The dialectical relationship between tokens and project value: Don't treat tokens as equity

Original Author: Xia Ke Zhang

Original Source: Uncertain Thinking

Today I saw the news that Uniswap has started charging fees, and I felt a chill in my heart.

The main reason is that they announced a significant event affecting the protocol without going through community governance.

Many users analyze whether this means that Uniswap Labs believes that only the protocol layer belongs to the community, while the front-end applications and mobile versions belong to the project team.

I think they haven't considered these matters at all; voting governance is just a perfunctory response. Essentially, they are still following the equity entrepreneurship route, or in other words, they haven't figured out what the tokens are really for.

Uniswap is the most innovative application in my opinion, but a good application does not necessarily mean that the token is good; sometimes we subconsciously think of governance tokens as equity.

The first rule of value investing is that buying stocks means buying a part of the company's ownership.

In the crypto market, buying tokens does not equate to buying a part of the project's ownership. In this market, tokens have their own utility.

1. Most tokens have no equity value in the long term; they are merely amplifiers of sentiment.

A good project does not equal a good token; for example, Uniswap is definitely a top-tier project but has a third-rate token model.

In the traditional business world, if you are optimistic about a company's long-term development, the way to participate in the secondary market is to buy its equity.

In the crypto world, if you are optimistic about a project's long-term development, should you also directly purchase its tokens and hold them long-term?

The answer varies from person to person. My current thinking is to view it dialectically, focusing on its token supply and demand structure.

For example, Uniswap's token model has a large annual increase in supply, while on the demand side, it can only be used for governance, which makes it less effective.

If it is such a model, its price trend is likely only related to two things: one is the fluctuations of the overall market, and the other is the specific events of the project (such as the release of good news).

If this is the price fluctuation model, then why not buy Ethereum, which is more stable?

2. The utility of tokens is varied; it is essential to understand where their value originates.

Currently, there are many projects in the market that still have not issued tokens. For example, Coinbase has an exchange and a Base chain, following a traditional equity model; to share in its growth profits, just buy Coinbase stock.

Protocols like Curve and GMX have tokens that allow holders to earn protocol revenue sharing, which is very clear in utility.

Many applications primarily use tokens for cold starts, but after the launch, their value can plummet, like various early Uniswap clones and various open second pools.

Some tokens have no application at all, like various meme coins, whose utility mainly lies in emotional expression and speculative trading, which is also a form of value.

For example, OpenSea views governance rights and tokens separately, so it initially wanted to go public but ultimately did not succeed due to user pushback.

More applications use tokens as a guise to pua users into using them, secretly aiming for users' transaction fees in real money.

Different values correspond to different volatility curves, which is the value discovery cycle. If you do not see the value behind the tokens clearly and only use a buy-and-hold strategy, you may sometimes end up getting severely burned.

3. Blockchain networks have their native currencies.

If we compare different blockchain networks to different countries/cities, each country has its own currency, which serves the purpose of daily circulation, settlement, and value storage.

According to this model, Bitcoin and Ethereum are the settlement currencies of their respective "network countries," following the logic of currency value.

In this country, there is a vegetable market filled with a variety of goods; does this market necessarily need to issue its own currency/token?

This is like the early Uniswap, which operated very well without a token and sparked the entire liquidity mining craze.

4. Applications built on these blockchain networks can actually operate without their own tokens.

However, as they grow, they inevitably want a way to realize value, and issuing tokens is the most direct model.

The design of this token model is crucial; for example, Uniswap is very concerned about regulation, so it does not dare to share profits, while directly charging fees is unrelated to tokens, which is why it dares to do so.

Currently, MetaMask still does not have a token, yet it earns quite a bit from protocol fees, and many people use it.

Some applications only need to use ETH as a settlement currency, without the need for their own token empowerment; the key is that they have found their product positioning and have a genuine demand.

5. Not all blockchain networks need to issue tokens.

There are over 180 currencies in the world, but only about 130 remain after excluding fixed exchange rates. Among these, not all currencies can maintain their value over time. For example, the Turkish lira has been on a downward trend against the dollar.

This is similar to blockchain networks; many Layer 2 solutions can directly use Ethereum as the base currency, and their own tokens are more like "fun beans," with value needing to be extracted additionally.

Not all applications need to issue tokens.

There are approximately 40,000 publicly listed companies worldwide, and there are 170 million registered enterprises in China, including 114 million individual businesses.

This means that the number of entities that can share corporate dividends through equity is very, very small compared to the actual number of commercial entities.

Just like many blockchain applications, as long as they genuinely meet user needs, there will naturally be users, and they can generate revenue.

For those applications that have issued tokens, when purchasing, one must recognize what their utility is, as well as their economic model and supply-demand relationship.

Remember, a good application does not mean a good token.