This year so far has seen an incredible resurgence for crypto and the entire blockchain industry. With it, the pressure to launch a token has returned. Cryptocurrency markets started the year powered by the growing public interest in Non-Fungible Tokens (NFTs). That momentum continued with the growing adoption and popularity of Decentralized Finance ( DeFi ) products amongst the blockchain community. Initial Coin Offerings (ICOs) have picked up the pace again. Well over 300 ICOs conducted so far during this year. As interest and capital continue to pour into the industry, more projects are likely feeling the pressure of launching an ICO . In addition, they are finding ways to introduce a token to the world to raise funds to carry a project forward. As the public excitedly awaits the “next big ICO,” it is important for investors and companies to understand that not all ICOs are equal. While it may be obvious for most, this requires understanding that the inequality extends beyond the legitimacy and potential of the underlying project. What may not be regularly considered amongst token buyers in an ICO (or through general investing) is the utility of the token itself. For token holders, a belief that a successful project equates to an eventual rise in the token’s value. However, this is often met with the harsh reality that such ties are not as linear as initially expected. Several years after the 2017 ICO mania, there are clear examples today of successful crypto projects which have not been able to transfer that same level of success into the price of their token. But why? And how could this happen? Bad tokenomics can undermine good projects It may help to first define “token failure.” For the purposes of this article, token failure is the event where a project has issued a token that has little to no demand, use case, and utility. As it stands, these tokens simply exist. They are held principally by the project and speculators who hope the commercial success and increased popularity of a project will translate into rising demand. In turn, the price of the underlying token will appreciate. Explaining tokenomics It is also helpful to have a baseline understanding of the concept of tokenomics . Firstly, it is simply a mashup of two words – token and economics. In the cryptosphere, tokens can be treated as another word for cryptocurrency or crypto assets. They represent any crypto that isn’t bitcoin or ether. On the other hand, economics can generally be referred to as how society utilizes its limited resources to produce, distribute, and consume goods and services. Tokenomics is how the participants of a particular blockchain use the underlying token to power the distribution and consumption of goods and services related to that chain. It is in this area that many projects fail after the issuance of a token. Ultimately, the lack of a proper definition of how a token can be used to support the economy on the underlying blockchain leads to the inevitable question of how the token itself is even relevant. Without utility defined, what exactly is its purpose? How it can go wrong Several years ago, a provider of blockchain security solutions came under fire from its token holders. They felt misled by the company regarding its issued token. During this time, the project failed to clarify the types of payments accepted from its customers. That is, whether or not the project requires that customers use its issued tokens for payment or if fiat, BTC, or ETH was an acceptable alternative. Eventually, the company did admit that customers did not need to hold or pay in their issued token to receive services. This is in contradiction to what the company previously communicated. Without this requirement to hold the project’s native token, its utility became questionable. Customers and users no longer had any incentive to hold on to such a token. Despite these issues early on, the project continued to grow. Today, it works with several leading projects in the crypto space and continues to take on high-profile clients. However, its token price has plummeted and now trades for pennies on the dollar. The token is now a shadow of the former glory it once promised. These days, the project continues without any mention of the token. It no longer appears to play a significant (or any) role in its ongoing business model. Despite this, the company continues to find commercial success, growing in size, popularity, and product […]
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