Automated Market Maker

How to build a token utility?

GM! Now, when the bear market hit the whole space hard, crypto communities from all over the world started to question multiple token utilities. It turned out that when the hype is gone, and we need to say, “I am checking”, most token utilities do not bring anything innovative to the table. Most models are designed in a non-beneficial way for the community, which makes it even harder for conscious investors to put money into new projects. I would go even further and say that a vast part of the tokens is nothing more than copycats – tokens with the exact mechanisms, same utilities, and same price action.

If you think about that, it’s not that hard: anyone can launch an ERC-20 token via fair launch (i.e., on PinkSale Finance), create social media, raise money, use a part of it to add to liquidity pools and extend hype, using simple technics (which is easy while knowing the behavior of humans). In the long term, the team can sell its tokens and cause a pump & dump effect. It’s a typical cash grab. We should call out such situations. 

The true challenge is to create something sustainable in the long term. That’s why I wrote this article: to present current utilities of crypto tokens, point out the weak points, and propose new solutions that, after implementation, may fix the market of poor token utilities and -99% price declines.

Let’s dive deeper into the rabbit hole!

1. What is the token utility?

In the crypto world, a token is a digital asset that represents a specific use case or purpose within a larger blockchain-based project. Token utility refers to the specific function or purpose that a token serves within a particular project or ecosystem.

One of the most common use cases for tokens is representing and transferring value within a decentralized application (DApp) or platform. For example, a token may be used as a digital currency for buying and selling goods and services within a particular DApp. In this case, the token would have utility as a means of exchange within that specific DApp.

Tokens can also have utility as a representation of rights or access within a particular platform or project. For example, a token may grant holders access to certain features or services within a DApp, or it may give them the right to vote on decisions related to the governance of the project.

Overall, the specific utility of a token will depend on the specific use case and purpose of the token within the context of the project or ecosystem in which it is used.

Sidenote. We have a few years of experience providing liquidity in DeFi. Let us know if we can help your project grow its presence on centralized and decentralized exchanges. 

2. “Tell me more!”

Let’s take a look at the six most popular token utilities (and why the model used by most is fundamentally wrong): 

2.1 Gather Fundraising

Raising capital through initial coin offerings (ICOs, or IDOs) can be a fast and efficient way for companies to fund their projects, especially in the rapidly-evolving world of cryptocurrency and blockchain technology. 

However, it is important for potential investors to thoroughly research and evaluate the potential risks and rewards before participating in an ICO or airdrop. There have been instances of fraudulent ICOs and airdrops, so it is important to exercise caution and due diligence when considering these types of investment opportunities.]

Case study: Polkadot $DOT 

Polkadot was developed by the Web3 Foundation, a Swiss non-profit organization that aims to promote and support the development of decentralized technologies. In 2017, the Web3 Foundation launched an initial coin offering (ICO) to fund the development of Polkadot and its ecosystem.

During the ICO, the Web3 Foundation sold tokens called DOTs to investors. These tokens would later be used to participate in the governance of the Polkadot network and to secure the network by becoming validators.

The ICO was conducted through a series of private and public sales. In the private sale, a limited number of DOTs were sold to strategic investors at a discount. In the public sale, the remaining DOTs were made available to the general public at a higher price.

The ICO was successful, and the Web3 Foundation raised a total of $145 million from the sale of DOTs. The funds were used to develop and launch the Polkadot network.

2.2 Means of Payment

Utility tokens can be used as a form of payment for products or services within a particular ecosystem. For example, if a company sells a software product, it may accept payment in its utility token and offer a discount for using the token. 

This helps drive demand for the token and can also help the company save on transaction fees compared to traditional payment methods. Additionally, using utility tokens as a form of payment can make it easier for the company to track and record transactions, as they can be recorded on the blockchain. 

It can also make it easier for users to make payments, as they may not need to enter their credit card information or go through other traditional payment processes.

Case study: Cosmos $ATOM

The Cosmos ATOM token is the native cryptocurrency of the Cosmos network, a decentralized network of independent parallel blockchains that can interact with each other. The main use of ATOM is to participate in the governance of the Cosmos network. ATOM holders can vote on proposals to change the protocol and participate in the maintenance of the network by staking their tokens and becoming validators. Additionally, ATOM is used as a native means of payment on the Cosmos blockchain, meaning all the users need to hold ATOM to pay the transaction fees.

2.3 Token-as-access

Utility tokens can be used to grant access to a specific platform or service. For example, a company might create a utility token that allows users to access their subscription-based platform or to use certain features within the platform. 

This can help the company monetize its product and encourage users to hold onto its tokens, as they will continue to have value as long as the user wants to access the platform. 

Additionally, using utility tokens to grant access can create a sense of exclusivity and can make users feel more invested in the platform. It can also help the company better track and manage access to its platform, as it can use the blockchain to record and verify access.

Case study: $EOS 

EOS is a type of cryptocurrency that uses tokens to allow people to use its network. To use the EOS network, people need to have a certain number of EOS tokens. The amount of tokens needed depends on the resource being used and how much of it is being used. EOS uses tokens to manage access to its resources.

2.4 Loyalty programs

Utility tokens can be used to create loyalty programs within an ecosystem. For example, a company might offer discounts or other perks to users who hold a certain amount of the company’s utility token. This can encourage users to hold onto their tokens and potentially even buy more, as they will continue to earn benefits as long as they have the tokens. 

Additionally, using utility tokens for loyalty programs can help the company create a sense of community and encourage users to engage more with the platform. It can also help the company better track and manage the loyalty of their customers.

Case study: Starbucks loyalty program (BETA stage) 

Starbucks has partnered with Polygon to create a new feature called Starbucks Odyssey, which is an extension of the Starbucks Rewards loyalty program. This feature is powered by Web3 technology and is currently in the beta testing phase. 

It will allow Starbucks Rewards members to access exclusive benefits and experiences. 

Right now, the program will use NFT tokens as a reward, and it will later extend to the use of utility tokens.

2.5 Voting rights, project governance

Some token development platforms allow token holders to vote on decisions within the network. For example, a company might allow token holders to vote on new features or changes to the platform. This can give token holders a sense of ownership and help the company gather feedback and make more informed decisions. 

Additionally, using utility tokens for voting can create a sense of democracy and encourage users to stay engaged with the platform. It can also help the company ensure that voting is fair and transparent, as the blockchain can be used to record and verify votes.

Case study: Uniswap $UNI

UNI is a digital token that gives you a say in how the Uniswap platform is run. If you hold UNI, you can cast votes on proposals that could change the way Uniswap works, like adding new features or adjusting fees. By participating in the governance of Uniswap with UNI, you have the power to shape the platform’s future and potentially reap the rewards. And like other cryptocurrencies, you can also trade UNI on various exchanges. So, owning UNI lets you not only influence Uniswap, but it can also be a way to make money.

2.6 Earning opportunities

Companies can create utility tokens and provide passive income opportunities to their users through various means, such as token staking (holding onto tokens to earn rewards) or revenue sharing (earning a percentage of the company’s profits based on the number of tokens held). 

Additionally, using utility tokens to earn money can provide a new source of revenue for the company and encourage users to hold onto their tokens, as they will continue to have value as long as the company is successful. 

It can also help the company attract new investors and can provide a way for the company to finance the development of its products or services.

Speaking of staking and earning – it’s one of the points that most often kills most crypto projects. How is that possible? Crypto is based mainly on financial incentives. At some point, when you are a crypto project, it’s a game of who will make a better financial incentive for the community, so more community members will come, buy the token, or invest in the public sale. 

One of the most popular ways of increasing the hype is offering super high, even unreasonable high staking rewards. Imagine when you are offering 600% APR (annual percentage yield). People will go crazy! When most earn 6% in the Wells Fargo account, 600% sounds like winning a lottery. And they might invest, but you will get only the short-term benefits. Because they will buy, stake, and then what? Then they will dump the tokens because there is no incentive to keep them in the wallet. 

High APR = high token inflation = price decline

How to fix that? 

Here’s where the Real Yield mechanisms are helpful. 

Real yield is a way of generating returns that differs from traditional DeFi user acquisition. In traditional DeFi, users receive extremely high, unsustainable annual yields to increase the amount of funds deposited by users. While these high yields may appeal to traders, they cannot be sustained through false yield or token emissions. Instead, they require creating new tokens and paying rewards for these tokens.

Projects that offer real yield do not need to have high inflation emissions. Instead, they focus on providing value and using methods that rely on a genuine, consistent, and dedicated user base. These types of projects, which generate yield through actual revenue generation, are becoming more popular. Examples include DYDX, GMX, GNS, SNX, and UMAMI, which are DEXs with good long-term potential. These projects offer leverage trading with deep liquidity, low fees, and other benefits.

The yield comes from trading fees and is distributed in the protocol’s different tokens – GMX, GNS, or UMAMI are paying yield in DAI, ETH, or AVAX. 

How does it impact the price action? 

Let’s check: 

  • GMX is down 30% from its ATH (when BTC or ETH are down over 60%)
  • GNS recently had its all-time high, and the token value increased from $1.5 to $4.3 in 2 months. Now it’s hanging around $3.5

Why does this model work? 

How is that possible? How do these tokens perform that well, even during the bear market? There is no incentive to dump the tokens when you can get yield paid in ETH, which is a blue chip token and can increase in value.

3. “How to build the token utility? TL;DR of 16 tips (share with your co-founders)

  1. Don’t accelerate the token inflation
  2. Create a sustainable yield model
  3. Don’t create a selling pressure
  4. Make people want to hold your token
  5. If you don’t know how to build the token utility, look at the projects that succeeded and have great performing models (copy the token frameworks from them!)
  6. Don’t pay the yield in your token
  7. Make the community feel like they have an impact on the project’s development
  8. Think about your tokenomics as an internal economic system of your small country (and that’s why you shouldn’t inflate the main currency in the ecosystem as it’s done in the current capitalistic world)
  9. Strive to create a model where all token holders have roughly the same rights

Let’s pause for a bit on that point. How is that essential? Because if you launch four fundraising rounds, and let’s say seed investors got the token for $0.05, the private investors for $0.07, and public investors for $0.15, it’s natural that the seed investors will do 6-7x easily during the listing, and as they have the biggest bags (because most often these are VC funds or angel investors with deep pockets), they would have the highest stakes, meaning they will dump the tokens to exit with profit.

How to prevent that? Make a community launch where every single investor is getting the same price. Such a model was implemented by Camelot DEX, which set the starting price for their token at $20. However, it was made in such a way: with the increasing amount of money invested, the token price ($GRAIL) increased. It ended at the $254 price level.

And guess what: no matter if you put $5 or $50k, you get the same token price. And now, when the bear market is ongoing, the $GRAIL price didn’t dump like 99% of tokens straight after the DEX listing. No, the price hangs around $215, which is ONLY a 15% decrease. 

Trust me, it’s nothing in the current world situation when the recession is around the corner.

Bottom Line:

And that’s all for today! Here’s how to create the token utility and what you should pay attention to. If you have a dApp that takes fees at some part of the user process, some fees can be distributed to the token stakers or token holders. You should avoid distributing the rewards in your token because it generates massive selling pressure on your token and makes the model unsustainable in the long-term. The better the token price performance, the bigger part of the market you will be able to attract.

Learn here the details on how we do market making for many successful projects in the crypto space.