Utility vs Equity tokens

Utility vs Equity tokens

My feeling is that in the future people will invest exclusively in equity tokens (startups’ shares). I get the idea that any kind of utility tokens needs to have either a fixed price and represent some goods or services (which the startup is selling) or become e-money (this effectively means holding fiat in collateral).

Why should this be? These days, startups are trying to avoid security offering regulations by selling utility tokens. This token has certain characteristics through which it can grow up – for example fixed supply. But there’s no economy that can function properly if its own internal currency (utility token in our case) is volatile. Instead of contract with each other in that currency, people will spend all their time speculating instead.

It could, perhaps, make sense to regulate the supply of internal currency, so that its exchange rate in relation to virtual goods is predictable. In other words, emission and withdrawal from turnover would be regulated by a smart contract based on economical factors. In actual economies, this process is managed manually – but it would be good to see some kind of operational theory in this area.

How could utility tokens and equity tokens be linked?

Let’s take an example of an online multiplayer game – such as Warcraft. The game creator could develop its decentralized version, in which each player has their own full copy of the game engine. All the copies are connected in the decentralized network.

The game has its own internal currency (gold), along with a whole range of goods (swords, shields etc) which can be traded. There is also an exchange, where gold can be bought for fiat. The inventory of gold and the game’s goods is managed by its own blockchain, which is distributed among all the players.

The game’s creator also keeps an account in gold. He has the initial right to set a rule that every transaction between the players – whether in gold or in goods – requires the payment of a small fee, which accumulates in the creator’s account. In reality, this can be called the profit of the virtual corporation.

But now let’s come to the most important point. The creator may issue tokens which represent the game’s shares (equity tokens) – and pre-program distribution of the profits proportionally among the token owners. These shares could be pre-sold in advance of the game’s development.

The emission of internal gold will depend on the number of players, and the volume of transactions between them. Investment in the game’s internal gold should be valueless – but the game’s equity tokens themselves can bring in a profit that is proportional to the volume of the game’s economy.

Now let’s consider the important consequences:

  1. The company does need to own any servers.
  2. The company can be fully virtual, and doesn’t belong to any jurisdiction.
  3. The company’s profits are generated fully transparently for all players and investors.
  4. Investors in the project are guaranteed to receive profits, since their distribution is no longer controlled by the game’s creator.

We at Distributed Lab are currently working on just this kind of model and framework for enterprise tokenization – TokenD.

Pavel KravchenkoCryptographer, founder of Distributed Lab