In reference to the uprising trend of idealistic decentralized systems, it’s alarming how the good old mechanics of capitalism and monopolies jeopardize our beautiful new decentralized world.

Before we get into the details of my controversial thoughts, let’s clarify what exactly capitalism is and what utility tokens are.

Definition

As described in this awesome wikihow article, capitalism is an economic system that relies on the private ownership and production of capital assets allowing everyone to put their money on whatever they choose. It’s a political philosophy that advocates for free markets, free of forced external intervention believing in a self-regulating market. Actors in this system are so-called capitalists/investors who own capital and try to grow that capital in order to improve their position in life. Doesn’t sound that bad right?

That’s what good capitalist would say

In our scenario, the chosen asset is a utility token. A utility token is a non-physical token that has a certain use case inside a system and can be exchanged within the system for a product or service. Therefore the purchase of a utility token, in general, shouldn’t be seen as an exchange in a (crypto-)currency which is defined by the fact that is a generally accepted form of money.

So far so good, now it’s getting interesting: Instead of directly serving the stated purpose, nowadays utility token mostly are created for crowdfunding purposes. This means that the utility token is exchanged for a currency so that the entity that provides the token is able to invest the earned money to develop a product that people, LATER on, will be able to use. (To add this on this point, most of the people who invest during the crowdsale will probably not use the token to exchange it for a product or service.) Therefore, the primary driver for most of the investors (capitalists) is that the underlying system is developed/progresses so that another entity is willing to pay more money for the utility token later on. It should be noted that although the investor isn’t able to redeem the utility token for goods or services at this point, he is in most cases able to go onto a crypto exchange to sell (and of course also buy) the token.

Velocity Problem

While still a few months ago the majority of people didn’t care about the exact mechanics of the token within the system, nowadays clearly defined tokenomics are essential for every project and the investors in terms of the speculation on the future worth of the token. Basic principles like “There is a fixed supply of tokens, as the demand for the token increases, so must the price” seem to be outdated in terms of the confounding velocity problem for most tokens. As comprehensively described by Chris Burniske in his blog entry, the increase of the velocity decreases the value of the referenced asset quite linear and therefore, in reference to our assumption on the investors, also the value of the token.

Solution

Of course, no one wants to alienate their investors and therefore it is necessary to find suitable measures in order to solve the velocity problem. On a high level, we can differentiate between two options which are to either find incentives to amplify the demand-side or to reduce the velocity. Since it is quite difficult to create or increase the demand, most projects are looking into mechanics to artificially reduce the prices.

While there are some quite promising mechanics like Factom’s burn-and-mint mechanics and buy-and-burn mechanisms as they are used by Augur, the most trending ones implement a staking mechanism which can and will destroy some ecosystems if they are not considered carefully.

Problem

So yeah, staking reduces the velocity, but what’s the problem? Most of the staking mechanism require people to lock their token in order to be able to use certain features or fulfill certain functions within the ecosystem. But why should the investor lock their funds? In order to be a good capitalist, you need some capital to invest. You need to grow your business and invest in other capital assets to increase your revenue and make your life better. Another capitalist would probably tell you that you don’t need a lot to get something started, but let’s have a look at this point in detail. You should invest a lot and I’ll tell you why. The token issuer, of course, want’s you to invest, steps his game up and brings up an incentive for staking. A common method is to pay you a small percentage of their token, based on the tokens locked, and by doing so one gets discouraged from selling and is, in turn, more likely attracted to invest more. There is nothing new about this method and in fact, this mechanism is actually used by many (non-crypto) currencies to hike interest and attract capital.

“Accumulate, accumulate! This is Moses and the Prophets!” ― Karl Marx, Capital, Vol 1: A Critical Analysis of Capitalist Production

If you are a good capitalist and have invested a big amount of money (and probably looking forward in investing some more), you’re probably really happy right now. The money works for you and you can grow your capital easily, not only by collecting the interest but also by reducing the velocity and pushing the value of the token itself.

And what’s better than money? Power! If the ecosystem also offers some government functionality which is bound to the amount of token you are holding, you are on the right way to become a superpower in the ecosystem in no time. You will be able to govern the system and earn money. And with a steady growing power within the system, you’ll also be able to nudge the price to new equilibriums.

When you’re at the calculated peak, as a good capitalist, you sell your tokens and get on your way to new markets. Awesome for you, the token issuer, but what about the ecosystem?

“Master Skywalker, there are too many of them. What are we going to do?”

The staking mechanism has made you a god but you have forsaken the little decentralized world. You have aborted the system which was able to attract your interest in a sea of diverse projects. Is that what you wanted?

Capitalism does not permit an even flow of economic resources. With this system, a small privileged few are rich beyond conscience, and almost all others are doomed to be poor at some level. That’s the way the system works. And since we know that the system will not change the rules, we are going to have to change the system. — Martin Luther King, Jr.

Be the change!

Stick with your ecosystem and become an important part of a new world.