for loyal customers, they also represent an interesting aspect: they capture value from the “top line” rather than from the “bottom line”. In other words, their value is a function of the network effectiveness, not of the ability of the participants to yield a profit. In that regard, it is less risky because yielding a profit is a function of network effectiveness, but also operational efficiency.
I can think of existing 2 discount token models: Binance’s BNB and Sweetbridge:
- Binance is one of the largest crypto exchanges in the world. Their BNB token can be used to obtain a significant discount on the trading fees (50% initially and decreasing over 5 years). At the time of writing, the whole BNB supply is valued north of $2Bn dollars, which gives an idea of the order of magnitude of net revenues for Binance.
- Sweetbridge, on the other end is a protocol stack for global commerce and supply chains. I have to confess that I did not fully understand exactly how their discount token model actually works, even though their whitepaper on the subject is a reference.
The discount token model may appear limited at first as each token’s value may look “capped” by the the actual value of the discounted service. However this is only true if the discount each token represents is fixed. In a better model, one can consider that, instead of attaching a discount to a token, we can apply the discount to the whole supply. Each token’s value is now linked to the network size itself. A smart release mechanism can yield much higher perspectives and provide the right incentives to reward network growers.
Want a more precise example? Check this story.
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