Last updated on October 15th, 2024 at 12:39 pm
Tokens have become a popular way for crypto projects to raise money quickly and efficiently. By creating and selling “native tokens”, these projects can attract investors and secure funding without needing traditional methods like venture capital or bank loans. Investors buy these tokens early, hoping for future returns if the project succeeds.
From high-profile Initial Coin Offerings (ICOs) and Initial DEX Offerings (IDOs) to massive token airdrops, the trend of issuing tokens has become almost routine. However, this practice is not without its flaws. In reality, many crypto projects don’t need their own tokens to succeed.
The rush to create new tokens often overlooks the core purpose of a cryptocurrency, which should be to offer genuine utility and value. Far too frequently, tokens are launched with little more than speculative hype, leading to a decline in their value and, more critically, a loss of trust within the community.
This article discusses the implications of issuing unnecessary tokens on a project’s credibility, overall value, and the trust of its user base, advocating for a more thoughtful approach to token creation.
What Makes a Digital Token Valuable?
A truly valuable token must have specific, practical use within a project’s ecosystem, solving a problem or providing a valuable service. For instance, the Basic Attention Token (BAT) is used in the Brave browser to reward users for viewing ads, giving it a clear and defined usage. Similarly, Chainlink (LINK) has amassed a strong community by providing decentralized oracle services and essential data for smart contracts.
Tokens with real utility should be seamlessly integrated into a platform’s operations. They need to be essential for accessing services, paying for transactions, or participating in governance. Ethereum (ETH) exemplifies this by being used to run smart contracts on its network and pay for transaction fees. The UNI token, used for governance on the Uniswap decentralized exchange, is another prime example of a token with clear utility.
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Projects that are transparent about their goals, progress, and token usage build trust with their community. Cardano (ADA), which emphasizes rigorous peer-reviewed research and transparent development processes, has garnered strong community support. Polkadot (DOT) aims to enable a multi-chain network, with its token playing a crucial role in governance and staking within that ecosystem.
Tokens Lacking Genuine Utility Lose Value Quickly
Without a clear function or role within the project’s ecosystem, these tokens become purely speculative assets, relying solely on hype and marketing to drive their initial value. And this is what many crypto projects that launch tokens do.
Tokens without genuine utility tend to lose their value quickly. When a token has no clear purpose or use, it’s hard to maintain its value over time. Investors quickly lose interest, and the drop is usually fast and severe, as seen in many ICOs where tokens rise in value during the initial sale but crash when the lack of utility becomes clear.
Even tokens with a “conceivable utility” can face this issue. The play-to-earn web3 game Axie Infinity’s two tokens is a good example.
READ MORE: Axie Infinity Tokens Are Down Bad, How Did We Get Here?
Transparency is key
Another dimension to this issue is the behaviour of developers and project teams regarding the funds they raise through token sales. Many projects release whitepapers with little to no information on the tokenomics of their protocol or based on faulty economic principles.
DeFi doesn’t introduce new rules of economics; it only alters how they are applied. The law of supply and demand always works when there is a value exchange—flooding the market with tokens with no clear value and using gimmicks to prop them up will backfire.
One example of this sure way is this: launching tokens without real value can severely damage trust in the crypto community. When projects fail to deliver on their promises, investors feel deceived. The case of BitConnect, which raised $3.45 billion before collapsing as a Ponzi scheme, illustrates the severe consequences of deceptive practices in token launches.
Another notable example is Centra Tech, which raised over $25 million through its ICO in 2017, promising to revolutionize financial transactions. Despite the successful fundraising, Centra Tech faced legal issues and was accused of fraud by the U.S. Securities and Exchange Commission (SEC).
Even well-known companies aren’t immune to these issues, as seen with Telegram’s Telegram Open Network (TON), which raised $1.7 billion but faced regulatory hurdles that led to significant challenges.
Transparency is key. Projects should be open about how they’ll use the funds from token sales and the actual utility of the tokens. Being transparent helps avoid misleading claims and builds trust with investors. In fact, the whole community should consider developing a simple framework or set of guidelines, like a set of questions, that projects should adhere to and satisfy before adding a token. While this might seem far-fetched, it could be a necessary step.
Crypto Platforms Can Target More Users with Reduced Token Reliance
Creating tokens can be especially problematic when targeting non-crypto users or newcomers. Many people find digital currencies confusing, making them hesitant to engage with a service. For example, a platform might struggle if it requires users to buy a special token through a crypto exchange first. This extra step can make things complicated and less appealing.
In many cases, using traditional payment methods or existing and trusted cryptocurrencies like Bitcoin can simplify the process and remove the need for complex tokens. Instead of requiring users to buy tokens through crypto exchanges, platforms can use familiar payment methods like credit cards or PayPal to make things much easier.
A better strategy would be to focus on delivering tangible benefits and clear value propositions that resonate with non-crypto users. This can involve highlighting unique features and advantages of the service, such as enhanced security, privacy, or efficiency, without emphasizing the underlying blockchain technology or tokens.
By simplifying the user experience and reducing reliance on tokens, DeFi projects can attract more people and gain wider adoption. This approach helps build trust and ensures that users get real value from the service.
In conclusion, while tokens have their place in the crypto ecosystem, not every project needs one. By focusing on genuine utility, transparency, and user-friendly approaches, crypto projects can build trust, attract a wider user base, and contribute to the long-term health and stability of the cryptocurrency market. It’s time for the industry to be honest about when tokens are truly necessary and when they might be more of a hindrance than a help.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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