On Flawed Crypto Token Models


'Laolu Samuel-Biyi
On Flawed Crypto Token Models

The crypto market is a wild place, and given how young the industry is and how I’m about 5 years into it, I can claim veteran status and opine somewhat authoritatively. I have both made and lost too much, doing everything from building to investing to speculating, and quite literally seen it all. The recent death spiral experienced in the Terra ecosystem brings to fore my own personal experience as a token issuer with SureRemit ($RMT). $RMT was launched in January 2018 at the peak of a bull market, and the thesis was to create a pureplay payment token. Given that shopping vouchers are mirrors of broad categories of real-life goods and services, the token’s utility was to be the primary payment instrument for shopping vouchers across the world, thereby bringing “real-life utility” to crypto if you can use it to pay for everyday needs without forcing merchant acceptance of crypto first. 

My co-founders and I conducted the ICO quite successfully, about $7m in mostly ETH was raised. The details of this raise would prove to be important for how it developed over time. Over 85% of the value was purchased by a few corporate institutions. At the time, we also tried to be above board with securities regulation and actively excluded US and Chinese participants. Due to lack of regulatory clarity, we also did not structure as a Nigerian company nor actively market to Nigerians, despite the fact that we were Nigerian promoters, but 70 Nigerians did buy ~$82,000 worth of tokens. Most of these buyers are known personally to me and reached out, many just to be supportive. Nonetheless, we proactively engaged with the Nigerian SEC with the details of the raise to give them comfort and proceeded to implement the defined use-case: Buy international vouchers, pay with $RMT. 

In an ideal market, this could have worked very well. No need to have USD to buy international vouchers. On-ramp into crypto and pay with low-fee $RMT. In a liquid market with enough demand for $RMT, we can easily sell it into USD and pay the merchants, or in a perfect world, the merchant might even accept the $RMT eventually. Armed with $7m in ETH, we could also invest in building the merchant network and expanding the use-case. 

Almost immediately after the raise, the market turned. Over the following 2 years, ETH (and everything else) tumbled 90% from $1400 to $80. This happened very rapidly and the bear market lasted for at least 2 years, and we had to sell eventually through such a market. The smart thing would have been to sell the entire raise into a stablecoin (no USD banking for crypto and gift card companies), but we would have needed to do that within 2 months of the raise to preserve any significant value, and we would have had to be geniuses to predict such an extended bear market. We were advised to do so by a few people, but as crypto enthusiasts, we were not very inclined to sell so quickly (after all, RMT was crashing too and we were also not inclined to sell that, and most of the market development bills were denominated in ETH and RMT). 

The first baptism of fire came in the first year. No project was immune to the macros. Most ICOs tanked and died that year. Africa never really featured prominently in the token-issuance space (about 10,000 ICOs at the time and maybe only 3 successful out of Africa), but even the African projects quickly felt the squeeze. Token projects like Wala ($1.2m) and Kora ($12m) could also not survive, and the reason was clear: A utility token with a pure payment use-case needs positive market conditions to avoid a death spiral. If you receive payment for assets priced in USD in token $XYZ, you must be able to sell token $XYZ for at least the price of the USD-denominated asset you sold in order to cover your cost of sales. If the price of $XYZ falls before you can sell it, or there is limited secondary market liquidity to sell it, you have to cover the cost-of-sales with your ICO treasury, the same treasury that is also being battered by the bear market. Eventually, due to persistent negative external market conditions, you’re stuck with tokens you can’t sell, with USD liabilities you need to cover with treasury. This is the reason why no payment token model has ever worked because it requires all of these at the same time: 

1. the market price of the tokens to remain flat or appreciate post-redemption

2. the company tokens to be consistently liquid

3. the market value of the consideration received during the ICO has to remain flat or appreciate

4. the consideration received during the ICO to be consistently liquid

Most payment token projects upon realization of this bad tokenomics simply just retire the project (perhaps the smart thing to do in hindsight), but other utility token models do work, especially deflationary token models where you had control over the redemption value of the tokens (i.e., not determined by a cost of sales). These are typically reward tokens like $BNB. In 2020, I proposed a switch to a deflationary token model and it was somewhat well-received. However, a major driver of its success–as measured by the market price of the token–is still extraneous (it relies on positive speculatory sentiment). Token deflation can influence market sentiment positively, but it is not the main driver. Nothing fundamental is. People will sell their tokens for whatever personal reasons. Institutions that bought the tokens at ICO would also continue to put downward pressure on the tokens, which counters the positive sentiment from deflation. It didn’t help at all that some retail holders who were (rightly) frustrated about continuously declining prices aired those frustrations publicly and sometimes with falsehoods, which contributed further to negative sentiment and depressed prices. 

In the 2017/2018 bull market cycle, there were a few things projects could do to influence the market sentiment though. They could “shill” the tokens (considered marketing by tokenholders). They could also pay very expensive fees for exchange listings and market-makers to ensure liquidity for the tokens and force upward price action. (Un)fortunately, we had been proactive about being above-board with several authorities, and any of these activities would explicitly mark us as promoters trying to influence the market (price), which crosses very clear securities redlines (we were already dealing with this even from markets we excluded from the ICO). We immediately made it clearer that we will not discuss anything related to token price, secondary markets, exchange listings, or do anything that could be acted upon by speculators. This kept the project alive, but it would naturally be construed as passiveness by speculative token-holders. Doing all the above things was just not worth it legally, and we would prefer to shut it down than do it.

Despite all these complexities, the project remained perhaps one of the few surviving ones from the 2017/2018 ICO era. Even with RMT, there were many opportunities to sell above the ICO price over the years, including briefly last year, and I know many people that did, but in any volatile public market, everybody can’t be winners every time. It now comes with the territory for projects that are not unicorns with persistent upward trajectories to be “subbed” or termed as scams (sprinkle some anti-Nigeria stereotypes in there and it makes it easier). Since the ICO, I have done many things and had a lot of other successes in the crypto space. About 2 years later, I proceeded to government-sponsored grad school, worked at top crypto VC firms where I met hundreds of global ICO issuers who have shut down to do other things. I build other successful crypto businesses, and I continue to study cryptoeconomic models that work at doctoral level. I have also advised several African potential token issuers (and governments), most of whom would have launched similar payment token models that were doomed to fail. Many will still proceed with token issuances that have better tokenomics, but even with those, not everybody will be winners. There is no project exceptionalism that can beat the macros and speculative pressure, and if the market is in a general bear mode, be prepared for your token to also take a hit and the associated smears that comes with it. You will not be the one diamond token to run against the bear market, especially if you don’t want to poke the eyes of any regulators. 

Currently, $RMT works the only way it can; as a background reward token where holders can pay the 1% fees for international vouchers with $RMT, and these fees will be burned, thereby making the utility zero-fee purchases for tokenholders, and a deflationary supply. We can control this while extricating ourselves entirely from the market dynamics and just focusing on voucher sales. We can’t even allow any form of predictability around when and how much RMT will be burned, as this could be acted upon by speculators and perceived as us participating in the markets. If people use the platform for its primary use-case (buying vouchers) and see the zero-fee and burns as incentive enough to buy and hold $RMT, then that could create some price action, but even then, it’s all experimental and it cannot be an explicit consideration of ours in implementing a utility. 

Although the original token model has proven to be unworkable, our current hope is that as more ordinary people purchase vouchers, they will see enough utility in RMT as re-designed, which will enable the company to acquire and burn the tokens faster. The voucher business is in the hands of a capable team that has succeeded at that specifically over many years, and I have full confidence in their work. Thankfully, also, the major buyers of RMT were institutions, and they are better at internalising the risks inherent in token markets, so there is no active pressure from them.

ICOs are a great fundraising mechanism. It has evolved a lot, exposed superiority to traditional VC, especially regarding discovery, and it needs to survive. It will however be on the graves of many projects, grifters and good actors alike. The market is turning into what is being said to be another extended bear market, and I’m curious to see what set of learnings it will bring. 

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