…to understand cryptocurrency you have to treat it like a startup. Does it have a good team? Does it have a good product? Does the product work? Would someone want to use it? It’s far too early to assess the value of cryptocurrency as a whole, but if we assume that tokens or coins will become the way computers pay each other in the future, this lets us hand wave away a lot of doubt.
I share the same view. Analyze crypto projects similar to evaluating a startup. As I mentioned in the previous article, crypto is a speculative market, therefore it is extremely important to evaluate projects based on utility. Many projects will become obsolete due to two factors, competition or lack of adoption. Competition means that one company gains market dominance with superior tech, better marketing, first mover advantage, etc. Ultimately, the superior utility brings consumers and investors, drives value in associated product/service, and creates a healthy sustainable corporate-like ecosystem.
A good example to introduce the concept of a token’s utility is the project that many know and use, Ethereum. MasterTheCrypto provides a great explanation of the utility of the ETH token on the Ethereum network:
A coin must have a strong function (or use-case) to incentivize people to hold the coins; a coin’s utility is strongly correlated with its value. Let’s use Ether (ETH) as a case study. In order for anyone to execute commands and develop applications in the Ethereum Blockchain one needs to have ETH, as it will be converted into gas and represents the ‘fuel’ for the Ethereum ecosystem. Therefore, ETH is used as a currency within its system to fuel transactions and development. The more people that execute transactions and develop apps, the greater the demand for ETH and will, therefore, push prices up. Some utility includes voting rights, dividend payments or most commonly a medium of exchange within their respective ecosystem.
There are outlying factors that could effect utility such as government regulations, patent disputes, radical changes in technology, or geopolitical clashes/sanctions on specific crypto. An example of a project with high regulatory visibility is Substratum, “an open-source network that allows anyone to allocate spare computing resources to make the internet a free and fair place for the entire world”. Here is a good Reddit thread on Substratum and Net Neutrality, to give you an idea on how decentralization can combat, conflict, or workaround regulations.
My favorite utility token is Theta. While the entire project and team is very exciting, the utility is derived from their uniquely incentivized sharing and reward model that functions similar to BitTorrent. Here is a good summary of Theta from my friend Store of Value Blog:
Theta is a work-in-progress blockchain designed for peer-to-peer video streaming. It aims to be a decentralized video Content Distribution Network (CDN) by allowing anyone with spare bandwidth to become video distribution nodes. These nodes are compensated through proof of work (edit: it’s proof-of-stake consensus) mining on Theta’s blockchain. In order to fairly compensate nodes, Theta introduces a novel concept called Reputation Dependent Mining that increases block rewards based on how many clients a node is serving.
Valuing a project or it’s utility requires extensive research on the functional utility, current and future, of a specific token. Examples of extensive research includes tracking new project developments, beta/product testing, social media engagement, adoption statistics, competition, etc. This helps evaluate utility efficacy while also holding the project and team accountable to public statements and project roadmap. To help explain advanced utility research, see an excerpt of Theta’s Blockchain Advisory Council Medium blog post below:
Staking rewards need to be sufficient to encourage users to participate in the network as caching nodes, but not so high as to cause unwanted inflation in the ecosystem. At the same time, there needs to be a mechanism to discourage attackers from gaming the system, such as the “slasher” mechanism used in Tendermint and Casper. Steve’s (Steve Dakh from Ethereum) advice has already been invaluable, and as we build the wallet client for Theta Token we’ll be working with the best in the business!
In this case, the explanation by Steve Dakh, an original developer on the Ethereum project and current head of Theta’s Blockchain Advisory Council, elaborates on the complexity of creating sustainable utility for Theta (and that applies to any token ecosystem project).
For this article, I chose Ethereum as a base example to explain the fundamental purpose of a utility token. I chose Theta as a more advanced example of a utility token because it provides clear examples of advanced utility for consumers, streamers, publishers, and networks.
Disclaimer: This blog is for educational purposes only. Do not use any information provided by myself or this blog as professional/financial/legal advice or personal suggestion. Please seek financial, legal, and accounting professionals before making any financial, legal, or accounting decisions related to investing.