Opinion: Practical tokens from real companies will drive the next big explosion in Web3

Written by: TaschaLabs

Compiled by: TechFlow intern

Tokenization is a significant breakthrough in Web 3. It creates enormous possibilities for innovation but also opens Pandora's box.

Anyone can create a token to represent anything of value and trade it with other assets on an open network based on common standards, which was unimaginable before the advent of public blockchains. Tokenization has also allowed many Web 3 "products" to gain traction in the short term, even if they are unsustainable in themselves.

Ponzi schemes eventually collapse, but this does not negate the fact that—if applied in the right environment—tokenization is a powerful economic tool that can drive business growth.

Real-world businesses are just beginning to realize the power of tokenization, and the demise of speculation in a bear market provides breathing room for genuine innovation in tokenization. Companies with viable products that can incorporate utility tokens into their existing business models early on will reap substantial rewards while promoting cryptocurrency adoption.

What I mean by "utility tokens" refers to tokens that have a clear purpose in the product lifecycle, rather than "equity tokens" that allow holders to share in company profits, which are similar to stocks and may face regulatory hurdles in the future. So how can traditional businesses benefit from utility tokens? Here are three ways:

1. User Stickiness/User Loyalty

The simplest use case for utility tokens is as a rewards program—users earn more tokens the more they use the product, and then the tokens can be redeemed for more products in the future.

Loyalty is not a new concept—think of frequent flyer miles, Starbucks rewards, credit card points, etc. The game-changing part is: allowing the "points" a person earns to have liquidity on a secondary market on a public blockchain.

This fundamentally disrupts the traditional loyalty business model.

Traditional user rewards are essentially discriminatory pricing. Charging users different prices based on usage levels allows companies to achieve higher profits—or in economic terms, greater producer surplus.

Example: The orange area in the figure below represents the producer surplus when charging all customers the same price (P):

If producers create secondary pricing based on purchase quantity, the orange area is now larger.

The finer the price discrimination, the more producer surplus there is, as long as the company ensures that higher-tier customers cannot cheat to take advantage of lower prices in other tiers.

This is why airlines do not allow you to sell frequent flyer miles; if "bulk discounts" could be transferred to other users, this business model would collapse.

However, if you tokenize loyalty, something like this happens: if loyalty points are interchangeable tokens that can be traded on a secondary market, then the discount you give to everyone is the same, i.e., token price × number of products that one token can be redeemed for.

So, why do companies want to tokenize loyalty?

Because while tokens make differentiated pricing possible, they provide users with a stronger incentive to earn rewards, as monetary benefits can be immediately cashed out on the secondary market, making tokenized rewards more attractive than loyalty points confined to a single product.

From an economic perspective, the additional incentives will shift the demand curve upward by an amount equal to the discount, resulting in user growth and increased usage among existing users. The resulting equilibrium price, quantity, and producer surplus will all be higher than in the baseline case.

2. Fund Growth Marketing Spend Without Impacting Current Cash Flow

In 2000, PayPal rewarded new users with tens of millions of dollars in sign-up bonuses to drive usage. This was a great incentive, but it was real cash taken from the company’s treasury.

Unless you are a startup with large VC backing, it is difficult for other new companies to achieve such growth marketing stunts.

But if the sign-up bonus is in the form of tokens, it does not affect the company's current cash position. Instead, when users later use the tokens to redeem the company's products and services, the tokens issued at that time can be recouped.

With the liquidity of the secondary market, you can fund today's growth with future (unrealized) revenue. This is a more flexible marketing spend solution for more companies.

Additionally, you can adjust the redemption ratio, i.e., X number of tokens can be redeemed for Y number of products, to change your dollar-denominated discounts at different times based on your product and secondary market prices.

This "monetary policy" is an additional marketing lever you can use (it also helps set a floor for your tokens and support price stability). Another benefit of tokens compared to traditional rewards programs is that it increases the number of direct and indirect stakeholders.

3. Expand the Stakeholder Base

Many so-called Web 3 "communities" are merely echo chambers for speculators hoping for token price increases. Communities built on this are strong in bull markets but are also fragile and even destructive in the long run, not to mention that if the goal of holding tokens is merely price appreciation, you may encounter regulatory troubles.

In contrast, a good currency should aim to create long-term trust in the token among users at a relatively stable price. Therefore, users should be incentivized to earn more tokens rather than wait for token appreciation.

Even without speculative enthusiasts, the fact that your tokens circulate in the secondary market means that the number of people who can interact with them is greater than your actual user base, and an asset with stable value can be incorporated into other financial instruments, further expanding your influence.

So what types of companies are suitable for having such tokens? Here are a few basic criteria:

A. Your product has low market fit

Issuing tokens for untested products on day one is unwise. The reflexivity of token prices and the "users" of speculation will mislead your product. When the tide goes out (and it will), you will find yourself swimming naked.

If there is a high churn rate in the short term, having tokens will not solve this problem. Ensure that your product has enough stickiness to retain the users you attract.

B. Marginal Cost

Remember that issuing token rewards comes at the expense of your future revenue. If your marginal cost decreases as the number of users increases, then there is no problem.

In this case, acquiring more users makes sense as it can offset your reward costs, and tokenization will help you achieve that goal. However, if your marginal cost remains flat or increases, then tokenization may not make much sense.

C. Winner-Takes-All Market

This complements point B, as winner-takes-all situations often occur in industries with decreasing marginal costs.

But the key point is that this market should have enough room to meaningfully drive the demand curve upward; if you run a small-town restaurant serving 2,000 locals, tokens may not be the right marketing tool for you.

D. Your business model allows tokens to have clear utility

Example: Your product is priced at X dollars/month, and users can pay with tokens, up to Y%.

If the usage and sales of your product come from different groups, such as a content platform relying on advertising revenue, tokens can also play a role. In this case, the audience earns tokens by consuming content—> the audience sells tokens on the secondary market—> advertisers buy tokens and pay you.

Tokenization once again becomes a powerful economic model for driving business growth, but it must be integrated with viable value-added products and services; otherwise, it will have no foothold. I hope to see many innovations in this space emerge from the bear market and become the next frontier of crypto adoption.