Statistically speaking, it’s true. In about 80% of the white papers I read, the token mechanics make no sense. And we already know that 90–98% of businesses fail. So, I don’t mean to insult you personally, but statistically speaking your ICO will successfully raise money but the underlying technology will fail.
Often, when people come to me with token mechanics that make no sense, they will tell me the name of some large ICO that has similar mechanics as the reason that what they said makes sense.
Guess what, people? We don’t know if any of those ecosystems work yet. Some of them look more promising than others, but the truth is that we just don’t know. It’s all one big, crazy experiment, so someone else’s ICO isn’t proof of logic or success.
So let’s talk some logic.
Simple token mechanics (that don’t justify an ICO)
Token mechanics is a euphemism for fiscal policy. Most people have never thought about fiscal policy. If you haven’t thought at all about fiscal policy and want to understand why the world is a hot mess, the best books I know on the topic are by Yanis Faroukakis. If you don’t want to learn about fiscal policy, you might ask yourself what you are doing setting fiscal policy in a token ecosystem.
Because no matter how small your ecosystem is, a token economy is an economy. If you are making a utility token for the local lemonade stand, the token value will go down when it snows and back up in the summer, and everybody who holds your token knows it. On the upside, the SEC won’t be after you for selling equity in a lemonade stand.
But let’s say, oh, yeah. You’re right. I’m going to have hot chocolate in the winter, to stabilize the token. In the autumn I’ll have cider and in the spring I’ll have iced tea. But you know what the problem is now? Every time I get a token from someone, the only thing I can do with the token is sell it to someone who wants a drink. My drink stand only takes token, so people come to one side of the lemonade stand, buy a token with their credit card, then go to the other side of the lemonade stand, give me the token, and get a cup of lemonade.
Isn’t that a little silly? Part 1
Yes. It’s a little silly to sell a token for your services if you could just sell your services for money.
So what’s a token?
If my lemonade stand reminds you of the State or County Fair, it’s no coincidence. A token in cryptocurrency is the same as a token in real life. You go to the county fair. You can buy tickets for $1 apiece or 25 for $20. Rides cost 3 or 4 tickets a piece, so no matter what you do, at the end you have 1 or 2 tickets left and they are worth nothing. Theoretically, you could sell these “utility tokens” to someone else at $1 a piece, but what you really do is just give the to someone coming in as you are going out. If your token has no utility outside of the park, it’s not a utility token. It’s a casino chip.
Isn’t that a little silly? Part 2
Yes. It’s a little silly for people to invest millions of dollars in casino chips that are worthless outside of a casino. And, as I said in part 1, it’s silly to make them if you could just use money. We understand why we don’t want every kid who runs the rides at the county fair to have a belt full of cash, but we don’t understand why you can’t just use ethererum or bitcoin for your company’s payment system.
For example, what if you want to buy organic food (Ecobit), could you just use money for that? Yes. If you wanted food with a smart contract that guaranteed its origin, you could make people pay ETH for it and build the system with no dedicated token. A strong hint that something is weird about your token is if your home page says that you get a reward for holding the token more than 6 months. Most people buy food more than every six months, but if your ecosystem is unstable, you have to provide some incentive for people to hold the token. Otherwise, people would never hold it for more than the time it takes to wait in line for their cup of lemonade.
Why would investors want a utility token?
Investors don’t want a utility token. Most of the people who are putting their money into utility tokens are buying on speculation. They call it “high-risk investment”. These investors don’t plan to buy organic food, disk storage, infrastructure, utilities or even gambling tokens. They are gambling already. They are buying tokens as an “investment” while tokens are growing in value. Some people will make a ton of money, if they get out before everyone else.
But in the end, the tokens will be worthless, because at least 90% of the companies are going to fail, optimistically speaking. Businesses fail the overwhelming majority of the time. Businesses on the blockchain are ridiculously speculative, so the reality will be even harsher. And there’s nothing wrong with that. If you are investing in a company you believe in, and you know the reality, that’s cool. That’s why we have venture capitalists. But venture capitalists don’t get tokens. They get equity.
Real investors want equity. You can’t sell equity in your company without regulatory compliance, so people sell tokens. But tokens are nothing. When you have no company yet and no utility yet, tokens are just a piece of nothing. I’m not judging, by the way; that’s the reality. Buying a token gets you nothing and every single ICO has a long disclaimer legally guaranteeing you no rights to anything. Ask anyone holding Tezzies.
You’ve probably heard that ICOs are a scam. I disagree. It’s not a scam, because everybody in the ecosystem knows what the game is.
This is the game:
- Companies who don’t really need a token raise money as an ICO. They create some kind of token economy that may or may not seem plausible.
- Speculators buy tokens and sell them later for a higher price, hopefully. Some token buyers don’t really care if the price is higher or lower, as long as they can get money out of their local currency to something tradable. For someone with a currency in a country that doesn’t allow free currency trade, getting 50 cents on the dollar is still a good deal.
- The company gets money to develop their technology. Most of the companies I speak to are led by earnest and caring CEOs who really want to build the thing they say they want to build and do not intend to run off with the money.
- So far, speculatory investors are making good returns.
- The investors know this bonanza will end some day and they are taking enough out of the system along the way.
- A bunch of industries develop along the way, like me making money writing ICO whitepapers, blockchain developers, journalists, analysts, lawyers, conference organizers, marketeers, and all the other stuff that we keep buying with the money circulating in the system. Money circulating means more work for more people.
In the above scenario, you can see that nobody is scamming anyone. Everybody knows the game and nobody is getting scammed.
Oh, wait. One entity is getting scammed. The entity that is getting scammed is the government. You see, nobody is paying taxes here. The company gets an investment, but they are incorporated in Switzerland as a foundation, and the foundation is paying some other company to do the development, and the payment is in BTC, and the company isn’t profitable yet. The investors and employees are making money in BTC and ETH, so who the heck knows where that is going and how they are spending it. However, Uncle Sam, or whatever Uncle you have in your country, is getting very nervous and upset because money is changing hands without going through the tax authority.
As you can imagine, none of the players in this scam feel very bad about scamming the government. I won’t say anything about why nobody today feels bad about scamming their government. You have a government. You know why nobody feels bad about this. Unless you are a Finn. If you are a Finn, I apologize. Finland has an effective government and you do not know why someone would want to avoid taxes.
In any case, the government is getting really irritated. That’s why you hear the central banks talking about how bitcoin is horrible and evil and will cause the sky to fall or the world to end. The SEC regulating the heck out of it, ICOs declare that you can’t participate if you are from a particular nationality, and we commonly use the phrase “US person”. What is a US person? It’s a person with fewer freedoms than people from the rest of the world when it comes to participation in this new financial system.
But back to our scenario. Your token has no value and your are going to fail. But it doesn’t matter because in the meanwhile, people are employed and happy. That’s how economics works. Governments can print money but they can’t make value. People can make value. Sometimes the people making value are government workers, but more often they are people being industrious and creating a whole new industry, called, in this case “cryptocurrency”. And in this new industry, we even have our own money.
That’s why this article is about fiscal policy.
Fiscal policy sounds boring until it’s your money
I am not an expert in fiscal policy. But people ask me about fiscal policy every day. Or more often, I tell them their token economics are illogical and then I help them construct something that will be stable or at least viable. In my first month in business, I was highly influential in at least half a dozen fiscal policies. That is a very scary thought. Or maybe not, when you think about who has been setting fiscal policy up until now.
Because every token you create has its own economy, when you create the token, you want to think very carefully about the token economy. If you have to incentivize people to hold onto your coin, you have a system that is in danger of collapse. You can’t incentivize people enough to make them hold something that has no value.
So what economies make sense?
Apparently, I’m as naive as you are. I thought I could get through this topic in one post, but it’s already TLDR.
Next week I will talk about some specific reasons you would need a token of your own. Just like this week, I’ll use ideas anyone can understand. I’m not trying to impress anyone with academic or intellectual terminology. I’m trying to impress you with my writing, because I’m a writer. If you don’t understand what I’m talking about, that’s my fault, not yours.
So tune in for the next post, where I explain what a good token economy looks like and give some examples.