In the world of blockchain, the success of a token goes beyond its supply model. It requires a compelling purpose and value proposition that encourages people to hold and utilize it.
In the previous parts of this Tokenomics series, we discussed the fundamental concepts for evaluating tokens within projects or companies. We explored aspects such as supply dynamics, emission rates, market capitalization, total supply, and distribution.
Now, in this third part, we delve into the concept of utility. Utility plays a crucial role in determining the demand side of tokenomics. Even with a well-designed supply model, a token must provide a strong rationale for its existence and the incentive for individuals to acquire and retain it.
Without these elements, the token will lack demand, rendering it undesirable for investors.
Let’s explore the various dimensions of utility that contribute to the value and demand of blockchain tokens which is essential part of crypto tokenomics.
Tokenomics: Spending Vs Holding
When it comes to utility in blockchain tokens, it is important to distinguish between tokens designed for spending and those intended for holding. Understanding this difference helps determine the optimal usage and value proposition of a token for better understanding of tokenomics.
Let’s illustrate this concept with an example:
Consider a hypothetical token called “EcoCoin.” EcoCoin is a utility token associated with an eco-friendly marketplace where users can purchase sustainable products and services.
In this scenario, EcoCoin is primarily meant for spending. Its utility lies in enabling users to transact within the eco-friendly marketplace, where they can buy products that align with their values. The token serves as a medium of exchange within the ecosystem, facilitating seamless and secure transactions between buyers and sellers.
For users who believe in sustainable living and frequently purchase eco-friendly products, it makes sense to acquire EcoCoins to use them for their intended purpose. They can acquire the tokens in smaller increments as needed and spend them directly within the marketplace whenever they wish to make a purchase.
Holding EcoCoins for an extended period might not provide significant benefits since the primary objective is to utilize them for eco-conscious transactions.
On the other hand, there are tokens designed for holding, which offer different utility dynamics. Let’s consider another example with a token called “StakeToken.”
StakeToken is a governance token associated with a decentralized finance (DeFi) platform. Token holders have the ability to participate in governance processes, vote on proposals, and influence the platform’s direction. StakeToken holders also earn rewards based on their stake in the ecosystem.
In this case, the utility of StakeToken revolves around holding and actively engaging with the platform. Token holders can stake their tokens in liquidity pools or participate in yield farming to earn additional tokens or fees generated by the platform.
The more StakeTokens they hold and actively utilize within the DeFi ecosystem, the greater their potential rewards and influence over governance decisions.
For users who believe in the long-term success and growth of the DeFi platform, it is beneficial to acquire and hold StakeTokens. By holding the tokens, users can maximize their potential rewards, actively participate in governance decisions, and potentially contribute to the development and success of the ecosystem.
In summary, understanding whether a token is designed for spending or holding is crucial in determining its utility and understanding of tokenomics. Tokens like EcoCoin are meant for spending within a specific ecosystem, while tokens like StakeToken offer utility through holding and active engagement within a decentralized finance platform.
Analyzing the intended usage and utility of a token enables users to make informed decisions regarding its acquisition and utilization within the blockchain ecosystem.
Real World Example:
Chainlink is a pivotal player in the crypto realm, providing essential infrastructure for various DApps. However, when it comes to investing in Chainlink’s LINK token, there are important considerations.
Although LINK may initially seem like an appealing investment, with its finite supply and valuable infrastructure, its primary function is as a spending token. Holding LINK grants you the ability to pay for Chainlink services, but there is no need to acquire it beforehand. You can simply purchase it as needed.
While Chainlink plans to introduce staking for revenue sharing in the future, the details and release date are currently unknown. Presently, the sole utility of LINK lies in spending it.
Moreover, using spending tokens as investments can pose challenges, as the parent platform may be disincentivized from allowing excessive price surges that would drive up the costs of their services.
In summary, LINK’s limitations as an investment are as follows: it is primarily a spending token, Chainlink aims to prevent service costs from soaring, and holding LINK does not generate cash flows or additional benefits.
Remember, the importance of Chainlink as a project does not necessarily guarantee that its token is a strong investment choice. Understanding tokenomics is vital in making informed investment decisions.
Cash Flows
One essential aspect of utility in blockchain tokens for crypto tokenomics is their ability to generate cash flows. Some tokens provide mechanisms that allow holders to earn rewards or dividends based on their participation or ownership.
Let’s illustrate this concept with an example:
Consider a token called “RewardCoin.” RewardCoin is associated with a decentralized platform that incentivizes users to contribute their computing power for decentralized cloud storage.
In this scenario, RewardCoin offers cash flows in the form of rewards. Users who contribute their computing resources to the decentralized cloud storage network receive RewardCoins as compensation for their participation.
The number of RewardCoins earned is typically proportional to the amount of computing power contributed and the duration of participation.
These rewards can be accumulated and either held as an investment or converted into other assets. Additionally, some platforms may offer opportunities to stake or provide liquidity using RewardCoins, enabling users to earn further rewards or fees generated by the ecosystem.
The cash flows associated with RewardCoin provide holders with a tangible incentive to participate in the network. Users can evaluate the potential returns from their contributions and make informed decisions regarding their involvement in the decentralized cloud storage ecosystem.
The more computing power they dedicate and the longer they participate, the greater their cash flow potential in the form of RewardCoins.
It is important to note that the specific cash flow mechanisms and rates may vary for different tokens and platforms. Some tokens may offer direct dividends based on platform revenue, while others may distribute rewards based on specific activities within the ecosystem, such as staking, lending, or participating in governance processes.
By considering the cash flow potential of a token, investors and users can assess the utility and long-term value proposition of the token which is key factors contributing tokenomics. They can evaluate the potential returns on their investment or participation, weigh the associated risks, and make informed decisions about acquiring, holding, or utilizing the token within the blockchain ecosystem.
In summary, tokens like RewardCoin exemplify the concept of cash flows by offering rewards or dividends to token holders based on their participation or ownership.
Real World Example:
One way tokens create value is through fee sharing. Take SUSHI, for example. You can hold it for long-term speculation on SushiSwap or stake it for xSUSHI, earning a portion of platform fees. xSUSHI, a “liquid staking token,” increases in value over time, allowing flexibility to use it as collateral elsewhere.
While earning a 10% APR with xSUSHI is better than holding regular SUSHI with no return, consider if it offsets potential depreciation against your base asset, like ETH. Note that buying Sushi before November 2020 yielded a less favorable deal.
Another notable cash flow token is Convex, offering a 44% APR on locked tokens and demonstrating resilience against ETH.
When evaluating cash flows, prioritize tokens generating revenue-based flows in various tokens, rather than the staked token itself. Convex rewards with different tokens based on bribes, while staked RAIDER earns AURUM based on in-game spending.
Although Dopex pays staking revenue in DPX and rDPX until activating a true revenue sharing system, it reduces share dilution. Dopex plans to transition in the near future.
Cash flows provide substantial utility for holding tokens, beyond ETH speculation. Analyze the cash flow potential to identify tokens with long-term value and tangible benefits.
Understanding the cash flow dynamics associated with a token enables users to evaluate the potential returns and make informed decisions regarding their involvement in the blockchain ecosystem.
Governance
Governance is a crucial aspect of utility in blockchain tokens and part of crypto tokenomics. Tokens that incorporate governance functionality empower holders to participate in decision-making processes within a blockchain network. Let’s illustrate this concept with an example:
Consider a token called “GovToken.” GovToken is associated with a decentralized platform that allows users to propose and vote on protocol upgrades and changes.
In this scenario, GovToken holders have the ability to actively participate in the governance of the blockchain network. They can submit proposals to improve the platform, suggest changes to existing protocols, or vote on proposals submitted by other token holders.
The voting power of each GovToken holder is typically proportional to their token ownership, incentivizing larger stakeholders to actively engage in governance processes.
The governance mechanism enabled by GovToken offers holders the opportunity to influence the platform’s future direction, shape its policies, and drive its development. By having a say in the decision-making processes, token holders can actively contribute to the ecosystem’s growth and ensure that their interests align with the platform’s objectives.
For example, if a proposed upgrade introduces a new feature or modifies existing functionalities, GovToken holders can vote on whether to accept or reject the proposal. Their votes collectively determine the outcome, and the platform implements changes accordingly.
This governance process allows token holders to have a stake in the platform’s evolution and fosters a sense of community ownership and involvement.
Additionally, some platforms may allocate rewards or incentives to token holders who actively participate in governance processes. These rewards can serve as an additional motivation for holders to engage in governance-related activities, further enhancing the utility of the token.
By incorporating governance functionality, tokens like GovToken give holders the power to shape the future of the blockchain ecosystem. They enable democratic decision-making, encourage community involvement, and ensure that the platform evolves according to the collective will of its stakeholders.
It’s important to note that the specific governance mechanisms and processes may vary for different tokens and platforms. Some platforms may implement voting systems with different voting weights or require certain thresholds for proposals to be approved.
The governance framework is designed to provide a fair and inclusive environment for token holders to voice their opinions and collectively govern the blockchain ecosystem.
In summary, tokens like GovToken exemplify the concept of governance by granting token holders the ability to actively participate in decision-making processes within a blockchain network. By having a say in the platform’s governance, token holders can shape its future, align their interests with the ecosystem’s objectives, and foster a sense of community ownership and engagement.
Real World Example:
While AAVE’s price chart may not be as promising compared to ETH, the AAVE governance forum tells a different story. With an active community, votes consistently gather 250,000 to 400,000 participants.
This presents an opportunity for DeFi protocols, VC firms, whales, or anyone seeking influence over AAVE’s future decisions. Holding AAVE tokens allows individuals to actively participate in voting on crucial proposals.
Personally, the allure of this benefit may not be compelling for everyone. Trusting AAVE to make the best decisions for their platform might be preferred. However, in certain cases, it can prove lucrative. Convex, for instance, leverages its cash flow mechanism through governance vote bribes.
If a protocol possesses impactful governance votes, owning a say in those decisions can be financially rewarding.
For those holding DAO tokens, this benefit holds significant value. The more CabinDAO or other popular DAO tokens you possess, the greater your influence on fund allocation and selecting fellowship attendees.
Prominent DAOs like FWB offer similar opportunities for token holders to shape decisions.
In conclusion, governance power is a noteworthy advantage of token ownership. While price performance may vary, actively participating in governance votes can provide a means to influence and potentially profit from key decisions within protocols and DAOs.
Collateral
Collateral utility is an important aspect of some blockchain tokens. These tokens can serve as collateral within decentralized finance (DeFi) ecosystems, enabling users to access various financial services.
Let’s illustrate this concept with an example:
Consider a token called “LoanToken.” LoanToken is designed as a collateral asset within a decentralized lending platform.
In this scenario, LoanToken holders can utilize their tokens as collateral to secure loans from the lending platform. By locking up their LoanTokens as collateral, users can borrow other assets or stablecoins, using their LoanTokens as a guarantee for repayment.
The value of the collateral determines the borrowing capacity, and the loans are subject to certain interest rates and repayment terms.
The collateral utility of LoanToken brings several advantages to token holders. It allows them to unlock the value of their LoanTokens without needing to sell them, enabling them to access liquidity while maintaining their ownership of the tokens.
Furthermore, by leveraging LoanTokens as collateral, users can engage in various financial activities, such as trading, yield farming, or participating in other DeFi protocols.
For example, if a user holds a significant number of LoanTokens but requires immediate liquidity, they can lock up a portion of their LoanTokens as collateral and borrow a stablecoin or another asset.
They can then use the borrowed funds for other investment opportunities or to cover expenses, while their LoanTokens act as collateral to secure the loan.
The collateral utility of LoanToken provides flexibility, liquidity, and broader financial possibilities for token holders. It expands the use cases of LoanTokens beyond simple ownership, allowing holders to actively participate in DeFi ecosystems and leverage their token holdings for various financial purposes.
It’s important to note that the specific collateralization ratios, borrowing limits, and interest rates may vary for different tokens and lending platforms. The collateralization process typically involves the evaluation of the token’s value, volatility, and liquidity to determine the loan-to-value ratio and the associated risks.
In summary, tokens like LoanToken exemplify the concept of collateral utility by enabling holders to use their tokens as collateral within DeFi lending platforms. By leveraging their token holdings, users can access liquidity, engage in financial activities, and unlock the value of their tokens without needing to sell them.
The collateral utility expands the utility of the token beyond ownership, providing broader financial opportunities within the blockchain ecosystem.
Real World Example
Tokenomics plays a vital role in maximizing the value of tokens. One compelling example is xSUSHI, which not only offers fee sharing but also allows users to deposit it on AAVE and borrow against it. This strategy enables token holders to earn a 10% interest while deposited and access up to 50% of the token’s value in other assets like ETH or USDC.
Another illustration is Abracadabra, where staked SPELL tokens can be utilized as collateral for borrowing. This innovative approach expands the utility of SPELL tokens, granting users borrowing capabilities backed by their staked collateral.
By embracing these borrowing opportunities, token holders can unlock additional liquidity and explore diverse investment avenues. These mechanisms leverage the value of tokens, providing a means to capitalize on holdings beyond traditional means.
Discover the power of tokenomics and tap into the potential of borrowing and liquidity to maximize the value of your tokens.
Conclusion:
Understanding token utility is crucial for investors and users in the blockchain space. Understanding crypto tokenomics via exploring the utility of blockchain tokens are crucial. Tokens with clear use cases and utility have a higher chance of attracting demand and providing value to their holders.
Whether a token is designed for spending, offers cash flows, governance functionality, or collateralization, each aspect adds a unique dimension to its overall utility.
By evaluating the utility of a token, investors can make informed decisions about acquiring, holding, or utilizing tokens within the blockchain ecosystem. It is essential to consider the specific dynamics, rewards, risks, and potential returns associated with each token’s utility.
As the blockchain industry continues to evolve, the exploration of utility will remain a vital aspect of tokenomics. Token developers and projects should aim to create compelling utility propositions . that align with the needs and preferences of their target audience, fostering engagement, and ensuring the long-term success of their tokens and ecosystems.