The Problem with Utility Tokens
The past two years have seen an impressive amount of capital raised by blockchain-based startups via initial coin offerings (ICOs), though it hasn’t all been smooth sailing. The ICO model, in theory, offers a highly beneficial investment vehicle for both companies and individuals wishing to support a project. Foremost, a company can offer its tokens in exchange for cryptocurrencies without having to sell any equity in the company itself. By extension, investors can participate in projects they support by purchasing the tokens for use within the ecosystems or to generate returns for speculative purposes.
Too often utility tokens have no real utility.
This model, which has rapidly become a popular fundraising channel for many blockchain-based businesses, produces what are referred to as utility tokens—cryptocurrencies or coins that represent access to a company’s products or services. The key feature of these utility tokens is that they are decidedly not an investment in the actual company itself—users are not entitled to shares of the company or any accompanying shareholder rights.
While utility tokens can prove to be lucrative investment options, they essentially represent the ability to pay for a service that may or may not have already been built. While they may be useful for speculating, these tokens have little long-term value until the company that offered them launches their service (an event that never actually happens for nearly half of all ICOs). At the heart of the problem is the fact that these tokens have no underlying asset to give them value.
The problem most utility tokens have:
- No natural mechanism to increase the value of the tokens.
- No real use case: it was simply an idea that cannot be realized.
- No intrinsic value: the Ecosystem has not invested in tangible assets.
- No adoption: they are not adapted to the targeted market.
- No decision-power: the founders and core team take the decisions without the opinion of the token holders.
- No liquidity: the market cap will never reach an acceptable amount.
Blockchain companies may have to return to traditional debt or equity based financing to try to raise their funds and instead use pure utility token air drops to try to create a community.
If they are going to attempt to continue to create utility tokens offerings the first issue they need to solve is the valuation of their own tokens. Most are substantially overvalued when they are initially released and are without a product to be used in. All of the value of the tokens are therefore entirely speculative leading to extremely quick market crashes for tokens.
Projects need to release utility tokens for products that are functioning and they need to focus on gaining and keeping users to increase the true fundamental value of their tokens.
Right now the entire community needs to focus on building products instead of trying to raise funds for the ecosystem to grow. Ether is considered a commodity and therefore can be used by projects to facilitate transactions. On top of this stable coins right now don’t seem to be heading in the direction of being a security and could be used to make dApps more understandable for the average user by allowing them to use their standard currency.
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In 2018, ICOs raised nearly $8 billion. But as many know too well, the ICO wave has since come crashing down. ICOs now raise about 58 times less than they did just a little more than one year ago.