Why would an Investor buy a Utility token anyway?

And then we have STOs which sounds like a teenage decease…

It seems we have gone full circle since we built the Chainstarter ICO platform in mid 2017 on the core assumption that all tokens will be considered security tokens by the authorities and regulators at some point. And why we planned for exchanges to de-list tokens and strand tokens that are deemed securites, and why we build our security token crypto exchange. It stands to reason when you really think about it.

Regulators are notoriously slow at delivering new guidelines which become law for new tech, made harder when they do not understand it. Bitcoin and the Blockchain is such a problem for them. It is far easier for these politically motivated, bureaucratic, centrally controlled and secretive agencies to push crypto currencies down the path of least resistance. By defining crypto in a way that suits them, as they are able to push this new movement into the path of existing regulations — Securities Laws, Payments, Collective Investment Scheme Rules, Crowdfunding, Retail and Institutional Investments, MiiFID, PSD and the list goes on… Now crypto essentially touches all of them.

Look when it comes down to it ask yourself, why would anyone buy a Utility Token…especially an Investor who will compare your project with other non Blockchain that offer clear returns…they wont!

It is clear that in most cases you get nothing, or maybe you get access (pay to play) to a platform or a service. Big deal unless you are a genuine and interested user. But then oh yes you can trade the infamous utility token on an exchange and make your money that way, as founders will always tell you the value of the token will go up as they expand their eco system? But cannot tell you why because they don’t know. They wrongly assume value is based on activty demand and adding more people. This assumes a lot, starting with the base assumption the token will actually get listed and will require sufficient liquidity in the exchange for value to move at all other than down.

I get asked to invest in several deals a day and I always ask this simple question: what do I get if I buy this token? The answer is not easy to prize from their grasp, as founders try to disguise what you get, often babbling nonsense and they finish by sating “join our pre sale and you get extra tokens” or free tokens that once they are listed people will sell drying up any liquidity for committed investors.

OK, maybe you do get nothing from holding the token other than some discount if you commit from buying early in the process. Or do you just earn rewards or benefits you can spend on the platfrom? Which assumes you have to do something to earn them (rewards, vouchers). As long as you spend them on the platform… Some projects have been very successful driving this closed economy approach using uility tokens.

But then again if the platform isn’t built and you are raising funds through a token to build and develop, then you have a security token as it is defined as a pooling instrument. Why do so many founders argue this point? With many now claiming they products are built but cannot offer a roadmap for availability or can show you anything.

But then 95% of so called utility tokens are indeed securities, financial instruments issued to raise capital because the banks still aren’t lending and VCs rape your equity with your eyes open. The others are currencies that have payment utilities and even Ripple which is neither a Blockchain or crypto has just been challenged on this point.

The bottom line is all regulators claim they want to make sure investors and token buyers are protected even though the crowd may not care, although we know deep down they know their days are numbered. And what of the crowd anyway as they are being squeezed from the ICO market as ETH and BTC have sideways plays due to excessive OTC activity that means the crowd have less profit to spend on ICOs. The fuel from gains that carried the ICO explosion in the second half of 2017 has been replaced with new sources of capotal and it is old money.

80% of capital flowing into ICOs is coming through private routes ahead of a public sale. This means the vast number of ICOs coming to market are competing for a smaller share of the pie, a slither even. As timing right now is bad right and unless you spend time courting investors, with your public sale ready and waiting or risk falling flat by going to the public too early.

Tell me what good is having 30,000 telegram followers, where 99.999% will never buy your token anyway, and then there is airdrops. Hurrah for giving away free stuff! How is this a measure of a projects success. It is misleading the witness as instituional money want to see substance over form.

It is tricky out there and getting ICOs away is much harder these days than people realise., despite the level of lunacy and madness of some entrepreneurs that think all the rules don’t apply to them. Beyond naïve. Especially when they are advised by the ICO Advisor, the infamous Blockchain experts these days swamp LinkedIn, and where again 90% of these people have never done one and judging by the projects we get called into save, they are a real and present danger.

ICOs are complex and rely on a tokenomics structure that can reflect the ambition of the founders, reward the investors and deliver value to users can be tricky to perfect, often requiring a couple of goes at the challenge, as income streams, returns and yields need to cascade into the token economy, and where again the transaction count can overwhelm Blockchains and what gets written to the Blockchain to deliver the transparency and confidence to make the new business model better than what was there before requires the right people to be in the room.

ICO advisors have to deliver value, should have a deep understanding of Blockchain and how to create new business models and financial structures (in code), pricing theories and cryptonomics in terms of underlying cryptography, consensus and packet switching networks, at a minimum. Or does your ICO advisor say they will raise money and have a large social media following, which is very useful, but please don’t let them near the tokenomics.

Don’t you just hate another random term STO’s appears standing for Security Token Offerings. I am not sure this really matters other than adding another layer of madness to the process of raising capital. So, it really comes down to what you are prepared to offer Investors if you want to get your hands on their wallet to properly fund your project, and not have the rely on the crowd who aren’t spending unless we see BTC hit $10,000 and Ether $1,000.

ICOs strangely are going private, full circle as projects as dressed to look more like traditional investment opportunities. And yet so many young founders have no clue what this means or how to pitch to serious institutional investors, who themselves struggle with Blockchain and crypto concepts. The concept of delivering on promises, of governance and keeping investors updated are simply missing.

This is the squeeze where “Ignorance on both side is Strengthened”unless the ICO is properly prepared for what lies ahead, which is inevitably a more classical investment discussion. Investors are looking for returns and want to understand some simple things. Is your token linked to anything that remotely can generate any value at all?

But then we are seeing some significant progress which brings a smile to my face as a new generation of financial instruments are appearing through the amazing imaginations of entrepreneurs, some advancements in tokenomics engineering and some clever crafting of a new generation of Token (Sale) Agreement (not SAFE or SAFT fortunately) that is about to move the ICO market forward. Whilst giving the new crypto exchanges new challenges to make markets with tokens that can literally ‘shapeshift’ as the inputs change their state, yields and purpose. But this is good news for everyone. But how can you account for it?

I get asked why do we often design the proposition around a dual token structure. In tokenomics parlance some tokens are engineered in some cases to have no relationship at all with another token, but in other scenarios we will have the investor token as the ramp for everyone to move value off platform. The simple answer is it is hard to achieve everything in a single token despite changing its state over time. The single token model often lays prey top platform inflation and price volatility which makes it harder to satisfy user experiences and deliver the ramps to exchange value and for holders to leave the game (to sell and leave). Unless you earn the token and spend it as a reward on the platform as essentially a discount voucher, the simplest model of all.

Dual token models define the business proposition far easier, linking one to rewarding investors for backing the project and the other that fuels the platform and makes it easier for the products and services to consumed and any rewards and utility earned to be cashed in or exchange traded into fiat. And then I once designed an e-commerce Blockchain solution using three tokens that required a separate exchange to equalise and exchange value, a path that lies ahead for exchanging goods and services across and transactions across different Blockchains, we won’t see mature until Blockchain 3.0 from 2022 onwards.

The most basic flaw in tokenomics is where a single token is priced to support a product and/or service proposition, and is also listed on an exchange where liquidity creates further volatility. I think you get the picture, as consumers are looking for value stability. Like setting off in a taxi where during the ride the price may go up 50% or down 20%.

Should you consider the private placement route if you are a Blockchain business the token issuing may come later, but you still have to do this, albeit the first deal will involve equity and may fall outside any token regulations. But then again, a convertible note that entitles the holder to tokens that pay a yield is a likely outcome from this type of fund raise and one we fully endorse.

So dont buy utility tokens. They should be earned and given as a reward for something, moving, playing, singing, laughing or something. And when it comes to an ICO get some real help from people that have already made the mistakes and do not call themselves experts!


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Nick Ayton

Nick Ayton is General Partners Multi Family Office, Futurist, Film Maker