​​Do You Need a Token?

In the realm of blockchain and cryptocurrency, a question that’s often on the minds of businesses is whether they should launch a token. It's a query that resonates frequently in our discussions with prospective clients.

Yet, the blunt truth is the overwhelming majority, we’d argue around 99%, of projects simply do not require a token. The necessity for projects to launch their own token, instead of using BTC (or other blue chips), stablecoins, or good ol’ fiat, is often non-existent.

However, it's important to recognise that this conclusion doesn’t imply that projects shouldn’t launch tokens. Not being a necessity doesn’t mean it can’t add value; rather, it underscores the importance of strategic foresight, the common lack of which inadvertently leads to a divergence of the business from its core product, users, and overall direction.

To navigate this nuanced topic effectively, lets dissect the inherent benefits of tokens and discern how businesses can leverage them to their advantage.

Benefit 1 - Fundraising

It’s no secret one of the most common reasons founders want to implement a token is to fundraise. Ultimately, it is easier to raise with a token for two reasons: VCs in crypto prefer tokens, especially during a bull run, due to the faster and more liquid exit, and because projects can avoid legal bureaucracy. Additionally, if you raise with tokens you can keep your equity.

This capital can be used to build the product, onboard users, conduct marketing, hire, and pay for all the crypto expenses like exchange listings and market making. However, whilst money is great to have, it is rarely the answer to the problems of a real start-up:

• not knowing who your users are;

• not understanding the market deeply;

• not being fiscally responsible;

• not hiring well;

• not having a strategy in place; and so on.

Having money doesn’t equate to being successful in the long term. More crucially, while fundraising may serve as a compelling rationale for token issuance, it alone does not suffice to justify token implementation. The token needs to be truly used in an ecosystem in order to accrue value, or at least retain it, which means it needs to be used by users within an economy that makes sense. This means that creating a token for the sole purpose of fundraising and then throwing together some subpar token utilities that add friction and disincentivise users is detrimental to your business.

It is essential to ensure that the token is derived from your actual product and the economy aligns with the project's objectives and accrues tangible value; if the money you fundraised isn’t at least partially used to ensure this, statistically speaking, your project is doomed to fail.

Benefit 2 - User Alignment

In conventional business models, the company simply provides products and services to users. However, within Web3 which is focused on decentralisation and user control, projects need to devise systems to incentivise desired user actions that are aligned with the sustainability of the project itself. For instance, in the case of Ethereum, network validation is incentivised by newly mined Ether as a reward, and malicious behaviour is disincentivised with the possibility of having the Ether stake slashed. This ensures that all actors in the ecosystem are aligned to behave.

The reason the creation of Ether was warranted is because it is needed to avoid counterparty risk, whereby the other asset that Ethereum would have had to have used for staking could’ve turned malicious or had exogenous problems. Moreover, it would be very costly as Ethereum would need to purchase another asset to give out as rewards which is expensive for something that is decentralised.

GMX stands out as another prime example of successfully aligning incentives across all participants. Notably, the ecosystem revolves around two distinct tokens: $GMX and $GLP, both serving a unique purpose, with minimal overlap beyond certain rewards. $GMX is for earning low risk rewards, whilst $GLP acts as a decentralised B-Book for any users trading futures on the exchange with higher rewards but higher risk. GMX needs users to create a pool for futures traders to trade against, so it did, with $GLP. Such a strategic separation safeguards the interests of both token holders and ecosystem participants.

If you are a project with decentralisation at its core, your own token is almost vital to incentivise specific user behaviour.

Benefit 3 - User Acquisition

One of the most formidable challenges faced by new businesses is the process of acquiring users. Moreover, for many Web3 businesses that have some sort of P2P interactions, network effects are essential in achieving success. Alas, given the super competitive landscapes, this is often difficult to achieve.

Tokens offer a compelling solution to this predicament by facilitating the bootstrapping of network effects. Through tokens, new market entrants have a relatively “free” way to incentivise new users to join their project, allowing anyone with a good enough strategy to take on incumbents.

A notable example of this is Blur's successful capture of market share from Opensea. Through a strategic airdrop campaign, Blur incentivised users to migrate from Opensea, ultimately leading to a significant shift in market dominance. Opensea, lacking a native token, found itself unable to counteract Blur's aggressive token-based approach, resulting in Blur's ascension to the forefront of the market.

However, this is not a long term solution. Blur happens to be better than Opensea. Most projects, that incentivise users with money to try their project over existing competitors, are not. A lot of tokens end up going to $0 from unsuccessful campaigns and overall bad economy designs, so, circling back to Benefit 1, if the money you fundraised isn’t at least partially used to ensure successful strategic decisions, statistically speaking, your project is doomed to fail.

Conclusion

The point of this article is to showcase that whilst tokens are not needed in nearly all projects, given the fact that stablecoins, BTC, or fiat can be used, the benefits that come with a properly designed token can be huge, and can easily propel new entrants to the number 1 spot.

However, the emphasis here is on “properly designed”, because most tokens are not, which leads to price charts that go down by 99% and speculators milking the project for cash which could’ve been used to build a better product.