Tokens are at the very heart of the crypto industry and many projects currently have one tied to them (or will have one in the future). A big talking point over the last few months has been around when the layer 2’s building on Ethereum are going to tokenize with some of them even confirming that a token is coming soon. Though these teams are in between a big rock and a very hard place as these tokens are some of the most hyped-up things in the industry which isn’t necessarily a good thing.
A successful token is extremely hard to pull off - especially if the token is launched in a bull market or is over-hyped. For example, many tokens that launched during 2021 started with multi-billion dollar fully diluted valuations and only had a very small floating token supply at launch (usually less than 5%). Almost all of these tokens have absolutely no way to accrue lasting value so what ends up happening is that they basically just become “down only” tokens (aka all they do is fall in price). Most of these tokens are currently down 90%+ against USD (and even more against ETH) which means that most investors are completely underwater.
Launching an unhyped token in a bear market is actually a blessing - not a curse. This is because the token has a strong chance of having a muted launch with a low valuation and then over time a community can be built around the project and buy into the token (or earn the token by doing work for the project). Then, as the project sees more product/market fit and the token begins to accrue fundamental value, these early buyers will be able to go along for the ride and share in the success of the project. This basically flips the entire token trend that we’ve seen over the last year on its head and makes it so that regular folk have a chance to see upside with a token - not just VC’s, funds and angel investors.
I think this is all why coins/tokens like ETH and BTC have had such success over the years - they were very fair launches and both have their own strong value accrual properties. Of course, even the fairest launched token isn’t going to appreciate in value if there isn’t actually any good value accrual mechanisms, but I think that it’s incredibly hard for a token to come back from a 90%+ drawdown for many reasons. I mean, at that point unless the project is able to source outside funding then the team will essentially run out of money and on top of that they’ll have a very angry community to deal with. And as we all know, a good performing token is probably the best marketing tool any project has in crypto - whether we like it or not.
I could talk about tokens forever but I’ll digress for today’s piece. I think the main point I wanted to get across is that getting everything right around a token is difficult - from distribution to value accrual - and teams shouldn’t rush into launching one just for the sake of it. I actually hope we don’t see these layer 2 tokens go live until they have a bustling ecosystem built up around them - the token should compliment that rather than be used to force it.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.
I’m working on tokenizing cap tables for startups => blokshares.io