One of the biggest changes we saw in the crypto markets in 2019 was the decline of the prevailing Utility Token Model, and the rise of a new one. We started seeing the transition from 1st generation to 2nd generation utility token economic models. And In 2020, we will see the rise of 3rd generation utility tokens. When I say utility token economic models, I am referring to the way utility tokens are valued.
And, how are utility tokens valued?
This seems like an obvious question.
Yet it’s hard to get a straight answer on this subject
So let me share my perspective
Utility tokens are valued, based on an economic theory.
The theory of supply and demand
The theory goes like this….
Utility tokens are needed to perform some utility on a blockchain, some function.
Let’s say you want to play a dApp game. That game is run on a blockchain. And it needs a token to work. You buy the token, you feed the token into the smart contract, and get done what you want to do. Say. trade an NFT.
Now as more people want to play the dApp game, more people need to buy the token to do that. And as more people buy the token, the existing token holders see demand going up, and they react by demanding a higher price to part with their tokens.
A growing demand for something with a fixed supply causes the price to rise, at least according to the law of supply and demand.
So there is this relationship between demand for the utility token, and its price.
The more people who want the token, the more the sellers can charge for it.
I’d summarize this first generation economic principle as follows: The token value is theoretically associated with on-blockchain transactions.
Now I said “theoretical” because there is no DIRECT link between the blockchain transactions, and the value of the token.
And NEARLY ALL utility tokens are based on this economic model.
But it’s 2020 now. And market sentiment is waning on this concept. This is one reason utility tokens have declined so much from the ICO mania of 2017.
So what’s next?
In 2019, we saw the first signs that the 2nd generation utility token model had arrived. What is a 2nd generation utility token model? It’s where the token is finally linked - albeit indirectly - to off-blockchain economic activity.
The Binance token would be a good example of this.
What is appealing to a lot of people about the 2nd generation utility tokens, is that these token offer holders a way to share in some economic activity. They have a security token-like quality in that regard.
And the market responded to this in 2019 very positively. Binance’s BNB token went from an $800M marketcap in Jan, to a high of over $5 billion dollars. Now in a bad market for utility tokens, BNB finished the year with a market cap of over $2 billion dollars. It grew by more than 300%.
Which is why you are seeing other businesses, namely crypto exchanges, following suit with their own 2nd generation utility tokens.
This type of token is clearly preferred over the original utility token model.
So what comes next?
I think we are going to see a pretty rapid movement into 3rd generation utility tokens.
And the hallmark of a 3rd generation utility tokens, is this: The token value is DIRECTLY linked to on-blockchain economic activity.
3rd generation utility tokens differ from the 2nd generation, in two critical respects:
-The economic activity being shared with token holders is direct from on-chain activity.
-And that economic activity is transparent. Because it’s on the blockchain. Not going on somewhere else, like a centralized exchange.
Think of DeFi applications that allow on-chain collateralization and on-chain leverage as an early example of 3rd generation utility tokens. And given the very positive market response to this evolution in utility token design, expect to see a lot more to come. And perhaps even a sneak peak at the dawn of 4th generation utility tokens before the year is up. What will 4th generation utility tokens bring that’s not in 3rd generation? You’ll have to wait a little longer for that answer.
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