Imagine that real-world companies only accepted their own currencies. You stop at McDonald's for a morning coffee and pay in MCD coin. You pick up toothpaste and pay in CVS coin. You head to Chipotle for lunch with a friend, but since you don't often eat there, you have to log onto an exchange to get some CMG coin. You balance the roles of portfolio manager and consumer for a moment, deciding to sell Target's TGT coin—up 6% this week—for CMG coin.
You don't get a very good rate, since the TGT-CMG market is thin, and you have to pay a fee. You'll also have to put off buying that new shower curtain for a bit.
This situation is where the blockchain economy is heading, optimistically. More likely, the total infeasibility of the different-token-for-every-platform model will prevent decentralized applications from ever gaining wide adoption.
Utility tokens have become all the rage in recent months. Once bitcoin was the sole blockchain-based token on the sole blockchain, inspiring comparisons to currency. Now that every blockchain project has its own token, whether or not it has its own blockchain, "cryptocurrency" no longer seems like an appropriate label.
Say a consumer a few years from now uses a decentralized social network, a decentralized ride sharing service, a decentralized storage platform, a decentralized web browser and a decentralized medical data platform. They must juggle a minimum of five tokens, all of which—even if crypto volatility settles down—will fluctuate in value and be subject to variable liquidity.
The ICO boom has made the currency metaphor's inadequacy obvious, and it's mostly been replaced with the line that cryptocurrencies (that label has proved tenacious) are something entirely new, which comparisons to existing instruments fail to describe. That' probably true. But while cryptocurrencies are not just currencies, they will eventually need to act like them in certain significant ways. At the very least, they will need to allow users to pay and be paid for services rendered.
The little thought experiment at the beginning of this article suggests the utility token model won't hack it.
Most projects that issue utility tokens don't explicitly justify the decision, since there's a consensus that tokens are a useful, even necessary feature of any blockchain-based platform (Hyperledger and its enterprise ilk excepted). This consensus mostly depends on the economic argument that incentives are needed to maintain the network—where mining or something analogous is involved—and to facilitate whatever exchange is occurring: providing access to spare hard drive space in exchange for tokens, for example, and using those tokens to pay for decentralized cloud storage.
But these economic arguments fall apart when the rest of the world comes into play. A platform that runs on a utility token is not an autarky (jargon for a self-contained universe of economic activity). It is one of several services a given person is likely to use. And that person is unlikely to appreciate the proliferation of currencies they have to worry about.
Luckily there's a fairly simple answer to this conundrum: ditch utility tokens entirely and use the crypto world's reserve currencies, bitcoin and ether. (Or litecoin or zcash or monero or bitcoin cash or whatever else makes sense. The exact identities of the handful of dominant coins don't matter so much as their existence.)
Some projects acknowledge that things will eventually move in this direction. Storj, the kind of distributed cloud storage platform I described above, is "payment agnostic," according to the whitepaper. "The current implementation assumes Storjcoin, but many other payment types could be implemented, including BTC, Ether, ACH transfer, or physical transfer of live goats." (Full disclosure: I've earned roughly $2 worth of Storjcoin renting hard drive space over the past few weeks.)
At least one project, a blockchain-based energy trading platform called Causam eXchange, isn't waiting for the consensus on utility coins to shift. The platform's smart contracts will accept bitcoin and ether, as well as fiat currency—although fiat transactions must be conducted off-chain.
"You have to have a liquid instrument that's widely accepted, that you can convert into mainstream currencies," Causam eXchange's CEO Joe Forbes told me in February, "and then you have to have the ability to have that instrument recognized by more than just you." If that instrument is "your own minted coin," he said, "I think that's a tall order."
It may seem like common sense that bootstrapping a platform for counterparties to perform exchanges is hard enough, without having to bootstrap a whole new medium of exchange as well.
"It is perfectly okay to think about using mainstream forms of payment for goods and services that are liquid," Forbes says. "Why create your own?"
The simple answer is that ICOs offer—or offered, during the boom times of 2017—a fundraising opportunity that's difficult to pass up. In the long term, tying your platform to ERC20 funnybucks, rather than an established coin like bitcoin or ether, throws up hurdles to adoption and usability. In the short term, it allows you to raise millions from a voracious pool of investors who don't ask all that many questions. Best of all, there's no need to submit reams of paperwork to the SEC.
Except that utility tokens' perceived invincibility to securities law, always a product of wishful thinking, is a thing of the past. The SEC has made it clear though statements and enforcement actions that ICOs are not outside its purview. The term "utility token" came into vogue as a regulatory apotropaic: if the token on offer were solely meant to provide incentives and act as a medium of exchange within the network, issuers hoped they could wash their hands of the secondary market and breeze through the Howey test federal regulators use to assess whether an instrument is a security.
I have heard blockchain entrepreneurs bend over backwards to portray their tokens this way, but no one who has observed the ICO boom can sincerely believe that the bulk of people buying tokens are aspiring users of the platform, rather than investors or gamblers. Entrepreneurs may wish it were so, since less volatile token prices would ease adoption, but then how would they raise money?
The fact of the matter is that regulators are cracking down, meaning that the days of the ICO as we know it are numbered, at least in the U.S. Soon token sales will be restricted to accredited investors (read, the rich), as Causam eXchange's ongoing sale of ethereum-based equity is. Venture capital—relatively scarce in the blockchain space so far—will step into its accustomed role as the money hose of choice for early-stage tech projects.
There are problems with these trends. ICOs inspired such enthusiasm mostly because of their get-rich-quick potential, but there was a democratizing aspect to them as well, as little-guy investors got a rare chance to earn some of the returns Wall Street and Sand Hill Road have been gobbling up in recent years.
On the other hand, something positive might rise from the ashes of ICO mania. Utility tokens threatened to revive the kind of currency fragmentation the U.S. left behind when it ditched state currencies, private bank notes and company scrip. By taking away the fundraising potential of ICOs, the SEC might have opened the way for a stronger, more economically sane cryptocurrency space: one where a few widely accepted, liquid, relatively nonvolatile coins dominate.