Token Utility: Make it Something People Want

In a prior post, we outlined how native tokens can be used to reward specific community behaviors and become a project’s secret weapon to achieve growth and loyalty targets.

For token rewards to be an effective incentive mechanism however, the token should represent something people truly value. Just because a community member can earn a project’s token doesn’t mean there is a reason they want to have it. And if there is no value in having the token, then it won’t deliver on a project’s goals.

“Token utility” is the value someone gets by having the token.

Utility has become a common term in the Web3 space that means everything and nothing. For this article, we are going to be very specific and break down token utility into 5 key categories:

Access: Benefits only available to those with the token

NFTs and tokens can be used as tools for creating rewards, benefit programs and membership tiers. However, NFTs are often overly restrictive due to their cost of entry (floor price) and exclusivity (e.g. a maximum of 10,000 individuals are able to own a Bored Ape).

Tokens enable individuals to join the community at any price point since they are divisible by design. This provides a lower barrier to entry, allowing projects to scale quickly and serve a variety of customer segments.

For instance, with the introduction of ApeCoin, the Yuga Labs community grew to include more than 90,000 individuals (with the potential to scale to millions). Someone can buy $1s worth or $100k worth of ApeCoin if desired. Also, by pairing NFTs with tokens, projects have the option to create ‘tiers’ of access that can both maintain their exclusivity and expand their audience.

For example, take Gary Vee’s FlyFish Club. It will be an exclusive restaurant only accessible to the 3,035 FlyFish NFT holders. Given this small group, there may be nights with open reservation times.

What if individuals that are part of the broader VeeFriends community could be rewarded with a VeeFriends token when they take certain actions, like attending an event, referring a friend, or buying a VeeFriends toy at Macy’s? FlyFish Club could create a token-gated auction site where individuals with the VeeFriends token could bid on passes to visit the restaurant for dates that have unfilled reservations. This would maintain the restaurant’s exclusivity while also expanding its reach to a larger group, who may go on to purchase a FlyFish NFT based on their experience.

Payments: Goods and services that can be purchased with the token

No surprises here. Tokens function well as a medium of exchange due to their inherent characteristics of interchangeability and divisibility.

There are many examples of how this works, from Yuga Labs’ sale of Otherdeeds in ApeCoin, to the DeGod’s Y00ts sale in $DUST.

Unfortunately, what these examples highlight is that when there are inconsistent opportunities to purchase items with a brand’s token, it results in the token price skyrocketing before a large sale and plummeting afterwards.

This dynamic negatively impacts both buyers and sellers. Buyers have to pay more for the tokens, and sellers receive tokens that are severely devalued immediately following the sale.

So what is the learning here? Should projects avoid using their token as a payment mechanism? Not exactly. The key is there should be a functioning and ongoing token economy to prevent massive spikes in demand that result in extreme price volatility.

Building a healthy token economy is easier said than done, however we are seeing some incremental progress in this regard, from ApeCoin being accepted at Gucci, to ongoing raffles and auctions being listed in $DUST.

Governance: Voting with the token

Tokens are commonly used for voting in Web3 communities. There are two crucial factors to the success of tokenized governance as a utility:

1. Making governance fun (vs. a responsibility)
2. Identifying the best mechanism for governance

If voting is to be a utility (i.e. something people value), it needs to be fun and people need to care about what is being voted on. There is a small number of individuals who want to vote on the process for liquidation event handling within a DeFi protocol.

There is likely a larger number of people who want to vote on whether Trader Joes brings back a seasonal product that has a cult following. Does this need to be a token? No, but by having it be a token, a brand unlocks additional use cases (see our rewards post and other utilities listed in this article).

Additionally, since tokens can be given out based on someone’s level of engagement, token voting can allow brands to understand and weight an individual’s vote based on their importance within the ecosystem (e.g. total spend, number of store visits, etc).

That gets us to #2 — the best mechanism for governance. There are differing opinions on this point. NFTs can be and are used for voting within many communities (e.g. Nouns with NounsDAO, Doodles with DoodleBank). For small communities with a single NFT collection, NFTs serve this purpose well.

For brands that expand to include multiple NFT collections at different price points, and whose goal is to significantly grow their community over time, using NFTs as the voting mechanism becomes overly complex. For example:

• What is the voting power of one NFT to another, such as a Moonbird vs. a Mythic? (apparently more, but it’s still being defined)
• For a new NFT collection offered in the future, how is that voting power determined? Is it defined at the outset and based on the mint price, or is it defined after the drop based on the trading price?
• How does an NFT’s voting power change over time (or not) to reflect the community’s relative weighting of one collection’s importance to another?
• What about collectors who are more active contributors to the community — should they have greater voting power? How are their contributions recognized? Are they given additional NFTs as rewards to reflect this?
• What about the most loyal community members? How can that loyalty be recognized in voting?

While all of the above could be solved with NFTs, it’s like using an axe to pound a nail into the wall. You can do it, but there may be a better tool for the job.

Tokens, on the other hand, present a more flexible approach to voting within a diverse and dynamic ecosystem. Using tokens, projects can easily layer on multiple strategies (e.g. airdrops, staking, grants, loyalty) that collectively sum up to represent an individual’s contributions and importance in the community and thereby determine their voting power.

Identity: Token balances signifying reputation or status within a community (for illiquid tokens)

A blue-chip NFT is the ultimate flex. Societally, we’ve always had ways to communicate financial status. In ancient times it was purple clothing. More recently, it’s been photos of expensive cars, vacation homes, or designer handbags on social media. For many within Web3, this signaling is done via an octagonal profile pic on Twitter.

Project’s don’t necessarily need another tool to convey status or belonging, but tokens do present a way to recognize an individual’s contributions to the community (vs. their financial means).

For instance, when a project’s token can only be earned (not bought or sold), then someone’s token balance can represent their engagement and value to a community, regardless of their wealth. Furthemore, illiquid tokens can offer many of the same functionality of freely tradable, liquid tokens while greatly reducing risk in the current regulatory environment.

Financial: Monetary value of the token (for liquid tokens)

In instances where a token is liquid (or freely tradable and able to be bought and sold on exchanges), there is a market price for a token. Should a token holder wish to exit a community, they can sell their tokens. This may sound simple and straightforward, but the implications within a consumer brand context are massive.

Brands shouldn’t launch tokens with the expectation of price appreciation. However, the ability for an individual to truly own their loyalty to a brand, and therefore be able to decide if and when they want to sell that accrued loyalty (because it is actually theirs) is extremely valuable and something absent in existing Web2 loyalty programs.

How many “points” do you have spread across various loyalty programs, from airlines to coffee shops? If you owned those points, you would be able to decide what to do with them, which includes being able to monetize them (vs. redeem them) if desired.

Take Delta’s SkyMiles program, for instance. Delta sets out rules for how to earn points, and when you do, you can then use them to pay for flights (sound familiar?).

But you can’t sell those points, which begs the question of whether they are yours to begin with. You are allowed to gift or transfer those points, but you’ll pay $0.01/point. To transfer 40,000 points (a common amount needed to pay for a flight), it will cost you $400, plus a $30 processing fee. You may as well just buy the person a ticket.

Where to go from here?

An enduring brand isn’t made up of just super-users. Those super-users are the heartbeat of a community, but the brand’s reach needs to extend beyond them.

For Web3 brands to scale, they need to provide community member onramps to those who have differing levels of financial, emotional and time commitments to give.

Museums provide a helpful IRL example. There will always be those who become patrons and members of a museum and play a key role in the museum’s growth and direction. However it is also important to enable others to visit the museum once a year and buy a trinket from the gift shop.

The spectrum of consumer engagement, from brand evangelists to those who pop in for a visit, collectively serve a purpose. This is more critical than ever as NFT royalties are being debated. NFT projects and other Web3 brands need to create sustainable and diverse sources of revenue to survive and thrive. Growing an audience beyond their super users is a key step in that evolution.

Even though token utility is at its infancy, the potential is apparent. However, there is a big elephant in the room — the fear of having the SEC come after you saying your project’s token is a security.

In future posts, we will go in depth on how brands can launch a token that solves for token rewards and utility, while greatly reducing regulatory risk.

In the meantime, make sure to stay connected with us on our Twitter for the latest updates!