Benefits of tokens, capturing value, ownership, communities without tokens
→ this post originally appeared, here on the Tokenomics DAO substack.
This post is part of a series, where we explore our own tokenomics. Read the first post here. We also discussed this topic on our recent podcast.
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Back in 2017 everyone needed a blockchain. It was the tool to solve all problems and the hype around it was truly amazing. Now most people understand that a blockchain is not the solution to all problems and that the approach back then was more of a hammer looking for nails. When talking about tokens nowadays I often get that similar feeling. Every project wants to launch a token.
The drivers behind it are diverse and I would like to look into when a token makes sense and when it doesn’t. A good real world resemblance of tokens are shares of a corporation. According to the australian shareholder association the share market has two functions:
Primary — to allow companies to raise money by issuing shares through an Initial Public offering or float
Secondary — to allow investors to buy and sell shares at prices that are determined by supply and demand factors
The risks, according to the australian shareholders association, are price movements including losing your money as well as lack of control.
This is a pretty spot-on definition that also applies to tokens in web3. The main novelty of web3 is the fact that here, almost anybody can launch a token and use it for the above purposes. Almost anybody can buy these tokens giving equal access to retail investors and less friction for the system overall. Less friction because it costs very little to transfer ownership to anyone.
I don’t want to get into the regulatory aspects of this, but issuing shares is regulated and tokens are often somewhat unregulated. This is due to the classification of tokens into either securities tokens or utility tokens. Most protocols will make an effort to ensure their token is a utility token to avoid the regulation of securities. This is done by defining a utility into the token i.e. turning them into a voucher to grant access to a service or functionality.
Coindesk has a good analogy here:
Utility tokens are like chips in a casino. They can be used as currency within the casino for playing games and tipping dealers, and converted back to fiat/cash when it’s time to cash out. Holders of a casino’s chips do not own a stake in the casino, nor are they entitled to any of the casino’s winnings or profits.
Security tokens, on the other hand, are like owning stock in the casino, shares in the company itself. When the house wins, you win. Security token holders own something that might pay off through profits or distributions. Utility tokens are used in an ecosystem. Security tokens give you ownership in that ecosystem.
Ownership however can not easily be excluded from utility tokens as they might give governance rights, and by that allow users to decide on how the treasury or potential profits might be distributed. Fabric Ventures classifies utility tokens as value capturing.
To summarise, tokens allow you to raise money, let investors buy and sell them and to some degree represent ownership or value.
Given our recent thoughts on how the principal-agent theory (listen to it here or here) applies to DAOs, we have seen that holding tokens can turn people from agents to principals, incentivising them to participate driven by their own self interest. This is a big differentiator for token ownership vs more traditional structures currently in use. Just think about how you treat your own car versus a rental car. That’s how contribution quality towards the goal of a project or a DAO changes with token ownership.
Julien Thevenard from Fabric Ventures has written a great piece on tokenized ownership and I highly recommend checking it out here — the piece is full of goodies. I tried to summarise parts of his findings and other properties / benefits of tokens in the diagram below, showing that there really is more to a token than ownership and raising capital.
I covered off the market valuation, raising money and ownership but let’s go through the details of what a token could do for the Tokenomics DAO.