Are two tokens better than one? It’s a question that blockchain developers are increasingly wrestling with, even if the major networks aren’t likely to change their model anytime soon.
Although the traditional single-token system favored by Bitcoin and Ethereum undoubtedly has its merits – deep liquidity, simplicity – only a two-token model can solve blockchain's perennial economic conflict that stymies network growth by disincentivizing actual network use.
Let me explain.
Da Hongfei is the founder of the Neo blockchain and a developer of the international ISO-TC307 blockchain standard.
A problematic paradox
Ultimately, all blockchains share a common goal: to reliably record transactions, store economic value and engender network growth. Sure, they set about achieving these goals in various ways, and some have stronger privacy guarantees than others. But fundamentally, they pull in the same direction.
At present, the vast majority of blockchain ecosystems depend on a single token,one that reflects the value of the project and is simultaneously used as a store of value (similar to a stock), a medium of exchange (money), a mining reward and a way to pay transaction fees. Therein lies the problem.
Holders of a crypto asset – the very lifeblood of any token-based economy – support the project and want it to succeed. They amass tokens because they like the tech, trust the developers and have faith that a project (and its native asset) will succeed.
See also: Bitcoin's Biggest Question Isn't Ease of Use, It's 'Why Use it?' | Opinion (2015)
However, if they spend their tokens – on gas fees for instance – they reduce their stake in the whole enterprise. Conversely, if they refuse to part with their tokens, they neglect actually using a network.
This paradox is easy to understand but difficult to reconcile. Unlike currencies, crypto assets have the potential to markedly appreciate over time, making them attractive to long-term savers. This is a good thing from the perspective of blockchains, whose developers strive to create loyal communities that spread the good word.
The choice between actively using a protocol (and reducing their stake through paying gas fees) or holding onto tokens to hopefully profit at a later date is an economic and emotional conflict.
There is also a question of influence. In some ecosystems, spending your tokens can reduce the amount of authority and leverage you have in certain governance models. This makes users even more reluctant to “spend” their hard-won tokens on utility use-cases.
But there's an alternative.
Making the economics work
You shouldn’t have to eat into your tokens just to transact value. It’s like buying a cup of coffee with your Starbucks (SBUX) shares, or snapping up the latest iPhone with your precious Apple (AAPL) stock. And it’s particularly painful when transaction fees skyrocket due to network congestion.
Back in February, fees for transacting on Ethereum breached previous records after rising above $20 for the first time. If you’re an Ethereum diehard, parting with $20 of ETH every time you want to make a transaction is like discarding a Lotto ticket before the draw occurs. After all, that $20 might be worth $200 in five years.
A dual-token economy fixes this. In such a scenario, one token fulfills governance duties, while another is reserved solely to pay gas. In such a system, holders of the primary token can be considered the “owners” of the network, as they are entitled to influence the project’s direction via voting. The gas token, meanwhile, is completely decoupled from the main asset. Thus the "stake reduction through use" problem is solved.
Dual-token systems are still in the minority, and perhaps that’s because blockchain OGs are reluctant to introduce sweeping changes to their model. We have seen several blockchains fork in the past, and the ensuing fallout is invariably ugly. Modifying a protocol’s basic rules by introducing a separate gas token isn’t a decision to take lightly.
Second- and third-generation blockchains, however, appreciate the benefits of issuing separate tokens for governance/payments and incentives/gas. And it’s not just blockchains either: Many GameFi projects, stablecoin protocols and lending/funding platforms have all bought into a two-token system, meaning their users no longer need to sacrifice liquidity or compete for scarce on-chain resources.
Projects such as Neo (my project), VeChain, Ontology, Axie Infinity and Frax all experiment with differing two-token models and, in my view, future-proofing their businesses.
That said, as with any experimental technology, protocol designs can go awry. This was demonstrated by the catastrophic implosion of the Terra blockchain, which used a native asset, LUNA, to help secure a series stablecoins, most notably the dollar-denominated UST token.
See also: 'Built to Fail'? Why TerraUSD's Growth Is Giving Finance Experts Nightmares | Opinion
Researchers noted long before its collapse that the network's design created incentives to short the stablecoin, an issue that isn't and need not be repeated in other two-token systems.
Two tokens to rule them all
The economics of a two-token system can be, as several projects have already demonstrated, sound. There are several common characteristics to a two-token model.
Firstly, the primary token typically has a limited total supply, and is used for governance, share-of-voice or dividend distribution. It is often allocated via a public sale or grants.
In contrast, the secondary token – or utility token – has an unlimited or resilient supply. It is used for on-chain payments and gas fees, and is rewarded to participants of its ecosystem or primary token holders.
The price of a utility token rises when the growth rate of economic activity exceeds its inflation supply rate. As the yield of utility tokens rises, the demand and price for the primary token rises until the yield reaches a new equilibrium level.
In the end, utility tokens form a positive feedback to governance tokens through economic activity.
Following this model, the economic/emotional conflict that forces users to choose between actively using the protocol and investing long-term is solved. When a utility token is used for ongoing incentives and system growth, primary token holders are incentivized to take part in on-chain activities and secure the network.
With cutting-edge technology like blockchain, novel ideas need to be embraced. A two-token model is no longer an outré fantasy but a workable solution to a maddening problem. Where blockchain economies are concerned, two really can be better than one.