Redefining "Value" for Crypto Tokens

December 02, 2023 • 4 min read
Redefining "Value" for Crypto Tokens

Tokens are the primitive elements of the web3 world. They are essentially internet-native units of values, aiding in the scaling and bootstrapping of decentralized protocols. They have a multifaceted utility, representing ownership, establishing identity, or serving as currency. 

In the ownership economy article, Jess Walden, CEO of Variant, clearly highlights the benefits of tokens as a catalyst for developing the next generation of the internet. If distilled into a single sentence: “Tokens are mechanisms for the trusted exchange of value within a network.”

Currently, tokens rarely maintain value as their values are not very tangible value for users. This article explains why values are not persistent and how they should be tangibly infused into tokens.

Beyond voting rights

In recent years, the crypto market has demonstrated that tokens used only for granting voting rights (DAO) are insufficient for sustaining and increasing their value over time.  

Even inflationary tactics like staking tend to significantly dilute holdings in the long run, leading to a propensity for holders to sell off their tokens. 

This figure shows the price trends of some tokens, which focus solely on providing voting rights. As observed, most of them follow a specific pattern: initially peak and then gradually decline in value towards zero. 

Equity and Dividends

For a token to gain value, it must carry a monetary value, and what is better than the protocol's revenue? Every protocol has a function that provides a service to users in exchange for a fee, like a swap function in a DEX or the borrow function in a lending protocol. 

The total of all these fees, or the revenue, should be distributed among the token holders. This approach anchors the token's value to a tangible metric, the protocol's revenue, rather than the intangible metric of speculative market forces. 

This establishes a robust and positive feedback loop for enhancing the project's value: a solid product's use case attracts more customers, boosting revenue. This rise in revenue then elevates the token's value, thereby providing the team with additional resources to improve the product further.

This model mirrors the traditional concept of equity and dividends seen in large corporations like Apple and Microsoft. Shareholders in these companies own a portion of the enterprise and, consequently, a share in its profits.

GMX - #realyield

GMX exchange was the first project to initiate revenue distribution to its token holders by starting the #realyield movement. In this perpetual DEX, a portion of the trading service fee is regularly allocated to $GMX token holders.

The figure demonstrates the potential strength of this approach. Despite a bearish market trend, the price of the $GMX token remained relatively stable. This stability is due to holders basing their decisions on the revenue received from the project rather than market sentiment.

The revenue distribution model presents three key advantages:

  • Stable price dynamics: The price of tokens does not fluctuate merely based on market sentiment. Rather, it aligns with the protocol's economic growth over time, leading to more stable and predictable price movements.
  • Merit-based positioning: Tokens associated with protocols with robust and practical use cases tend to rise to the top of the market. The strength of the use case directly elevates the token's position in the market.
  • Prevention of overvaluation: This model mitigates the risk of tokens being overvalued at their inception, a common occurrence driven by venture capital backing and influencer hype. 

The Securities Acts of 1933 and 1934 in the United States mandate that companies offering public shares must adhere to specific regulations. The Howey Test, a key determinant in this context, states:

“If profit is expected from the efforts of a promoter or third party, the entity is subject to securities laws.”

This definition fits precisely to tokens used for protocol revenue distribution. It poses a significant challenge for developers, as these tokens' open and decentralized nature makes regulatory compliance impossible. 

To ensure compliance, developers must ensure:

  • All token holders go through a thorough KYC process.
  • Token trading is limited to officially licensed brokers.
  • A detailed and tough audit process is implemented.

Consequently, many projects opt to limit their offerings to providing voting rights through tokens, avoiding the complexities of these laws. 

Yet, as these regulations date back 89 years, they are ill-fitted for financial ecosystems evolving with digitalization and user-centered ownership. The crypto community hopes lawmakers adopt a more flexible approach in the future that supports the industry’s growth and value.