The Argument for Security Tokens (Part 2 of 3)

Scenario 2: Role of Utility Tokens in an Environment Where Security Tokens Do Not Exist and Blockchain Companies Have Developed Products

Fast-forwarding to the point when HouseChain has developed its decentralized short-term rental service, let’s analyze how purchasers of HouseCoins will use their tokens. This analysis assumes that HouseChain matured to a developed state without security tokens ever becoming the standard for raising capital (i.e., HouseChain issued HouseCoins, instead of HouseSTs, to raise capital).

The above assumption implies that a HouseCoin has two potential uses:

· Means for speculation

· Means of trade for goods or services

The Argument for Security Tokens (Part 1 of 3)

Scenario 1: Role of Utility Tokens in an Environment Where Security Tokens Do Not Exist and Blockchain Companies Have Yet to Develop Their Products

Originally, utility tokens were proliferated (not necessarily sold) across a wide set of users: founders, developers, prospective miners, members of the crypto community, and anyone else that was teach-savvy enough to have a cryptowallet. Early crypto enthusiasts pointed to network effects as to why this practice was necessary. If the network reached its critical mass of users (i.e., critical mass of token holders), then demand for the utility token would increase with minimal or zero user acquisition costs — in other words, the utility token would appreciate in value.

Utility Tokens: A General Understanding

A utility token is a non-physical token (think of a Chuck-e-Cheese or Dave & Busters arcade token that you can’t touch, or hold in your hands) that has been created for crowdfunding purposes (think of KickStarter, GoFundMe — those types of sites). This means that the buyer of a utility token has paid the issuer of the token money NOW so that the company can develop a product that the buyer of the token can LATER redeem for that good or service.

Blockchain startups raised $5.4bn (Source: CoinDesk) through Initial Coin Offerings (ICOs). An ICO is the process of when utility tokens are issued and sold in a crowdfunding manner.