Raising the Bar for a Utility Token
Somewhere along the line, circa 2017, regulators inadvertently pushed the term “utility token” (aka “not a security token”) into widespread use. It’s now a fait accompli — too late to change the name. This is too bad. It is misleading and harmful to token markets. It implies that tokens should be judged on how much utility they create.
Instead, they should be judged on how much new value the token enables through cooperation.
I propose calling that value Marginal Commons Value, or MCV.
Why inject the word commons? It neatly identifies the type of value being created. All blockchain-based decentralized projects operate as a commons. That commons starts out as a shared ledger and set of smart contracts; it then adds resources (identity, reputation, expertise, data, assets, etc.) from the participants themselves. Providing shared access to these resources is not enough: in the absence of a central authority, some kind of incentive mechanism must exist to align incentives and prevent a commons tragedy.
Simply put, the job of the project token is to generate MCV by incentivizing cooperation. It is not to “provide utility”. Lots of transactions can be useful without their token generating MCV.
Let’s explore that notion.
If I pay my doctor for a check-up in fiat, that’s useful to both of us. The vast majority of us believe in fiat’s future value and liquidity. This “store of value” (SoV) and “medium of exchange” (MoE) belief exists in what Yuval Harari calls our “shared imagination”, or “intersubjective”. This intersubjective is a type of commons, and it magically creates value out of worthless pieces of paper. As Harari pointed out in Sapiens, the invention of currency (of which fiat is a subset) generated loads of MCV. For him, it ranks up there with religion and language as major human cultural adaptations.
If, next time, I pay that same doctor with Bitcoin, the cryptocurrency gains a tiny amount of acceptance as a means of payment. Seeing that, others may raise their shared conviction that Bitcoin is a future store of value. As a result of the payment, I’ve added MCV to the Bitcoin SoV commons. Note that this is a specific type of value — a commons for storing wealth and making payments— created by a specific shared belief. Creating this kind of MCV was its founder’s intention.
Now let’s say instead, I pay the doctor with a dapp token. Let’s call it the “Doctor Token”. This dapp is a decentralized commons intended to improve healthcare access. The idea is that doctors can form an exclusive network to provide care, and patients can compensate them with a token for that service. Lots of dapp “labor marketplace” tokens have this design: users of labor pay suppliers of labor with a token.
Does the Doctor Token create MCV?
Not based on just those details. The reason is we can already use the fiat MoE commons as a platform to pay those doctors. Our new dapp token adds little if any MCV on top of it. The change in the behavior of doctors that join the commons is negligible. Very little new cooperation resulted. All that has happened is that the founders have launched a competing MoE commons to fiat, one that is bound to be inferior.
Note that the Doctor Token has plenty of “utility” in the sense that it is being exchanged for a useful good or service. This is why the term is so misleading. Both the project designers and the token markets may think they are creating value by transacting in it.
In reality, the patients and doctors will have very little incentive to hold the token as commons participants (rather than as speculators). The velocity of this token is likely to be exceedingly high, not because it lacks artificial velocity sinks, but because it creates no MCV in the first place. Making payments or creating stores of value is simply not the purpose of the vast majority of dapp commons. Putting velocity sinks — such as staking — into the design of their flawed tokens is like trying to prop up a Jenga tower.
The question a healthcare dapp team should ask themselves is, “how can our token incentivize cooperation and sharing in the commons — the source of MCV — in a way that fiat or other SoV commons cannot?
One way is for the commons to exist as an “open source” medical protocol network. Any doctor that accepts the commons tokens agrees to adhere to a set of shared, public medical protocols for continuous preventative care; and they also agree to stake a value of tokens up front. If they drop below a certain index of patient feedback with regards to protocol adherence, they lose their stake. Any patient in the commons also agrees to stake a certain minimum amount of tokens to compensate doctors, so that the practitioners have an assurance of payment (i.e. they access a known pool of revenue). They also agree to provide de-identified data into a pool for researchers to analyze. Further, any researcher that produces a new protocol, one that is voted onto the open source set, also earns a percentage of the token pool. In this particular case, the commons tokens does two things: 1) it enforces and governs the use of an open source care protocol; and 2) aligns the incentives of three types of commons participants (doctors, patients, researchers) in a way that results in preventative care not available to participants in the fiat commons. This is a commons that can operate without a central authority. That open source nature makes it easy for the network to scale and continue to innovate — i.e. it is an MCV “machine”.
There is a problem, though. The doctors, patients and researchers all have costs denominated in an SoV/MoE commons token (fiat). The production of MCV requires that the Doctors Token be converted to fiat to pay bills like rent, equipment leases, transportation, etc. In other words, a big part of the doctor commons MCV actually comes from outside that commons. Picture the value chain: it extends way into a place where fiat is used to enable cooperation. To say this forced exchange into fiat is a “velocity” problem is to get it backwards. Velocity is high because so much MCV comes from outside the commons; not because the commons lacks artificial velocity sinks to prevent the fiat from flowing out. One way or another, one stake or another, fiat will flow out, and the velocity will rise to its natural attractor.
That leads us to a premise. The MCV of a token depends on two things: 1) the MCV created by cooperation and sharing enabled within the commons; and 2) the percent of the value chain that actually resides in the commons.
That second part is a challenge for the valuation of a large number of dapps. Their MCV results from a long value chain, only the last few links of which involve intra-commons cooperation. Even if their network creates a significant amount of value, much of it will flow out of their respective tokens.
Here’s the thing: we should not care. By “we” I mean people who want to see commons arise as a new, and in many ways better, means of economic organization. A token’s initial value is only relevant to speculators and capital raisers, and not to whether the commons will succeed in creating new behaviors. Yes, up-front capital is necessary to make commons, but how much? Chances are, a lower perceived MCV may still be sufficient to fund what are actually open source projects. Perhaps these dapps would produce far few less billionaires than some of the early cryptocurrencies. Perhaps also, dapp team members will still make a return on their time that is more than worth it.
Also, those team members have the option of raising funds through a security token offering, which really has little to do with commons tokens as a token type. Security tokens represent a claim on project equity or revenue rather than a direct stake in MCV. If the project’s value is mostly captured by MCV, then the valuations of both will be closely related. However, it’s also possible that the project teams can design ways to make themselves useful as central authorities. This is not sacrilege. Participants may trust the team to carry out certain services, including ones that would normally reside in the fiat commons. Why not? We trust people and institutions all the time. The notion that only “trustless” dapps can solve problems is something anarchists dream about, but not commonists. Commonists just want to see more commons behavior, more cooperation and sharing, and not an absence of rules or institutions.
So, in the case where project teams can monetize their contributions to MCV’s as central authorities, the value of a project’s security token will be a function of MCV and the value captured by providing non-cooperative, traditional utility via the fiat commons. If the latter is too high relative to the former, and the team is seen as exploiting the commons, the participants can always vote with their feet (and competing projects can help them do that).
Blockchain has enormous potential to enable new commons. In so many areas of our economy and lives, cooperation is long overdue, and necessary to cure what ails our society. Commons tokens will enable and reflect a great deal of this value creation. They will succeed and flourish. They also need to be judged for what they are intended to do — generate MCV and not “utility” — as the standard for their evaluation.
 To be clear, a “currency” is a token that enables an SoV or MoE commons; a “utility token” enables commons cooperation (not utility) other than SoV or MoE. Both are subsets of the umbrella concept of a commons token.
 Does MCV require the existence of a network dynamic that produces emergent, self-reinforcing behavior? Perhaps. This is the subject of another post.