What Chuck E. Cheese Can Teach Us about Tokenomics
Utility is the Bedrock
(Chuck E. Cheese is an American chain pizza restaurant and family entertainment center that has its own tokens for games and amusements.)
The short answer is that a tokenomics can only work as long as it takes the provision of user utility seriously. But how can it do that?
There are two meanings to “token” that we need to understand in order to get the most out of a cryptocurrency tokenomics system. This is because such systems rely on these two meanings in order to keep their native ecosystem alive. And by implication, less successful ecosystems either don’t do this; or they’re just not aware of how important it is to do so.
to·ken
/ˈtōk(ə)n/
noun
1. An item serving as a visible or tangible representation of a conventional or standard unit of value.
2. An item that can be exchanged for goods or services
A Matter of Convention & Chuck E. Cheese
Do you remember the days of the arcade token? I remember going hastily to the dollar bill exchange machine to insert my singles to get the equivalent of 4 quarters in tokens to play arcade games like Galaxian, Mappy, or Frontline. If I was lucky, I’d have a five-dollar bill — in which case, you’d sometimes get a better exchange rate. The more you put in, the more you get, like an additional two tokens per each $5.
Taking into consideration our two definitions:
- the arcade token is an item that is a physical representation of a quarter; and
- it is an item that I can use in order to exchange for entertainment.
What’s interesting about this system of representation, exchange, and use is that it is more or less built on convention — or agreement between parties (the token issuer and the token user) that a token canbe exchanged and redeemed for services.
The general idea of a token is that it is physical representation of some standard unit of value, typically a fiat currency, that provides utility in roughly the same value denomination. There are two ways in which a token’s convertibility works. We’ll call the first one “singular conversion” and the second “reciprocal conversion”.
Singular Conversion
A token represents some standard unit of value without being convertible back to that standard unit of value. E.g. You exchange $5 for 20 tokens. You’re stuck with those tokens and so have to use them to “cash out” on their value.
Reciprocal Conversion
While being convertible for the standard unit of value, the token cannot be converted for a profit above the exchange rate. E.g. You have 20 tokens and can convert them back to 20 quarters (or $5), and not more.
Both instances presume that the token provides some real utility. Otherwise, why would you exchange fiat currency for tokens in the first place? In the case of an arcade, that utility is entertainment. Another example might be laundromats or self-washing car washes, where tokens can be used to wash clothes or cars.
This presumption of utility is important. It’s the incentive that makes the system work and keeps it working. As long as utility is needed and provided, people will exchange fiat for tokens. And if the business is savvy, it might offer further incentives for exchange — e.g. special deals on a better exchange rate when more fiat is converted, or discounted fees for a limited period of time.
How Tokens Benefit Businesses
There are at least four benefits for business that relate to the conventional token. I’ll note how these benefits change when tokens are of the cryptocurrency kind.
Repeat Custom
Businesses can offer a straight exchange rate but then offer services that use unsymmetrical/unparallel values so that customers can never “zero” their token holding complete and will always have some leftovers. E.g. a wash is equal to 5 tokens or $1.25, which always leaves 3 tokens or $0.75 remaining.
Lock Value in the Ecosystem
Repeat custom means that value is more likely to be locked into the system, especially if tokens are only singularly convertible. Customers bring money in, and they can only take out utility in terms of entertainment or services. If the system uses a reciprocal conversion, then the business needs to ensure that customers will want to come back.
Crypto projects need to take measures to prevent “dumping” scenarios. It can do this through vesting, or locking, schedules. Or, it can control its emissions/minting of tokens to ensure price of the token remains stable and relatively close to a floor price.
Treasury Cushion
When value is locked into the system, it provides the business with a little more flexibility if and when the treasury needs to be spent. This is because the amount of value that gets locked (and cannot leave the system by being converted back to fiat so easily, if at all) means that the business will have a bit more in its coffers than it would have otherwise.
A nuance is added for crypto projects, where the value of the token might appreciate and can be exchange for fiat for a slight gain. This can have contradictory consequences, however, if a large sale of the token causes its price to plummet. A better strategy is to provide the token at a liquidity pool to profit from transaction fees.
Theft Protection
In the conventional instances of the arcade and the car wash, tokens provide a disincentive to theft. Theft is much more lucrative in instances where the items stolen do not need to be converted to gain cash. Tokens are essentially worthless in this instance.
A nuance is added for crypto projects. Theft (or a hack) is lucrative if the tokens can be easily converted to fiat and untraceable.
How Tokens Benefit Users
To be sure, users lose out on the convertibility issue. But ideally, they gain in terms of the services provided by using the token. So let’s unpack this a bit more.
The barrier to converting fiat currency to tokens involves a bit of incentivization above and beyond the utility a business provides. So favorable exchange rates (“Get an extra token for every $5 you spend!”) or rewards initiatives can help keep users coming back and new users coming in (i.e. network effect).
Because tokens help to lock value in the system, this has knock-on effects for the provision of other services that might be offered. In other words, the business gaining in terms of value can translate into value for the users — whether this is actually a financial return to the users’ pockets or a discount on future use.
How this Matters for Cryptocurrency Projects
The answer is straightforward :
Crypto projects have to take into account how tokens function as a token of utility if they are going to work.
If a cryptocurrency project does not take utility seriously and jumps straight into trying to make its token desirable for purely speculative reasons (like a moonshot), that desire will only create short-lived value. It won’t lock value into the system through repeat custom; nor will it be able to bring in new users. Any benefit of early adoption will only be for speculative gain in terms of a pump and dump, or more nefariously, in instances of a rug pull.
I’m a writer and researcher for The Art of the Bubble / 1.2 Labs.
Though this article is credited to me, it is the product of collaboration in thought and work between myself and Sebastian Purcell, PhD.
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