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Utility tokens are imperfect solutions to a critical problem in crypto – defining use cases.
Here is a brief summary of their key challenges:
- Many are copycats and lack teams capable of ever delivering on the promises laid out in their ubiquitous white papers. In a review last year of documents produced for 1,450 digital coin offerings, the Wall Street Journal found 271 with red flags that include plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams.
- They have done damage to and turned off investors and potential users around the world who bought into the space at the height of the hype cycle in 2017 and sold at losses between 50-85 percent
- They face regulatory uncertainty around the world as we all try to create a definitive taxonomy of crypto assets and differentiate utility tokens from currencies and security tokens
- It remains an open question regarding how the underlying economics of utility tokens will work (regardless of whether they are based on a standard such as ERC-20 or are intended for use on a new platform such as Tezos or Telegram). For instance, aside from supporting an initial crowdfunding proposal, why would rational consumers pre-pay for access to a distributed file storage system (unless it was at a discount equal to or greater than the net-present value of their payment) to let another entity hold the funds and take the float? This is a similar question asked of providers of crypto-backed stablecoins that need to be severely overcapitalized as a precaution against margin calls.
That said, through all of this negativity utility coins and the ICO boom provided a critical service to crypto industry and the broader digital economy – they raised collective expectations of what this technology can achieve and the ways that it can impact our lives on a daily basis. This mental shift is a monumental accomplishment given the fact that users around the world have long sought to dis-intermediate today’s technological titans such as Google, Facebook, and Uber that vacuum up our data and sell it to the highest advertising bidder or violate their own privacy policies.
Why is this so? The reasons are simple and threefold:
- The problem of centralized companies necessitates a decentralized antidote
- Before the advent of utility tokens and the ICO craze, the crypto industry was approaching a ceiling that was far too low
- Discussions about crypto outside of the industry lacked a real message about the value to everyday users who were not ideologically opposed to our current financial system
Consider Bitcoin and Satoshi Nakamoto’s white paper, which first appeared ten years ago, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. As progressive as this document was and remains today, it has become vibrantly clear that Bitcoin’s setup and functionality would be challenged to support use cases such as distributed storage, social networking, and mass computing, which we did not necessarily want to see succumb to centralized companies.
Satoshi’s white paper acknowledges these limitations in its title, and as most readers are already aware, Bitcoin was created in the aftermath of the global financial crisis and was only meant to be a deflationary and predictable monetary system that was beyond the reach of central banks. It is true that developers and technologists have used the security and predictability of Bitcoin’s network for other functions such as time-stamping data or to represent “real-world assets” on the blockchain. However, given the limited throughput of the network (7 transactions a second) this may not be scalable globally.
It was within this vacuum that Ethereum appeared in 2014, as the first real “utility coin” that could be used to execute any smart contract or program on the Ethereum network, but it has similar scalability challenges to Bitcoin.
Conversations about what crypto could achieve began to get bogged down by core key questions such as how to migrate from a Proof of Work to a Proof of Stake system, whether or not second-layer scaling technologies such as the lightning network could ever work, and what it would take for institutional investors to come into the space.
Utility tokens offered, and still offer, a respite to these less exciting (albeit important) questions, by reminding crypto enthusiasts and casual observers alike about the true potential and purpose of the space. It is not to necessarily make everyone rich, although there are and will continue to be crypto millionaires and billionaires, but to offer a way for everyone to restore their digital sovereignty, what could be argued is the defining challenge of the 21st century.
Utility tokens are not perfect, and even well-intentioned projects have been misappropriated by nefarious purposes. However, this should not invalidate a technology. Remember, Bitcoin would not be where it is today without Ross Ulbricht and Silk Road, which the FBI took down in 2014.
There is a culling taking place across crypto, defined by mass layoffs at industry stallwarts such as Bitmain, ConsenSys, Steemit, and ShapeShift, among others. A similar, and probably deeper and more widespread, trend is taking place among ICO-backed companies and utility token providers.
In the end, we will hopefully left with a smaller cadre of more technologically sophisticated, mature, and differentiated utility and platform tokens that solve real-world problems in a safe, secure, and more equitable fashion.
January 28, 2019 at 12:02PM
Forbes – Entrepreneurs