Importance of token economics and capturing value in utility tokens.

In one of the conferences Miko Matsumura, co-founder of Evercoin, has compared state of the current blockchain ecosystem with a sand pile. While you pour sand on top of the pile the lower parts will collapse and slide down giving you a wider base on which a bigger sand pile could be built.

While there is little to be excited about the sand pile itself it represents protocols that can facilitate sufficient amount of transactions with sophisticated consensus algorithms and working self governance. It was one of the most desired ICO opportunities for investors so far and probably will remain such for some time in the future. But how many efficient protocols with distributed architecture the ecosystem will really need?

Decentralized applications will infuse life into a boring sand pile. It will be dapps that will drive mass adoption and real world use cases that will result in new business models and new value capture and distribution mechanisms. But for the decentralized applications to function properly and in perpetuity a lot of though has to be put into a token model that provides incentives for participants and aligns interests of investors, something that majority of current projects have overlooked in a hurry to announce an ICO and that will most probably be the cause they are buried under that sand pile once it collapses in order to continue to grow.

In traditional business models value created on the platform is captured in form of profits that can be paid out to shareholders as dividends or reinvested into company if such a decision is made by shareholders. Profits can be made by selling membership options that unlock certain features, taking transaction fees, serving adds to platform users etc.

It seems that there is nothing wrong with the company to be inserted in between the participants since the company provides valuable services and is entitled to collect fees inside the network, apart from the fact that everybody hates adds, memberships and subscriptions have extremely high churn rates and users try to transact directly, outside the platform, in order to avoid unreasonably high transaction fees that is often a result of pressure by shareholders to maximize the profits.

From the moral perspective it does not seem fair that community members that create the value on the platform by sharing their content, driving traffic and increasing engagement through interactions are forced to pay for the service, consume adds and otherwise participate in unwanted activities that result in bad user experience which in turn is undesired outcome for platform creators. But is it possible to create an asset with value linked directly to the platform in order to avoid all this friction? It is. Welcome the Utility Token.

In 2017 and 2018 there was a surge of utility tokens with little utility. All ICO’s were trying to position their token as such mainly due to regulatory reasons. Even Ethereum was declared not a security by SEC but it also basically has the only utility which is fundraising.

Utility token is a scarce asset that should be required for all or at least some of important internal transactions to be conducted on the platform. A carefully and well thought out token model should be implemented and designed in such a way as to tie its value to the usage and growth of the platform. If it is used only as a proprietary payment currency it will suffer from extreme token velocity and will result in downwards price pressure on the value of the token since it does not provide a reason for token holders to hold the token for any longer that is needed to facilitate the transaction.

Token velocity can be calculated by dividing Total Transaction Volume by Average Network Value. In many cases utility token holders are trying to get rid of them as soon as they can once they have been paid for the service since usually there is little incentive to hold them for other reasons than expected increase of price. But by it’s own nature that price has downwards price pressure on the value since the only incentive to hold is speculative expectations of price increase. It is obvious that we are getting trapped in a loop here and a well thought out token models need to implemented with all new emerging business models involving blockchain technology.

Token velocity can be managed and ideally brought to equilibrium by implementing some of those below mentioned means:

Even though BeScouted has a working MVP and a growing and vibrant community of freelance content creators and various talents that already earn crypto for sharing their content, we resisted the urge to go with the first and even second waves of ICO’s simply because we wanted to build a solid token model that would benefit the community in a long term. We have put a lot of hours and effort into research and development of token model and the way it is used to interact within a freelance economy that will change how visual content is created and consumed in the whole industry.

Since rewarding users for the content that they share requires some level of inflation and having in mind that it will be a utility token with many actual utilities, we have developed various mechanisms that will bring token velocity to equilibrium and in later stages might even result in our token being a deflationary coin despite decreasing but ongoing inflation.

All the above mentioned and other incetivizing mechanisms added in the future will help to reduce token velocity and make the economy work in perpetuity. It will result in a token that actually has utility and can be used to power the freelance economy of visual content creation that will dis-intermediate currently broken infrastructure that intentionally builds high entry barriers for new and creative talents and robs them of their revenue. Creating artificial obstacles for fresh talent participation in the ecosystem will eventually fail and power over their careers will be brought back to the community. Those very people are powering today’s social media worth hundreds of billions of dollars and get nothing back in return and still have to pay for additional exposure and different features to be used on those numerous platforms.

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