How to make a “utility token” economy in a right way
(This is Part #4 of Equity-based token distribution legal framework)
If your project only features utility tokens, you’re going to run into problems. The functions of any utility token can be split down amongst commodity, currency and revenue tokens.
Commodity tokens are like vouchers (or futures, or receipts) for services. They can be redeemed for services at any moment, regardless of the price. These tokens are issued by the business or platform which provides the services, and they can be sold just like goods. They could also be exchanged among the platform users.
Currency tokens are an accounting tool for users, with unlimited issuance or not managed by the project. The payment currency needs to be linked to another existing currency in 99% of cases. Currency tokens are considered as an ideal payment system, or pegged to an external currency.
Equity tokens offer the right to co-ownership of a system. If necessary, equity tokens can be split into three elements — ownership, revenue, and governance. Ownership means the exact proportion of ownership of a company, and can be considered to be a tokenized share. Revenue token gives the right to receive dividends from the system in the form of the commodity or currency tokens. Governance enables the holder to take part in decision-making concerning the management of the platform.
Currency tokens are the most complicated to define:
1. A Currency token should be as independent from the system as possible, in order to prevent the possibility of its manipulating (otherwise it is just another utility token).
2. The amount of currency tokens in circulation could be (and should be) linked to the size of the internal economy. In cases where there is an internal currency, this implies the possibility of additional issuance. In cases with an external currency, it implies increases in reserves in a custody.
3. Having your own internal currency is only necessary for managing the internal economy. Binding users to the use of an internal currency can be achieved by (a) commissions, which must be paid in the currency (b) obligatory reserves on the accounts, or (c)compulsory centralized services.
Cases when having your own currency isn’t needed (which covers 99% of cases — and this where the majority of the ideas of an ICO come in) include:
1. If there is only one merchant in the system (a separate currency which only Apple accepts, for example, doesn’t make sense)
2. If there are only merchants of one kind in the system (a currency which can only be used to buy kebabs doesn’t make sense either — at least, while it’s not a commodity token — for example a voucher valid for one kebab).
3. For internal accounting inside companies or ecosystems, even if they are working on a DAO principle.
Now let me emphasize this once more — when you don’t need YOUR OWN currency, it makes sense to use a tokenized external currency (or several of them), which will be user-friendly; and commodity and equity tokens.
A tokenized company with transparent distribution of profits, quick decision-making, and independence from its founders would be an investor’s dream come true. It would accept any currency that suits the users. The P/E multiplier of such a company, if compared with a traditional one, could be bigger (due to the transparency of its cash flow), but its market share could rise even faster. I’d say this model would be primarily applicable for existing businesses, in which the market demand is clearly understood. It’s much less suitable for start-ups who make a pivot every week.