Progress vs. Process — Thoughts on “Appended” Utility Token Valuations and Their Future

This is the first in a series of posts detailing the future of “appended” tokens, utility token valuations, intelligent design, and securities conversion.

“The struggle itself toward the heights is enough to fill a man’s heart. One must imagine Sisyphus happy.” ~ Albert Camus

There is futility in the search for meaning, just as there is futility in finding the proper value of crypto assets. Multi-billion-dollar market capitalizations have been built on speculation alone, but does the speculation that drives pricing fade as a project has hit its own peak? Bringing Camus’ thoughts on the absurd into the fray: the concept of the absurd in this case demands no transcendence (or finished product), as that would essentially lead to the asset’s suicide. There is danger to completion in a project, as its asset’s transactional value dwindles due to its role in an application. It’s not a currency, it is to be consumed.

To take a step back, I’m referencing projects that have raised capital through an ICO in order to implement a decentralized feature-set into their application. The ICO comes with a token, proprietary to an application, which is to be used in said application (hopefully?). The asset itself that was granted in return for the project’s fundraising could in fact be trading even before it provides any form of utility. This has been seen countless times in the space, as some assets even without utility have surpassed valuations of $100MM, $200MM and so on.

For those that don’t know, Sisyphus, the hero of existentialist thinkers, was condemned to repeat his actions of rolling a large boulder up a hill for all of eternity, only to have it roll back down once near the top. This was due to his nature as a brutal ruler of Corinth, his trickery of Thanatos (or Hades depending on the version), and trickery of Persephone in the Underworld. The God’s thought their punishment was clever, in that Sisyphus was condemned to this form of futility for all of eternity. However, it is in this futility that meaning is drawn, or rather, value is derived. If Sisyphus were in fact to be able to complete his task, what would be left for him besides eternity itself?

Project completion is a dangerous thing for most appended assets, as a project’s progress is what gives them their explosive growth.

Progress — the Current Value-Driver

“The struggle itself toward milestones is enough to fill a man’s heart. One must imagine the bagholder happy.”

What I’m arguing is that the value of most appended utility tokens as we currently view them tend to be Sisyphean in nature, where progress is dictating the price — not process. Simply put, progress is the lead-up to the product, while process is the product in action.

We see progress all the time, whether it be an announcement of a partnership, an alpha milestone, a feature release, or even a community event. Even an announcement of an announcement could suffice as an indicator of progress, as it is simply a move to rile up the community about another milestone being achieved for the sake of reaching the top of the hill.

The key word here is appended — can the business exist without the utility token while entering a process phase? Or is the token integral to the model of the product. Can it be replaced with USD or Ether — or does it need to exist for the success of the platform.

Progress is what moves a community to where it’s not just direct speculation on an asset, but speculation on the dates of deliverables in order to either anticipate or catch a spike in the price of an asset. It’s not about the actual delivery, but the anticipation of delivery — even if delayed. Progressive progress on a promising project.

Process however, is the dread associated with “business as usual.” This is where a business has reached its operational stage — where it can self-sustain, regardless of a token, and is more focused on its own revenue leading up to an evolution, potential buyout or acquisition.

While a buyout or acquisition can be considered fantastic for equity holders in a business, it could prove to be extremely dangerous in the case of a business with a utility token. For instance, a utility token grants the holders no equity or governance rights, and therefore no financial benefit in the case of an acquisition. Utility token holders have no rights in any business process (although they typically think of themselves as “investors” with rights), and a black swan event could occur in the case of the acquiring body discontinuing the functionality of the token. If the business has developed a technology that can exist independent of a tokenized system, why continue to use the token at all? The token offers a bit of a downside to the acquiring company, with its neo-communications strategies to learn and increased community management labor as well.

The company acquiring the business might not want to deal with the constant instant-gratification requests of the community, and might even liquidate the oh-so-common treasuries that companies hold to have a quick gain during the speculation surrounding the acquisition. This would not only kill the valuation and community holders, but be a quick and dirty way of discontinuing the token.

It’s not about the endgame because that stifles valuation, rather it’s about the seemingly never-ending journey to that final milestone.

Securities — Into the Wild

But what of the tokenized security? The new holy grail for which there has been an endless storm of support from those that see the value in them? A token that potentially pays a dividend, represents equity in a company, represents an asset, or offers governance rights in a company. This could possibly be the endgame for the appended utility token.

But what can be done about these appended tokens in the case of process?

The appended utility token need not fade away, but rather evolve. Once a particular appended utility token’s value depreciates due to the maturation of a system, one far-reaching example of a business giving back could be the granting of equity for the utility token holders through a conversion process.

But wait, isn’t that an example of a security?

Why yes, yes it is.

As a “thanks for bootstrapping the network” example, an appended token’s swan song can come in the form of equity granting to the holders. For example, let’s say we have Example Corp with their ExampleCoin (EXC). EXC has a supply of 1,000,000,000 and is doomed to fade away as the company reaches a particular milestone or acquisition point. As a “thanks for bootstrapping the network,” such a company might put away a small percentage of equity to represent those 1,000,000,000 tokens, and allow the holders to convert the tokens through a KYC and burn process. These new ExampleEquityCoins (EEC) would represent a percentage of equity as the functionality of EXC fades into obscurity or is discontinued (pivots do in-fact happen).

While far-reaching and full of legal ramifications, another option could be to actually give your token functionality through another platform. For example, the creators of Example Corp might sell their business, but start a new venture or platform that uses EXC as its native token. EXC might not have to fade away, but it would require some form of support to sustain in the scenario where Example Corp’s acquirer wishes to discontinue the original function of the token.

To be quite honest, I don’t think we’ve solved this problem yet, as this space is still nascent. As more projects with appended tokens reach completion I feel as though more thought will go into this very subject.

Soon™ — Beyond Buzzwords

Soon™ has come to describe plenty of projects in the space. Missing certain deadlines (although aggravating) or delaying releases could be seen as a positive as there is more of a cushion to continue to build hype, get listed on more exchanges, and garner more attention.

Augur is a great example of this form of never-ending journey in crypto-time, considering that the horologic nature of the entire space is skewed. This isn’t to say that they’re not building something incredible or that REP is an “appended” token, but this is simply a musing on token valuations. The valuation of Augur’s native token, REP, has purely been explosive due to this notion of progress over process. REP has been valued over time as a result of exchange listings and general market trends — not functionality. REP as of right now still has zero functionality, as Augur just recently completed their contract audits and are slowly entering their deployment phase.

To speak to its valuation history, the following sample of spikes correlate to the following events:

REP’s Price History — (CoinMarketCap)

A. March 2016 — the first beta version of Augur is released on the Ethereum testnet.

B. Summer cryptocurrency bull market, general upswing of most assets.

C. October 2016 — REP listed on Poloniex, Bittrex, Shapeshift and Kraken — tokens distributed to owners.

D. Summer 2017 altcoin run, general upswing of most assets.

E. Winter 2017 bull run, general upswing of most assets.

F. May 2018 — Augur listed on Binance.

To give a bit of context on its history, back during the Summer of 2015, Augur conducted their token sale and effectively raised around $5.5 million to build a decentralized predictions market. REP’s value post platform-success is yet to be determined, as they are set to launch in July.

Nic Carter on Augur’s Release Schedule

It’s about intelligent design, not appended design —

There are in fact excellent utility designs like REP that avoid the “process” problem in that they’re governed by and centered around the participating community rather than a business. Quick examples of these would be ZRX’s protocol governance, DNT’s registry voting, MKR’s ruling over DAI, or even BNT’s reserve design to name a few. These types of assets will most likely last as they aren’t subject to the same forces that appended tokens adhere to. Smarter tokens lead to a healthier market ecosystem.

Considering that the “blockchain revolution” is beginning to grip institutions, the conversation on buy-outs, appended valuations, and intelligent token design is starting to ramp up as well. However, in order to reach critical mass, we’ll need to first see a company with an appended token get bought out and observe the following:

1. What is to be of the original token
2. Where the “treasury” if one exist goes
3. The price action leading up to the announcement of the buy-out
4. The ethics surrounding the founders post buy-out

Those who claim that ‘it’s still early’ don’t realize how far we’ve come. We’re creating valuation systems for utility tokens all of the time, but have we created models that reflect future business-events? From where we currently stand on the cryptocurrency timeline, there’s still more strength in sentiment.

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Special thanks to Matt, Jacob, Kevin, and Travis for providing feedback on this post.

Nothing in this article should be taken as legal or investment advice.