Tokens are vehicles for transacting any form of value, meaning that a token can serve a multitude of functions at once (i.e. it can have different utilities); this makes tokens unique to traditional financial instruments that can only transact one form of value at a time.
More details about tokens can be found here: https://thoughts.simplicitygroup.xyz/p/token-utilities
A dual-token economy is a term used to describe crypto projects that utilise two separate tokens within their ecosystem.
A token’s versatility opens a world of opportunities and benefits, however, it also leads to three main concerns:
These issues can be countered by introducing a dual token economy that allows the project to separate token functions into multiple tokens.
There are a few benefits to the dual-token model that are worth highlighting in particular as evidence to how it solves the above problems.
Overall, a dual-token economy that separates token functions can provide a more flexible, transparent, and efficient ecosystem that can meet the needs of different users and corresponding utilities without conflicting mechanisms. This gives projects freedom to innovate and create new solutions for old problems.
Even though there are many benefits to using a dual token model, there are a few problems. Firstly, you have higher development costs and more tech-related considerations. Secondly, it’s tougher to explain the economy to investors and users. But most importantly, there is one drawback to be wary of:
Perpetual possibility of conflict of interest between those who hold either token. For instance, when comparing the goals and incentives of those who hold security tokens to those who hold utility tokens, it is clear that there is a distinction between the two groups' ideal future because the former care more about profit whereas the latter care more about protocol functionality and experience.
An example of this conflict occurring is an issue that emerged with MakerDAO on September 2020. When $DAI holders lost about US$2,500,000 from their vaults on the system due to a hack, a governance vote was held on whether to reimburse the loses with the $MKR treasury. The governors, $MKR holders, decided against compensating the losses. This shows a clear misalignment of incentives between different token holders and how that can impact the overall ecosystem.
The fundamental key here is that $MKR holders are not aligned enough with the users of $DAI. This isn’t a fault of the dual-token model inherently, but more so that of the project.
$MKR holders gain nothing (in the short term) by using treasury funds to reimburse $DAI holders.
If the project intertwines the incentives of both token holders by making them dependant on one another, that would resolve the concern of conflict of interest. It’s a classic prisoners dilemma where if both parties work together, they get the most reward (or the least benefits), however, with one key difference…
The project can prevent one party “confessing” and one party “remaining silent” - i.e. the project can enforce alignment by attaching the success of one party to the rewards of the other, in essence creating a situation where if one party confesses and one remains silent, then they both still get 5 years each.
You need to assess the financial status and the corresponding monetary and fiscal policy of the token first. Let’s look at an example:
If token is used for governance and a medium of exchange on the project’s platform’s marketplace, then the financial status of the the token will be different for the two distinct parts of the ecosystem.
This means the monetary policy (primarily money rules governing the money supply) for the governors is ideally to have a maximum supply and longer vesting schedules.
However, for the marketplace it would be better to have a Burn and Mint mechanism for the supply that adapts to the demand and velocity of the tokens within the marketplace.
If you decide that your economy utilises a token for functions that contradict each other when it comes to the monetary or fiscal policies, then it could be good to implement a dual-token model.
Axie Infinity: $AXS is used for governance and staking with a limited supply, whereas $SLP is infinite and is used for in-game transactions.
GMX: $GMX is a governance and utility token, whereas $GLP is a liquidity provision token used as a decentralised B-Book for swaps and leverage trading (more info).
Curve: $CRV is a governance token, whereas $veCRV is an escrow token that gives users extra platform benefits.
Dual token economies allow for the separation of different token functions which comes with great benefits, but also some risk. These ecosystems require careful consideration, but have fantastic effects if implemented correctly.
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