By Larry Wright
Introduction
According to recent research crypto market as a whole has managed to bring in an incredible behemoth of investment than the stock and forex markets put together, despite the initial conservations of financial investors and analysts who exceedingly predicted that the crypto market is going to collapse in the near future because there isn’t any requirement for such a mode of finance to ever exist in the first place, it is here and booming rapidly.
When you look at it, you will see potentially three or four main offerings, but when you take a deeper dive, each of these offerings further categorizes themselves into multiple opportunities and investments. You have got the usual cryptocurrencies, the exchange-traded funds, the non-fungible tokens, and mining pools. But each and every one of these has its own subsequent investment delicacies that can be interacted with should you choose to do so.
Today the topic of discussion is the dual token model; you might be thinking, is this an exact mirror of an already existing token or what? To put your mind at ease, the dual token model is actually the concept that many new cryptocurrencies and blockchain technologies come up with. Suppose there is a new project being commenced and developed from the ground up; they are going to have two different types of tokens to sustain the infrastructure and, therefore, the working of the whole project.
The first thing that you have are the utility tokens; you use those tokens for the sake of paying for services that you avail from the crypto network on which these utility tokens exist. You can use those tokens for the sake of buying stuff on the blockchain, paying up the transaction fees that you owe, or other service charges that you might have accumulated along the way. The next type of tokens that a crypto project might create are the security tokens; these types of tokens are there for governance-oriented purposes.
These are more inclined towards the legislation and other such prospects of the project than the monetary aspects. These two tokens in unity are referred to as dual tokens.
This idea was proposed back in the day with a few of the altcoins first as an experiment that had only one objective in mind, which was to become more compliant with the regulators. Should you choose to go back to the very roots of the crypto market, how it came into being, and the overall prospects of decentralization, you would see that Bitcoin being the flagship cryptocurrency that has only ever had one token, was used as both utility and governance token but the game has changed since then.
Features of Dual Token Model
The dual token structure has provided new crypto projects with an incredible incentive to bring in as much funding as possible; one token in this dedicated trade is used for the purpose of fundraising and as a governance-oriented token, while the other one works as a utility. These, both in unity, sustain the overall working of whatever crypto or blockchain entity this support.
If an initial coin offering is a go-to way for making sure that a crypto project can launch itself into the market, if the whole transition goes sideways and is not being approved by the regulatory authorities, then the dual tokens should be preached as a form of innovation that the project has taken since the recent rejection on the regulatory authorities as this will definitely grease the hands and will allow the project to sustain itself.
Many other crypto projects out there, such as the MarketDAO, have already deployed this specific type of model, and they are seeing incredible returns on this genius incentive to tackle fundraising and other possible elements of the project.
The year 2017 marks the year when the crypto market was at its full boom Bitcoin was doing exceptionally, and new crypto tokens were being introduced left and right; tokens sales and active trading with those cryptocurrencies became the key driver for the crypto market.
Every possible token which was being launched during that particular time period saw an elementary increase in its price and value, and everyone wanted to let themselves in on the action, which ultimately created a bubble.
Sooner than later, the whole market came crashing down, and the initial coin offerings then started as a potential way to grab the attention of the investors, who did, by the way, lose their interest in the crypto market for good given the recent crash that they had witnessed themselves.
The SEC was being extremely itchy around the subjects of initial coin offerings and was issuing warnings and or shutting down projects left and right; it was only a hit and miss chance for a project to be selected or approved by the Regulatory Commission because a bulk of these was being dumped pretty hard.
This legal action became so intense that, at some point, the developers wanted to just leave the crypto market for good because of these regulatory committees breathing down their necks. To get themselves out of this regulatory slump and to make sure that something like this doesn’t happen in the future work around was to be developed; this came down in the form of security token offerings, simple agreement for future tokens, and other incentives such as consumer token offerings or CTOs.
All of these were offering this dual token setup, and it proved to be an incredible method for startups to have the highest possible mark of funding while at the same time doing their best to avoid themselves coming under the radar of regulatory authorities. Better understand the purpose of each dual token, and if this approach is more tempting than the single one, you must at first know a bit or two about the anatomy of these tokens and what they represent.
How Does Dual Token Model Work?
There are two different terms used to address the crypto entities, and these are tokens and assets; sometimes, this comparison can blur a little the prospect of other financial rivals of cryptos such as stocks, forex, and commodities.
The first thing that you need to accept about dual tokens is that these are part of the new technology shaping the modern world of finance, and it is practically impossible to be able to discern between crypto tokens or any other crypto asset for that matter, using the older framework which was used to define other financial assets belonging to a wide array of market segments.
The prospect of a dual token model has helped new and existing crypto projects on two different fronts; first of all, with the help of these tokens, developers and crypto analysts can get the regulatory authorities off of their back which means that they won’t have to deal with the consistent burdening of regulatory framework disrupting the actions of the crypto project in question.
On another front, the idea of dual tokens allows these crypto projects to deal with uncertainty; uncertainty is the key figure here within the crypto world because everything from the idea of cryptocurrencies and their trading towards the bigger shifts that the market is going to take in the future is uncertain.
Crypto tokens help to mitigate that practical element while assigning predefined roles to these two different tokens. Security tokens are going to help the developers deal with the governance-oriented issues of the platform and to bring ease of mind whenever voting is done to ensure that only the users who are holding the security tokens will get to cast a vote and not everyone has a utility token will get to do the same.
Utility tokens, on the other hand, clear the financial aptitude of the whole system by allowing the developers to record or investigate their finances in real-time by only targeting the utility token and not having to deal with the security token as well; at times, these can be used as financial components.
Security tokens are also associated with the idea of raising money for the dedicated blockchain project while at the same time working in the cross constraint of the regulatory authorities and their supreme guidelines towards how the project should run in the first place.
You can’t use the utility or native token of a dedicated blockchain project for the sake of raising funds or money because it is only assigned to the prospect of dealing with the financial elements of the project.
You can use it to pay for the transaction fees that you have been conducting on the platform, you can use it for the sake of paying your dues on the blockchain entity for the services that you have rendered from the platform, and so on so, this disparity and yet the union of security and utility tokens help in the driving of that particular crypto project forward.
SEC and Dual Token Sales
The Securities and Exchange Commission has been oblivious about the ideation and working of dual token sales; you would be amazed to know that before 2019 Securities and Exchange Commission had not even uttered a word about its stand on the difference between crypto tokens and crypto-assets.
Not much has been done by the Commission to further the cause of decentralization and blockchain technology; cryptocurrencies have existed without regulatory oversight, but when they are trying to boom their existence and try to better the world of finance for good, there suddenly is this regulatory oversight wandering about on their shoulders trying to undermine their authority and trying to close them for good.
This thing is not only bad for the whole crypto market but, in general, for the validity of the whole financial sector; later on, in 2019, the Securities and Exchange Commission came up with a framework for investment contracts and analysis of digital assets. This framework finally allows these cryptocurrencies to help a potential set of rules which they should abide by and try not to break in any sense of the word. This framework allows people, whether coming from a financial background or not, to gain some insight into the word digital assets versus tokens.
For something to be classified as a security, the following elements or criteria need to be met. First of all, if someone is expecting a profit from a dedicated asset, then it, in reality, is security. If you can use that particular token right away either to buy stuff or invest in another plausible opportunity, then again, it is a security. If the project, in any sense of the word, is decentralized and works on the principle of blockchain technology, then sure, once again, it is a security.
So in a manner of speaking, if a crypto project is embarking on the development as well as the progression of their project with a dual token model in mind, then they won’t have any problems dealing with regulatory organizations or any kind of heat from those agencies in particular.
Difference Between Dual Tokens and Other Tokens
You have already read and understood about how a dual token model allowed these crypto projects to bypass the regulatory metrics and allow them to smooth sail their way into a sea of regulating prowess but other than that; these projects enjoy various other benefits.
First of all, with a dual token model in execution, these projects can customize their token economies because they have different kinds of tokens to tackle various affairs of the platform in a much more concise way; they can program the security tokens to work as the governance sustaining element and at the same time working towards the progression of acquiring funds for the continuity of the said project.
As for the utility tokens, these can be used to pay for any outstanding balances that the user has for that particular platform or for the sake of paying the transaction fees that were conducted on the platform by the user. Each and every aspect of these tokens can be customized to the very core of their functioning, allowing the developers to have a much more hands-on experience with these tokens and catering their properties to the very liking of the end-user.
If you add decentralized apps and smart contracts into the equation, then you have got yourself a party that you don’t want to miss out on. Other than that, it might lead to the complexity of the crypto token system, but it is eventually worth it because then you would have this extensive library of offerings that you can propose to the end-user.
Sometimes the crypto projects out there might choose to stick with the dual token system not to get the regulatory tension off of their backs or try to prioritize the token economics for the whole system but to make sure that the platform works in the most sustainable way possible.
Examples of Dual Token Model
MarketDAO is probably the best and brightest example when it comes to the idea of crypto tokens and how these work. The sale for this particular token began back in 2017 when the crypto boom was at its peak, and people were just throwing money in trying to understand crypto and anticipating overall returns they could have on their investment and if there was an opportunity present within the market worth cashing.
It wasn’t the most popular option back in the day, but it certainly was pertinent to the overall functioning of the system design and the overall architecture of the blockchain, which it initially supported.
MKR was used as a governance token that sustained the legitimate as well as fundraising properties for the platform, making it easier for the developers to discern and develop the utility and governance tokens separately and assigning them properties and functions in a much more subtle way.
DAI was another token that has the properties of a utility token allowing the developers to sustain the economic-related aspects of the network; whenever the price of this utility token fluctuated and saw a huge bump, the pertaining supply of the governance tokens on this specific dual token structure was burned and the users were accommodated with utility tokens in place of the governance tokens.
When the market was subjected to crash and was dwindling like a leaf that is all but ready to let go of the stem facing the ferocious wind ready to execute the task for it, similarly when the price of utility token was slain across the board and users were then accommodated with governance token in its place to fight volatility.
At the end of the day, all of it worked incredibly for this specific dual token structure; later on, analysts and market participants came to know about the existence and fundamentals of dual tokens, and they were suggesting ideas to refine the structure of these tokens and system and so on so.
After tons of refinements and additions and subtractions, we get to see the present version of dual tokens, how these collaborate with each other, and what it means for the proper functioning of a dedicated blockchain project.