Utility Token Projects: Operating in the Land of Tokenomics Agencies and Market Making

August 12th, 2018
San Francisco, CA

It has been widely accepted in the current blockchain ecosystem that “token velocity” (a spin-off of the term “velocity of money”) is correlated to the price of a token. Because of this, current teams in blockchain hire teams of PhD’s to help them design models of “tokenomics” to include in their whitepapers. Many hold the opinion that strong tokenomics is the foundation of any successful token sale and many hours are spent designing incentives for users to keep their tokens within the token economy or “platform” of the project. The goal is often to incentivize users to hold or “stake” the token to earn more tokens instead of cashing out. Tokenomics agencies and consultants have gained material mindshare as projects seek the magic formula to driving token demand.

What happens after the token sale is a testament to many projects’ skepticism that the tokenomics will be able to sustain the price of their token. Many projects will spend millions of dollars manipulating the price of their tokens after it hits an exchange in order to create the illusion that the token has positive momentum and will prove to be a good investment to tokenholders. It is almost as if hitting these vanity metrics of ROI post-ICO will create a self-fulfilling pattern of success that proves the “tokenomics” of the platform actually work, despite the price action being driven primarily by market manipulation.

With the rise of the security tokens, it seems that the price of security tokens will have a more fundamental nature due to the fact that the value of these tokens are dependent on some underlying asset.

If this is the case, will security token offerings forego the heavy emphasis on tokenomic design? Will security token offerings allow more time for these projects to spend time on what matters, which is increasing the value of the underlying asset?

One benefit of conducting a security token offering may be that once security tokens hit exchanges, companies may rely less on traditional “market making” price manipulation techniques that they would have otherwise spent millions of dollars on. Instead, they may adopt a more focused approach on, again, building a strong business with cash flows that will warrant a higher valuation in the future.

What are your thoughts? Do security token offerings help eliminate some of the vanity metrics that initial coin offerings like to emphasize? Please let me know in the comments below.

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Disclaimer: These opinions are solely my own and do not represent the opinions of Sharespost or any companies that I may advise or invest in.

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Thank you kind reader for taking the time to read through my blog! If we haven’t met yet, it’s an honor to make your acquaintance. My name is John Wu and I am currently CEO of Sharespost’s Digital Assets Group. My primary aim is to bridge the gap between professional “institution-grade” asset management and cryptocurrency/blockchain investing. If you’d like to connect, please drop me a line on LinkedIn here.