On Protocol Investing and why Utility Tokens are not Useless

New utility tokens are popping up every day. Some with good ideas and executions, others with the sole purpose of making money for the founders. For every new platform, protocol or application, a new token is introduced. Wondering why every single project needs a token can be justified. Why not just pay with bitcoin or litecoin? In this post I'll try to explain why a utility token is actually not useless (in most cases).

Token or Currency?

Let's begin by clarifying what I mean by a token. A token is a cryptoasset that's used to access the underlying blockchain protocol. Think of Ethereum, to access the functions the Ethereum platform offers, one must use the native token - Ether.

Bitcoin, on the other hand, is solely meant as a currency. It's main function is to serve as a store of value and means of exchange - this makes it a currency.

Protocols

Next thing I need to explain is the protocol/application relation. You've probably heard of TCP/IP - the protocol underneath the Internet. A protocol is basically a set of rules that determines how nodes in a network communicate. This protocol is completely decentralized, no one owns it. TCP/IP never developed further to offer the things the internet serves today, think of your digital identity, cloud storage, online marketplaces etc. The problem with these is that because they were never implemented in the protocol layer, centralized applications started filling that market gap. The problem being, of course, that they are centralized. Facebook owns your digital identity, you don't. Google owns your online behavior, not you. They can use that data in whatever way they want, for example, by selling your online behavior to advertisers who can then target you. Privacy is completely lost, several large corporations have access to your complete identity.

The problem with the current state of the web, is that the protocol is underdeveloped and there are too many centralized applications, in a way that doesn't really benefit the general public. I don't think a petition to reinvent the internet of today and disregard the complete application layer as the way to change the online world, there has to be an alternative that's simply better. This is where blockchain comes in.

The Blockchain Protocol

A Blockchain is a distributed, public, immutable database that keeps a record of transactions of data. On the Bitcoin blockchain, that data is monetary value. On the Ethereum network, it could be something like a set of rules, which is called a smart-contract. On a decentralized exchange's blockchain, like 0x or Airswap, it could be a trade that just executed.

Blockchains are in early stages of development and basically don't really have a lot of applications built on them yet. This is really what makes them different from Web 2.0, the protocol layer is much more advanced. This is were tokens come in. To access the functions of a blockchain or protocol, one must use the native currency or token. By investing in the token, you basically bet that the token's blockchain will be used more in the future, which will drive higher demand, which will increase the price. These economic incentives create network effects, i.e. the founders, developers, community all have economic incentives to make the protocol as good as it can possibly be. This is what I mean by investing in protocols. And that is huge. Everyone in a given network benefits economically when the network is improved.

My point being, utility tokens may not seem very useful and easily replaceable at first, but they create the most profound network effects which can really benefit the blockchain space. Investing in a token now is like buying domain names back in 1994, the only way one could really invest in the Internet protocol.

Thanks for reading!