While the term “Initial Coin Offering” (ICO) may not have hit the mainstream until late 2017, its history spans all the way back to 2013. That year, the world’s first ICO, a project named Mastercoin (now known as Omni) was launched. This project raised $500kUSD – a respectable amount, given that the concept and potential significance of an ICO was hardly clear to all of its participants, much less fully defined.
However, this limited understanding would be short lived, as the rising price of Bitcoin, Ether, and other cryptocurrencies would soon garner increasing public interest in the crypto space, driving more and more demand for new and exciting projects.
By the end of 2019, there would be more than 5,100 ICOs created since Mastercoin, raising an astonishing $26 billion+ USD in capital combined.
While a staggering number of these ICOs were later revealed to be scams (over 1,100 (78%) of ICOs reviewed by the Satis Research Group were found to be fraudulent), many projects had (and continue to have) good intentions behind the solutions which they offer to the crypto world.
However, even with such intentions, many projects struggled with the “chicken and the egg” issue of launching a project without capital. Without capital, projects could not get off the ground. Without anything to show to the public, projects would have trouble raising capital.
Captivated by the ICO mania which peaked in 2017, many legitimate projects saw an opportunity to raise significant funds with nothing but a website and a white paper. And while it was difficult for the general public to discern between a real project from a fraudulent one, there are projects which carry forward today intent on developing their solution based on their initial ideas from many years ago.
While these projects may have found success raising capital via an ICO – many were later trapped with the painful reality that the issued tokens had no viable use cases. Dreams that a successful project would equate to a rising token price were soon met with the harsh reality that such ties were not as linear as initially expected. And while many successful crypto projects continue today – it would not be surprising to see that this success had very little carryover into the relevant tokens that were issued to get those projects off the ground to begin with. But why? And how could this happen?
How Tokens Can Fail, Even When the Underlying Project is Successful
It may help to first define what is meant by “token failure” before moving on to explaining how this can happen. However, for the purposes of this article, token failure is the event where a project has issued a token which has little to no demand, use case and/or utility. As it stands, these tokens simply exist – held principally by the project and/or speculators who hope that eventually, the commercial success and increased popularity of a project will translate into a rising demand (and price appreciation) of the underlying token.
Several years ago, a provider of blockchain security solutions came under fire from its token holders who felt misled by the company regarding its issued token. During this time, the project failed to provide clarity regarding the types of payments accepted from its customers (that is, whether or not the project required that customers use its issued tokens for payment, or if fiat, BTC, or ETH was an acceptable alternative). Eventually, the company did admit that customers did not need to hold or pay in their issued token to receive services, which stood in contradiction to what was previously communicated by the company. Without this requirement to hold the project’s native token, its utility became questionable – as customers and users no longer had any incentive to hold on to such a token.
Despite these issues early on, the project has continued to grow. Today, it works with some of the leading blockchain projects in the crypto space, and continues to take on high profile clients. However, its token price has tanked – from its all-time highs down to pennies on the dollar, the token is a shadow of the former glory it once promised.
These days, the project continues without any mention of the token, as it no longer appears to play a significant (or any) role in its ongoing business model. Despite this, the company continues to find commercial success, growing in size, popularity, and product adoption.
While this continued success is great for the project, its token holders have continued to suffer. Worse yet, the project is left with digital assets which are not being fully leveraged, thereby missing further opportunities for growth and adoption. But it doesn’t have to be this way – how did this project (and so many others) get here, and knowing this, how can they get out?
Broken Tokenomics – Lack of a Crypto Circular Economy
Video game enthusiasts may remember happy times spent at the local video game arcade during their youth, pushing away at the red and blue buttons to try a new special move, or testing a secret code to skip past various obstacles. As the money poured into the machines to do these things, arcades unknowingly became one of the first venues to expose the public to the concept and workings of tokens.
Players may remember that many arcades require its users to convert their cash to tokens. Machines around every corner of the arcade often converted bills or other coins into the “currency” accepted by the business.
In doing so, each arcade effectively created its own token economy – where services (game play) were provided for the exchange of tokens. Factoring in other uses (e.g. one token to access the restroom, tokens to purchase food and drink, gifting tokens to a friend so they can continue to play, etc…), and the arcade can suddenly feel a bit like how crypto tokens and economies are meant to be structured today.
Unfortunately, while these token economies work well within the arcade, they fail miserably outside of it. After all, try to take the same tokens to McDonalds to buy a hamburger and one will quickly see how useless these currencies are outside of the gaming facility.
Token economies like these are very linear:
- Person takes fiat to exchange for tokens from business
- Person uses tokens to buy service from business
- Person consumes service from business
- Business sells tokens to next person
In the case of the blockchain security solution company above, steps 1,2, and 4 have even been circumvented, thereby collapsing the entire token economy.
Unfortunately, there are blockchain companies out there which follow very similar models. For token holders, many rely on the assumption that, as more people come into the project’s ecosystem, the more that the token will achieve greater utility, the token economy will then be stronger, and as a result of that, the price of the token will rise.
Under this example, this logic is flawed. The token’s utility has already been defined up front. Whether a project has one user or 1,000 users, the token will not achieve more utility given this tokenomic model. While the token may rise against a fixed supply and increasing demand, it is unlikely that it will appreciate significantly if the model is ultimately to use the token to consume the service. Hodling the token would be akin to hodling the service, something that makes little sense, especially for projects which are accepting fiat or other crypto as forms of payment, thereby nulling the effects of hodling or general long-term holding of the token.
Pitfalls of tokens as AppCoins, see more – https://iq.space/docs/iq-yellow-paper.pdf
This linearity in this type of model, where users do not transact with other users but only with the token issuer is the ultimate downfall of such project defined tokenomics.
Without a real economy – where users transact with other users, where businesses transact with other businesses, and where users and businesses transact with each other, there is nowhere for the funds to come “full circle”, where the spending of one party has a downstream impact on other participants in the same economy.
Until Now – PARSIQ’s IQ Protocol Provides Existing Tokens Utility
Fixing a broken economy is not for the faint of heart, after all, full careers have been built around such monumental tasks – understanding everything from borrowing and lending, to national and global consumption in the consideration of setting various economic policies.
However, in the context of token economies, PARSIQ, and its revolutionary IQ Protocol, has created the ultimate “plug and play” tokenomics model. This solution, which is industry and blockchain agnostic, lays out the framework to provide instant utility to existing and/or planned tokens.
IQ Protocol is a risk-free, collateral-less solution to tokenize subscriptions. Effectively, any product or service sold by a project can be turned into a subscription – where access to that solution is controlled via the project’s token. Under this protocol, PARSIQ has completely reimagined how the subscription model is executed, and has also introduced a new dimension in terms of how businesses can operate (didn’t think a business’ existing framework could support a subscription-based model? That’s because these businesses haven’t met PARSIQ).
So How does it work?
The IQ protocol revolves around two basic principles – Life-Time Value, and Rentability.
As described earlier, a common blockchain business model often involves the conversion of fiat into the project token, and then the utilization of that project token to purchase the solution from the project itself. But what if this type of a transaction didn’t have to be so linear? What if the model could be modified where a transaction didn’t need to take place each time the buyer required access to the product? What if this access was perpetual?
Effectively, this is a subscription model. Users do not pay to watch each episode in a Netflix series, but rather, pay a monthly fee to consume as much Netflix content which they desire. The same goes for a Spotify subscription, users do not pay per song, but for the rights to listen to all songs in the Spotify catalog for a fixed monthly fee.
With IQ protocol, any project can now directly tie their solution offerings to their tokens. From media content to a weekly delivery of fresh bagels, any product or service can now be tokenized on the blockchain. Here’s how.
Businesses utilizing IQ will first need to look at their product portfolio to understand how such solutions can be turned into a subscription model. Bike sharing business? How about a token that enables the holder to unlimited access to the company’s bikes? Cheese shop? What about a token which gives the token holder first access and right to purchase to the latest cheese imports? The possibilities are endless.
Once the business has defined what the token can represent, the product can then be tied to the token, giving the token holder the rights and privileges that have been assigned to that token as defined by the business. Tokens are then assigned a lifetime value – which determines how much and how long the token holder has access to the products and services for while holding that token.
IQ also introduces a concept known as the renting pool – which ultimately allows consumers to rent tokens from token holders versus holding them outright. Perhaps a student is spending two weeks in a big city, and wishes to get around via bicycle. If the bike business tokens only offers tokens which provide unlimited riding on a monthly basis, the student could rent the token from the renting pool for two weeks and still enjoy all of the benefits that a bona fide token holder enjoys. Such a model is good not only for consumers who have constraints on using a business’ product, but also for those who wish to try the product for a short term before committing.
Under this token economic model, the relations between economic participants is considerably less linear and much more representative of a real-world economy. Businesses sell tokens to consumers, who are incentivized to hold so that they can continue to consume the goods for the life of the token. Alternatively, consumers can sell the tokens to each other, for varying prices depending upon the remaining life of the token. Token holders can also put their tokens up for rent, earning income on their digital assets, and further incentivizing them to hold the tokens throughout its useful life. While collecting income from these digital assets, the original token holders can then put those earnings back into the economy to obtain more tokens from the issuer, or to purchase other goods or services from other consumers.
Leverage Underutilized Tokens
Token economics is difficult. Besides worrying about the number of tokens to issue, burn rate, and the amounts to set aside for various groups and individuals involved in the project, arguably the biggest challenge is defining a solid purpose and use case for the token.
PARSIQ provides the framework to do this – and to do this easily. There are many projects out there with tokens that serve little to no purpose. And while there are projects which are unfazed by this, a strong tokenomics framework and a defined use case for a project can only serve to amplify the relevance and significance of the underlying project. Besides providing utility, it can also be an effective marketing tool, giving further exposure and credibility to the objectives that the supporting team looks to achieve with their Web3 solution.
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