Equity-Based Token Distribution. Part 3. “Why utility coins is a scam” or “How to make your kebab stand worth $1B”.
Be ready for some math, but, I guess, the $1B reward is worth it 🙂 You have a kebab stand. You sell kebab for 2$. Your costs are 1$. 1. Issue 1000000 utility tokens, sell 10% for 1$ each, gather $100k. 2. Make a rule that when one pays in tokens 1 kebab costs 1$ instead of 2$. 3. Initial market price of your token is $1, so 1 kebab = 1 token. 4. Sell 1000 kebabs per day for tokens, so customers need to buy tokens on an exchange. Cover your costs from ICO funds. 5. After each day, the market price goes higher (let’s say 5%), because supply is reduced and there is still demand for tokens to buy kebab. 6. After 100 days your ICO funds are drained, but token price is ~100$ and your market cap is $100M. Now one kebab costs 0.01 token. 7. Sell 5% of your tokens to big investors and spend cash to increase production. 8. Now you sell 10000 kebabs a day, which increases the demand 10x. Token price easily goes to $1000. Your market cap is $1B and your kebab token becomes a global payment system 🙂 Don’t say thank you 😃 The model is taken from ICO whitepapers. It’s some kind of a Ponzi scheme. Initial price of the token, kebab, costs don’t matter until your control majority of tokens.
Equity-Based Token Distribution. Part 4 — How to set up your own economy.
If your project only features Utility Tokens, you’re going to run into problems. The functions of any Utility Token can be split down amongst commodity, currency and equity tokens.
Commodity Tokens are vouchers (or futures, or receipts) for services. They can be cashed-in for services at any moment, regardless of the price. These tokens are issued by the business or platform which provides the services, and they can be sold just like goods. They could also be exchanged among the platform users.
Currency Tokens are an accounting tool for users, with unlimited issuance or not managed by the project. The payment currency needs to be linked to another existing currency in 99% of cases. Currency tokens are usually either an idealized internal payment system, or are based on an external currency.
Equity Tokens offer the right to co-ownership of a system. If necessary, Equity Tokens can be split into three elements – ownership, dividend, and governance. Ownership means the exact proportion of ownership of a company, and can be considered to be a tokenized Share. Dividend gives the right to receive dividends from the system in the form of the Commodity or Currency Tokens. Governance enables the holder to take part in decision-making concerning the management of the platform.
Currency Tokens are the most complicated to define:
- A Currency Token should be as independent from the system as possible, in order to prevent the possibility of its manipulating (otherwise it is just an ordinary Utility Token).
- The volume of Currency Tokens in circulation could be (and should be) linked to the size of the internal economy. In cases where there is an internal currency, this implies the possibility of additional issuance. In cases with an external currency, it implies increases in reserves.
- Having your own Currency Token is only necessary for managing the internal economy. Chaining users to the use of an internal currency can be achieved by (a) commissions, which must be paid in the currency (b) reserves on the accounts, or (c) compulsory centralized services.
Cases when having your own currency isn’t needed (which covers 99% of cases – and this where the majority of the ideas of an ICO come in) include:
- If there is only one merchant in the system (a currency which only Apple accepts, for example, doesn’t make sense).
- If there are only merchants of one kind in the system (a currency which can only be used to buy kebabs doesn’t make sense either – at least, while it’s not a commodity token – for example a voucher valid for one kebab).
- For internal accounting inside companies or ecosystems, even if they are working on a DAO principle.
Now let me emphasize this once more – when you don’t need YOUR OWN currency, it makes sense to use a tokenized external currency (or several of them), which will be user-friendly; and Commodity and Equity tokens.
Let’s look at an example.
A tokenized company with transparent distribution of profits, quick decision-making, and independence from its founders would be an investor’s dream come true. It would accept any currency that suits the users, and with 99% of user cases. The P/E multiplier of such a company, if compared with a traditional one, could be as much as double, or more (based on the transparency of its cash flow), but its market share could rise even faster. I’d say this model would be primarily applicable for existing businesses, in which the motivation of its service users is clearly understood. It’s much less suitable for start-ups who make a pivot every week.