Multi-Token Games Are Trouble
Crypto projects often live and die by their economic design. Single token, multi-token, NFT-only — all design weapons of choice for devs looking to spin up a new ecosystem. But industry norms have converged on a seriously flawed set of standards, and it seems many designers have been slow to pivot.
Driving value to even just one entity is hard, but trying to drive value to multiple simultaneously is truly insane.
This topic was one of many discussed with John Linden of Mythical Games in the context of broad web3 game economies and design — watch here.
Tokens Need Purpose
Dual-token models have been all the rage for the past year. One half of that duo is invariably touted as a “governance” token, and the other half is a “utility” token. Ostensibly, the governance token is supposed to represent the community’s ownership over the related ecosystem, while the utility token is supposed to be a currency-like method of transacting with said ecosystem.
In reality, without sufficient sinks, the utility token ends up being an uncapped fiat-like mechanism of infinite inflation, and the governance token ends up being more a Facebook thumbs-up “like” counter than really anything that would resemble actual stewardship of the ecosystem.
The cherry on top is that within these dual-token economies, ordinary community participants (e.g. not-investors, not-team members) generally have access only to earning the “utility” token, or maybe very miniscule amounts of the “governance” token. This effectively creates a dual-caste ecosystem wherein ordinary community members are relegated to some lesser serf-like status with little to no hope of converting to true owners.
No project dev in their right mind would honestly pitch this as a purposeful set of characteristics. And, while that’s bad, the real problem comes when trying to drive actual financial value to both tokens at once.
Drive Value to One Entity, Not More
Tokens reflect the value, speculative or realized, of their associated projects. It’s incredibly hard to generate any type of value, regardless of if it’s actual cash flow or just marketing and hype. Hamstringing a project out of the gate by splitting the value between multiple tokens (entities) is a quick way to secure a big red line down, and it’s a relic of a time when we had less market data around the do’s and don’t’s of token issuance.
I’ve written at length before about the idea of “entities” within crypto & web3 at large. In “tradfi,” the only real entity at any startup’s disposal was equity. In cryptoland, you’ve got to contend potentially with 1) equity, 2) tokens, and 3) NFTs, none of which ever have particularly clear revenue or value mappings due to the nascency of both founders and investors in the space, as well as intentional obfuscation by a small number of savvy bad actors.
Projects often claim that their set of tokens will have long-run value because of “community” or other soft non-revenue bearing speculative characteristics, but, as investors in the space become increasingly sophisticated, just buying 100k Twitter followers won’t be enough to secure you the bag anymore.¹ Projects have to show an actual path to productive cash flow generation, and it has to be driven to the actual entity that is being sold.
Stick to just one entity, drive value to it, and massively improve your chances of success.
No, Really — Actually Drive Value to One Entity
To date, I would openly challenge anyone to submit an example of a dual-token model with a provable life span greater than the amount of time in their circulating token supply model committed to “rewards emissions.”
Spoiler: There isn’t one, and it’s because it would necessitate the associated organization splitting its value between at least two entities (the “governance” token and the “utility” token), and, because the founders of such projects inevitably hold the most valuable part of the ecosystem (e.g. the “governance” token or equity), they’re only incentivized to drive value to exactly that part.
This is not an impossible problem to solve. Pick one: equity, or tokens. Then, align founders and investors. Are we driving value to equity today? Or are we driving to the token? Either one is completely fine, but make it clear from the outset. Smart contracts help — you can conclusively demonstrate that revenue produced by a protocol will go to some central treasury, in true web3 fashion. But even ordinary contracts are fine if both founders & investors are honest with each other about where the cash ends up at the end of the day.
Web3 is a Plus, So Actually Use It
It’s truly surprising the number of both founders & investors in the space who are averse to actually using web3 mechanics, i.e. blockchain & smart contracts. These tools exist to help smooth a lot of the questions around “how do I know you’ll do what you’ve promised me” and “where can you provably show me that I own this?”
I expect this fear of blockchain business transactions² to change substantially as retail-facing qualitative audit reporting becomes the norm, with white hat firms publicly commenting on popular projects to say “yes, this one drives value to the token properly” or “no, this project siphons cash away from tokenholders to equity.”
And it’s not all gloom-and-doom for multi-token ecosystems. There’s still a ton of fantastic projects that just happened to choose an outdated model predicated on old assumptions around market behavior. I expect some of those projects to begin converting (i.e. buying back) their less-useful “utility” token & exchanging it for their governance token, to move back to a fully-aligned & single-entity methodology.
We all have a ton to learn, let’s start by making the hard decisions. 🛠️
¹Tongue-in-cheek, but I do recognize the obvious value of an audience yet-to-be-monetized. If you’ve made a legitimate organization of followers, that’s value.
²Very specific transactions, like OTC deals third parties, are almost certainly better served by smart contracts than paper contracts, as evidenced by Three Arrows Capital recently liquidating certain holdings it was contractually obligated to not sell, due to its bankruptcy proceedings. But the majority of other legal arrangements have to stay on paper till our legal system evolves, sorry cypherpunks.
Sam is the CEO of Playground Labs, a web3 protocol dev organization, and Partner & Head of Interactive at Hivemind Capital, a crypto-focused multi-strategy fund. Follow him on Twitter.
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