Does your web3 business need a token?

What is a Web3 business?

A Web3 business leverages decentralized technologies like blockchain, cryptocurrencies, and smart contracts to create innovative, secure, and transparent online solutions.

What is a token?

A token represents a value and how value flows in an ecosystem, through which we can structure the regulation between different agents. Tokens can have the following characteristics

• Intrinsic value of a multi-sided platform
• main incentive and disincentive in the ecosystem
• Tokens can be traded for market value or can have intrinsic value and trade within the system.
• Tokens can be used as a coordination tool (e.g. currency, governance token, access token or as a representation of an asset ( e.g. art, NFTs, financial assets)

Does your product need a token?

Tokens in the past have been used for fundraising during the ICO era, empowering community-led decisions, payment utility, etc.

Whether a business model requires a token is a contentious topic among many web3 users.

Businesses that need tokens

. Layer1 blockchains: All consensus algorithm types require a native monetary asset to motivate validators and miners and guarantee their incentive alignment (e.g. by the possibility of slashing) to protect the blockchain. Typically, to use the blockchain, the token must also be used to pay transaction fees, which are used to incentivize validators and miners.

. Decentralized storage platforms: Digital resource networks, which deliver these resources in a decentralized fashion and must balance supply and demand, including data connectivity, computation, and storage, are another type of use case, e.g., file coin.

Businesses that may significantly improve with the introduction of tokens

In a business where content creation or curation is left in the hands of community members, introducing tokens as an incentive and disincentive mechanism can effectively improve the process. E.g. In ocean protocol, the data curation process and in nexus mutual the claim assessment process are good applications of tokens to the system.

A common pitfall of tokenizing as a reward mechanism is not providing users with enough reasons to hold or lock their tokens. Financial incentives have the potential to “crowd out” users’ intrinsic drive, and if the primary use for the token is to sell it for cash, it will struggle to maintain its value.

In general, if there are reasons to want the users to perform some activities inside your system, it is advised to have a token, and each token in the ecosystem should have a purpose. Tokens are advised to have intrinsic value, which helps to drive their valuation in the external market. The choice of a one-token or multi-token system is highly dependent on different purposes.

If your product does not have the above business model. Does your product need a token? The answer is no, but there could also be reasons to tokenize such as access rights, and governance rights which may have financial value or not as long as the common pitfall explained above is avoided.

References:

Does your product need a token? — Outlier Ventures