Most Utility Tokens Will Be Worthless Soon

Except the few that understand crypto-economics

Petros Ring
Apr 18, 2018 · 3 min read

While this title is scary, it will sadly be the case for many utility tokens unless they change the way they’re structured to fit the new landscape that is coming.

“This is fine.”

All of this will be a slow progression but it’s going to happen because two new technologies are rapidly advancing this year: stable coins and atomic swaps. Let’s start by explaining these two concepts.

Stable Coins

Stable coins are coins with extremely minimal volatility, most try to peg themselves closely to already established sovereign currencies. The two best player’s in the market right now are Dai (makerdao.com) and TrueUSD (trueusd.com) with both attempting to peg themselves at a 1:1 ratio to the US dollar.

Atomic Swaps

Atomic swapping is the concept of converting one token to another token without dealing with the market. For instance, you would simply say I’d like to trade 10 <whatever coin> for the market value to get <a different coin>, you press a button, and then almost instantly you have your new <a different coin> in your wallet.

This is done by pulling from existing liquidity pools on exchanges. It simplifies the whole system for the user and can theoretically be done by smart contracts as well.

Now Let’s Combine Stable Coins + Atomic Swaps + Utility Tokens

Now instead of holding value in Ethereum or a certain token, non-speculative users will hold their money in stable coins. Then when they want to interact with a service they will atomic swap their coin into whatever token they need and pay for the service.

This will be great for regular users because they won’t have to worry about the constant volatility of the crypto markets and how that will impact their budget in using the dozens of dApps that are going live this year and in the future.

Let’s take Golem as an example. They just went live on the Ethereum Mainnet allowing users to process CGI rendering jobs through a network of processing computers, with the payments being made in their token. Instead of holding the Golem tokens, freelancers and companies wishing to use their service can hold money in a USD stable coin and convert it only at the time of payment for the service. Reducing any issues of volatility to zero.

Why is this going to destroy token value?

Utility tokens have an actual way to measure their fundamental value by using macroeconomic theory. If you want to read more in detail go read my other article. These concepts can be derived down into the formula below.

Market Cap = Value of Goods Transacted Per Day * Average Holding Period

So what happens when you don’t have users holding your coin and only entering it when they need to use your service?

Your market cap will slowly fall toward zero.

This is going to become a massive problem for tokens that are only used as a form of payment and don’t create any incentives for users to stake or hold onto tokens.

Crypto-Economics is a Big Deal

Crypto-economics isn’t just some fancy term that someone invented to sound like they know what they’re talking about. It’s a growing field of research that combines economic theories, game theory, and blockchain systems to incentivize users to act in certain ways.

Designing a token is tough enough already. As the technologies I’ve mentioned above take over you will start to see tokens that don’t have proper crypto-economic systems in place have their market cap slowly slip to zero.


About the Author: Petros is a Blockchain Engineer at a growing ICO launching company Block 16. We are a full service blockchain agency that does crypto-economics, network syndication, marketing services and blockchain development. If you would like to reach out to me send an email to petros@block16.io.

Block 16

A Crypto Venture Studio

185

185 claps
Petros Ring

Written by

Building a better world through smart contracts. Cofounder of Leet (exited to Unikrn). Currently Blockchain Engineer at Block 16.

Block 16

Block 16

A Crypto Venture Studio