Bitcoin maximalists say everything that isn’t Bitcoin is a scam.
They have a point.
What explains this hostility?
While the possibilities of token issuance are powerful – capital formation, quick liquidity, community building, etc. – there are serious problems in the space.
Even honest token sales take advantage of people’s desire to find the next 1000x return. The implication is that anything could go from low $millions in FDV to $billion in FDV.
Bitcoin’s amazing track record of returns has convinced people that such returns are possible. But little effort has gone into educating the public that such returns are insanely rare. Ethereum, despite its lousy returns since its peak, is still roughly 10,000x the pre-sale price.
Many projects that have raised successfully go completely silent. Does this mean the project failed and the promoters just ran through the money? Did they just run off to live a comfortable life on the investors’ money? Or are they working diligently behind the scenes, still planning to release the project?
Whatever happened to EOS?
In 2017-2018, EOSIO distributed one billion ERC-20 tokens, raising several billion dollars. Yet the Wikipedia page, https://en.wikipedia.org/wiki/EOS.IO, is silent on any activity after 2021.
If multi-billion raises lead to virtual silence, should we really expect more of sub-million dollar raises?
Was this a planned scam or did it just fail.
Rotation and replacement
Good projects, backed by serious money, also seem to come and go. Ethereum had its moment, but it peaked in Bitcoin terms in June 2017. And, while it rallied in 2021, it has been declining steadily for over 3 years. $NEAR has had a similar pattern. $SOL has been strong recently, it has not overcome its December 2021 peak relative to Bitcoin. $SUI is doing well versus BTC, but for how long?
These are well-funded, serious ventures and they cannot seem to keep up with Bitcoin. What about the rest?
And this does not just apply to crypto. In the conventional stock market, returns are generated by just a few stocks. There is always a problem of concentration of winners.
The pay-to-play conveyor belt
Having begun the token release process, the self-dealing nature of parts of the business has become obvious.
The advice we have received is to launch a token followed by an almost immediate release to a centralized exchange. Why? Because exchange listing is meant to bring in new buyers, who will provide a positive exit for your initial buyers.
To play this game, a project only needs to pay off the token listing exchanges with high listing fees and the transfer of most of the funds raised for “market making”. Market making in this instance seems to refer to creating the appearance of trading activity to lure in unsuspecting token buyers. It will provide liquidity with the project’s funds and no risk of market maker capital.
The entire process seems designed to reward exchanges and consultants. It leaves honest projects with few financial resources and is even worse for the token investors. A sharp jump in token price followed by months of the token price grinding toward zero appears to be the actual goal. Of course, if the goal is simply to extract funds from the public, it’s a pretty efficient process.
Tokenomics as afterthought
Most tokenomics seem to be simply bolted on to the project, with little thought to whether or not they make sense. In most cases, the only discussion of tokenomics is token distribution, rather than the actual use of the token.
Is the token to be used as gas on a network?
This does make sense for a layer 1, but certainly not for any layer above that.
Is there revenue sharing with token holders?
This can make sense for projects that generate revenue in terms of fees. At some point, this begins to look like a security. Also, if there is a limit to the scale of the project, it could become a simple bond – providing a capped revenue stream. Look at GMX, for instance, which shares fee revenue. The token has steadily declined in price (although, the token staker is down less because of the fee share), despite being a good platform.
Is the token for governance?
Perhaps, thousands or even millions of people care about the governance of major projects – Uniswap, Arbitrum, etc. Moreover, both Uniswap and Arbitrum are used by many other projects, so there can be some concentrated demand for a governance process. But how many large, committed communities can be developed? A developing project probably needs centralized control for years to even reach a point where enough users care about governance. Outside of very popular projects, this seems more of an excuse for a token than a real reason.
Access?
Limiting access to token holders gives a real benefit to token owners, if they value access to the projects. But most new projects need new users and can’t necessarily afford to create a gate.
Discounts?
If a project charges fees, then discounts are a concrete benefit. This certainly is a utility in what is often described as a utility token.
Disappointing reality of too much of the token space
So, we are left with:
- buyers taking risk in search of often unrealistic returns,
- a natural rotation of winners that leaves some holding declining bags of tokens,
- the presence of scammers,
- a token launch/listing process that mostly serves service providers instead of projects and investors,
- and Tokenomics that may not serve the token buyer.
A Way Out?
As stated at the outset, there can be substantial benefits to token issuance. We believe that tokenomics can be constructed to be useful to both the token buyer and the project.
We can prove the Bitcoin maximalists wrong.
In our next article we will discuss a set of requirements that we believe are necessary to a good token issuance.