In 2017, ICOs were white hot and raising billions to fund projects that many anticipated would serve as the foundation for ‘Web 3.0’. And while a substantial amount of progress has been made in terms of infrastructure and ecosystem development as a result of these funds, how many of the tokens which were created as a result are actively being used for their intended purposes?
Based on some research from dAppRadar, we’ve found that successful tokens all enable users to perform some action that either allows them to collect additional value (e.g. fees, rewards) or save money (e.g. discount). In addition, tokens within these systems are often destroyed or burned upon use - this burning is performed with the intention of decreasing supply as demand increases, causing the value of the token to rise.
To better illustrate these points, let’s take a look at 9 Ethereum-based projects which are actively using their ICO token as it was supposed to be used.
When Binance launched its coin, it had a very simple value proposition - to lower trading fees. While major exchanges around the world were charging a minimum of 0.2% on trades, Binance launched with a 0.1% fee and halved that to 0.05% for anyone trading with BNB. This, coupled with the various perks provided to BNB holders (early access to new listings, further discounts, airdrops, etc…) allowed BNB to become a very popular medium of exchange on the platform. Binance also uses 20% of its quarterly profits to buy back and destroy BNB tokens (with a max cap of 100 million BNB tokens) to achieve scarcity.
These factors, combined with Binance’s ability to act very deftly in the adding of new coins to their platform have helped to contribute to BNB’s immense popularity. While many exchanges had become either lax or stymied in their development, Binance was able to act deftly in their execution and even relocated operations to Malta to further these efforts. In this way, we see BNB as providing value to its holders in two ways - in a discounted MoE as well as something which provides its holders access to exclusive opportunities and events within the platform.
The Bancor Network and Bancor Protocol were created to automate fast, fair, and affordable conversions of tokens. Instead of having counterparties to trade tokens, Bancor allows users to send and receive tokens from on-chain liquidity pools at algorithmically-calculated rates. These liquidity pools exist in the form of smart contracts that token creators own and manage.
Token creators connect to the Bancor Network by staking some amount of BNT and their token to their smart contract. This allows the smart contract to automatically conduct the exchange of BNT received for its token and vice versa - eliminating counterparty risk and streamlining the entire process of converting tokens.
Bancor was bold in its mission and has received solid traction as token economies continue to develop and evolve. We believe gains its value from the fact that it allows projects to more easily bootstrap new token economies that do not need to depend on exchanges for their proliferation.
Decentraland is a virtual reality platform powered by the Ethereum blockchain. Users come to Decentraland to purchase land and subsequently develop that land in a meaningful way which allows them to extract value from other participants in the ecosystem. To develop the land and create digital goods, users are able to leverage existing tools such as SketchUp, Blender, and Maya to create 3D models which can then be imported into Decentraland.
While it’s insisted that MANA serve as the MoE for goods in the Decentraland ecosystem, it’s only required for the purchase of parcels of LAND. LAND is a non-fungible, transferable, and scarce resource within the virtual world which is stored on the Ethereum smart contract. We believe that MANA gains its value through this mechanic, specifically by serving as the only way to access this finite and scarce resource.
The MKR token is used principally in two capacities - the first is as a utility token which is required to pay any fees accrued on the CDPs which are used to generate DAI. When these fees are paid, the MKR used to pay them is burned, decreasing its overall supply. An increasing demand for CDPs and DAI ergo causes both an increase in demand for MKR whilst decreasing its supply.
The second use case of MKR is as a governance token to manage risk around the Maker ecosystem. Facilitation of this process is done through continuous approval voting whereby holders of MKR create and participate in various proposals relating to risk parameters for each collateral asset and CDP type on a regular basis. Proposals receiving the most votes are activated after built-in delay which provides the community with a buffer for reacting to the upcoming changes.
As DAI continues to exhibit itself as a strong stablecoin, more and more developers are beginning to open CDPs and use it in the dApps. This is putting downward pressure on supply of MKR while putting upward pressure on demand for it. This, in tandem with the ability to participate in the governance of the system’s risk tolerance for participants’ funds make it a very desirable token.
In 2017, 0x launched as “an open protocol for decentralized exchange on the Ethereum blockchain.” Parties building on top of this protocol, referred to as ‘Relayers’, provide liquidity to the network and serve a counterparties in peer-to-peer exchanges in exchange for fees (collected in ZRX).
While ZRX is used to pay fees to Relayers for their services, its chief function is to serve as a governance token which allows holders to take part in the protocol’s upgrade process. We believe that this provides major value to the chief consumers of the token (Relayers) by allowing them to campaign for new features or upgrades to improve their overall experience with the protocol. And as we’ve seen over time, this has helped to ensure that 0x was always providing the greatest value to its users.
Origin Protocol (OGN)
With the growth of “gig-economies”, we’ve seen new businesses coordinating the work of thousands of independent contractors to create networks which can easily be leveraged for things like transportation, delivery, handywork, etc… As these networks have grown, the businesses responsible for their facilitation have seen tremendous upside. Origin disintermediate this ecosystem with its Ethereum-based platform for creating decentralized, peer-to-peer marketplaces.
Origin accomplishes this by allowing individuals to create marketplaces with their protocol and earn OGN tokens from sellers on their marketplace for helping them to promote their listings. In this way, Origin has created a free market for market creation, where the marketplaces with operators most helpful to their sellers should see the most growth.
Kyber Network (KNC)
Kyber is an on-chain liquidity protocol that aggregates liquidity from a wide range of reserves, powering instant and secure token exchange in any decentralized application. Individuals operating these reserves pay a small fee in the network’s native token, KNC, to every exchange in the network to cover exchange operational costs and reward them for bringing trade volume to the network. In return, these operators are able to earn spreads from trading activities within the Kyber Network ecosystem.
As transactions are processed, a small portion of them is converted to KNC and burned, decreasing overall supply of KNC. This decreasing supply in tandem with an increasing demand of the token by reserve operators is posited to increase the overall value of the token over time.
Augur is a decentralized oracle and prediction market protocol built on the Ethereum blockchain. Individuals who participate in this Augur are rewarded for accurately forecasting events and ensuring that those serving as oracles of the system are not acting nefariously.
When creating a bet, the bet creator is required to stake a no-show bond to bind a designated reporter (the bet creator or another party) to report on the outcome of the bet within a certain time period (e.g. 3 days) after the bet’s expiration.
The native token to Augur, REP, is short for “Reputation.” This is because whenever you take an action that uses REP, you are literally staking your reputation. And if you are able to add value to the platform through such actions, you will increase your REP. If a designated reporter fails to report on the outcome of a bet, this stake is put on the free market for anyone to then claim by reporting on the outcome.
After an outcome has been reported on, the bet goes into a dispute phase for some additional period of time (e.g. 7 days). During this time, one or multiple people can dispute the tentative outcome of the bet by staking twice the amount of the no-show bond. Successful dispute of an outcome rewards all parties involved with the dispute with the entire no-show bond.
In this way, the value of REP lies in its ability to ensure the validity of information which is provided to the platform by participants. As the network continues to gain in popularity, it is posited that the ability of REP to accomplish this only increase, over time.
Numeraire is a hedge fund built by a network of data scientists. This network is effectively a token-driven Kaggle competition. In fact, Numeraire actually seeded their platform with existing Kaggle users by airdropping them tokens, causing the site to experience a marked increase in logins from individuals trying to break into Kaggle accounts to claim the tokens. That said, it certainly got users on to their platform.
The value proposition of NMR is simple, individuals on the platform stake NMR tokens in relation to their level of confidence in their prediction models. If their predictions are poor, the NMR is destroyed. However, if their predictions are good, they will earn money from those predictions as well as have their NMR returned to them.
The ability of Numeraire to tap into an existing market where the value is highly disproportional (~1% of Kaggle users win 99% of competitions) and allow these users access to a greater distribution of value has shown to be an incredible value proposition. Continued growth in the network should be reflected in NMR given its requirement to engage as a participant in the network.
The successful tokens covered here all enable users to perform some action that can either allow them to collect rent via the usage of their token or save money. While some may say this isn’t the case for governance tokens, they should consider the fact that MKR holders are attempting to prevent the dilution of their CDPs while 0x relayers are attempting to increase the utility of the network and thus, their potential profits.
This utility is often reinforced by a factor of scarcity whereby tokens within the system are destroyed or burned upon use or at some regular interval - with the intention of decreasing supply as demand increases, causing the value of the token to rise.
So long as a project follows a similar guideline and provides value in a meaningful way to an existing community, it is likely to find success in its token’s usage. This should also be taken with the caveat that many individuals not familiar with decentralization or Ethereum may not be interested in using such a service if it seems too techy or confusing. To mitigate potential user disengagement, projects can focus on the needs of existing members of the community (Ex: DAI) as well as present their dApps such that the token is made nigh invisible to the end-user.
We’re still very early on in our understanding of token economics and are excited to see what the future might hold as these models continue to adapt and evolve!
If you’d like to learn more about these projects and their tokens, here are a few links to each!
Disclaimer: This post is intended for informational and research purposes only.
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