Adding Token’s Real Utility and Value – A Guide for Emerging Crypto Projects
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The token utility is a fundamental function of any crypto project. The core concept of cryptocurrencies and DeFi is not just to mint a token and facilitate general trading but rather to create a digital asset that holds real value and utility. This is what differentiates crypto from other assets like stocks and bonds.
Cryptocurrencies are meant to function like liquid assets in a fully digital environment without the intervention of any centralized entities. Therefore, any token must have a certain level of utility. Users should be able to use their assets to carry out a wide range of functions on the associated blockchain network.
Whether it’s allowing goods and services to be purchased using the tokens, governing a protocol or accessing other investment and income options, as long as a certain level of usage or utility is ensured, a token will hold a significant value.
Every crypto project in development must innovate a model that generates a utility value of its native token or currency. There are different approaches to how this can be achieved, which I am going to review in the passages below.
Project features boost
Project-based boosting the process of incentivizing users to hold the token as part of their investment portfolio is one of the most challenging ways of building up token utility. The effectiveness of this method depends on the project’s prospect.
If it has a well-defined vision, an influential user base and its concept is a good fit for the market, then creating utility through feature boosting is feasible.
Suppose a project cannot attract and engage a solid user base. In this case, this method won’t be effective, as users will not see the value in including the token as a part of their portfolio.
There are also several other models of creating utility value through feature boosting. Some crypto projects develop partnerships and collaborations with brands to provide promotions for users transacting with their tokens.
There are also bounty campaigns where users are incentivized to participate in various activities associated with an ICO (initial coin offering).
Token liquidity management
Liquidity management is one of the best strategies for creating utility for a new token or promoting it in the modern DeFi market. In crypto, liquidity management refers to how easily a token can be exchanged for other assets.
For instance, tier-one cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and USDC stablecoin have high liquidity, as they can be seamlessly swapped for other tokens or fiat currencies through most exchanges.
High liquidity is the borderline definition of utility, as liquid markets attract the most users. Ultimately a token has no value if it can’t be easily traded or swapped for other assets.
The traditional DeFi approach to increasing a token’s liquidity is incentivizing liquidity pools with token rewards. This boosts the inflation of the token, leading users to sell into the liquidity pair that the token was incentivizing.
However, a more modern and sustainable approach to liquidity management is emerging approach that allows digital assets to be traded automatically using liquidity pools without permission.
Creating utility through governance
On-chain governance is one of the rarest ways of generating utility for a token. It refers to a decentralized model where holders of a particular token can vote, propose new ideas and participate in implementing changes to a blockchain network.
Establishing a governance model can elevate a token’s value by making it an integral part of all decentralized activities on the blockchain. Users holding the token can participate in impactful and actionable decisions.
Take Uniswap, for example. The decentralized exchange has created a governance model where UNI token holders can retain the right to vote on the exchange’s decisions, access exclusive features and receive incentives in exchange for providing liquidity.
But how can crypto projects establish a governance model using their native token? To achieve this, projects need to become a DAO (decentralized autonomous organization).
For new emerging projects, the best way of doing this is through platforms where any new project can create proposals for cryptocurrency users to vote on.
Traditionally, new crypto projects have to create and promote an infrastructure to attain new users and create a polling system to establish a DAO. Such platforms allow projects to seek out their most committed members who hold their chosen cryptocurrency and ask them to make decisions.
They do this by not sending the transactions to a blockchain. It’s a low-cost and easy way of introducing your crypto venture as a DAO.
Staking as a utility feature
One of the best methods of creating utility value for a token is staking. It’s no surprise that crypto is volatile. For long-term hodlers, sitting back and waiting for their crypto assets to go up in price can be frustrating and redundant. Staking, however, allows crypto holders to generate passive income.
Users can deposit and stake their tokens on investment platforms and earn high-interests. By allowing token staking, new projects can significantly increase utility by creating a way for users to attain a passive income from their holdings.
Tier-one coins such as ETH, SOL and ADA all have a high staking market cap one of the reasons for their high utility value.
Buybacks even more utility
Buybacks are a rather unique but effective approach to creating value for a token. It is a process where crypto platforms use a part of their profits to buy back and burn tokens from users.
The automated supply and burn mechanism can often lead to a token’s inflation, ultimately slumping its price. Buybacks allow projects to control inflation or even trigger deflation, thereby providing an upward drive for its price, increasing the token’s value.
Binance, for one, uses buyback to drive the value of its native BNB token. The company employs 20% of its profits to buy back and burn BNB tokens every quarter, thus reducing its overall supply.
In conclusion, adding utility value to a token should be the prime goal of any crypto project. New crypto ventures should understand their tokenomics model and evaluate which approach can sustainably elevate their token utility.
Iakov Levin has over five years of experience in delivering technically-complex projects, with a focus on blockchain, crypto, fintech, DeFi and CeDeFi. He has a deep and vast expertise in cognitive science, startups, product management, system creation and innovations.
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Author: Iakov Levin
