Web3: The Dilemma of Tokens and the Path Towards Real-world Assets

Web3: The Dilemma of Tokens and the Path Towards Real-world Assets

The goal of web3 has always been to create a decentralized internet, free from the control of dominant players. While the World Wide Web achieved this, web2 became more centralized, with major entities like Google and Facebook dominating the online ecosystem.

Web3 aims to offer a different path by employing a token-based incentive mechanism for internet protocols. This is in contrast to the first iteration of the web, which didn't offer incentives to its users. Many web3 communities believe that tokenized incentives will prevent centralization from happening again. However, this idealistic outcome may be less realistic due to human greed.

Therefore, instead of focusing solely on tokens, projects should consider tokenizing real-world assets and issuing security tokens to value their project.

The Three Types of Tokens in Web3 Projects

Web3 projects typically classify their tokens into three categories: utility, governance, and security.

  • Utility Tokens: These tokens provide specific utilities to their holders on a blockchain network or protocol. For example, Ether is used for transactions on the Ethereum network.

  • Governance Tokens: These tokens give holders the right to participate in the governance process of a network or protocol, often through a Decentralized Autonomous Organization (DAO). Examples of governance tokens include Ethereum Name Service (ENS) or Uniswap tokens.

  • Security Tokens: These tokens function like traditional securities. They represent investor shareholdings in a project or protocol, can potentially yield dividends, and their value is tied to the underlying project's valuation.

However, creating security tokens can be challenging due to the strict regulations imposed by various financial regulators. As a result, security tokens have not yet become a prominent feature of web3.

The Dilemma of Utility Tokens and the Rise of Greed

Web3 has witnessed the emergence of Initial Coin Offerings (ICOs) as a popular way of raising funds, with Ethereum's ICO being particularly successful. However, this led to an ICO bubble a few years later, highlighting the misaligned incentives between web3 projects and investors. On the one hand, projects require funds to turn their ideas into reality, while on the other hand, investors are looking for the highest possible return on their investment.

Many of these tokens were marketed as utility tokens intended to be used to pay for decentralized services on a network or project. However, the influx of capital from professional investors and speculators often led to them selling their holdings to retail investors who didn't have the resources or knowledge to get into the projects early.

This scenario reveals one of the fundamental challenges of the classic token model for protocols. Utility tokens are used by investors, who are incentivized by growth, but the core services are also paid for using these same tokens. There is a need to separate the two. It is similar to Amazon, Microsoft, or Google, requiring that you pay for their cloud services using shares in their respective companies.

The Path Towards Real-world Assets

It would be better for web3 development teams to focus on creating familiar assets such as fiat currencies, securities, or Exchange-Traded Funds (ETFs) instead of creating new currencies and assets. These assets should be affordable for the general public, and their value should be based on the underlying asset's usefulness rather than on speculative reasons like "because web3 is the future".

Unfortunately, many web3 projects have missed this point, resulting in utility tokens that are part utility and part facade and governance tokens that only offer a say in protocol governance but no yield or return based on the project's success. As a result, many protocols and economic models do not work, and they need to generate real revenue. This is where web3 is broken.

The Illusion of Product Market Fit in Web3

The value of cryptocurrencies and tokens in web3 has been increasing rapidly, resulting in many teams and projects having large token treasuries. While this may make them cash-rich, they are likely revenue-poor. Launching a token can help projects achieve this level, but it only sometimes leads to a functioning business. That's why many people and projects prefer to launch new blockchains - it's an easier story for investors to get a return on than an experimental application that can potentially onboard more users to web3.

Web3 has a lot of potential, but it must address the issues surrounding the quality of tokens in the ecosystem. By focusing on creating familiar assets on these platforms and ensuring that tokens serve their intended purposes, we can move away from speculation and greed and towards a more sustainable and practical approach to building the next generation of the internet.