An adage sometimes heard by crypto pessimists is that blockchain technology has a bright future, but cryptocurrencies don’t. This notion disregards that cryptocurrency tokens and blockchains are two sides of the same coin. While there are some use cases for blockchains that do not require a token economy, such as distributed private or consortium databases, most use cases rely on the exchange of value in one form or another. In the case of permissionless blockchains, it is not possible to construct them without aligning the incentives of its users through tokens.
Moreover, a single-token model is often not enough to reflect the whole incentive system that revolves around a blockchain network. Projects, therefore, often split up the economical and functional properties of their blockchains among two or more tokens. Let us take a look at projects that have implemented a dual-token strategy and their rationale behind their tokenomic setup.
In most cases, dual-token economies aim to create one token as a store of value, while the other token is used for payments on the network. The projects behind these tokens often argue that using a single token for both purposes induces some awkward incentives for token holders. When token owners sense that they will reap a high return for holding their tokens, they are reluctant to spend them on the network. In result, tokens tend to stay put in their owners wallets rather than circulate throughout the network.
Of course, active network users may still be willing to spend some tokens for the services a network offers. However, since a lot of token owners are not willing to separate themselves from their tokens, the supply side starts to drain heavily. While this may seem like a good thing in the short run, as the token increases in price, it creates an illusory boom.
After all, the value of a utility token comes from its usability within the network, which suffers when the token price, and thus the price of network services, rises. When the prices get high enough, investors will sell their tokens en masse, bursting the bubble they have created and sending the token price into a downward spiral. By separating the investment and spending functions of tokens, blockchain networks can become more resilient against wild price swings.
Another reason for dual-token models is the regulatory uncertainty imposed by the SEC’s unclear view on whether a token can be regarded as an unregulated utility token or as a security that is subject to SEC regulation. After STOs have so far mainly been used to sell equity or investment bonds for companies outside of the core cryptoeconomy, blockchain projects are increasingly looking to issue security tokens because of their improved regulatory certainty and investor protection.
Although the SEC has explicitly stated that a security token can become a utility token, once the underlying network is sufficiently well developed and decentralized, there are no fixed rules that can be applied to determine that this is in fact the case for a specific token. As it is still very difficult to obtain them by a non-accredited investor, security tokens are not suitable as payment tokens. Hence, some projects are creating an investment token to conduct a security token offering (STO), while creating an additional utility token for payments.