During the ICO boom of 2017, projects were not incentivized to finish their proposed products. Instead, they would create cycles of perpetual hype based on their hypothetical future plans. This toxic environment has led to ICO projects that do not develop anything about two years later, leaving us with the status of today's tokens.
The formula for a successful ICO seemed simple enough: take something and add a token at the end and you were good at the exponential gains. People have bought tokens regardless of sustainability. But fund-raising projects are failing or abandoning their original planned utility tokens.
Mercury Protocol, Civic and Iconomi reimagined their tokens. (Congratulations to be adaptable in a rapidly evolving sector) Cofound.it has abandoned crowdfunding and their site now redirects to 404 Page Not Found. The projects bought tokens, interrupted them, converted into shares or in another security. Civic introduced a new whitepaper on up-to-date token usage.
These companies generally moved away from their payment tokens. Rather, they try to capture value more effectively. It is much more difficult to pay with a token than with Bitcoin, Ethereum, Litecoin, Stellar, etc., Putting payment tokens at an immediate disadvantage.
The vast majority of tokens will not acquire any significant value. Many token projects simply failed in the design of the mechanisms. They did not know how to acquire the value of a token. And thanks to these pioneers, we now know what not to do.
There are four things a token can do.
The first is to be a payment token.
Users have little incentive to retain them. This presents a problem, since the game's theory turns into a game of redeeming payment tokens as quickly as possible, in theory for a good or service. However, tokens have a considerable amount of friction. P eople did not pay in Quantstamp, a protocol for the security of intelligent contracts, for its auditing services. It was easier to pay ETH or USD ̵
Payment tokens may be the most popular type of token integrated into a token project. Most do not actually capture the value. In addition to Ethereum, Bitcoin, Bitcoin Cash, Stellar and Litecoin all require payment features.
The second thing a token can do is provide a mechanism for voting.
So-called "governance" tokens are often based on Ethereum. The governance of Ethereum will therefore influence the governance of these tokens. Most governance tokens, largely due to their dependence on Ethereum, do not actually acquire value. They are intended to represent a vote.
The third type of token is to reward a user for a service that provides the network.
Work tokens are perhaps the most easily recognizable cryptocurrency models. In this model, the user provides a service for the network for a reward. Ethereum and Bitcoin are examples of work tokens or proof-of-work systems, in which a user provides electricity for block bitcoin rewards. With that said, Ethereum is migrating to a stake test model this week.
At the token level, this whole dynamic is abstract. You should evaluate these networks more than you would with Ethereum to be incentivized to work for them. Most people would support Bitcoin or Ethereum before they supported a token.
A network could give or pay in a work token or it could be used to block a staking mechanism for a bond, etc., and gain from it. In the token universe, projects that described work tokens in their white papers failed to provide a network for which users can work. You can not work for a network that is not in production.
The fourth type of token represents the equity or a resource
There is of course the popular security token, which is an investment contract and represents a real world resource. Projects like Polymath.Network have drawn attention to solving problems like KYC and AML when it comes to tokens.
The security token ecosystem is nascent, but this will be a big market. You will have both systems: utilities and titles. Both will exist.
The Near Future of Tokenization
Several token-released protocols could offer advantages over Ethereum, which enjoyed the advantage of the first token in the token industry. Other protocols may offer similar, and possibly better, features that would have important implications for token holders released on Ethereum.
For now too many tokenized projects simply have no use for their tokens. Companies blocked their products when there was no reason. Blockchains are good in some things, such as resistance to censorship, immutability and verifiability. Not many companies have designed their tokens in an elegant or sophisticated way.
Po.et is an example of an elegant blockchain-based business model. They do not use a token. Po.et authenticates the bitcoin blockchain. Blockchain provides value here through the proof of existence and notarization.
There probably will not be another ICO bubble like 2017. There will be another bubble cycle that artificially pushes the value of tokens. Today and in the future companies will have to design good tokens. This means identifying a problem that is elegantly resolved by a token. Today, the standard involves creating a problem where nobody else was before, and then created an even bigger problem by attacking a token on it.
If you're considering a token for your activities, focus on your business first. So on how the blockchain applies. And then, and only then, ask yourself if you really – honestly – need a token. Honestly, probably not.
We'll start to see more Ethereum-based applications – and indeed, on other systems – that have nothing to do with tokens, and just use the basic protocol as it is. The only thing that captures the value at the basic protocol level is the decentralized exchanges, which are currently used to move tokens. In the future, in addition to CryptoKitties, we will see more services like Po.et using blockchain in a defensible way.