Introduction
Cryptoassets fall into three primary categories:
- Stores of value (e.g., Bitcoin, Ethereum)
- Security tokens (traditional securities on blockchain)
- Utility tokens (focus of this article)
This article explores innovative economic models for utility tokens, addressing the velocity problem—where high token circulation rates suppress value.
Background: The Velocity Problem
Most ICOs (2016–2017) launched utility tokens as proprietary payment currencies (e.g., Filecoin, BAT). These tokens face a critical flaw:
- Equation of Exchange: MV = PQ implies token value (M) inversely relates to velocity (V).
- High Velocity: Proprietary currencies often exhibit velocities exceeding 100 (vs. USD M1 at 5.5), creating perpetual downward price pressure.
👉 Discover how utility tokens can defy traditional valuation models
Model 1: Work Tokens
Key Concept
Service providers stake tokens to earn the right to perform work (e.g., Filecoin storage, Augur predictions).
Benefits
- Value Capture: Tokens represent a claim on network cash flows (NPV model), not just transaction volume.
- Example: Filecoin’s terminal value could be 100x higher under the work token model ($137.5B vs. $1.1B–$3.6B).
Mechanics
- Staking: Providers lock tokens proportional to desired workload.
- Slashing: Penalties for poor performance (e.g., unavailable storage).
- Pricing: Unit service costs fixed at the protocol level.
Ideal Use Cases
- Commodity services (storage, computation).
- Decentralized cloud platforms (Livepeer, Keep).
Model 2: Burn-and-Mint Equilibrium (BME)
Key Concept
Users burn tokens to access services, while the protocol mints new tokens to reward providers.
Benefits
- Price Stability: Token supply adjusts dynamically to usage (equilibrium between burned/minted tokens).
- Flexibility: Service providers set their own prices.
Example: Factom
- Cost per transaction: Fixed at $0.001 (denominated in USD).
- Minting rate: 10,000 tokens/month ensures supply-demand balance.
Limitations
- Arbitrage Risk: Short-term manipulation possible (mitigated via commit/reveal schemes).
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Comparing the Models
| Feature | Work Tokens | BME Tokens |
|---------------------------|--------------------------|-------------------------|
| Value Capture | Cash flow multiples | Transaction volume |
| Pricing Control | Protocol-set | Provider-set |
| Best For | Commodities | Differentiated services |
Governance & Scalability
- Work Tokens: Governance by stakers (supply-side focus).
- BME Tokens: Neutral impact on governance.
- Scaling: Work tokens enable synthetic assets across chains (e.g., cross-chain staking).
FAQ
Q1: Why do utility tokens struggle with velocity?
A: Unlike general-purpose money, holders have no incentive to retain tokens beyond immediate use, accelerating circulation.
Q2: Can BME tokens inflate indefinitely?
A: No. Burning adjusts dynamically—higher usage reduces supply, increasing token value.
Q3: Which model suits decentralized marketplaces like 0x?
A: BME, as providers compete on UX/API quality (non-commodity).
Conclusion
Utility tokens evolve beyond simple payment instruments:
- Work tokens maximize value capture for commodity networks.
- BME balances supply-demand for differentiated services.
The future lies in hybrid models and programmable money innovations.
For feedback or collaboration, contact [email protected].
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