Is there a disconnect between token value and product usage?


Token pre-sale structures and the disconnect between network usage and token value are two primary reasons that foster ICO speculation. The former has been discussed, now it’s time to reflect on the second reason.

90% of cryptocurrencies are “useless”

Most tokenized blockchains do not have a ‘product’ to sell yet, this makes most of the tokens we see on the market today a “useless” affair. Today, speculation is king. Most of you already know this however and investing in a whitepaper project is done because we see — or hope to see — an increase in value because the idea being proposed is solid. We all want to invest in the next Google or Amazon so me calling this out would be arrogant or condescending. So let’s move on to the actual point here so your time is less wasted.

Image 1: random allegory used to get my point across

That point starts with one question: “what drives token value”? Beyond a basic explanation of supply and demand you need to ponder why would someone ‘need’ to buy token X, Y or Z?

We all have Bitcoin, yet how many of you use it for its intended purposes?

In the case of Bitcoin most of us use it as a store of value or long-term investment. In essence however Bitcoin is a payment currency. Some have already started to pay their taxes in Bitcoin but using it in real life remains a hassle. I personally remain doubtful whether mass adoption of BTC will ever take place. In the Netherlands for example we can do contactless payments using our debit card. I can do groceries and pay for them within half a second. So why would the average consumer ever pay with Bitcoin? Why should I or any other individual need Bitcoin? It might be unfair to single Bitcoin out in this case and I simplify it extremely but the case here is valid for most other cryptocurrencies as well. We are in a market where price (token value) has almost nothing to do with actual usage of the product. For reference we should take a look at Bitcoin (images 2 & 3).

Image 2: Log chart of Bitcoin price jan-2017 to jan-2019
Image 3: Log chart of Bitcoin transactions each day jan-2017 to jan-2019

Logarithmic charts are used in image 2 & 3 because they better reflect whether a certain change (like price) is constant. Linear charts show outliers and makes it more difficult to assess whether the change was meaningful or a fluke. The december 2017 bullrun was one of those outliers, a return to the mean was expected.

Summarized, images 2 & 3 tell us that the network usage of Bitcoin has not significantly changed, while token price did. As you can see there is a clear disconnect between adoption and price. Image 3 shows the number of Bitcoin transactions each day and has not meaningfully changed over the past two years — YET we had a very volatile period of price movement behind us (image 2). The same holds true for other cryptocurrencies. Unlike Amazon or Google, cryptocurrencies do not accurately convey the economical success of the company/team/product/blockchain behind it.

There is a clear disconnect between token price and actual network usage

Adoption at its core

Ideally speaking a healthy token economy is one where actual network usage leads to an increase of token price. Adoption should be the number one determinant for mature blockchain projects. To exemplify this we take a look at the stakeholders currently present within each blockchain project (image 4).

image 4: common actors and stakeholders in blockchain

Mature blockchain projects interfere in this landscape by discouraging the amount of strong passive stakers and encouraging active network participants. These can be validators or clients using the network.

LTO Network is one such an enterprise that attempts to provide a solution between the disconnect of network usage and token value. LTO consists of both a private and a public blockchain. The private layer of the chain creates value from a business perspective and it is this part of the chain that direct clients of LTO use. Then there is a public layer, which represents the private layer from an economic perspective — the token value of LTO.

LTO tries to incentivize ‘Joint Business Builders’ — the actual enterprises using LTO — to run a node on the LTO network. In order to do so however they need a stake in the form of a set amount of tokens. Two problems arise however:

  1. most companies cannot buy or own tokens for a number of reasons.
  2. most blockchains do not incentivize network usage but rather the holding of a set amount of tokens

LTO solves both problems by introducing a new consensus algorithm and splitting token holders from end-users.

WAVES and NEM combined — Leased Proof of Importance

LTO’s consensus algorithm Leased Proof of Importance (LPoI) builds upon WAVES’ Leased Proof of Stake (PoS) and NEM’s Proof of Importance (PoI) and combines the two. Especially NEM’s PoI is a very innovative approach to solve the problem of network usage =/= token value.

PoI states that productive network activity, not the amount of coins one holds should be rewarded. Hence when one runs a validator node, one does not automatically receive a set amount of validator node rewards. The odds of reward selection and the pool of rewards is dependent on the amount of work you contribute towards the network. This means staking rewards are skewed by network activity in the form of transactions. Note that gaming this system is not possible, for details on those I would refer to the tokenomics paper.

Productive network activity, not the amount of coins one has should be rewarded

The more transactions you make while running a node, the higher the probability you are selected as a validator node and thus receive compensation. And so network activity drives token value, it might not sound like a big deal but utilizing a PoI consensus algorithm this way is actually very unique in today’s market. LTO even dared people to come up with projects which create value this way and promised 5,000 LTO tokens in return. While PoI creates network value, the leased part makes it possible to connect token holders with end-users.

“From a company’s perspective, this makes sure that they can run the product without actually having to buy or own tokens. They can simply spin off a node and attract token holders who want to lease their tokens, improving the model from passive stakers into useful network participants.” (LTO network, token economy, p.8)

Now this is beautiful for a very simple reason. Companies that are not 100% familiar with blockchain or token markets do not need to concern themselves with acquiring tokens. This removes all the frictions, entry requirements and/or hassle for companies that want to make use of blockchain networks like that of LTO. The main purpose is to make it as easy as possible for them.

Clients of LTO (like Heineken or Deloitte) do not need to actually buy tokens from the market to utilize LTO’s chain. The only thing they need to do is set up a node on the mainnet, those with LTO tokens can then lease out their tokens to Deloitte for example. This way Deloitte does not need LTO tokens but they do use LTO tokens. Of course if clients know how to buy tokens and are able to do so themselves, they are very free to do it. Perhaps their integrators can even buy it for them? In any case, the LTO token is used at all times — whether companies purchased or leased them.

Whether tokens are leased or (in)directly bought — the higher the usage of LTO’s platform, the less tokens are circulating on exchanges for speculative purposes.

Summarized, LTO came up with a way to create value for clients while transposing this into a token. Thus solving both the frictions companies have in acquiring tokens and incentivizing real network usage. There is not a single blockchain project out there which effectively make this possible. The critical reader here might however ponder whether the network will be decentralized enough to deter any 51%-attacks and for those I duly advise them to read on to LTO’s article on defeating centralization.

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Disclosure: Steven currently holds LTO tokens and was given a small compensation by LTO for the work in this article.

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