TLDR: Cryptocurrency tokens are vehicles for transacting value and should be created on top of existing companies / communities / protocols. Tokens should have a clear purpose and inherent reason for their existence, and their utilities should enhance the user experience. By carefully considering the purpose and utilities of a token, projects can create a successful, decentralised ecosystem that aligns incentives, facilitates governance, establishes ownership, enhances sovereignty, redistributes wealth, and more.
Cryptocurrencies and tokens have revolutionised the way we transact value, from traditional monetary exchange to social and political interaction.
This means creating a token for your ecosystem is not about hopping on the bandwagon but about creating a clear mechanism that provides value to the users and ecosystem.
It is important to distinguish between cryptocurrencies and tokens.
Whilst cryptocurrencies are used to fundamentally align incentives in a DLT, tokens are created as a layer above companies, communities, or protocols, that serve as a feature that improves user experience and/or company performance.
Token utilities are the practical applications of the token's purpose, and they should be designed to enhance the user experience and create additional demand. But what is the purpose of a token? There are three - decentralisation, control, and data transfer.
The mantra of Web3 is about giving users ownership of their own data, assets, activities, and everything in-between. To its extreme, this implies creating completely decentralised ecosystems that don’t need any middle-men, including the founders or team. Without a central authority however, these ecosystems need something to align incentives (1) and continue the idea of decentralisation beyond a localised system (2).
By utilising an independent token, it's possible to create ecosystems that are not associated or reliant in any way on anything or anyone else; this grants autonomy (1) and much greater safety from counterparty risk (2).
Utilising tokens to transfer data cuts the length & cost, increasing liquidity, and adds immutability and security, increasing trust. This is fantastic when tokenizing assets (1), for sensitive data transferring (2), and for data storage (3).
These purposes overlap in loads of different ways, and a token can have the purpose be any combination of the three at the same time.
Utilities are the direct actions that define what a token can be used for, and all fall under one or more of the token purposes above. We have outlined some of the most popular utilities below.
The crucial thing that most projects get wrong is they look at other tokens and think, “What utilities should we add to our token?” This is the top-down approach and the problem with it is that the utilities don’t stem from the product, which causes a disparity in the ecosystem.
In reality, you should create your product first, then think about whether you need a token and where it could be implemented, and then from there you can derive the necessary utilities.
It is crucial to understand that creating a token for your ecosystem should not be taken lightly. The reason behind the token needs to be carefully thought about and understood, so that the economy and tokenomics can reflect it.
Tokens are not a quick fix to a bad product or a trendy gimmick, but a serious commitment that requires careful consideration of the token's purpose and utilities.
Creating a successful token requires expertise in economics and finance, as well as understanding of politics and sociology, and a deep understanding of the underlying technology.
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