Foundational Benefits and Challenges of Single-Coin Blockchain Systems
by Brian Tinsman
Understanding pros and cons of blockchain economic systems is important when a business is deciding which blockchain platform to use to launch an ICO or utility token.
This article discusses the tokenomic structure of blockchain systems. In other words, it compares ways of designing high level economic models of blockchains. In contrast, this article is not about creating a coin for a specific business use. We are focusing on where the rail systems can take us, not what kind of trains to run.
Benefits of Single-Coin Blockchain Systems
A traditional blockchain’s coin often performs many functions, it can:
- Act as a reward for miners or others supporting the network.
- Act as a vehicle for investors.
- Serve as a fundraising instrument for a startup.
- Give holders voting rights for the organization’s governance.
- Provide ongoing revenue for marketing or other uses.
- Perform some other transaction-type function such as paying fees on a decentralized platform (Ethereum, NEM), giving rights to services (Golem, Siacoin), or acting as a medium of exchange within an ecosystem (Ripple, Tether.)
It’s amazing that a single digital object can do so much. There’s academic research showing that there may be no other system like a blockchain in the entire field of economics.
Challenges of Single-Coin Blockchain Systems
But sometimes these functions can conflict with each other. For example, investors want a coin with a free-floating market price so they can ride it up. But, users that do business in cryptocurrency don’t want this volatility -- they want a stable-priced coin because if the price of a free-floating coin crashes, the business is at risk of missing next month’s payroll or rent.
Another conflict is securities compliance. The SEC has been ambiguous about how they draw the line between a security that needs to be regulated and a utility coin that is purchased to redeem for services. There are plenty of coin issuers that promise they will provide services someday in exchange for the coin. Are those coins investment securities or utilities? Those organizations aren’t sure how the SEC will see them and currently have to worry about legal repercussions.
Conflicts like these can pull feature development and governance in different directions and result in difficult compromises.
This is not to say that single-coin systems are inherently flawed or inferior. They make up the vast majority of tokenomic systems and support multi-billion dollar market caps. But some newer blockchain systems have used double-coin models to solve some of these problems in interesting ways.
This is part one of a two-part series on blockchain economic systems. Part two covers double-coin systems.