One of the pillars of a successful token is utility.
Users should be incentivized to buy and interact with the token because they can hold or exchange it for a benefit, utility, or desired outcome. In other words - it’s not solely speculation of future profits that is propping up demand for the token.
Building utility into a token is how cryptocurrency evolves from being an equity-like instrument into something greater. Tokens can potentially disrupt products/services like credit card points, loyalty membership programs, in-game items, and gift card credits.
Traditionally in web2, all these are being “rented” from a centralized provider who controls how they can be leveraged. In web3, however, tokens create a more public, community-owned version of the aforementioned products.
Simply creating a community-centric token is not enough - it still has to add value to the user. As such, we try to focus on the “jobs-to-be-done” for each token to understand WHY users would want to purchase them outside of speculation.
Fee for service is one of the most direct ways to align incentives within an ecosystem because the underlying product requires the purchase/ownership of the native token. This requirement means that the builders, network validators/participants, and users are all incentivized to behave harmoniously within the ecosystem.
While it’s possible to simply use fiat, ETH, or another alternative asset, charging the native token rewards active token holders with upside as the project continues to grow.
In this utility deep-dive, we’ll explore a few examples of fee-for-service utility.
Example 1: Ethereum
The OG crypto utility. The Ethereum network allows users to spend ETH for the execution of smart contracts on the blockchain. It provides a decentralized, trustless platform for executing and enforcing smart contracts, which underpin application such as decentralized finance, digital collectibles, and gaming. Ethereum enables the smart contracts/developers to create applications with code that is provably guaranteed to execute as written.
Interacting with applications on Ethereum requires ETH. This ensures organic demand for ETH as long as there are users, useful applications, and developers on Ethereum.
Most of today’s successful tokens are Layer-1 protocol tokens (e.g. SOL, BNB, MATIC, AVAX, APTOS, etc.)
Example 2: Filecoin
Filecoin allows users to buy and sell digital storage in a decentralized manner. Users of Filecoin can buy and sell storage space using Filecoin’s token, FIL, and the network charges fees for certain types of transactions, creating a demand for the token. As a result, FIL’s value is directly tied to market demand for decentralized storage.
Example 3: Helium
The Helium network offers a pay-as-you-go internet connection by pairing bandwidth providers with bandwidth users. Users pay (burn) HNT, which is then awarded to bandwidth providers proportional to the amount of traffic they pass through their hotspot via data credits. HNT’s value is directly tied to the value of decentralized data transfer.
Example 4: Chainlink
Chainlink (LINK) operates oracles to integrate real-world off-chain data with on-chain smart contracts. Chainlink’s blockchain is powered by node operators that run Chainlink’s oracle infrastructure (hardware and software). These operators are then compensated with LINK tokens from users based on demand for the data they can provide and the current market for that data.
One of the original designs for tokens, fee-for-service is one of the strongest mechanics for aligning a use case with your token. While some of the most successful tokens (e.g. Layer 1 tokens) utilize the fee-for-service, we’d like to see further experimentation with new projects like the ones mentioned in this post.
By combining utility, upside, and incentive alignment into a single token, it carries the very real possibility of disrupting traditional monetization models.