Keys to the kingdom: custom tokens for blockchain resilience
Whenever we compare the current state of ICO to the tulip mania, we are missing a crucial point. Tulips were a store of speculative value with no productive use. Crypto-tokens — at least the properly designed ones — are different. They offer an inherent utility tied to the blockchain network itself, just like API keys provide valuable access to applications.
Tokens provide a liquidity premium, reach out to a global diverse community of investors, and slash transaction costs. Custom token and protocol development is a step further. Its impact on business value and performance may be less obvious but is just as powerful in the long run.
Incentive and control
A private token is both a control mechanism and an effective indicator of performance. At the start it allows to bootstrap the idea and incentivize early adoption which is vital for the network effects to occur: every new user not only adds value to the network, but also increases the value of ownership stake for the token holders.
Source: Blockchain Tokens and the dawn of the Decentralized Business Model
The value of a custom token is closely tied to the particular platform. It is less affected by external factors such as speculation or uncontrollable inflation. The company’s token flow model becomes more sustainable if there are no third parties taking arbitrary decisions. Besides, as the value of a company token is decoupled from other crypto or fiat currencies, its dynamics are a relatively accurate indicator of the underlying blockchain network value. As a result, the token is both an instrument for the company to manage the ecosystem and a valid source of price signals for its investors and users.
Future cooldown
More governments are attempting to tame cryptofinance. Just like bloated software has a wider surface of attack, generic and widespread tokens have a vast “surface of regulation” as their large range of use cases has a higher chance of crossing legal borders (as in the case of tokens resembling securities). Many regulators have shown a more lenient attitude toward specific tokens that are inherently useful for particular services.
Ultimately token sales may face tougher regulations such as licensing requirements, geographic restrictions, or limited access for professional investors only. Valuations may be overheated now amidst the massive ICO frenzy, but these high expectations will attract more early adopters who will, in turn, unleash stronger network effects. While the market is still unrestrained and strong, it is a great opportunity for companies to launch their own tokens as minor cryptocurrency issuers will likely be spared by the regulators.
Building bridges
Smart contract functionality is constantly evolving, and promising technologies for blockchain interoperability are emerging. This could lead to fewer “Swiss Army knife” tokens employed in a wider range of use cases across multiple blockchains. However, these technologies are still too raw to offset the benefits of custom tokens and blockchains. Besides, as interoperability is implemented at the protocol level, developers relying on tailor-made solutions will have more flexibility and control if they ever decide to adapt or create a mechanism for communication with other blockchains on their own terms.
Hedging the bets
Most of the value produced by the internet innovation has been captured at the application level: application and service creators made fortunes while the protocols they relied on subsisted on enthusiasm or government funding. This “thin protocol, fat applications” model doesn’t apply to blockchain. In contrast, blockchain platform value is derived from the protocol itself. It is still unclear whether competitive innovation will lead to a “fat protocol, thin applications” model, or whether forking and specialization will result in a stack of multiple “thin protocols”. However, in both cases developing a custom token or protocol offers a competitive edge.
On one hand, creating and supporting a custom token ecosystem provides a chance to find a niche if the future of blockchain is specialized. On the other hand, early innovation can help gain momentum for the possible consolidation around “fat” protocols. The internet evolution followed a similar “winner-takes-it-all” scheme a decade ago. If blockchain platforms ever find themselves in a race towards an oligopolistic market, they’d better prepare for it now.
Raising capital has never been easier. Taking shortcuts and adopting off-the-peg solutions may be easy now, but when the boom is over, thousands of budding companies will have to prove their worth in the long run. Forging your own blockchain and developing a new token is one of the ways to get ahead now. Down the road it may turn into a means of survival.
