Unlike other forms of crytpo, the premise of utility tokens is not set in stone. There’s limitless room for growth, evolution. This is going to be fun.

What makes a token valuable? What would ensure that it increases in value? What mysterious force would keep it in circulation year after year, forevermore?

I don’t know. No one does, really. But I could hazard a guess and go long on it. The one thing that can give steadily growing value and longevity to a token, is utility. The best part about utility is that there are hundred different ways to be useful. Especially for a token. There is the preset utility that the devs thought up when the protocol was on the white board. But as the protocol evolves, so do the number of ways in which the token can be used.

But I’m getting ahead of myself. We’ll discuss tokenomics soon enough. Let’s give Ryan Selkis a nod first. He started it all. I happened to re-read his 95 Crypto Theses recently, where he flexes this theory he calls the cryptoasset barbell. According to the theory (if I’ve understood correctly), sky’s the limit for store of value cryptocurrencies, the world will bow down to smart securities — a new kind of crypto asset, and utility tokens are heading to zero. Wait, what? This was the first time I found myself unable to agree with him. The opinion is straightforward — higher velocity, or the rate of movement of the token on the protocol and off it, brings down the value of the token. And holding the token reduces supply, thereby increasing value. A conflict emerges. The protocol demands velocity, and an investor/trader would demand value. However, this argument judges value only from the perspective of token supply. Are there more parameters, which could work over a longer period of time? Has the potential of utility been underestimated?

We could either chow down on jargon and I could reel off a list of references, or we could keep this light and use a metaphor instead. I vote metaphor.

Welcome to the arcade

What’s the coolest part about a gaming arcade? For one, it’s the perfect metaphor for a protocol. Imagine that for a second. There’s this space, which allows a whole range of games on different consoles — some you can play independently, and some are multi-player, which you enjoy as a group. The best part of the arcade isn’t the games themselves, but the ecosystem they’re set in. Games might change, evolve, disappear. But the ecosystem continues to thrive. The games are just the surface. It’s the ecosystem the players are addicted to.

The arcade’s a first of its kind. It doesn’t charge you for coming in. It just designed the rules of the games, and made a bunch of tokens that you feed into the games to get them started. It sold these tokens by the bunch to everyone in the village, for pennies. If you didn’t get your tokens when the arcade opened, you can buy them from the players that bought them early on. Or at token counters around town that buy and sell arcade tokens. Get to a counter, pick a game, pay, get some tokens and begin to play. From this point on, there are two scenarios -

You exhaust all your tokens on the games and you leave You earn more tokens by either excelling at your favourite game, or providing a service in the arcade

In the first scenario, you’d have to buy your way in every time, and ‘burn’/use up the tokens. In scenario two, you earn more tokens, and with them, the right to continue playing.

You can earn tokens -

By racking up points When they’re gifted to you by a friend When you win them in a wager in multi-player games When you get paid to help around in the arcade

Throughout all this, there must be an adequate supply of tokens in the arcade. What if all the players turn out to be stars on a particular day? What if you get highly enthusiastic volunteers who demand payment? Even if there are only a dozen players today, the arcade needs to imagine a future with 1,000 players.

Within the arcade, the value of the tokens remains constant. One token to play one game, or five tokens to play another. How many tokens you can earn and for what sort of work, is also decided among the parties involved.

But on the outside, something interesting is happening. Everyone wants tokens. They are suddenly worth their weight in gold. They’re valuable, not because they’re in short supply, but because they are the key to radical fun in the arcade.

In the arcade, they’re worth the same. The games change, some die off, others evolve. But the tokens remain the fuel of the arcade. Forever and ever. And this makes little Fred and Bob very happy.

Any further down this road and we risk psychedelically overcooking the metaphor. Moving on.

Lasting Value over a speculative ATH

Ryan and Kyle Samani describe three kinds of tokens, four if you count the as yet non-existent securities.

Store of Value (SoV) Utility token Stable coin

There have been pros and cons listed against each, but broadly, an SoV token, like Bitcoin, is secure, scarce and self-sovereign. It can absorb infinite speculation, so yeah, super-volatile. And needs to have no practical use whatsoever.

A stable coin like Maker bats for price stability, but falls flat when you consider that it is over collateralised and subject to the same economic and political push and pull of the underlying asset. When a black swan event occurs, and the underlying collateral collapses, the stable coin does, too. Besides, if there isn’t going to be any volatility, it isn’t a great crypto investment vehicle; not much fun.

But utility tokens, now. Like Ethereum, the forebear of them all, utility tokens are the best of both worlds. They can be stores of value even when they perform a utility function. The utility factor, as we discussed earlier, can continue to evolve over time. Staking mechanisms, or a deep integration with protocol governance, can keep the token relevant to the very fabric of the protocol.

Their value within the protocol is defined by the community and can remain relatively unchanged. But their value in the market would continue to increase. They would not be as volatile as SoV tokens, neither would they be as sedate or limited in scope as stable coins.

Granted, at any point in the future, it is tough to imagine that a utility token would shoot up in value like an SoV. However, it isn’t a stretch to imagine a strong, steady and seriously long upward curve in value.

The future is in utility. As long as something is useful, it will be around, and it will be valuable.