Futility Tokens: A utility-based post-mortem
Think you’re escaping and run into yourself. Longest way round is the shortest way home ~James Joyce, Ulysses
A futility token is an already-existing token that has no chance at accruing future value due to its poor design. The users are still delusional, the company may or may not be aware of the token’s problems, and general ecosystem participants are becoming aware of the flaws in the design of payment tokens. There is no future for these types of tokens, other than a dramatic change in the direction of its own ecosystem and functionality — or an outright conversion to a security. During the last few months, this has been the case for a few projects.
Back in May, I wrote about tokens not being able to capture value and companies realizing that as their system matures, the need for their token slowly dwindles. In the given example, I brought about an example company, and their entire token pool representing a portion of equity. The discontinuation of the token meant that a layer of friction was removed in their service, and the token holders benefitted by now having something that could accrue value so long as the company did well. I’m a large fan of tokenized securities, but there’s one problem — not every utility token holder wants a security, as the speculative drive dramatically diminishes.
In the case of utility tokens that will never accrue value, I’m proposing a new game: The Bagholder’s Dilemma:
In this case, there are four distinct scenarios.
The first being the case of the company holding and the user holding. The project remains on its path toward destruction, the company continues its charade, and the bagholders get increasingly violent.
The second is the case of the company folding and the user holding. The company is completely bankrupt, dumps its remaining tokens on the open market, and the holders eat the absolute losses considering the massive treasuries that these projects still have.
The third is the case of the user folding and the company holding. The user takes a massive loss on the tokens, and the company continues its path toward destruction unabated.
The last is the case of both the company and user folding. Everybody wins because nobody has to hear about this token anymore.
However, outside of this game is the option of a company converting their utility token into something meaningful, whether it be a security representing equity, or even giving the community a buy-back option. As token companies continue their death-spiral, there is an option outside of this game that they can take: create a meaningful way in which the users have an exit without it having any massive downside on the company. The following four companies have recently come out with the fact that their token efforts were moot, and have given options for conversion to their holders.
Digipulse
Amount Raised in ICO: ~$1MM
Type of Exit: Equity Conversion
According to their white paper, Digipulse’s vision was to create a service in which you can will-off your cryptoassets automatically when you die. Also included is an attempt at a decentralized storage solution in order to further protect and encrypt information.
The token model for Digipulse is a basic payment token for the service, and to pay storage providers for their vault system. They forked off of Storj to create their own proprietary solution — and as a side note, all providers contact information and billing states are kept centralized. They’ve even prepared for their own demise on the 17th page of the white paper (don’t worry, I’ve read it so you don’t have to):
On August 1st, the Digipulse team released a blog post detailing their new service — Digipulse Freemium. In an effort to bootstrap their demand side, they began offering the product for free in a limited capacity. Oh yeah - the actual token conversion and disengagement were displayed afterward as bottom fodder rather than up-front. Maybe it would make sense for the heavy token-holders to open up one of their vaults considering they were already six feet under.
In the post, the team mentioned that out of the 320 signups they had to the service, 2 people used their tokens to pay for it. This could be for one of two reasons: either the tokens were better to speculate on, or individuals didn’t want to go through the hurdles of purchasing illiquid tokens for the service. I’m going to assume it was the latter option, as there aren’t many exchange options for the token, and its volume typically fell daily in the low thousands. Along with this, they also announced their official delisting date of December 15th, which will probably apply to both IDEX and Cryptopia as they have controlled-listing policies.
However, this token conversion to equity came with its own catch — individuals will only be eligible for the conversion if they have more than 10,000 DGPT (Digipulse Tokens). Considering that there is no exact exchange rate and this number was set arbitrarily, it could hypothetically be a case where the team wants a small bit of an exit on the tokens they hold in their treasury and among partners, and set the number in an effort to boost liquidity. If I had 1,000 tokens and believed in this project, I’d buy an extra 9,000 for the equity which would require me to buy it from someone else who wouldn’t want that equity. Users who don’t want equity can relinquish all of their tokens in order to have a lifetime subscription to the service — not a bad bonus either.
Why Exit?
- Insufficient interest and liquidity — too much work to create it
- Increased subscribers after the token is discontinued, as people lost their life-savings
Alternate Future
- A sustainable work model where storage is provided to an already-existing service rather than a simple Storj fork
- The Digipulse team opens up a vault the day after the ICO, and this is premeditated
Mercury Protocol
Amount Raised in ICO: Estimated $1–2MM, $10MM private
Type of Exit: Reclassification of a Utility Token
Mercury Protocol originally stemmed from Dust, a messaging application that stored all messages in the device RAM. The idea was to create a protocol agnostic communication network, along with a tokenized ecosystem for services built on top of the protocol.
The team’s justification for a token felt the same as any other payment token pitch: we have this ecosystem, and this token will be the de-facto currency of this ecosystem. The token would be used to reward users that generate value in the ecosystem, which they then could redeem for other services. They did, however, mention the usage of Bitcoin or Ether, two liquid and accessible assets, in the ecosystem, but they instead went for a token (which ironically enough would suffer from more volatility).
Since Mark Cuban backed the project, he became a large focus of their marketing strategy through forms of flag following. Articles started pouring out of technology news sites in regard to Cuban’s endorsement of the project, which was then taken by purchasers as a green light to back the project.
Things were even dicier for Cuban when Howard Marks began complaining about unregulated cryptocurrency markets and Cuban’s promotion of the project during their crowdsale. However, Marks’ ulterior motives were present in the promotion of his own tokenized securities exchange.
The exit all started with a blog post from Mercury Protocol on July 17th, explaining the difference between “regulated,” “utility,” and “consumer” tokens. The regulated bucket, as expected, was just a small section on security tokens, and the utility bucket was an attempt at defining utility tokens. However, the “consumer” token bucket was where the team drew a line in the sand on how their token would operate.
To Mercury Protocol, a “consumer token” was one in which the token was burnt upon spending, and is not a financial vehicle. The consumer token, in this case, would have a fixed price-point and would not be able to trade on an open market. Shortly after that, the team dropped the hammer:
The article ended with a myriad of open-ended questions, leaving the bagholder in a permanent state of crypto-philosophical-euphoria. Questions to be asked at that point include:
- What even is a token?
- How can I find true peace as Mercury Protocol did?
- Is any of this even real?
After that slight distraction, Mercury Protocol ends with bringing up more classifications of tokens to further distract the reader from the bombshell. A stunning performance.
After throwing their community into chaos with their tactics, they released a follow-up post on July 30th to clarify a few points. In this case, refunds weren’t going to be given to contributors, a peg to $0.04 was established (sale price), and users would be able to buy more tokens in the future directly for fiat. Those who bought GMT on secondary markets would have to enter their ‘decentralized’ system with a KYC/AML chokepoint. As for now, Mercury Protocol has their token holders in limbo.
Why Exit?
- Keep all your raised funds and play nice with regulators
- Remove any thought of responsibility to the community that contributed
- Focus solely on the product rather than token ecosystem — after raising for a token ecosystem
Alternate Future
- Mercury Protocol beats Mainframe to a work model
- Mercury Protocol never ICOs and creates a great, frictionless application
Fun Fact
The Mercury Protocol general ICO contributors didn’t have any lockup on their tokens, so secondary market trading was already occurring while Mercury Protocol was soliciting contributions. The secondary market was trading the tokens for less than the purchasing price, leaving Mercury Protocol hypothetically with no justification for their selling point.
Cofound.it
Amount Raised in ICO: $14,800,000
Type of Exit: Fund Redistribution
Calling themselves an “alternative VC ecosystem built around crowdfunding,” the purpose of Cofound.it was to be an early whitelisting solution for ICO contributions. Cofound.it would syndicate projects on their platform that went through rounds of scrutiny, and allow CFI token holders to have priority access to invest in the syndicated projects if listed.
The CFI token’s functionality dealt with a 5,000 token lockup for a “priority pass” and a couple of access features including a community evaluator program, and an exclusive slack — essentially something best handled with a regular database, considering there were plenty of centralized gateways in between these features.
On September 14th, the former CEO of Cofound.it, Daniel Zakrisson, released a blog post detailing the “closing” of the company as the “crowdfunding market disappears.” After praising themselves countless times for their work and mentioning how their pivot slowly came in the form of advisory and life-cycle health of the assets issued off their platform, they dropped the bombshell: Cofound.it was closing down.
In what they’re calling a “creative destruction,” they’re apparently distributing the rest of their holdings to the community and the team is to go “spend their time and energy on other things” that are “ecosystem” related.
Cofoundit’s redistribution process deals with sending tokens to a burn address in order to be reimbursed with Ether starting mid-October. Apparently Ether will be sent “periodically” to addresses that are eligible, as the team plans on liquidating the rest of their assets. Considering that there won’t be liquidity on CFI because of the assets retirement, and the fact that it would prove more lucrative to burn them then sell them on the open market, does this mean that Cofoundit is potentially holding a treasury of other tokens and assets?
The tokens that have launched on Cofound.it, including Musiconomi, Maecenas, X8, and Da Power Play, all have a combined 24 hour liquidity of under $1,000, leaving Cofound.it with not-so-sufficient liquidity on that part of their treasury.
According to their blog post on their plan of action, Cofound.it currently holds around $14.4MM in their treasury across a broad spectrum of assets, and a significant amount of cash. The liabilities of the company total to around $350,980.50, just a small fraction of what they have in reserves. The entire market capitalization of CFI at the time of writing is around $9.37MM, which leaves the company enough to pay off their liabilities, refund any CFI holder according to the current market rate, and possibly still have a few million for their pockets if they choose to do so — not bad for ‘shutting down shop.’
The ringleader of the entire operation is Ervin K. Ursic, editor of the cofound.it blog, who also just happened to be the former COO of ICONOMI. Prior to ICONOMI, Ervin was a part of Cashila (ICONOMI predecessor) that also shut down a few years after its inception. He has since taken over Cofound.it’s management, has custody of the assets, terminated all outstanding contracts, and reached out to exchanges to halt CFI’s trading.
Why Exit?
- Token not needing to be a part of business logic
- No form of decentralization present, more of a controlled community
- Treasury value exceeds the value of outstanding liabilities, including the token
- Potential avoidance of legal issues, having a “clean exit”
- Narrative control
Alternate Future
- A security token representing equity in incubated projects
- A security token providing dividends in the form of incubated project’s utility tokens
ICONOMI
Amount Raised in ICO: $10,576,227
Type of Exit: Buyback and Equity Conversion
ICONOMI’s original plan was to allow users to make their own investment funds and allow other users to invest in those funds. Along with that, ICONOMI created their own index funds to manage and allow users to invest in as well.
The original token outlined in the white paper could be potentially classified as a security. It represented ownership of the platform, along with a dividend model and the rights to vote on issues pertaining to ICONOMI.
The token eventually settled in with a buyback and burn model where ICONOMI was buying back tokens every quarter with profits generated. Still a security in this case, even with their other plans to require users to burn ICN in order to open a fund.
It’s also important to note that ICONOMI was caught in the Parity Multisig freeze that left millions of Ether in parity multisig wallets frozen until further notice. ICONOMI in particular still has over $20MM (114,939 ETH) frozen in their multisig wallet, along with a few tokens.
On September 27th, ICONOMI’s CEO, Tim M. Zagar released a blog post detailing the project’s current token transition. As the project was acquiring the license to become a regulated virtual financial asset service provider, they “revised” their corporate structure and governance, and apparently wanted the token holders to have a form of involvement. Allowing the token holders to govern the company turns ICN directly into a security (if it wasn’t already obviously one).
Holders of ICN will be able to convert their tokens on November 1st to “eICN” which is the tokenized share. There aren’t any details on the actual issuance or secondary trading as of yet. Holders that don’t wish to convert their tokens will have the option to turn the tokens back into Ether, considering that there will probably be a rigorous process to deanonymize shareholders in ICONOMI.
A follow-up post by current COO, Matej Tomazin, details both the technological and legal side of the transition. The actual share price will be determined at a later date, and all “eligible” holders of ICN will be able to now acquire shares in the new holding company known as ICONOMI AG.
The “utility” functions of ICN will be disabled on December 31st — is any action really needed here?
ICONOMI’s current market capitalization is around $38MM, and the team has been quite transparent about their books, even going so far as having an audit back in April on their reserves. As of their Q2 financials, they had around $148MM of assets including the Ether frozen in the parity wallet (which has since had its value cut in half), and a rough estimate places them at half that value for Q3 considering market activity. The CCP portfolio had around $65MM AUM, with its value most likely being cut as well for Q3. This still leaves them with enough reserves to buy back the entire supply of ICN if they wish to do so, as the price tag leaves the purchase around $37MM. However, their conversion to equity in the company will most likely leave them with reserves under management.
Why Exit?
- Accepting your fate as a security, two years later
- Tokenized securities easier to make now — haven’t been hit by the law just yet
- An easier future with decentralized investment funds: now regulatory-friendly™
Alternate Future
- ICONOMI acting as a DAO as a service model for funds
Fun Fact
ICONOMI currently owns 50M Cofound.it tokens, accounting for over 15% of its circulating supply, as well as a portion of the Maecenas, Musiconomi, and DA Power Play supplies.
Route Canal
The next few months to years will be painful for people still holding the bag on a few projects, as they realize that many tokens really never took care of any meaningful process, or accrued any real value. However, the alternatives offered by particular companies may outweigh the negative sentiment generated by the dropped support of a token. In the case of securities, increasing amounts of exchanges and a potential liquidity influx might allow individuals to see the value in converting their assets if a company offers that as an option. This also gives companies the ability to “make-right” on their original ICO that they conducted — as it was typically a case of hanlon’s razor.
Never attribute to malice that which is adequately explained by futility.
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Special thanks to Matt and the Alpine team for providing feedback on this post.
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Nothing in this article should be taken as legal or investment advice. The “Why Exit” and “Alternate Future” sections are also purely opinion.
