Your utility token is worthless
Despite the turbulence in the markets the past two weeks, there’s no doubt that blockchain is the most buzzworthy technology du jour. If you read anything from the the blockchain prophets, this technology is going to completely usher in innovations that will fix everything that’s wrong with money, the internet, corrupt politicians, bankers and everything else that’s broken in our world. Something like that anyway.
The current consensus in the community is the idea that the protocol will do the heavy lifting, and a thin layer of custom business logic will enable apps to run on each of these heavy protocols. If you believe the world is headed to this direction, there’s a good chance the world will look something like this — there will be a publishing protocol, which will host all of your content, with custom apps for each channel that offers the custom functionality. So the NYT, WSJ and the Economist are going to still be accessed through their own apps, but you’ll pay for your subscription to content through the publishing token. Similarly, for your social media will transition to a social media protocol, and thin apps will provide a custom newsfeed and other social experiences.
There’s a lot to unpack there. However, in this post, I’d like to drill down specifically to one particular element in that scenario — the token.
There’s been no shortage of new tokens introduced through ICOs in the last couple of years, each with it’s own niche. So far, really the only utility of most of these tokens have been speculative “investments” made by “crypto investors”, hoping that one of them will become the next hottest cryptocurrency that’ll enable them to retire by liquidating publishing credits at 4% a year for the rest of their lives (just kidding on this one). In fact, despite the enormous promises of breaking this next frontier of distributed computing, the only real application we’ve managed to build on the blockchain so far is the coin app.
I would be willing to make a bet — if blockchain is indeed going to unlock this next wave of innovation in information technology, most of these utility tokens are going to go to shit.
To make my case, I’m going to draw an analogy to some of the previous waves of innovation (most are still on-going), and how it ultimately came to the end user. Let’s take big data for example, the thing that everyone in 2011 thought was going to change the world. Whether or not it actually changed the world, your grandpa hasn’t yet realized that they’re using a big data application when they’re using Facebook. Your grandma doesn’t realize she’s using AI when her spell-checker corrects her email to you quietly in the background. Your grandpa didn’t ask for a classification operation to be performed on big data to decide whether or not he wants to read your most recent Facebook post, but there surely were a plethora of ML algorithms that ensured that he saw your updates (if the system thinks he likes you anyway). Similarly, there’s no way that the average grandma actively chooses to decide to use AI whenever she is typing an email and realizes that she would want to make fewer typos.
In all of these waves of innovation that made it all the way to the end user, the actual nuts and bolts of the technology has been entirely hidden from them.
If the blockchain truly does enter mainstream use, it will also be hidden from the user.
Let’s keep going with the earlier example of the big data social network and the innocent spell-checker. Let’s now introduce a token to them — let’s say there’s a big data social network token (BDSNT) and a spell-checker token (SPT). These tokens are not too dissimilar from the many utility tokens that have proliferated through the crypto-speculators — that is to say, they are fungible, volatile and not pegged to any real world assets.
With those assumptions, grandpa would have to purchase BDSNT to be able to keep in touch with his friends and family, and grandma would buy SPT to not make any typos in outgoing emails. Let’s also assume that grandpa and grandma are going to hop on to an exchange and buy $10 worth of BDSNT and SPT every month. And because BDSNT and SPT resolve to different amount of fiat at any moment in time, they will never know exactly how much utility they’re getting.
The biggest problem with this is that because BDSNT is volatile, grandpa doesn’t know how much social networking he’s buying with $10 every month. Because SPT is volatile, grandma has no way to tell how many typos her spell-checker is going to fix for her tonight. They’re not going to be checking their cryptocurrency portfolio every time they want to use their social network or spell-checker to see how many social network posts they can afford to consume or how many typos she can afford to make in her next email to her favorite grandson.
With all of the multitude of crypto-tokens that are out today, volatility is the single biggest barrier to adoption.
Most end consumers will not pay for a volatile amount of virtual utility every month. If you look at the average household budget, the most volatile item is maybe the gas budget. For a set of complex reasons that consumers have accepted for as long as they’ve used energy — it comes through a complex supply chain and there’s a cartel that’s got a monopoly over supply and distribution. It’s very unlikely that most households (or businesses for that matter) will be willing to add another recurring volatile item to their budgets, where the value of what their real money can buy can fluctuate as much as 90% depending on th emonth.
However, the promise of dApps is real
There’s a lot to be said for bringing more democracy, transparency, security and other virtues to our existing Internet services; and the blockchain really is a neat way to bring about liquidity to under-used assets, physical or virtual. At the same time, a volatile utility token is the single biggest barrier to real world adoption right now. Clearly, Bitcoin’s recent volatility means that it’s not even a good store of value, let alone a medium of exchange — and it definitely doesn’t have any real utility as an enabler for dApps.
Stablecoins
I am excited about the emergence of stablecoins — I believe they address the most fundamental problem to the mass adoption of distributed applications. Being able to use the same currency that I can use to pay my taxes and groceries for dApps is powerful, and will enable the next billion users to leverage dApps.
Like with most things, I do not believe that the best technology will win. The stablecoin that is the least volatile with respect to each local fiat currency has the best shot of winning.
This doesn’t necessarily mean that the protocol won’t do most of the heavy lifting — however, the most widely used protocols will not use their own utility token, but rather a stable coin. This means that grandma and grandpa will have a fixed budget for their social network and spell-checker, and all will be well with the world.
Who does the stablecoin?
Now, there’s an open question as to who introduces these stablecoins in the world. From looking at the impossible trinity, I would hypothesize the economies (like the United States) that have no capital controls will allow private entities to play on the same level playing field as central banks. However, they will be highly regulated — for good reason — armies of hackers will emerge trying to attack every single stable coin. The consequences of messing up an entire country’s capital infrastructure are going to be devastating. (side B on the diagram below).
In countries that have capital controls, only the central bank is going to be allowed to legally introduce a stablecoin for that currency. China is one of those countries. (Side C in the diagram above)
This is an exciting time to be in the blockchain space. Contrary to the consensus libertarian view, stablecoins should welcome regulation — it’s still the best way to earn the trust of hundreds of millions of people.
