Token Models Explained
A dApp creates and distributes typically what is a fixed amount of tokens that are required to use the application. Imagine a dApp called The Grand Crypto Fair, a futuristic virtual reality based fair made up of entertainers and fair goers. In order to be entertained, you will need to exchange your USD for fair tokens (FAIR) using a crypto currency exchange so that you can give the individual entertainers FAIR in exchange for entertainment.
Let’s pretend this is the first year of The Grand Crypto Fair and nobody knows if it’s worth going to or not. In order to incentivize early adopters, the creators of the fair create a fixed pool of FAIR and offer them for purchase at a cheap price to thrill seekers or perhaps those speculating that the fair will be popular and want to resell their FAIR on a crypto currency exchange at a higher price to later fair goers. The thrill seekers, speculators, entertainers, and creators of the fair are all economically incentivized to promote the fair and attract more participants who then must purchase FAIR. Because there is only a fixed amount of FAIR in circulation, the more popular the fair becomes, the more FAIR is desired and appreciates in value. The more valuable FAIR becomes, the higher quality entertainers will join, the better time the fair goers will have in a self-reinforcing cycle into perpetuity.
But why do you need to exchange your USD for FAIR? Can’t you just use USD? Issuing a native token helps solve the classic chicken and egg problem of marketplaces. Buyers won’t join if there are no sellers and vice versa. Nobody will attend The Great Crypto Fair if there are no entertainers. No entertainers will attend The Great Crypto Fair if there are no fair goers. The token model seeds marketplaces with economically aligned early adopters and jumpstarts the ecosystem.
Keep in mind that although there are creators of this fair and they may reserve a large pool of the token supply for maintenance of the fair, bringing in special acts, etc., there is no “company”, rather The Great Crypto Fair is “owned” by all of those who hold the FAIR token.
Why do we need a FAIR token?
Many wonder why have a FAIR token when you could just use USD as a more stable, widely, and already held currency instead. The primary drawback is the loss of the “incentivize it [the network] and they will come” paradigm that native tokens allow. There are a number of other reasons not to use USD:
Any network facilitating money movement would likely need to be regulated as a Money Service Business (MSB) and have Money Transmission Licenses (MTLs) in each state in which it conducts business. Because there is no “middleman” between peer-to-peer exchanges of native tokens on a network, these are not required. Also, moving USD is painfully slow. Transfers from one US bank account to another are cheap but can take 3–5 days through the Automated Clearing House (ACH). Card to card money movement is fast, but comes with high association and interchange fees ranging from 2–4%.
What’s to stop the FAIR creators from issuing and selling more tokens?
Nothing. While this would be dilutive to existing token holders, issuing more tokens to fund initiatives that improve the value of the network can actually create more value to FAIR holders over the long term. So while you may own less of the pie if more tokens are sold, so long as the funds from newly issued tokens are invested wisely, the overall value of the pie increases.
We believe that issuing more tokens might make sense in certain situations, even if a creator originally stated no new token would be issued. However, we believe there should be a proper structure in place to govern such events, including things like letting existing FAIR holders vote on whether or not to issue new tokens.
Pollen Capital is evaluating investments in such proposed governance projects.