The State of Tokens 2019

During the ICO boom of 2017, projects were not incentivized to finish their proposed products. Instead, they’d create perpetual hype cycles based on their hypothetical future plans. This toxic environment led to ICO projects developing nothing nearly two years later, leaving us with the state of tokens today.

The formula for a successful ICO seemed simple enough: you take anything and tack a token onto the end of it and you were good for exponential gains. People bought tokens no matter the sustainability. But, projects that raised money are failing or abandoning their tokens original planned utility.

Mercury Protocol, Civic, and Iconomi reimagined their tokens. (Kudos to them for being adaptable in a swiftly evolving industry) abandoned crowdfunding altogether and their site now redirects to a 404 Page Not Found. Projects bought tokens back, discontinued theirs, converted it into equity or another security. Civic introduced a new white paper on its token’s updated usage.

These companies generally steered away from their payment tokens. They rather try to capture value more effectively. It’s much harder to pay with a token than with Bitcoin, Ethereum, Litecoin, Stellar, etc, placing payment tokens at an instant disadvantage.

The vast majority of tokens are not going to capture any meaningful value. Many token projects simply failed at mechanism design. They didn’t know how to capture a token’s value. And thanks to these pioneers, we know now what not to do.

There are four things a token can do.

The first is to be a payment token.

Users have little incentive to hold onto them. This presents a problem, as the game theoretics morph into a game of redeeming the payment tokens as fast as possible, theoretically for a good or service. Tokens though have a considerable amount of friction. People weren’t paying in Quantstamp, a protocol for securing smart contracts, for its auditing services. It was easier to pay ETH or USD – they’re liquid. Tokens are not.

Payment tokens might be the most popular type of token integrated into a token project. Most don’t effectively capture value. In addition to Ethereum, Bitcoin, Bitcoin Cash, Stellar, and Litecoin all claim payment functionality.

The second thing a token can do is provide a mechanism to vote.

So-called ‘governance’ tokens are often based on Ethereum. The governance of Ethereum will then affect the governance of these tokens. Most governance tokens, in large part due to their dependency on Ethereum, do not effectively capture value. They are meant to represent a vote.

The third type of token entails rewarding a user for a service they provide to the network.

Work tokens are perhaps the most easily recognizable cryptocurrency models. In this model, the user provides a service for the network for a reward. Ethereum and Bitcoin are examples work tokens or proof-of-work systems, in which a user provides electricity for bitcoin block rewards. With that said, Ethereum is migrating to a proof-of-stake model this coming week.

At the token level, this whole dynamic is abstracted. You’d have to value these networks more than you would Ethereum in order to be incentivized to work for them. Most people would support Bitcoin or Ethereum before they supported a token.

A network might give or pay in a work token or it might be used to lock a staking mechanism for a bond, etc, and earn from it. In the token universe, projects that described work tokens in their white papers have failed to deliver a network for which users can work. You can’t work for a network that is not in production.

The fourth type of token represents equity or an asset

There is of course the popular security token, which is an investment contract and represents a real world asset. Projects like Polymath.Network have garnered attention by setting out to solve problems like KYC and AML when it comes to tokens.

The security tokens ecosystem is nascent, but this will be a large market. You’ll have both systems – utility and securities. Both will exist.

The Near Future of Tokenization

Different protocols on which tokens can be issued might offer benefits over Ethereum, which enjoyed first mover advantage in the token industry. Other protocols might offer similar functionality, and possibly better, which would have major implications for holders of tokens issued on Ethereum.

For now, too many tokenized projects simply have no use for their tokens. Companies blockchainified their products when there was no point. Blockchains are good at a few things, like censorship resistance, immutability and verifiability. Not too many companies designed their token in an elegant or sophisticated way. is an example of an elegant blockchain-based business model. They don’t use a token. notarizes to bitcoin’s blockchain. Blockchain provides value here through proof of existence and notarizations.

There probably won’t be another ICO bubble like 2017. There will be another bubble cycle that drives the value of tokens up artificially. Nowadays and into the future companies will have to design good tokens. That means identifying a problem that is elegantly solved by a token. Today, the standard entails creating a problem where there earlier was none, and then creating an even bigger problem by tacking a token onto it.

If you’re considering a token for your businesses, focus first on your business. Then on how blockchain applies to it. And then, and only then, ask yourself whether or not you truly – honestly – need a token. Honestly, probably not.

We will begin seeing more applications built on Ethereum – and, indeed, other systems – that have nothing to do with tokens, and just use the base protocol as is. The only thing capturing value at the level of the base protocol are decentralized exchanges, which currently are used to move tokens. In the future – beyond CryptoKitties – we will see more services like using blockchain in a defensible manner.

Image: Pixabay.

Justin O'Connell is the founder of financial technology focused Justin organized the launch of the largest Bitcoin ATM hardware and software provider in the world at the historical Hotel del Coronado in southern California. His works appear in the U.S.'s third largest weekly, the San Diego Reader, VICE and elsewhere.