You may recall the Cambrian explosion of ICO projects in 2017–2018, where projects largely printed their own money to raise capital, in the form of “utility tokens” which more often than not simply introduced friction in the usage of platforms.
Tokens for fundraising
If we take reference from Brian Armstrong’s video on Building Crypto Companies at A16Z’s Crypto Startup School, a crypto startup uses crypto to:
- Raise funds
- Acquire customers
- Expand internationally
While ICOs did exceptionally well in the first category, it has largely failed in the other 2 respects. Tokens were mainly bought up by speculators who never used the product (a notable example is 0x), and in many cases the products never even launched (the Dead Coins list).
The recent proliferation of governance tokens in DeFi marks a new phase in the history of tokenomics. Popularized by Compound, where users who borrowed or lent capital earned COMP tokens, virtually every DeFi protocol now has a “liquidity mining” or “yield farming” component, sometimes even before the product is launched.
Tokens drive adoption
This wave differs from the ICO age in the real usage and volume going through DeFi protocols, rocketing from less than $1B in Jan 2020 to >$30B in Jan 2021. While there is significant “mercenary capital” which moves between platforms to maximize their “yield” by selling these tokens they earn, at least in the process they provide some value. This trend is also mitigated by maturing tokenomics incentivizing longer term behavior such as staking.
In fact, those who did not heed the trend, such as Uniswap, seemingly had to accelerate their plans to issue the UNI token, after Sushiswap famously executed a “vampire attack” to incentivize migration of liquidity to their native platform.
But is this the mature state of tokenomics? Far from it. Back to Brian’s framework, these DeFi tokens have succeeded in raising funds (in a pseudo way through liquidity mining, for example through Balancer’s Liquidity Bootstrap Pools), and also acquire customers (by incentivizing usage), but we are just beginning to tap into the potential of using tokens to scale up.
Tokens build communities
The projects closest to this model are the community-driven “fair launch” projects which never had investors buying tokens from “private rounds” not available to the public. Driven by the need to survive without the traditional funding, as well as strategic support from VCs, these projects are forced to tap into the strength of the community.
“Community” as a concept may still be vague, but let’s take a closer look at a specific example. Sushiswap’s core proposals like Bento Box came from the community, and its dashboard Sushiswap.vision, or alternative interface Sushiswap.lite were all suggested, executed, and popularized by the community, purely organically.
This is the beginning of a truly native Web 3.0 model of running and growing a “company”. It is beyond just forming a DAO for funding proposals or making investments. In this case, anyone can contribute to the ecosystem and be rewarded from the treasury, in native tokens.
These Web 3.0 companies are not limited by the core team size, the network of the strategic investors, or the vision-setting by founders/ CEOs.
We should look beyond Brian’s definition of “expand internationally”, and set our sights on “amplify contributors”, where network effects accrue not just economic benefits, but also feeds into product development and innovation.
Over time, this model of open innovation will accelerate growth and inclusion to the point where it is no longer feasible to not have a token which aligns the community. Right now, we can already glimpse into a future where the principal is — no token, no entry.
About LongHash Ventures
LongHash Ventures is a Web 3 investment fund and accelerator collaborating with founders to build their Web 3 model and tap into the vast potential of Asia. In January 2021, we launched a DeFi-focused fund and invested in projects such as Balancer, Acala, Instadapp, and Zapper. We collaborated with their founders to develop their tokenomics, governance, and communities through Asia DeFi Network.
With our LongHashX Accelerator, we have partnered with Polkadot and Filecoin to build more than 40 global Web 3 projects which have raised more than $100m in the past 3 years. Through such investments and active collaboration, we are committed to realising our mission of catalyzing growth for the next generation of the Web.
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