This article explains why token utility is so important for the value of a network. Afterall, investors are buying tokens not stock shares.
Good Networks vs. Good Investments
Just because a network is popular, and functions appropriately does not mean the underlying token will succeed as a worthwhile investment. The number of projects that have a great idea with moderate execution is numerous. Only those that provide utility or use case for the token stand above the rest. A good example would be Ethereum, ETH is used for fees for the underlying network transactions. ETH is also needed to lock tokens for rewards on the long term. ETH is needed to buy Ethereum NFTs, participate in decentralized finance, and to trade.
Ethereum is a leader in the market because it brings security and powerful decentralization. Ethereum also has enough interest that the utility the ETH token provides brings inherent value to the network. Since most investors cannot invest in Ethereum directly, buying the ETH token is the only option. If the token does not have a reason for users to continue to hold it, the price action generally falls.
Let us compare this ETH token to Dogecoin and the DOGE token. Dogecoin like Ethereum has an unlimited supply. What makes Ethereum not so inflationary is the fact that a portion of the fees on the network are removed from the circulating supply permanently. With enough daily volume, Ethereum can be come deflationary which is the opposite of what the US dollar provides. DOGE has a circulating supply of 130 billion, this means that for DOGE to hit 1 $, the tokens total value would be worth more than Apple in 2017. DOGE currently provides no utility for the user, there are no fees for trading tokens, there are no NFTs, there is no ecosystem built upon Dogecoin. So why then is DOGE worth 13 billion during a market crash, DOGE currently outvalues the entire company Roku, Wayfair, or Robinhood.
The thing the separates strong tokens from the pack is the underlying utility for the end user. Ethereum offers a moderate set for the token holder, but there are other networks that provide more direct utility. Exchange tokens are a good example of this including CRO (crypto.com) and FTT (FTX token). Users who hold these tokens get certain perks such as lower trading fees.. CRO token holders can also use the token to receive cash back (crypto rewards too) credit and debit cards. CRO token is used for fees and more on the Cronos blockchain as well . FTT token holders can stake the tokens for rewards, or use the tokens as collateral during trading .
Polkadot’s DOT token is used to invest in startup networks on the Polkadot network. Users can lock the tokens as a new network goes live, they receive that new network’s tokens in return at a later date, this is an example of powerful, long-term utility. In return the new network receives Polkadot rewards to help develop and grow. In many countries it is not allowed to invest early in new projects, Polkadot provides this service on chain in a decentralized manner away from the grips on the government.
Some tokens offer voting rights by percentage ownership, including Uniswap’s UNI token. Some are used to provide storage capabilities such as FIL, others function as a currency such as Stables coins (USDT, USDC etc.). The possibilities are endless, the point is that tokens that provide use case and utility are more likely to become sound investments. Those who can see through the thousands of tokens and find those true gems that have strong functionality will come out on top. Please remember none of this is financial advice, please stay safe out there!