Utility tokens: to convict or to acquit?
I mentioned in my previous blog post, that many utility tokens are security tokens in their essence, while they are emitted as utilities simply for being able to avoid strict legal regulation.
However, there are several cases — you can count them on the fingers of one hand — when the utility tokens are actually needed. This is what my post is all about.
First: the “own” blockchains
Utility tokens are needed when you are developing some kind of a decentralized platform that requires an instrument to protect against wasting of resources and to motivate the maintenance of infrastructure — it basically means that you are developing your own blockchain. I will explain in more detail: blockchain is a “distributed database” that does not belong to any particular person or organisation. In order for the blockchain to exist, someone needs to keep that database on their computers and allow others to log in and use it. You also need to synchronize it regularly with other network participants — to receive latest state. This has its own costs. Disk space. Internet traffic. CPU processing time. Electric power. Purchase of equipment, etc. These thousands of computers distributed all over the world constitute the infrastructure that requires the support of such kind. And the owners of these computers need to be motivated to permit the use of their computers and internet resources.
For instance, the creators of the Ethereum network had the vision that they needed “smarter” smart contracts compared to those of the bitcoin. Naturally, the use the bitcoin’s blockchain for them was not an option — they had to create their own blockchain and their tokens — ethers.
The developers of EOS have pointed out that the Eutherum network has an insufficient transaction volume and speed and overly high transaction costs. In addition, people often lose money due to fraud or simply lose the “keys” to their wallets. Consequently, they proposed a conceptually different technological solution for blockchain to look like: it could be faster and have free transactions with other types of accounts (people who lost their private keys would have the opportunity to recover them). The price to pay for this — more centralized network.
Cardano project (just like several others) raised the issue that mining is bad because computers consume a lot of power and thus harms the environment. Instead of the usual PoW (proof of work) consensus algorithm, they proposed Oroboros (version of proof of stake algorithm). In other words, it introduced the principle that the new blockchain block is confirmed not by the use of complicated mathematical calculations consuming enormous amounts of electricity, but simply by “voting” using tokens. So, it basically is doing what the mining is doing, but not by using electricity, but rather the utility tokens.
Second: specialized token solutions
There are situations where tokens require certain specific features that the Ethereum network does not provide by default.
As an example let’s take NOIA Network, startup which is developing a decentralized CDN (Content Delivery Network) platform. CDN is a very popular service (especially for hosting video and other static content), since it allows you to post content for your visitors in no time. However, this is still a rather costly service and is not able to accelerate the content download for all the users, as there are no CDN servers in their region.
There are a lot of people around the world who are not using the available capabilities of their computers. They could sell these resources and earn money from them. How to pay for this service? Bitcoin or ether are too slow and too expensive. This can be solved using payment channels or Lightning Network (solutions which allows cheap and fast off-chain payments) but there is one more question. How much such service should cost and how to protect users from huge volatility of crypto? Utility tokens, with extended functionality to stabilize it’s value, may be an answer for that.
It’s almost impossible to create such decentralized solution — with embedded decentralized monetary incentive to run CDN nodes — without using crypto currencies. And specialized token may help to make such network even better.
Third: games and loyalty
Utility tokens are useful when collections of some points or coins already exist in a current product. Video games is a great example of this.
For example, people play StarCraft and accumulate a lot of StarCraft gold in the game. There is even trading in player accounts with large amounts of such gold because there are “lazy” players who want everything “right here and right now” (for example, to buy a powerful weapon) instead of having to spend long hours playing and collecting all that “gold” of the game. When you have some kind of tokens in your game, there is a logic to do this in a blockchain. Then the players will be free to trade with each other, for example, to sell only a part of the gold rather than the entire player account.
Another possibility is for loyalty programs (where points are collected). Considering that the utility tokens are like certain kind of points on a particular platform, the tokens that are exchanged into something. Let’s have a look at that: I have some cinema loyalty points and my wife has some — we cannot go to the cinema for free one by one, but we could do that if we would add the points up in the blockchain. Of course, the question is whether it is not overly expensive to spend such kind of “money” in the blockchain. On the other hand, potential centralization of EOS should not be an obstacle and a lot of such solutions could be taken to the blockchain with the help of free transactions.
Fourth — a specific value
Another case is when the token stands for something specific. What is this “specific” thing? Some examples of this specific thing are time, fuel, or megabytes… You are storing my files and I am using tokens to pay to you for that. One megabyte equals one token. The price is “tied” to the token. There is no such thing that every token is ten megabytes today and fifteen tomorrow, and so on. No way. One token is one megabyte.
Another example is the rights to use some service or asset. E.g there are companies that have released ICO to build server facilities near a cheap source of electricity (for example, hydroelectric power plants). They give token holders right to use, sell or rent electric power at especially low price. 1 token is equal 1 watt of electric power.
These four cases essentially cover the entire field where the utility tokens are useful and sometimes necessary.
Utility tokens: to convict
I would advise against using utility tokens where their only function is to receive the money. You would be better using the euros, dollars or bitcoins for that purpose.
Let’s look at an example of a project where a monthly fee is charged for an account — creating a particular token for that would seem very strange, because then you do not even know how much that service actually costs.
By creating their own tokens, e-shops are only limiting their customer base. Just imagine what would happen if Amazon accepted only some kind of “Amazon Coins”?…
In my opinion, certain cryptocurrency exchanges are also making a mistake (or doing scam) by introducing their own tokens to serve as a transaction fee. It would be best for them to charge a certain percentage in the currency being exchanged (for example, if bitcoins are exchanged to dollars, then a certain amount in dollars; if ethers are exchanged to bitcoins — some bitcoins then, etc.). They basically plague a young and not yet formed “bubble” market.
For all these cases, a token was created solely to attract relatively cheap and fast money and ICO investors, and the tokenization does not bring any real benefits to the business.
N.B. Token — for being kind
The blockchain technology is still very young, so there’s plenty of room for innovation.
Have you ever thought of a token that…. could not be sold/transfered?..
Charity and support funds could issue tokens of “kindness” that would stand as evidence (blockchain entry) of you being a donor, which would be impossible to falsify. For example, having donated 1000 euros, you are awarded a “golden” token of “kindness”, and having donated 100 — a “silver” one, and so on.
But this is the beginning of a new topic of our crypto-identity.
I’m software engineer, blockchain specialist and martial arts instructor. You can buy my time at JaroCoin.com and blockchain audit and development services at Blockvis.
