It isn’t always the case that optimism around a product can be expressed by buying its native token. The Brave browser and its BAT token are probably the cleanest example of this. There was widespread optimism around the Brave browser as a privacy-enhancing tool to prowl the web without invasive advertisements and trackers. It was clear in 2019 that this was a great product. Many, including myself, sought to express this optimism by buying the BAT token. It didn’t quite play out as expected, and was my first lesson in product-token alignment.
Equities are simple instruments. They represent an ownership stake in a company. Every equity share in a region carries, more or less, the same characteristics. So when you’re looking at a company and believe it’s worth expressing a view through its publicly traded shares, you don’t really have to think about the instrument. It’s an ownership share — it is inherently aligned with the growth of the underlying business (for better or worse).
Tokens are a different animal. They’re basically a blank slate and can be programmed to be whatever the developers want it to be. So investing in tokens is not as straightforward as “I am bullish XYZ project, therefore I will buy XYZ token.” You can structure them as anything from ownership tokens to utility tokens, with the extreme end being a niche use-case like being redeemable for a pair of socks with a unicorn on it.
Naturally, this makes the investor’s job a lot more difficult. Not only do you have to diligence the underlying product/protocol, but you also have to understand what role the token plays in the protocol’s economy. Simply put, investors in crypto must also understand if a protocol’s native token is able to accrue value from the product. Things have improved from the utility token boom of 2017-18 though. It’s now clear that the most real, viable utility tokens are a chain’s native token that is used to pay for transaction fees (gas) and validate the network (for PoS networks). And in hindsight, the lack of value accrual to DeFi tokens circa 2020/21 is possibly a reason for the infra funding boom of 2021 to now. L1 tokens are the most obvious case of product-token alignment that exists.
As builders started to understand the need for long-term product-token alignment, things have begun to turn around. But we haven’t quite reached the stage where you can confidently express a view on a protocol by longing/shorting its token. And that likely will never be the case in crypto. The beauty of tokens is in their “blank slate-ness”. Every token can be structured as per the protocol’s best interests. But it’s also in the best interest of protocols to be more amenable to investors. So there’s a balance to strike between value accrual to the token and the intended purpose of the token — if anything beyond pushing control from the core developers to a larger community with skin in the game.
Over the next couple of years, I expect app token design to trend towards being representations of network ownership/stake in a network. Utility tokens for the application layer, if not designed in a specific way, are likely to add more friction to users than benefit to token owners.
TLDR: don’t expect the requirement to diligence a protocol and its token to disappear. Instead, think about viable hybrid models — a model that strikes a balance between revenue/value accrual without outright serving little purpose besides rent extraction.