The Economic Theory of Utility Tokens

This one is mind boggling to me, we have all seen newly self crowned experts on social media making wild predictions of $1000 valuations of the latest crypto token to hit Twitter.

But before you get your hopes up or buy into these guru’s bullsh!t, take a moment to understand the economics behind what is known as a “utility token” and see if their evaluation lines up. Now dont get confused with my words here, I’m not saying prices wont go up and down or if some of their “predictions” are some what close to the ball park. I’m simply trying to show you how you can sift through the bullsh!t and have more realistic expectations.

But first, lets understand the difference between a Crypto “Currency” a “Utility token” and a “Security token” to properly define or categorize a specific asset you’re looking into. I’m going to explain these in real simple terms that even someone fresh to the scene can understand and relate to.

A Crypto Currency is a coin designed and used to transact and pay for goods and services anywhere, think of it as a replacement or alternative to the all mighty US dollar. You can send your US dollars just about anywhere in the world and pay for some sort of goods or services, pretty basic stuff. Some crypto currencies claim to do a better job than others, maybe a more secure network, faster transaction speeds, cheaper fees and some even have the feature of being able to obfuscate the transaction making it untraceable.

A Utility token is a little different, and usually gives the user of the tokens access to a product or service in a specific ecosystem, but is not transactable outside of that network. Imagine if Uber had a Utility token, you might use 2 Uber token’s to pay for a ride instead of 10 dollars. But you couldn’t then go and buy a Big Mac with an Uber token because Maccas is a different ecosystem and you need to use a McToken for that.

A Security token is different again and considered more of an investment token as it generally derives a value from an external redeemable asset. Think of someone tokenizing a tradition Share of a company or maybe an ounce of gold, where as 1 token is redeemable for 1 ounce of gold, this is typically called a tokenized asset and classed as a security token. These ones can get messy as the creator has a legal obligation to meet the specifics of the contracts or face penalties from there regulatory body.

Ok so now you understand the basic’s between the 3 and how they differ, lets pop the hood and see what’s inside a Utility token. To do this I’m going to use an Analogy I created that I hope many can relate to. I call it The Timezone Token and it’s proven to be pretty effective in the past.
Remember back in the day we used to go to Timezone (For those not in Australia Timezone is a video game arcade), but you couldn’t just take a bunch of 1 and 2 dollars coins, you had to go to the counter and purchase a bunch of Timezone tokens with the cash in your pocket.

The tokens where generally plastic, colorful and had a single numeric denomination. 1 token = 1 game! Give the clerk $20 and receive 20 tokens, then use those 20 tokens to play 20 rounds of Daytona churr boi! But lets say after 10 games you and your mates are hungry and want to go grab a bite to eat.

You head down to Macca’s and order a Big Mac, “that will be $6.95 thank’s”, you reach into your pocket and pull out 7 Timezone tokens and drop them on the counter. The cashier looks at you and says “sorry mate, this isn’t Timezone you need real money to pay for this”. You realise you gave the Timezone clerk all your real money, so you head back to there to swap your tokens back to real money, so you can pay for your lunch.

Hello sir, I would like to cash in my tokens for my real money now thank you. “Sorry kid, store policy no returns, you have to use your tokens in the store, we do not offer cash redemptions” (other wise it would be classed as a security).

Sh!t…. What am I going to do now?, I’m starving and all I have is these tokens to play some more games.
DING…light bulb moment, I can sell them to another kid who wants to play Daytona (and now we have an open market). Hey mate I see you want to play some games, I have 10 Timezone tokens left over but I dont want to play any more so would you like to purchase them off me for $10? “Why would I do that, when I can get them over the counter for that price, Ill give you $7 instead” (supply is high, demand is low, price go down) You think for a moment and realise you dont have much option, so you agree and hand over your 10 tokens for $7 and finally you can pay for that Big Mac.

Imagine Timezone tokens being floated on an open market
“I heard Timezone’s getting listed on Binance”
“Are you riding Timezone right now?”
“Its revolutionizing the gaming industry”
“If you dont have 50% of your port folio in Timezone you dont like money”
“Timezone is so hot right now”
Price soars to $42.40 per token , Do this sound familiar?

Its a pitty 1 Timezone token still equals 1 game of Daytona, as now a single game of Daytona is gonna cost you roughly $42.40 … lol

Now I have used this analogy a lot over the years with great success with a lot of people having light bulb moments and properly understanding the purpose of a Utility token, to then be able to properly evaluate a price prediction from the actual use case of the token itself. Often people invest very emotionally and get caught up defending or pushing a specific Token with out stopping to think “Will I ever even USE this token for its intended purpose” If the answer is NO then you are simply a “speculator” on future price being higher than it is now, based on the theory that …. “I hope someone wants to USE this token for its intended purpose”.

You are not a USER of the Ecosystem, you are not a SUPPORTER of the Ecosystem you are a SPECULATOR of the ecosystem and hope to profit from others wanting to actually use it, and that’s ok, just understand the difference and dont get emotionally attached. Ok its time to do some digging into the token and figure out a fair valuation of future price, this valuation is normally based on various fundamentals and metrics, like potential userbase increasing over time that actually use the network. often referred to as “adoption”.

Some other things you may want to consider, does the overall circulating supply decrease or increase over time? as this can have a bearing on scarcity, using the theory of inflation and deflation. Now this is some what subjective, but does the use case of this token really solve a big problem in its current existing model or is it creating a problem to fix in the first place. And finally my favorite, can this system run on an already used currency or does it specifically need a new one? Unfortunately the answer to that last one is normally not what you want to hear as a punter. The fact is most utility tokens dont need to exist and the ecosystem could work flawlessly with out the need to create a new token in the first place. In other words we could just use Bitcoin, Litecoin or any other existing currency to use the network instead of factorizing a new token out of thin air. (sound familiar? cough federal reserve cough)

Imagine a new start up company comes up with the idea of being able to track who the original owner of that Timezone token was, when it was minted, how many times its changed hands and to confirm it is in fact a real time zone token and not a counterfeit version. They call them selves PooChain. PooChain is revolutionizing the supply chain industry, and have created a token called POO, You need to purchase POO tokens to be able to check this data on the PooChain. No POO tokens, NO data for you my friend…… how ever you can purchase some POO off PooChain for only 28 cent currently which is a steal, as Poochain has just announced a partnership with Google. Yep that’s right, there generic road mappy website now has google ads on it, this is very bullish news and I’m expecting at least $1 per token by the end of the year based of that alone.

^^ Does this sounds familiar? Poochain solves a problem that frankly, no one ever really gave a sh!t about in the first place, so the chances of future userbase increasing over time is low. Poochain didn’t really need to create a token either, and could have just used an existing currency to pay for data. Poochain has an infinite supply and will continue to print POO as long as people give them money, this causes inflation and will cause the token to devalue over time.

If all of his is starting to sound familiar , there is a good chance you’re holding a big bag of stinkers, its ok…. dont worry we have all been there, think of it like a right of passage to investing in the crypto market. Emotions are high and its easy to get swept up in the hype. Remember not all Coins and Tokens are created equal, there is some really cool tech out there, created by some really smart people. But there is also a lot of garbage, as new money attracts a lot of scams and half thought out plans by people wanting to exploit the opportunity to make a quick buck.

If your dead set on throwing some darts and catching that next moon coin just make sure you do plenty of research first. Hopefully this article has given you some clarity and help’s you to make some better decisions next time.

peace ✌️