Why does a hedge fund like Betoken need a custom ERC20 token?
We’re often asked why Betoken needs its own token. Are we just adding a completely unnecessary layer to our dApp that allows us to charge rent? Or do we just want an excuse to fill our pockets with ICO money?
Well of course not.
Issuing custom tokens has been usually met with disdain from the community, but we believe that such disdain is unfounded and even damaging to hard-working developers. Saying dApps shouldn’t use custom tokens because of greedy ICOs and unnecessary tokens is like saying we shouldn’t use the Internet because of the Twitter scam bots asking for Ether: we get where it’s coming from, but oh boy are you missing the bigger picture.
This is why we’re writing this post: to demonstrate that tokens are, in fact, an important and very useful tool for incentive designers, and genuine use cases exist for utility tokens. We will use our token, Kairo, as the main example.
The reason you want separate tokens for separate projects is so that it more easily fits the value being produced from these separate projects. The crypto-economic feedback loops necessary to sustain certain systems will only work if the value being produced is mapped to its own token.
Incentivizing a micro-economy
Kairo (KRO) is Betoken’s utility token. By carefully designing the way tokens are redistributed, we gave Kairo meaning: a user’s ability to make profitable investment decisions.
Here’s how: if you staked 100 Kairo as security deposit, and made 2 Ether of profits from a 10 Ether investment, you now have 120 Kairo. If you instead lost 2 Ether, you now have 80 Kairo.
Naturally, over time the people who have made more profits would have more Kairo, and those who made less would have less.
We then assigned Kairo another meaning: the amount of money that a user can invest on behalf of the Betoken fund. It’s easy to see what this implies: the people with the best performance can manage the most funds. Who wouldn’t want the best managers to handle their investments?
Every month, a part of the profits made in the previous month is distributed to Kairo holders, based on how much Kairo they own. The more good decisions you make, the more Kairo you have, the more income you get. This ensures that Betoken’s decision-making process is truly meritocratic, and incentivizes managers to become better and better. We call this system Incentivized Meritocracy.
Why not just replace Kairo with Ether?
One of the main complaints against custom tokens is “why not just use Ether?”, and we agree that many dApps include a custom token for no plausible reason than to profit from ICOs.
We think “why not Ether?” is a good rule of thumb for determining whether a dApp really needs its own token: imagine removing the token or replacing it with Ether, and try to redesign the dApp yourself. If you found that you reintroduced the token in the process, well, then the token is genuinely useful.
Let’s test it out with Kairo. Imagine if we removed Kairo from Betoken’s Incentivized Meritocracy, we would need some way of keeping track of each manager’s merit in investing, right? We would assign each manager some numerical value representing how good they are, and use that to determine how much funds they can manage. Wait…we just reinvented Kairo, didn’t we? Thus, you can see that Kairo is essential to Betoken’s normal operation.
(The Kairo we came up in the example isn’t necessarily transferable, and we agree non-transferable Kairo is a viable option, but making it transferable greatly simplifies the onboarding and offboarding process.)
To learn more about Betoken’s Incentivized Meritocracy, be sure to check out this post!
So to recap
Betoken uses a custom ERC20 token called Kairo to represent the investing merit of each manager. The more profits you make, the more Kairo you have, the more money you can manage. This is the core of Betoken’s Incentivized Meritocracy: by constantly redistributing Kairo based on the profit one makes for the fund, we can ensure that the best people manage the most money and get the most income. Kairo is essential to Betoken, because it cannot be removed or be replaced with Ether without completely crippling Betoken.
The usefulness of tokens can be seen in a lot of other projects as well. For instance, Curved Token Bonding is widely used in curation markets and token curated registries (TCRs) to instantly create “a liquid, low-barrier market for global games of curation & categorization” and improve their inclusiveness and effectiveness.
About Betoken
Betoken makes the best investments accessible to everyone in the form of a decentralized crypto hedge fund. Our open meritocratic system guarantees that your money is handled by the best people, and anyone can join us to get paid for their investment insights. Learn more at Betoken.fund & Medium. Follow Betoken on Twitter, Reddit, and Facebook, and join the official Betoken chat group on Telegram.
