A case for the utility token
Let’s start by looking at the past. How did the ICO begin?
In 2012, a man called J.R Willet had an idea. To make a new protocol layer on top of Bitcoin, change some features and secure funding from people all over the world who are interested in owning a part of that protocol. A year later, he ran the first ICO — Mastercoin. The project which is now called Omni raised 5,000 BTC, got a lot of people talking and was just the beginning of something bigger than anyone had imagined.
Fast forward a couple of years to 2017 and ICOs were raising billions. But somewhere in all that enthusiasm and hype, both projects and investors forgot about the actual utility of the token and just followed the quick money. Not only were most of these companies selling useless tokens without any value, but the whole industry was brimming with scammers, hacks and bad UI. All of that eventually caused the bubble to burst and many people to lose their interest and hard-earned cash.
Where are we now?
Let’s take a look at the current landscape within the blockchain industry. Unlike late 2017 when everyone was raking in tens millions for a simple whitepaper, ICOs today are finding it harder and harder to get the funding they need. Crowdsales are becoming a rarity — both regulatory pressures (looking at you, SEC) and the lack of general interest are causing almost all fundraisers to go private. Many of the companies who quickly grew around this hectic industry are now failing, having layoffs and calling it quits.
It looks like there’s a new trend brewing — everyone is speaking about STOs like the next big thing. I get it, truly owning equity in a company makes investors more confident and secure. I too believe that STOs deserve to take over the current outdated share ownership system. Security tokens are a much needed technological upgrade and have a lot of quirks and features that make them far superior. Everyone on Wall Street is getting ready, palms are sweaty:
https://www.youtube.com/watch?v=3dl05ISSGtY
And at the end of the day, this is the same old spaghetti. I’m a fan of this tech, I really am. But if I had to put it simply — security tokens are just an incremental upgrade of the stock.
By their very nature and just like IPOs, STOs will require a long legal and regulatory process which makes them so expensive that they’ll be out of reach for the majority of small companies. How is this so exciting? While looking at the shiny new security token, I believe a lot of people will miss out on the gem that is the utility token.
By their nature, utility tokens … have a utility. They are bought or earned and can be used for whatever the company creating it imagined. They shouldn’t be always considered an investment and obviously do not represent equity in the company. It’s hard to list all the different ways they could potentially work, but let’s look at a two industry examples as a start:
- Sia Coin — decentralized cloud storage option that competes with centralized legacy competitors such as DropBox, Amazon, Apple, and Microsoft. Sia lets users host or access encrypted storage through the platform, and all contracts, storage proofs, and transactions are verifiable using the blockchain’s public ledger. Sia takes cloud storage out of the hands of monolithic providers and puts it back into the hands of individuals. Doing so provides a peer-to-peer storage ecosystem that allows anyone to rent out or take advantage of spare hard drive space.
- Steem — an open source blockchain popularized by the application Steemit. Steemit is a blogging platform, where people earn rewards in form of cryptocurrency when their articles get upvoted by other users. You may think of Steem the blockchain as a power-plant and Steemit as a machine using the electricity. But the same electricity can be used to run a variety of different content rewarding platforms, not just Steemit.
I would urge policy makers to recognize that just like the examples above, not everything is a security. Utility tokens are a new technology that enables economic coordination like we’ve never seen before and shouldn’t be always crammed into such an old framework. When we’re applying existing legal and financial constructs to this amazing new technology, it almost feels like we’re keeping it caged.
There is a great deal of creative innovation that can happen in the utility token space. I’m looking forward to seeing well-designed tokenomics models where different elements are combined to create a viable and interesting economic system. Things like token velocity, staking of tokens to encourage trust, token rewards to encourage initial users, token buy-backs based on profits to maintain sufficient future tokens for rewards, etc., etc.
It is sad to see that the pressure from the SEC is causing projects where innovative utility tokens would make sense to shift to an STO model. Rather, they should have retained their utility token design and just issued the utility token as a security under reg D, etc.
What will the future hold for the utility token? If I knew, I’d not be spending time writing this. It might just go away like the ICO craze, but we shouldn’t give up on it yet.
