We are drowning in Utility Coins (and why its a problem)

Glub Glub

Lets start with a silly analogy:

My friends and I want to go to the city for the weekend and have ourselves a grand ol’ time spending our money to de-stress from a long week of work.

First we’ll have to take the subway there, so I’ll have to convert some of my dollars into the subway token in order to use the transport system and get to where we need.

Once we make it to the city we will probably be hungry and will want to go to McDonalds. Except McDonalds also has its own currency now. Again, I’ll have to convert some of my dollars into the brand new McChickenFriedDicks token so I can buy my lunch and maybe get a 5% discount for using their currency.

Then, we might want to go shopping so we decide to head towards the Nike store. But again, Nike has decided to create its own native currency so if we want to purchase anything there, we will have to switch some of our dollars into the JustBuyIt token in order to have access to any of the merchandise.

Finally, after a long day of walking around, we agree we want to go see the new SuperPoop film by Zack Snyder that just came out at our local theater. But all we have is an AMC and AMC also came up with this brilliant idea to use its own in house tokenized currency. If we want to see SuperPoop, it looks like we will have to transfer some of our USD into the NotSoCheapPopcorn token so we can watch their movies.

Ah shit, I just realized I don’t have any more USD on me but I still have some of my money I didn’t use in the Nike store so I’ll transfer that back into USD through a specialized exchange and then change it again into NotSoCheapPopcorn. Thankfully the fees aren’t too high today so I can still afford the movie. Phew.

Now that I think about it, it would probably be better if I leave some of my money in the AMC ecosystem because my purchasing power will hopefully let me choose what will be shown next weekend when we come back. I also need to pray that none of those companies go bankrupt as their value isn’t dependent on the overall value of our country’s economy. This makes them much riskier assets to hold as their tokens are tied only to their own independent valuation and have zero fallback. I should make sure that I pay attention to every single changes within these companies and their policies so I can predict if they will make any decisions that could potentially hurt their value in the long run. I’m sure AMC will be ok though, its not like a pandemic might happen or anything.

Also I need to make sure I don’t forget where all my money is and keep track of all this stuff because, man that’s a lot of different coins and its a lot of hassle for things that don’t really seem to be necessary and honestly that’s what tokenomics feels like within a decentralized blockchain ecosystem.

Ok so the analogy might be a little ridiculous but it honestly shows how the decentralized economy is shaping up to be in my eyes and I personally don’t see what the point of it is? I feel like we need to have a discussion about the valuation of tokenomics. We seem to be forgetting why and when tokens are necessary within an ecosystem as opposed to tokens whose value is purely artificial.

The current state of things:

It seems that the only real use-case for 90% of ERC-20 tokens and any other dapp “utility” tokens on a decentralized platform is providing financial security to the Dev team behind whatever dapp they are creating.

1. Team creates dapp
2. Team puts out ICO for dapp in order to gauge interest. Team gives coin unnecessary and artificial utility to fuel demand for said coin.
3. Team makes a bunch of money from value increase of the Token because people buy it and think it will go up in value because of airdrops, bounties and investment value.
4. Team is incentivized to actually create their product (hopefully) and cashes out on their token holdings in USD.
5. Product comes out and doesn’t use the token because it doesn’t want to alienate potential users who don’t want to buy the token and prioritizes ease of use. If the product forces artificial use of the token then it is not a good product.
6. Value of Token slowly (or rapidly) drops. First Token holders can take profits if they are smart, end of the line holders get screwed out of their money.
7. Is this a pyramid scheme???
8. Rinse and Repeat

Remember why we needed utility tokens in the first place?

In order to understand the grounded value of a utility token, it is necessary to distinguish the difference between the organic incentive to buy a coin and the artificial incentive. If the incentive is organic, then the existence of the coin is absolutely necessary for the network to survive. If it is artificial then the network will do just fine without it.

The first, the very best, and arguably the only use case for a utility token to exist within a distributed ecosystem is as a reward system to help secure the network. Nothing more, nothing less.

If the system rewards you through its token distribution protocol it is because you are actively helping secure the network in some way and the network recognizes you as a positive effect; aka mining in a POW blockchain or staking through a POS blockchain. If you act maliciously then the system should hopefully kick you out of the rewards system.

The idea is the same as the US Dollar. Although the network is distributed in this case, both monetary values of a centralized currency and a distributed currency rely on the belief and the incentive to believe that the network operates as it should and will continue to do so in the long run because it is secure and it is reliable.

Therefore, the fundamental idea behind a token is to provide an incentive for users (more specifically node validators) to create security. The more secure a decentralized network is, the higher its potential value can be. The value of a cryptocurrency is always inherently tied to the security and the decentralized aspects of its network. But, if the token does not require you to provide security on its network, if the network can operate firmly without the existence of the token, then the value of that token is useless in the long run and risks dropping to zero.

ICOs are largely unregulated by the government and are not overseen by institutions such as the SEC. This means the structure of the coin being offered in an ICO is very…liberal. So before you go all in on shitcoin #42069, ask yourself this:

1. Can I earn the token by providing necessary services and security to the network?
2. Does the application/network behind the token depend on me (or someone like me) to provide security and other necessary services to the network?

If the answer to these questions is no then the network has no reason for its coin besides some artificially pegged value and the people behind it just want your money. If that’s the case, I’m not saying you shouldn’t invest in it. I am just saying be aware of the risks.

I personally think ICOs suck. They are creating an oversaturated environment filled with needless coins, most of which will crash in the long run and hurt a lot of people in the process. These people might become alienated with the predatory side of the space and walk away from the crypto movement. To me, ICOs seem like a setback, not a way forward. I think we should find another way to help invest in projects we like without the unnecessary addition of yet another token in a space that already has thousands . This is of course my opinion.

As always, DYOR.