Fundraising Applications: A lot of initiatives merely made tokens as fundraising instruments rather than applying fiat/ETH. Boosting by using a regular equity spherical or an present token was a lot more complicated so initiatives simply just launched a new token. As a final result, even if these projects attain their technological roadmap, they will still see a disconnect between their product and token.
Medium of Trade (MoE) Models: “Utility” tokens do not immediately result in amplified network benefit with enhanced token use. Even following item start, networks with proprietary payment techniques provide minor incentive for individuals to hold their tokens. Both the supply and demand from customers aspect can then buy in, use the provider, and market when finished. With inflation, offering strain will press rates down even even further. Vitalik Buterin (Ethereum) and Kyle Samani (Multicoin Funds) have both reviewed the challenges about token velocity thoroughly:
“Now, let’s look at the story with a “medium of exchange” token. N people worth a solution that will exist in a decentralized community at $x the product or service will be bought at a value of $w < x. They each buy $w of tokens in the sale. The developer builds the network. Some sellers come in, and offer the product inside the network for $w. The buyers use their tokens to purchase this product, spending $w of tokens and getting $x of value. The sellers spend $v < w of resources and effort producing this product, and they now have $w worth of tokens.
There needs to be an ongoing stream of buyers and sellers for the token to continue having its value.” — Vitalik Buterin
Airdrops: We saw airdrops as a novel way of distributing value however, they failed to spark real adoption. Sending “interested” addresses tokens was a spray-and-pray model in which the vast number of addresses that even noticed the tokens simply dumped the tokens or provided almost zero value to the protocol.
Speculation: Speculation also caused projects to ignore token economics in 2017 and many now are still avoiding the subject by deferring to “utility” rather than incentives. Aside from failing to deliver on their technology, this will push some projects to their downfall. Even with improved token economics, we will see speculation disrupt market equilibriums.
With these issues, a few projects have begun thinking about their token economics from day one and better align supply side and demand side participants.
Emergence of Work Tokens
Medium of Exchange tokens help exploit the Free Rider problem in which certain market players receive benefits that they have not necessarily paid for. With no skin in the game, token holders who are not active participants will benefit disproportionately from active participants’ efforts. Along with very little incentive to hold the token, constant selling pressure based on external market forces/speculation will push prices down further.
Work tokens introduce a novel way to organize network participants. With proper incentives, participants are, in theory, incentivized to actively contribute to the network.
In a work token system, network participants need to stake a certain amount of tokens to provide a service on the network and earn the corresponding fees associated with that work. The common analogy is the taxi medallion model in which individuals pay a high upfront cost to receive a medallion which gives them the right to drive/lease the medallion for additional income.