Utility vs. Security Tokens: Why Not Both?
I’m seeing increased activity in the “token airdrop” model, and this topic deserves some thoughts.
In the most primitive scenario, companies declare that a certain percentage of their tokens are designated for users, and they send them randomly to wallet addresses with the hope that these wallet recipients become actual users.
The problem with these early scenarios is that most often the network is not ready, so there is no real token utility, in essence defeating (or considerably delaying) the purpose and effect of that air drop. Furthermore, these users weren’t pre-qualified as real potential users, so there is no market awareness about the products behind these companies. As a result, token usage remains a mirage. In this scenario, users are buying into a lotto, because a large number of token-based companies will not make it, compared to the ones that will be lucky enough to enjoy market value appreciation that is commensurate (to a degree) with actual token utility.
In some of these cases, the airdrops are part of a previous token offering, but a more recent scenario that appears to be popular with the EOS ecosystem is to just issue air dropped tokens (e.g. 20% of total distribution), keep a significant percentage as reserves (60-80%), wait until the token starts trading upwards (assuming there is some speculative hype or real usage that drive it), then start selling your reserve tokens into the public markets to fill your treasury. In essence, it’s like getting the effects of an ICO without raising money from anyone, and flying under the suspicious radars of regulators. This, in my opinion is a current loophole in the regulatory ICO landscape that may or may not last.
Moving to more advanced scenarios (Air Drop 2.0), token-generating projects are purposely introducing a delay in token issuance, and labeling their ICO as a “Usage Token Purchase”. In this case, users buy into the token, just as they would in a normal ICO, but they are required to take specific product actions with a determined number of their purchased tokens, in order to “unlock” their token ownership and resulting liquidity. If they don’t use them, they risk losing them. This form of token activity could range from end-user activity to a form of computational staking into the network itself.
Air Drop 2.0 is interesting, but that may not be enough. One of the primary reasons is that if the delays introduced are short, (e.g. 45 days), once these tokens are public, then we’re back to the scenario where the speculators can still overwhelm the market way ahead of full and sustainable token utility because the delay period may not give enough time to generate sufficient token usage at the network effect level.
As Mike Maples Jr. says in his post, Slow Money Crypto, Liquidity can be more of a “bug” than a “feature.”, to which I would add that “premature liquidity” as being the issue.
In the absence of real traction metrics, the current token-based appreciation model of happenstance gains of 10-30x over a period of a few months is not sustainable. Luck is not a business model. I don’t mind seeing 10x or even 100x on investments over a longer period of time. Many ICOs have already given 20x on their initial token prices, and they can still fail.
When there is profit to be taken, investors will take it. Most institutional ICO investors are momentum chasers who need to make their next trade as soon as it yields a profit they can register.
We need to disconnect user behavior/usage from speculative investor behaviors, but introducing a short delay between these two periods may not be enough.
Reality is,- token holders never become instant users, although the white papers expectations assume they would. You need to give time for user acquisition to play out, just like any other user acquisition unravels without a token. The token is not a carrot. In the best of cases, it is an organic incentive that is properly engineered into the product to enable a native and natural user behavior that cannot be gamed, although it might be gamified. I’ve already written about the dilemma of Token Users vs. Token Traders.
So, what if we had hybrid tokens, where one is a distinct usage token, and the other a speculative one?
What if there was a new scenario with two different classes of tokens where the company sells a “security token” to investors (and they will need to hold it for real), and sell (or give) a utility token to real users. Under this scenario, there would be a delay of at least a year to allow not just the network to be open, but for it to start proving its utility with at least some real usage. Or, the company could choose to not even issue the security token until much later, at a time of its own choosing.
In the above scenario, investors would be required to hold their tokens much longer.
What remains to be worked on is the interaction and relationships between the speculative token and the work token, both from a technical and legal perspective.
I’m watching some companies that are trying to figure this out, and planning to have 2 types of tokens, and not by using stable coins.
Air drops are a very interesting model, and I expect they will evolve into something real, if properly executed. I also see having different classes of tokens for the same project as a real path forward that could smoothly bridge the token utility aspect into its security characteristics.