In this post “What is Dual-Token Economy/Model (Two-Token Economy)”, you’d learn about dual token (non-ICO), the dual token model’s drawbacks, the dual token model’s benefits, examples of dual tokens, and the future of this token.
A dual-token economy or model in the blockchain industry refers to a project with two tokens. One of which is utilized for network utility and the other as protection to raise financing.
About Dual-Token Economy/Model (Two-Token Economy)
The dual-token economy, also known as the dual-token model or system. This is a term used to describe crypto initiatives that provide two sorts of tokens. The primary goal of generating tokens is to avoid regulatory complications. And also to divide the project’s ecosystem into two tokens for easier use.
One of the two tokens is usually used as a security to raise funds for a crypto project. The token achieves this by rigorously adhering to the rules that govern traditional securities such as bonds and equities. The other token is utilized on the network to perform specific tasks or functions. These responsibilities are frequently different from one project to the next.
The primary reason why cryptocurrency ventures want to use a dual-token economy model is because of the US Securities and Exchange Commission.
Unlike securities, stocks, and bonds, which have a clear status in the SEC framework. The SEC has yet to clearly classify crypto assets.
The “Framework for “Investment Contract” Analysis of Digital Assets”, on the other hand, has given blockchain projects a mechanism to register their tokens as securities. And also set specific conditions for them to operate in line with legislation.
To be classified as a security, a project must demonstrate that its tokens provide real-world benefit and profit to their holders. As well as being entirely decentralized. The SEC considers the token a security token if all of these conditions are met.
Another advantage of using the dual-token economy approach is that it gives token holders and potential investors greater incentives than other initiatives in the industry. A virtual currency project with two tokens can provide end-users with an improved incentive system, features, upgrades, and functionalities.
Axie Infinity is an excellent example of an NFT gaming project that offers two tokens, SLP and AXS, as incentives to users for playing the game. The “Small Love Potion,” or SLP, in this case, is a utility token with an inexhaustible supply that Axie Infinity users can use to conduct in-game actions. Such as paying a breeding cost for their Axies (game characters) and acquiring Axies from the built-in marketplace. However, AXS is an ERC-20 governance token with a limited supply of 27 million for the Axie universe.
AXS adds value to the Axie Infinity ecosystem by allowing players to purchase the token directly from crypto exchanges. And also allowing holders of AXS tokens to participate in in-game governance activities. As well as stake their tokens on the platform for passive benefits.
Other projects that use the dualeconomy technique include VeChainThor, MakerDAO, Anchor, and Filmio, in addition to Axie Infinity.
What are dual token sales, and how do they work?
When a project generates two tokens, one as a security to collect cash. And the other as an utility to support the network, it is known as a dual token sale. The goal is to assist projects in becoming more regulatory compliance.
- Dual token sales are a special variant of funding option in which one token is intended for fundraising and the other is intended to be used as a utility.
- The invention is the result of regulatory athorities cracking down on uncontrolled initial coin offerings (ICOs).
- This paradigm has already been implemented in a number of projects, including MakerDAO.
When the cryptocurrency market expanded in 2017, there was a lot of speculation, and token sales were a big part of it. The value of new tokens may skyrocket, and everyone wanted a piece of the action–a classic bubble.
The lottery ticket that was the Initial Coin Offering (ICO) morphed into a multitude of other token sale formats as the market crashed.
The sector was reacting as the US Securities and Exchange Commission issued not-so-subtle cautions and shut down crypto projects. New token sale structures, such as Simple Agreement for Future Tokens (SAFTs), Security Token Offerings (STOs), and Consumer Token Offerings (CTOs), were being tested to deal with anticipated legislation and legal action. The dual token sale was a novel way for entrepreneurs to generate funds while avoiding regulatory scrutiny. We’ll see if two tokens are better than one in this article.
What are dual token sales, and how do they work?
Ancient securities like as stocks, currencies, and commodities tend to blur the distinctions between tokens and crypto assets in general. It’s practically hard to define them precisely using the old framework, as it is with any new technology. By segregating utility and security tokens, dual token sales alleviate the uncertainty. One token will be labeled as a security or investment, with access restricted to accredited investors in a dual token sale. This security token can then be used to raise funds for a blockchain project. While still adhering to the same regulations that apply to traditional securities such as stocks and bonds.
In a dual token sale, the other token is usually a utility token, which is a token that is used in the network or platform. This second token isn’t used to raise funds; instead, it serves a different purpose based on the platform’s architecture.
What makes it so unique?
The SEC has been ambiguous regarding how it classifies tokens and crypto assets for the majority of crypto’s existence. In April 2019, they released the “Framework for ‘Investment Contract’ Analysis of Digital Assets,” their most detailed guidance on token sales to date. The framework ultimately provided a way for blockchain projects to avoid breaching the law.
The following are the major criteria for determining whether a token is a security:
- There is a revenue anticipation
- The token can be used right away.
- It is a decentralized project.
Companies might meet the SEC’s standards by raising funds with a security token, issuing a utility token that could be utilized immediately. And then becoming decentralized later with dual token sales. A dual token paradigm, in principle, keeps projects out of problems.
What else stands out?
Apart from regulation, dual tokens give projects additional control over their token economies. Different features, numerous incentive structures, and more options for users are all possible with two tokens. The tokenomics of a dual token system could grow even more complicated if smart contracts and dapps are added to the mix. The reason for having two tokens in some cases has nothing to do with regulations or token exchanges. But is critical to the system’s operation.
Examples of dual tokens
The employment of MKR and DAI by MakerDAO is perhaps the best-known illustration of a dual token system. The MKR token was sold very quietly and early in the crypto boom of 2017, compared to other token sales, but it was critical to the system’s architecture.
MakerDAO employed MKR as the DAI stablecoin’s governance token and price stability mechanism. MKR tokens are destroyed if DAI stays at one USD, and MKR holders gain from a lower MKR supply. If the price of DAI falls below one dollar, MKR tokens are issued, and MKR holders must deal with a surge in MKR supply. MKR holders can also agree on platform modifications like the addition of new collateral kinds.
Anchor also creates a stablecoin by combining two tokens. The “Monetary Measurement Unit (MMU)” functions as a stable financial index that reflects long-term economic expansion, and the value of their stable token is pegged to it. Unlike DAI, which is pegged to the US Dollar, Anchor is pegged to the MMU.
Anchor Tokens (ANCT) are the main money or stablecoin in the Anchor system, which is similar to DAI. The Dock Tokens (DOCT) are a variant of MKR that helps to sustain the currency.
Filmio, a crowdfunding platform for media projects, includes two tokens as well. FILM tokens are security tokens that can only be purchased by accredited investors. Holders of FILM are eligible to income from various Filmio projects in the same manner that stockholders in certain companies are allocated to dividends.
FAN tokens are utility tokens that are given out as a reward for joining the network.
The Filmio ecosystem’s utility tokens can be used to decide on projects and engage with other users.
The Long Run
Will the dual token sale catch on with so many distinct ways to sell a token?
The SEC has not yet shut down any dual token sales. Moreover, MakerDAO demonstrates a legitimate use case for a dual token system that goes beyond dealing with rules. Perhaps two tokens are preferable than one.
What is the Dual Token Model and How to Avoid ICO Mistakes?
The previously unnoticed dual token format was born out of the 2017 wave of Initial Coin Offerings (ICOs). In this concept, a blockchain project releases a utility token to power platform transactions as well as a second token to raise funds from the general public.
The growth of the dual token approach was largely a reaction to the US government’s increased monitoring of ICOs. The model, however, is not limited to ICO-funded projects. MakerDAO (MKR and DAI), the most well-known dual token platform, has never staged an ICO.
More information on the Dual Token Model
When a blockchain project issues two tokens, one for fundraising and the other for utility, it is known as the dual token model. The US Securities and Exchange Commission was alerted to the significant number of ICOs in 2017. (SEC). According to the commission, the tokens sold in these ICOs must be considered as securities under US law.
Skyrim Finance is an example of a company that uses a dual token approach (source)
This necessitated that ICO tokens must provide a clearly delineated ownership share in the platform, as well as the right to future dividends and interest on the project’s revenues.
Treating transactional utility tokens as securities could result in legal compliance requirements that are too stringent for the platform’s overall operation. Furthermore, ICO issuers could be held liable for securities law violations.
Many projects have started using the dual token concept for ICOs to circumvent these issues.
This token grants its bearer an ownership position in the project, as well as possible rights to future dividends and earnings, in order to comply with securities law.
The utility token, the second token, can be issued at any time during or after the ICO. On the platform, it functions as a standard transactional token. It’s similar to other blockchain tokens like Ethereum (ETH) and Bitcoin (BTC) (BTC).
Dual Token Projects in Three Formats
The dual token approach comes in three flavors: bundled ICO-based, detached ICO-based, and non-ICO.
Dual Tokens Based on an ICO Bundle
An ICO with both the security token and the utility token deployed is known as a packaged ICO.
The utility token is used as a bonus to encourage people to invest in the security token. For instance, every user who buys security tokens may be given a fixed number of utility tokens.
Dual Token Based on a Detached ICO
A project issues an ICO with only the security token to raise funds in this format. A utility token is not released at the same time as a security token. It is not, at the very least, used to incentivize the acquisition of security tokens.
Both tokens are processed individually, with no incentive system in place to entice new investors with utility token offerings. Typically, security tokens are released initially to obtain investment, followed by utility tokens when the project is ready to begin operations.
Dual Token (non-ICO)
Though initial coin offerings (ICOs) were a key driver of dual token initiatives, a dual token project does not have to be founded on an ICO. A security token in the non-ICO type is unconnected to the ICO securities law compliance issues. In truth, it isn’t always referred to as a “security token.” Both tokens could play a different role in such a project.
Maker DAO, the world’s largest dual token Distributed Finance (DeFi) project, is the most visible example of the non-ICO structure. The DAI token of Maker is used to lend money to the platform’s users. The loans are secured by ETH, which customers deposit in a “vault” on the system. DAI is a stablecoin with a 1:1 peg to the US dollar.
Maker’s second token, MKR, is utilized to grant its holders platform governance rights.
MKR owners have the ability to vote on crucial issues affecting the platform’s functioning.
Maker’s experience demonstrates that the distinction between security and utility tokens may not necessarily apply to non-ICO dual token enterprises. In Maker, DAI is a utility token that enables the platform’s most important feature: lending. MKR, on the other hand, is primarily a utility token with governance powers.
The Dual Token Model’s Benefits
The legal compliance with SEC requirements is the most evident benefit of the dual token model. The project founders will reduce any regulatory risk by releasing a security token that ensures ownership rights on the network.
Another benefit is that it builds trust and interest in the project among more hesitant investors.
Many blockchain projects and initial coin offerings (ICOs) still have a shaky reputation. Issuing SEC-compliant security tokens is essential for projecting a more reliable and legal image.
Using a second functional token that buffers system instability is another important benefit for dual token projects that rely on keeping a consistent rate for their stablecoin, such as DAI in Maker. The second transactional coin moves in lockstep with the platform’s overall activity, whilst the stablecoin is tethered to a fiat currency.
The Dual Token Model’s Drawbacks
While the dual token approach has a number of benefits, it also has a handful of drawbacks. For starters, the strategy may be perplexing to investors unfamiliar with blockchain or the new platform’s procedures.
Another issue is the constant possibility of a conflict of interest amongst token holders. Because the goals and motivations of individuals who hold security tokens and those who hold utility tokens are frequently different, their goals and objectives may also be distinct.
A conflict of interest issue arose on Maker in September 2020. During a governance vote, platform users opted against compensating DAI holders after they lost roughly $2,500,000 USD from their vaults on the system. Only MKR holders had a vote in how the lost monies were handled because MKR, not DAI, is the governance token.
Dual Token Projects Have a Bright Future
Although dual token initiatives make up a small percentage of all new blockchain firms, the number of projects is anticipated to grow as the US government tightens its grip on initial coin offerings (ICOs).
The concept is also well-suited to projects involving stablecoins. While one utility token is used to facilitate common transactions and may experience volatility as a result of user demand, the second token can be a pegged stablecoin.
The potential for expanded use in digital payments is expected to promote the growth of stablecoin projects. It’s also possible that the number of dual token systems may rise.
Dual token blockchain networks have seen substantial growth since 2017. The security and utility token paradigm has become the most typical scenario, fueled by ICO restrictions.
The dual token approach can act as both a compliance measure and a technique to enhance investor interest in ICO-driven ventures. The dual token concept can be used to effectively separate a volatile transactional token from a pegged stablecoin in non-ICO applications.
Because both ICOs and stablecoin projects are predicted to grow in popularity, dual token initiatives are likely to grow as well.
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