Abstract: I will argue that a true utility token must perform a function that is both unique and valuable before its value is not wholly speculative in nature. One protocol that will provide enough utility to use its own token for clearing transactions will be 0x (ZRX). As the 0x protocol begins to facilitate trade of asset-backed-tokens (which by their definition are not currency), these transactions will clear with ZRX because each asset being exchanged is non-fungible/unique and cannot include more of itself for the vig. As the protocol is used more and the network grows, the intrinsic value will be more closely matched with the price of ZRX. After this happens, the ZRX token will also become a viable governance staking mechanism. In order to be a viable governance staking mechanism, the unit being staked must carry with it some inherent value that is not specifically and majorly linked to speculative demand. Finally, a utility token that garners intrinsic value due to its medium of exchange properties will eventually become a currency. After a utility token is accepted as a currency, then and only then, can it be a store of value (future exchange).

The Tokenscape

From the perspective of valuation, most crypto tokens can be distilled down into three distinct categories:

Asset-backed tokens (includes security tokens and arguably stable coins) Currency tokens (coins) Utility tokens

What value do these tokens have? How does value look in each category? Price is not an accurate description of value, at least not at this point, because most utility tokens are trading in a speculative market and have no actual utility yet.

Asset-backed tokens, of which there are very few scaled examples yet, are by definition worth exactly what they are backed by. So a representative token that corresponds to a real-world asset such as unique parcel of land is effectively valued at a 1:1 ratio necessarily. You can even argue that a good stable coin is an asset-backed token even though the argument may be questionable due to the fact that stable coins are usually pegged to a fungible currency.

Currency tokens/coins like BTC and LTC are just really poor excuses for currencies with more inherent volatility than overtly inherent store of value or medium of exchange properties. I would argue that there are no currency tokens yet. Many are striving to be a currency and/or store of value but none have the properties of money and thereby are not functioning in the real world as money.

But what about utility tokens? This is a broad category of tokens. It’s almost become a catch-all for the sh*t-coins, protocol tokens, social tokens, and miscellaneous group that were used solely to raise non-dilutive capital during the ICO craze of 2016–2017. The working definition is that these tokens are used somehow to operate inside a closed ecosystem; MOE, governance, etc. However, just because these many of these tokens were effectively scams doesn't mean that there aren’t some hidden gems in there.

My thesis is that: even while utility tokens have more or less become the pariah of the crypto world, the most valuable tokens [and the networks, protocols, and ecosystems they belong to] will be those that derive value from mass adoption. And adoption will be due, in large part, to a platform’s utility and a large population or transactional volume being unable to part with the service or function it provides.

First, a little more on Asset-Backed Tokens:

What are asset-backed tokens? They are the real world assets represented as tokens to be transferred and traded trustlessly on a blockchain. Interestingly, this will likely include all IoT-related transactions — for which I believe you need trustless, blockchain based transaction. More obvious though is the tokenization of real estate, art, derivatives markets, attention, and other non-fungible assets that are currently festering in illiquid markets that are ripe with middle men who assume counterparts risk.

These illiquid markets place a gigantic liquidity premium on each transaction. Tokenization will happen with real things like joules of energy, distance traveled on an road by an autonomous car, real property, commodities, and even identity. It will bring tremendous efficiency by creating liquidity pools thereby eliminating liquidity premium and driving price discovery.

If the only way transact these assets is on the 0x protocol, and the asset backed tokens are not cryptocurrencies, then you will need a cryptocurrency native to the protocol to clear that transaction That is the ZRX token.

Utility Transforming Value

The notion that a native protocol token will act as a currency is absurd because native currencies are not necessary — just redundant. Applications built on top of another functioning protocol do not need their own utility token or currency. It’s redundant and it will eventually do one of two things:

Replace its underlying protocol’s currency all together

Be replaced by its underlying protocol token

The notion that native tokens will be used for staking in decentralized governance alone is false because one can simply use an underlying protocol token, USD, Euro, or any other scaled money for the same purpose — and eventually would — unless that native token has intrinsic value first.

A native token will have value if it’s underlying protocol is adopted for its utility. At that time, widespread protocol adoption will lead to widespread token adoption as a utility or means of transacting.

If a decentralized exchange protocol like 0x has its own token (ZRX), it will need to cross the chasm of widespread adoption before that token accrues non-speculative value — real value.

fig.1 :Snapshot of the 0x Ecosystem July 2018; Growing quickly

Currently in the 0x ecosystem, the ZRX token is not often used by the relayers (see fig.1)to clear transactions. Not yet at least.

Some fearful ZRX hodl’ers often posit the argument that the ZRX token should be used for governance instead. They are partially right but for the wrong reason. More specifically, the wrong reason I am referring to here is goverance functioning as a velocity sink to freeze supply and inflate price for the hodl’ers — but that’s not real value. ZRX token will not be used primarily for governance right off the bat. If something were to be used for governance, the assumption is that you would stake it for the right to vote. Moreover, it presupposes that there is value inherent in what is being staked in the first place. Without mass adoption, most of the token value comes from speculative demand. Something else has to happen before the ZRX token has inherent value. That something is mass adoption. It will have to accrue that value first before people choose to stake it for voting rights towards in decentralized arbitration. What is going to get us there?

What would generate real value for the ZRX token? First, I need to state that my belief is that ~99% of the ZRX price/value is speculative at present. As I stated above, real value is generated from widespread utility adoption. In plain terms: I actually need the ZRX token in order to do things that I want to do often. Mass adoption will get us there.

Will Warren (co-founder of 0x) supporting Vitalik’s claim that mass adoption justifies real value

What is going to get us mass adoption? Tokenization of real world assets (asset-backed tokens) will be the catalyst that ultimately infuses value into the ZRX token and its protocol.

You might not need ZRX tokens today to trade ETH on a decentralized exchange. Relayers might not require the ZRX token to swap Auger for wETH. But what about when you are trading a collectable? Or a microshare of a piece of property or art? What will the vig be? More of the art? Part of the microshare? Certainly this cannot and will not be the case lest we subdivide our assets up into the most illiquid pool one can conceive of. The fee to trade asset-backed tokens will be in ZRX, which in turn will lead to an effective decentralized governance structure.

Decentralized governance as a consequence of utility value:

Where does governance come in? Now that the token has intrinsic value, we can assume that the protocol has widespread and growing adoption. We can then assume that staking that value would actually mean something to the participants on the protocol. One obvious example is that positive growth and transaction volume will eventually require more ZRX tokens then there currently are in existence (~1Billion). So to mint more tokens, it would require a vote for protocol upgrade.

Summing it up

ZRX token will grow useful after we start to adopt asset-backed tokens and begin to tokenize the world around us. It is already happening now, but it will be accelerating with IoT and other projects like Harbor. With tokenization the world’s assets, we will see massive adoptions of protocols like 0x that are used for decentralized trade of the underlying assets. Mass adoption of the platform will grow the real value of the ZRX token due to its utility. Then, because it is useful and valuable for substantial transaction volume, it will become suitable to use it for governance staking. Anyone who trades often on this platform will be very interested in changes that take place on it and therefore stake in governance of those changes.

Eventually, if the utility of the token scales out enough, it will become a digital currency. This is analogous to how barley became the first currency due to its many money-like properties — durability, divisibility, widespread economic use. People eventually wanted to hold the currency for future yet-unknown purchases. They held the currency in lieu of excess/surplus assets that they produced. That’s a store of value…