Token buyers, Token holders and Token users by@ourielohayon
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Token buyers, Token holders and Token users

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Ouriel Ohayon
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I think i have finally managed to put the finger on what is really bugging me with most ICOs and why they are not the value creator most people think they are. Bear with me in the analysis.

First there was the token

Any Blockchain Dapp starts with a Token, the economic unit that enables this app to work and gives enough incentives to everyone to build and/or use a given service.

Tokens illustrate the dynamics of a decentralized network effect. But there is a chicken and egg problem: how do you get a token to get enough value to get the network going when your App is just getting started? Blockchain entrepreneurs have found the solution to that insanely complex problem the web has known for 3 decades: ICO

The promise of the network effect

By selling a dream project, a white paper, a nice github repositery, a fantastic team of uninvolved advisors and some hype, tokens are priced immediately and can be acquired very early on in the life of a project giving you a chance to own a % of the economy of this future project (as opposed to stock which gives you a chance to own a % of the future cash flow and value of the company). ICOs open the door to boostrapping the network effect when there is not even a product yet to create this network. It’s a 2-in-1 you get a community of “interest” a la kickstarter and you get S** load of money without dilution giving instant economic value to your token.

All that is great. Except it’s not.

In the current format, ICOs provide early on tokens a value, but also allow any token buyers to sell their token immediately. That translates in a market of super speculative activity around the value of the token, since there is no basic network effect metric to support the value (except in rare cases, read below)

95% of the value of a token is based on speculation today.

The reason this is not great, is not because of the speculation in itself but because the first token buyers are not token holders. Holders (or Hodlers as we like to call it) are interested in holding the token long enough until the network value has taken over the speculative value.

Imagine backing a kickstarter project. The pool of contribution is closing. The company is good to go with the project. But for some reason at this moment: every early backer start claiming their money back or cancel their product delivery even if the money is not moving back to their pocket. The contributors are not interested in the project

Tokens, when put on the market early to trade without real network value to be built in the medium term, create, by design, a different set of incentives for the token buyers, interested in a fast trade and the token holders (those who really believe in the project and want to support it all the way) and eventually even the token producers (the company). If you raised a bunch of money in an ICO but your token is worth very little then you re going to have a hard time to give incentives to your network (not mentioning giving the appearance of value to your economy)

Token ownership map

You have different type of token owners

  1. The team: they get their share of tokens in the ICO but are locked up to a period that align them with the milestones of the network effect. Those are rarely putting the token value at risk
  2. The institutional buyers: typically crypto funds that will back ICOs early on, or pre ICOs, those will usually align very well with group 1. Funds like Polychain, Pantera, DCG, Metastable or even hedge funds like Blocktower could be put in that group.
  3. The public ICO buyers: this is where the risk is here. There is a vast amount of people here that are bounty hunters and some are big enough (the whales) to create a pump-and-dump scenario that will help the token value to gain high multiples in the first days of trade but will also cause it to crash quickly
  4. The token users: those are the rarest *today*. Those are the real users of the token in the token economy designed by the startup. They will be the group of people who probably did not participate in the ICO at first but will want to use the service and for this they will have to either earn or buy tokens available on the marketplace. For example in the prediction market /hedge fund service Numerai, the token user is likely a good science/math researcher who wants to apply his own model to predict the market and earn some NUMÉRAIRE (the token they reward scientist when their stock prediction is accurate)

At this moment in way too many cases (the majority?) Token buyers and Token users are not the same. And can’t be by design until the product is built and start getting adopted. Some projects manage to align both Buyers and Users by not enabling the token to be traded immediately after the end of the ICO, waiting for the protocol to go live. A good example of that is TEZOS, which should go live in the next 3/4 months. To this day the token has not been distributed to token early buyers and the listing to marketplaces will happen near simultaneously to the production of the Tezos chain.

Over time as the network effect and the economy takes over the speculative value of a token is getting reduced significantly and token buyer are more contributors to the economy either as holders or token users. The ideal user being a hybrid of buyer, holder and user.

In some case you may already have a massive network at hand. You can leverage it and already prove your token “velocity” has value. But this would not happen if you prefer to go ICO first…

One of the problems i had with Kik ICO for example, is that by design Token buyers of the ICO are not and cannot be Token Users. KIK average age group is 13/20 years old: not the typical ICO buyer. In Kik’s case the network is already up and running, there was no reason why Kik could not have boostrapped their token by giving it first to their users before going the ICO way. Instead there is a total disconnect between token owners and token users which to me is going to be a source of problem in their economy (which reflects already in their token being valued below the ICO price)


The major challenge of a blockchain project is to manage to find the right alignment between all the type of token owners.

The ICO format as designed today, can only create unhealthy misalignment. You can fix those by delaying the trade of your token or, if you already own a network by proving the value of your token BEFORE the ICO.

In any case, i don’t believe the ICO format as we know today we’ll continue. It’s a great experiment, and probably a necessary one. The next generation of ICOs will find better ways to align the interest of all token owners.


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