Why API Tokens are Horrible for Investors, Users and Business
An API token is basically a token to be used to redeem a service from a company/smart contract. The idea being that you must buy the token for the system to work. Two examples would be Golem and Civic. If y0u want to render your 3d video you gotta buy some GNT and if you need to verify an identity you need to buy CVC.
Below is the basic frame work they use, take note of the need to use GNT token.
Zooming out: How an API economy would work.
The business or user decides he requires an API call, he then exchanges some ETH for API token that is then sent to API provider, the API provider provides the service keeps the token and proceeds to sells it in the exchange for some BTC/ETH/USD to buy more hardware and pay employees and on the side you have some speculators fuzzing around with price.
Why you don’t like it as a customer
As business you don’t want to be trader. If everything you bought for your company would vary in price by 3x, budgeting is impossible and your full time job would be to speculate on when to buy the micro cap tokens for services required.
Why you don’t like it as an API provider
In theory every API call should cost some amount of money, if the system does a great job every API call would be cheap and be able to accommodate peak demand while having relatively stable pricing and we would have a surplus in the market for tokens to be used. Token would decrease in value should the above happen, since the service should get cheaper.
API providers would also have to be guessing as to the pricing of their token Vs USD/ETH/BTC because their costs to provide the service are calculated in USD/BTC/ETH. So if speculators dump the price of the token they would raise the amount of tokens need to perform API call so they can cover cost of the operation, so it would be constant fight vs speculators fuzzing around with prices.
Why is it a bad investment.
The inverse is also true for the token to appreciate in value the system should be expensive and the token so scarce that people would have to bid up the price of tokens. This would be horrible for the business users and great for speculators. For a token like BTC it makes sense for the token to be scarce, driving the price up since price appreciation is part of the model. You don’t want that for an API provider, as the service should get cheaper with time, not more expensive!
In this framework we assume the receiver of such API tokens does not engage in pump-n-dumps, he sells them back into the market at a steady rate. Its also in his interest to do this, the API provider makes boatloads computing those API calls and stability of price is a selling point.
So the monetary appreciation of a token is inversely correlated to running a good operation/contract. Shit providers that do pump and dumps, are insanely inefficient and provide no stability to the market, might see a rise of token price for a short while but it would eventually kill the API provider due miss aligned incentives that lead to speculation, over creation of value.
Whilst the token of a great running business would decreases in value over time or be stable in price. if they build a more efficient product they would increase the amount of API calls they deliver thus lowering the price of the token and possibly reduce the demand for tokens since you will now only need a smaller fraction of a token to run the API call.
The alternative model
The API call is priced in ETH when you want to use the call their is no need to perform the extra step of converting to ETH into the micro cap token and all the risks associated with a low liquidity asset.
TLDR: If you are buying API tokens that does not give equity in the company you are basically buying a gift card so don’t expect it to appreciate in value based on fundamentals. If you are an API provider price the service in ETH so that speculators don’t fuzz with your costs. If you are an API user use a service that will have steady pricing or you business model will get destroyed when a speculator decides to pump-N-dump a small cap token.
If you made it this far you might enjoy my brain farts
Edit, Came up on a 18month old article by Fred Ehrsam discussing the value of the token model. Highly recommend reading it.
