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Why Create a Cryptocurrency Token?

For many people who are new to the web3 space, the idea of launching a token is as exciting and innovative as it was to create a website in the late 90’s or a mobile app in the early 2010’s.

In the past, the invention of critical infrastructure like the internet empowered millions of entrepreneurs to launch websites and build their business online.

Similarly, AWS and other cloud service providers gave startups the runway they needed to scale web2 applications at a fraction of the cost, removing the barriers to entry for anyone who wanted to participate in the gold rush of venture funded mobile apps.

Today, the advent of blockchain technology is empowering builders around the world to launch their own digital tokens with programmatic rules for their utility, distribution and value accrual within a network.

Like every other stage of technological innovation that came before the web3 era, the rush to participate in the ‘next big thing’ by creating a website, launching an app or creating their own token often causes many to overlook the tried and true lessons that come with launching a new product or service; which is to first understand why you are launching it and the value it provides to users.

Just like a website for selling sneakers or an app for delivering food, a token must have a clear and obvious reason for existing.

What differentiates a token from a website or startup is that a token, if designed correctly, is not the sole product or service, but rather a tool that supports the adoption of a primary product or service such as a game, a marketplace, an ecommerce website, etc.

Reasons Behind Creating a Token​

There are typically 3 reasons why a person launches a token, and oftentimes these reasons overlap depending on the specific objectives of the creator.

Reason #1 - Product Adoption​

If you are launching a token to incentivize users to adopt your product, you have to first answer the following questions:

  1. How does the token help to increase product adoption?

  2. Can your product eventually sustain itself without the token incentive?

Tokens can be a great tool to increase product adoption if they can be exchanged for fiat currencies, cryptocurrencies or other tokens. Or if they can allow customers to receive additional benefits from your product or service by holding or spending the token.

In the first case, your token is essentially a form of money that can be traded for other types of money.

What’s beneficial about launching your own token is that your cost of capital (i.e your cost of acquiring the money) is essentially 0. Because you created your token from scratch, there was no cost besides a small network fee to produce something that can now potentially be exchanged from real money like Dollars, Bitcoin or ETH.

This essentially means that you can generate a free marketing budget for yourself, which can be used to reward users who test your product, provide feedback or promote it to their networks. You can issue token rewards as part of a contest, or as a reward for your most loyal customers.

In the second case, your tokens can function like vouchers or reward points that allow users to receive exclusive offerings when they redeem their tokens.

For example, if your product is an ecommerce marketplace, you could create a token that users can accumulate by shopping on your site, and can then be used to receive discounts on future purchases.

In another example, if your product is a blog or video channel and you are trying to attract subscribers, you can launch a token that can be used to purchase access to exclusive content only available to your most loyal fans, or you can have people spend the token to acquire special raffle tickets to win a prize.

The more tokens users hold, the more tickets they can buy and therefore the greater chance they have of winning a prize.

Token Reward Programs​

You might be asking yourself; if many of these reward programs already exist for traditional products, why do I need to make a token to do the same thing?

While a token is not necessary to create these rewards programs, using a token does come with some additional benefits. For one, tokens exist on the blockchain and are therefore more transparent and globally accessible than reward points of gift vouchers.

With a token, anyone in the world can participate in your reward programs and earn tokens that are stored in their digital wallet. Users also benefit from being able to see exactly how token rewards were distributed for online contests, which can help build trust in your brand.

In addition, the blockchain provides a permanent and public audit trail of who owns your tokens. Think about this like a customer mailing list, except instead of an email address you have a list of wallet addresses.

This can come in handy much later as your product grows in adoption. If you decide to create new rewards or even launch new tokens, you will have a clear way to reward your first customers by airdropping the rewards to their wallet address, thereby ensuring that those customers will continue to support your product in the future.

Customers can also keep a track record of their own earnings, which can be leveraged as a positive reputation signal for other products looking to find passionate early adopters.

Tokens in Advertising​

One of the most innovative ways in which tokens are being leveraged to increase product adoption is through user-driven advertising models such as the Brave browser project.

Brave is a web and mobile browser that blocks traditional internet ads and instead allows users to earn the BRAVE token by clicking on ads that are most relevant to them.

Brands can then connect with prospective customers in a more intimate way as the user is given more control over their own ad experience and gets to choose the type of brands that they want to see ads from.

This model demonstrates how tokens can completely reverse traditional business models by placing the user in the driver's seat and empowering them to benefit from the experience of being introduced to new products and services.

Are the Reward Mechanisms Sustainable?​

While tokens can be a great incentive for product adoption, one has to be careful not to confuse product adoption that is driven by token rewards with organic product adoption that occurs without the benefit of token rewards.

This distinction can be very subtle, especially in the early stages of launching your product.

However, the clearest way to arrive at the truth about why people are using your product is to observe how much they use it or how much they engage with your product or content when there is no token incentive involved.

Generally, you should consider making any token-based reward program temporary. There should be a set timeline and a plan to stop issuing token rewards by a specific date or to slowly reduce rewards over a period of time.

This not only ensures that you preserve the remaining tokens you have created for future reward programs, it also allows you to assess what is really driving the growth in your product adoption. If you notice a steep drop in user engagement and product use after removing the token incentives, then you need to re-evaluate your product offerings to make it more attractive on its own.

Currently, many play-to-earn (P2E) games in the crypto space are experiencing this problem. While many teams in crypto assumed that video game fans would be attracted to games that allow them to also earn tokens while playing, what they’ve come to realize from games like Axie infinity and others is that most of the players of these P2E games are only interested in earning the tokens.

Players rarely stick around to continue playing the game once the token rewards subside or the price of the token falls.

Furthermore, as a result of misaligned incentives, many crypto game developers spend more time creating complex token incentive models than focusing on building games that are actually fun and engaging, leading to the creation of mediocre, poorly performing games that do not appeal to mainstream audiences.

The solution to this is simple; crypto game developers need to adjust their frame of thinking from ‘play to earn’ to ‘play AND earn’.

Meaning, the first and most important component to building a successful GameFi product is to build a great game that everyone wants to play even if they do not get rewarded tokens.

Only then, once metrics have proven that the game is highly engaging, should developers think about incorporating token reward elements, which can serve as a great way to further enhance the level of engagement that already exists.

Reason #2 - Fundraising​

Fundraising is often the main reason why most projects launch a token, though it is less emphasized because of the lack of clarity around securities laws.

Due to the fast pace of development in the crypto space, many innovations, including tokens, still fall under a gray area when it comes to regulations. According to the SEC and most other financial regulators, a token is classified as a security if it is launched for the purposes of raising funds.

Securities are a broad category of investment products that are heavily regulated in the United States and other major financial markets such as Europe and Asia.

Stocks are the most common type of Security. The process of registering a Security, whether it be a stock or a security token, can be both expensive and time consuming.

Dozens of rules and disclosures must be made to ensure that fundraisers are not defrauding investors.

In addition, investors must typically be accredited, which means they must have a net worth of at least $1 million or earn over $200,000 per year to qualify to invest in an early stage company.

Many token projects bypass this red tape by launching utility tokens.

These are a loose classification of tokens that serve some type of utility within the dapp or blockchain ecosystem that they were created from.

The idea is that a token that is used as a means to perform an action, such as conducting a trade of NFTs, receiving non-financial rewards, or gaining access to exclusive offerings is not considered a security, and therefore it can still serve to help project creators raise funding to support their projects as long as the fundraising component was simply a byproduct of users purchasing the token for its utility.

How well this argument holds up legally continues to be up for debate.

However, it is essential that you understand the legal implications of launching a token and the risks that come with using your token primarily as an instrument to raise funds.

Reason #3 - Transactable Currency​

If you are aiming to create a currency for your project, you need to specify what product or services people can buy with your token, and why they are better off buying that product or service with your token and not with ETH, BTC or a stablecoin.

Creating a widely adopted currency involves walking the type of rope between maintaining purchasing power and increasing the velocity of money (i.e how frequently it is used to purchase goods and services).

These qualities are actually somewhat contradictory, as the more things a currency can purchase over time, the less incentive there is to spend it because of the expectation that it can be used to buy more later.

This expectation leads holders of the currency to increasingly become savers rather than spenders, which reduces the velocity of money.

On the other hand, the expectation of a decline in a currency's purchasing power is often the biggest incentive people need to spend a currency, which allows it to have a high velocity of money but creates the expectation that the currency is not good for storing value.

To balance these contradictory ideas, you need to think about goods or services, either within your product or complimentary to your product, that provide enough value to the user today for them to be willing to spend your token even though they believe it might be worth more in the future.

For example, you can offer users who pay for your products with your token the chance to earn more tokens in the future through inflationary rewards or prizes of equivalent value, thereby negating the need to hoard the token because they believe they can earn some of the value back by simply spending it on the products you are offering.

Move-to-earn game STEPN does this well by encouraging users to spend their tokens on NFT shoes, which act as a booster that allows them to earn even more tokens for walking. Though there are concerns about how sustainable this model is.

You can also partner with vendors that serve your target customer base to make your currency accepted as a means of payment for their goods or services.

For example, if you are creating a marketplace for people to trade cooking recipes, you could partner with kitchenware brands or at home cooking delivery services to allow users to purchase their products with your token.

Depending on the size of your user base, vendors may be willing to take the risk of accepting your token as a currency over dollars if it allows them to sell to a large group of untapped customers.

Convert Your Product to a Marketplace to Increase Token Utility​

It is also important to remember that you cannot build a successful token currency without also creating a self-sustaining and growing ecosystem around your products to support it.

One way to approach this is to think about your products as not just a good or service being exchanged by one seller to many buyers, but also as a marketplace where many buyers can exchange goods or services with many sellers using your token as the currency.

Marketplaces can dramatically increase the velocity of money because they open up the number of products that can be sold and therefore expand the number of potential buyers that are willing to spend.

  • If you have a product that you are looking to create a token around, think about how that product can evolve to become a marketplace.
  • What type of offerings can members of your community offer to each other that are complimentary to your brand and can be exchanged via a marketplace structure.

For example, let’s say your product is focused on creating educational content about investing. Instead of offering just your content for sale using a token, you can consider creating a marketplace to allow other qualified people to sell their content using your token as the currency.

This will give it utility and increase the number of transactions beyond what would have been possible if subscribers were only paying for content from one person. You could then earn revenue from this activity via transaction fees, which you could choose to keep for yourself or re-distribute a portion to holders of your token, thereby giving the token greater purchasing power.

In conclusion, the primary reasons why you should create a token are to:

  1. Increase product adoption

    • This is not the same as trying to create product adoption from scratch using a token, which is typically unsustainable. You need to first focus on creating a product that users are willing to adopt without the token incentive before considering whether to include a token incentive.

  2. To raise funding that can be used to further develop your product

    • Launching a token solely for this reason may classify your token as a securities offering, which requires extra legal steps to be taken.

  3. To create a transactable currency

    • Here, a delicate balance must be struck between increasing the purchasing power of the token and increasing the frequency in which people are willing to spend it. At the end of the day, expect that your customers and the market will lean more towards either using your token as a store of value or using it as a currency, which is normal for most tokens.
    • Developing a marketplace can help to achieve this goal as well as expanding the number of vendors who are willing to accept your token as a means of payment.

Given all of the complexities involved in creating a successful token, you should expect it to take a long time before people broadly accept your token as a currency.

Money does not become instantly adopted as money until there are multiple points of external validation:

  • Vendors accepting it
  • Users transacting with it
  • Large trading volumes and liquidity
  • Institutional adoption
  • And many others

These points all take time to develop and should not be expected to occur within the first few months of a token's launch. It’s been 13 years and Bitcoin is only just beginning to be broadly accepted as money by the mainstream.

Fortunately, as the crypto markets slowly begin to mature, the time it takes for a new token to go from concept to accepted currency should decline as more market participants become comfortable with the idea of using tokens as a form of money.

At Horizen, we firmly believe that tokens will continue to serve as the driving force behind the wave of innovation in the world of blockchain and growth in adoption of dapps in the coming years.

This is why we have created TokenMint - a tool that allows anyone to quickly and easily launch their own token without the need of technical knowledge or a background in blockchain.

On TokenMint, you can:

We also created Horizen EON, the EVM-compatible sidechain.

Developers should consider creating a token on Horizen EON due to its unique features and benefits. As a fully EVM-compatible smart contracting platform, EON allows developers to efficiently build and deploy decentralized applications (dapps), leveraging the robustness of the Ethereum ecosystem. This compatibility with Ethereum means developers can use the same tools they are familiar with, reducing the learning curve and development time. Furthermore, Horizen EON is designed with scalability in mind, addressing one of the major challenges in blockchain development. It also offers a permissionless, interoperable, and customizable sidechain network, providing developers with the flexibility to design their blockchain applications according to their specific needs. Additionally, Horizen EON is part of a fast-growing ecosystem, providing developers with a large and active community for support and collaboration. Lastly, the tokenization process on Horizen EON is made easy, allowing developers to incentivize user adoption and participation in their dapps.

Last updated on by Horizen Contributor