An Insider's View of How Crypto is Paralyzed by its Tokens
Fixation on hyper-financialized token brands locks crypto projects into a doomed playbook
Previous in series: How Brandification Stifles Innovation and Feeds Bubbles
In my last couple of articles, I’ve been building towards a bigger picture of the reasons that crypto fell into the hole where it’s stuck today, hopefully so we can find a way out. This article is a long one, so strap in.
I described how financialization stunts what should be the natural evolution of blockchain technology toward getting better at solving useful problems. The built-in unconstrained financialization of current crypto platforms pushes usage of those platforms toward an exaggerated, fast-paced version of the worst aspects of traditional finance. Those hyperfinancialized, quick-money applications suck the energy (and funding) away from more complex and more useful applications – the kind that market forces should normally incentivize and reward in proportion to their benefit to society.
Then I described a particular type of brandification, common in luxury products, where the primary brand value is price itself and the key to success is treating the product like a financial asset. We see the inverse as well, when investment assets are marketed as brand-forward products to reach greater success. These assets often become dominated by meme-driven speculation that feeds dangerous bubbles, damaging market volatility, and ponzi schemes.
Maybe you can already see how the forces of financialization and brandification reinforce each other in a feedback loop. Products that brandify with price as their primary brand value become financialized assets, and financialized assets can stoke their value by focusing on brand, in turn further reinforcing financialization, and so on. Products, and even whole markets of products, that enter this cycle find it extraordinarily difficult to escape. Rather than evolving toward better solutions to problems or more efficient allocation of capital, these products and assets evolve toward the same end state: objects of speculation that live or die on the effectiveness of how the brand/price is marketed and manipulated.
Crypto couldn’t have been better designed to slide headlong into this cycle. When a blockchain platform is self-financialized by design, its initial users and developers rush toward quick-money finance-over-utility applications that only care about the price of tradable assets. The natural competitive battleground for both the platform and the applications running there becomes brand marketing and supply/demand tinkering, drowning out anything else not fanatically playing that game. Repeat this cycle across crypto with ever increasing amounts of capital, and the entire market becomes locked into a narrow groove of meaningless asset speculation, rather than expanding to explore the technology’s natural potential.
As a result, it’s obvious today that crypto technology hasn’t evolved like normal technologies. Despite much early excitement about a technology capable of solving a huge range of problems in digital ownership and identity, in practice “crypto” today is little more than a list of digital tokens. Even the popular term crypto itself (short for cryptocurrency) suggests that the point is to create a menagerie of tech-enabled funny-money tokens, rather than creating platforms for solving meaningful problems.
But is this really fundamental to how blockchain works? Well... as things stand, mostly yes. But if we look more closely at the source of the problem, maybe it doesn’t have to be.
The Platform Token Anchor
The root of the problem is the token.
Bitcoin, the first blockchain platform, does exactly one thing: the Bitcoin token. Other platforms that rapidly followed Bitcoin added much more capability, making it possible to create and deploy ownership-centric applications and application-specific digital assets on open, neutral networks. But regardless of increased capability, the technology reference point for all that followed was Bitcoin’s token-centric architecture. Maybe the most elemental design choice that every new platform has inherited has been a Bitcoin-like official platform token (eg. Ethereum’s ETH, Solana’s SOL).
A platform token is deeply integrated into how each network functions, and supports a number of crucial functions for the platform:
Paying network usage fees that incentivize operation and disincentivize spam
Building a community that has a stake in the success and growth of the network
Supporting network security by tying token holdings and value to network governance
Creating a development war chest for the platform’s creators or an associated entity
Not all platforms use their token for all of these functions, but the first 2 or 3 are pretty much universal. The platform token is assumed to be a fundamental of the technology, and generally is regarded in the crypto world as a brilliant way of aligning incentives between participants and scaling the platform up toward success.
There is, however, a hidden (or maybe not so hidden) assumption enabling all of these purposes for the token: the token price must increase. As the network becomes more successful, increasing token price increases the cost of overwhelming the network with spam, increases the strength of the community, makes the network more expensive to take control of, and increases funding for the platform’s development and promotion. Without an increasing token price, the network isn’t viable for very long. However, as the theory goes, the more popular and useful the network is, the greater the demand for the token which naturally increases its price in the market. Elegant!
At an idealized, techno-optimist level of strictly rational market actors this makes sense, but reality quickly intrudes. By wrapping all of these essential functions around a token whose price must increase, blockchain platforms immediately financialize themselves from the start. The value of the network and its measure of success are distilled down to a single number, the token price. And once that’s the case, hoping to increase the token price via steady delivery of useful functionality starts to look like a loser’s game compared to more directly pushing the token price in the market. The best way to do that is to make your token into a brand whose value is the price itself – a luxury product, an “investment”, a bet that your good taste in token brands is better than others’.
While we might want to believe that the price of network tokens will be driven by useful network functionality and usage, unconstrained financialization does what it always does: it turns the product into an asset whose price is driven primarily by speculation rather than fundamental value.
In a speculation-driven market where platforms require token price increases to survive, token price increase becomes the prerequisite to network success, rather than its result. The tail begins to wag the dog and platform creators have little choice but engage in unnatural behavior to drive that number faster than real product success possibly can.
As a result, crypto platform tokens today are traded in almost entirely reflexive fashion. Whether Bitcoin or Dogecoin, Ethereum or the latest smart contract L1, their tokens are bought primarily because number is going up and sold primarily because number is going down. The winning traders aren’t looking at the true utility of the platform or the plausibility of the roadmap to estimate a sensible token value. None of that matters compared to hype-driven “sentiment”.
The token problem extends to applications and assets hosted on blockchain networks. The dominant new assets are the latest batch of memecoins, and the dominant apps are those that enable ever more layered, leveraged, and liquid trading and speculation. Even the increasing prevalence of “stablecoins” (tokenized representations of relatively stable assets like dollars) or “RWAs” (tokenized real world assets) is almost entirely supported by their utility in token speculation apps. Crypto hyper-financializes everything it can touch, from traditional asset classes to shadier aspects of “finance” like prediction markets, tokenized money laundering, and lightly concealed bribery. Even gaming projects turn into virtual ponzi schemes when investable tokens enter the picture.
Playing It Out
If crypto is open and free by its nature, why don’t we see new crypto projects that break the cycle of brandification and financialization? Why don’t we see a new type of blockchain platform that achieves success by providing a true benefit to society rather than getting sucked into token speculation games driven by empty marketing and price manipulation?
To see how the problem continues to repeat itself, let’s imagine creating and launching our own blockchain network platform into the crypto market.
Our vision is grand, and we’ve got a crew of smart people who know they can build something with real feature and performance advantages that will enable a range of valuable use cases.
But before we get to the interesting stuff, we have to start with the platform basics. Like every other crypto network, it must have its token to pay network usage fees, build a community, support network security, and give us a development war chest. We know this will of course kick off a speculative cycle around the token, but we press ahead believing that our vision of greater utility and our measured execution toward that goal can drive positive token speculation and we can keep our attention steadfastly on making the world a better place. Our brand is real progress, not hype.
How do we enter the market? We know that all success (and a primary source of funding) is driven by token price, and so we can’t afford to wait to launch the network until it has all the features it needs to solve problems, so we rush out a stripped down version of the network that is just good enough to support its token, and maybe has a few unique elements for us to build on in the future.
Our token begins to trade. A few buyers are attracted by the vision and the clever technical design of the features on the roadmap, but all of that is years away so there is little reason for the average crypto head to buy the token yet. Developers appreciate our greater capability, but hold back from building here because they know that crypto’s user base only pays attention to platforms that have proven their worth by having a top token price. We have a bootstrapping problem.
To kick start everything we want to do in the coming years, we need short-term token price movement.
To drive the token price quickly, our only option is to push our brand visibility amidst a sea of token brands, creating urgent reasons to buy and pushing price increase to the forefront. We exaggerate the few unique elements of our simple launch network into obvious and overwhelming advantages, and replace our measured public roadmap into simple guarantees of inevitable dominance just around the corner. Maybe someday our brand can be about real progress, but right now it must be about token success and nothing can distract from that.
This is a very bitter pill to swallow. It feels like a detour from our long-term vision and a distraction from the focus we need to do the engineering work, but we have little choice. We’re going to run out of funding from our token war chest unless we can create sustained token demand. In fact we find that a strong brand alone isn’t enough to sustain token demand for long. We start to become desperate for VC backing that can provide the funding, visibility, and connections we need to be successful because even slow growth smells like death to crypto buyers. It becomes clear that our token marketing efforts are going to have to extend into more shady forms of manipulation of perception and the market itself because VCs aren’t much interested in us unless we give them the same wink and nod that they got from other crypto projects. They expect a 100x on their investment, and need to know you’ll make that happen by any means necessary.
So we embrace financialization of our token. Committing to playing the games of Patek and Ferrari (and maybe even Bernie Madoff), carefully engineering the supply and market for the token, just like all the other projects are. It starts with splitting up the token supply among early community supporters, the flood of newcomers we hope to entice, and big-money VC types – trying to make it look to each group like they’re the ones getting the special deal. We start broadcasting signals to the market that getting in early will be rewarded. We give the impression that price can only go up with token lockups, “burning” schemes, and staking programs that constrain supply. We hire paid market makers who make sure the token is trading with liquidity... and maybe even quietly nudging things to keep the chart looking right. We start to get approached by folks from countries with lax legal systems who promise they can do whatever’s necessary, if they get their cut. (And if we get in trouble later for some shady stuff, we’ll have enough money to pay the right lawyers and bribe the right politicians, right?)
Let’s say we play that game well. We get the VCs on board, push some high-profile brand messaging that dog whistles “we’re going to make this number go up and quickly, folks”, and whip our community (and some well-paid influencers) into a frenzy. Our token price spikes because the right people made sure it did. Some of our early token holders make a mint selling into the bullish retail sentiment, but we still make sure the chart keeps going in the right direction.
Now we’re sitting on a big token war chest, at least as long as the price of the token holds. Network effects are everything in crypto and we have to continually keep our supporters on-side and enthusiastic to maintain the premature impression that our network is gathering momentum. We are at the mercy of a “community” that pins their loyalty to a demand that token price continue to rise at all cost. VC token holdings become a sword of Damocles, ready to slash the token price as soon as their lockup ends if we aren’t continually showing that we can keep up the retail momentum. Progress on the product roadmap continually feels less urgent than creating short-term hype that can keep our “supporters” from turning toxic. In place of legitimate developers and businesses, a roving band of mercenaries charges enormous sums to bash together the same set of quick-money apps on our platform that they have built, and quickly abandoned, elsewhere.
It’s a relentless, expensive slog maintaining the brand hype and the Potemkin village of faked platform success. The budget is continually drained by supporting high-visibility marketing and developer programs that are often mostly about confidence signaling via the size of the spend. Our engineers have no particular urgency because product is a secondary concern; every practical step taken towards the long-term objectives for the network’s functionality has no impact on the token price in a completely brandified market. In fact each release becomes a token price risk, an opportunity for the reality of hard, steady, incremental product development to clash with the fiction of wildly unrealistic brand expectations. Founders and top-tier team members silently bleed away to try to go seek riches elsewhere.
Our once-ambitious project to solve real problems with great technology becomes yet another hollow memecoin with an oversized marketing budget and little real progress.
Given a crypto market full of highly brandified tokens playing elaborate financial engineering games, crypto token buyers have naturally concluded that the product is the token brand and the token brand is its price. That means there is no tolerance for not being laser focused on the brand marketing and market engineering of the token that is making them money, no room for products taking a different approach, even if it means death for the platform in the long-run.
Stuck With the Crypto Meme Market
You can see variations on this story playing out everywhere in crypto. Brand visibility is everything, whether Formula1 sponsorships by crypto companies or meme-centric tokens without function. Simple differentiating brand messages are what arm rabid token buyer “communities” fighting brand war with competing tokens. Platform and token creators enthusiastically wield all the tools of market engineering to ensure an increasing token price. But even for the most successful brands, meaningful development progress slows to a crawl after the first few years.
Basically, the self-financializing design of crypto has caused the whole market to skip over the normal technology innovation phase of product maturity and jump straight to a hyper-brandified endgame that locks it into a financialized quick-money feedback loop.
What if we went back in our story and refused to go all-in on the brandification games? What if we chose to take the high road? Launch the token, sure, but focus on making steady progress delivering increasing amounts of useful functionality that solves real problems. Give developers a platform and tools designed to support complex, robust applications around digital ownership. Give users an experience that is more mature and safe for everyday use.
Crypto projects that resist token brandification suffer an even worse fate: irrelevance. Developers may respect the tools you’re providing, but they have to go where the action is today and that’s on the competitor quick-money platforms. As a result, despite your mature user experience for real-world utility, there’s nothing for new users to do there and existing crypto gamblers think you’re crazy for not giving them a familiar crypto gambling experience like everybody else. When your brand is about solving real problems, rather than the short-term price of your token like your competition, your roadmap can never be fast enough or your marketing grand enough. VCs yawn and politely decline, which the market reads as an implied mark of death. Maybe your token price has a quick spike driven by your initial novelty, but it is followed by a slow slide that steadily strangles your ability to fund development.
The “good” crypto projects go the way of Omega in the years following Seiko’s quartz watch. As Paul Graham tells it in his article, the keen engineers at Omega responded to the quartz threat by trying to engineer their way out of the hole. Rather than embrace brandification, they introduced an improved mechanical watch. But quartz had already reached good-enough status for buyers and Omega went slowly, painfully bankrupt.
(Even starting at the top of the market, the only thing that saved Omega from obscurity was their eventual sale to a conglomerate that remade Omega as a luxury brand. Visit an Omega store now and you won’t see accuracy specs, you’ll see a celebration of the iconic, collectible watch that went to the moon.)
In the case of Omega and the watch market, this was arguably the way it had to be. Nobody actually needed a better watch than a Seiko quartz and the only “innovation” left to explore was in style and luxury. Maybe it was time for a brandified market. The situation with crypto is more tragic, however, because crypto is distinctly not good enough. Blockchain tech is capable of so much more than memecoins, money laundering schemes, and low-friction replication of the financialization of traditional markets. What current crypto is, however, good enough for right now is simple token games. And that’s what keeps the market locked unnaturally in place.
Looking for a Way Out
Is it possible for an open blockchain network to escape this fate? The current market landscape doesn’t give us a lot of hope, but maybe we can look to an adjacent example outside of crypto.
If you strip blockchain technologies to their core, they are internet protocols – agreed ways that computers on the internet talk to each other to reliably do something useful, in this case allowing people to own and transact digital objects. There are a huge number of internet protocols out there, from the common (SMTP for email, HTTP for the web, Bittorrent...) to the obscure, to the highly application-specific. Every blockchain platform iteration is, in a sense, just yet another protocol running on the internet.
In the early days of the open Internet, there was a Cambrian explosion of new internet protocols vying to gather enough usage to establish themselves as the foundations of the consumer ‘net. Unlike blockchain/crypto protocols, however, they had no financial component; they mostly existed only to facilitate various forms of communication or file sharing. There was no money to be made in creating an open protocol for communication because there was no such thing as buying a stake in the success of the protocol (via a token or any other means). The money to be made was in building applications using the protocol’s advantages. That meant that brandification and marketing of a new protocol would have been... pointless, not to mention a bit anathema to the techno-libertarian bent of the early protocol pioneers. The evolution of the technology was driven by the desire to create something meaningful, rather than to pump a token price, and yet the result was the set of protocols that make the world go ‘round today.
Of course blockchain protocols are different in other ways than just being financial by their nature. They are vastly more complex, requiring dedicated development teams. They are also stateful, meaning that we have to trust them not just to pass messages around but to serve as a persistent record of truth. Nonetheless, is there a lesson we can we learn from past internet protocols if we want to create an open blockchain network that avoids brandified paralysis?
A Call to Remove the Token
If anybody is going to create an open, neutral blockchain network that has the right dynamics to stay focused on solving real problems, it would seem that the first thing it needs to do differently is to aggressively de-financialize the design, so that it can resist the slide into premature brandification and stagnation.
I believe the first and most necessary step to de-financialize a crypto network is to not have a platform token at all. Simple Bitcoin will always be a cryptocurrency, and that’s fine for Bitcoin, but it’s the wrong model for a platform for applications. A token makes the platform instantly investable, and while that may seem exciting on the surface, we’ve seen how introducing an overwhelming stakeholder push for short-term token price movement at the earliest stages of a project is what paralyzes the technology.
Unfortunately one does not simply remove the token from a blockchain network. Network tokens provide solutions to legitimate platform design problems that don’t go away. To have an open, neutral platform we need to make sure the network can’t be overwhelmed by spam and can’t be corrupted or taken over by an adversary. We need to find a way to fund a highly complex, security-critical development. And as toxic as crypto communities can be, we do need some way to build a network of supporters and contributors around the protocol.
The solution is going to have to be the invention of a new kind of blockchain tech that’s still designed to create open and neutral platforms, but without using oversimplified tokenomics as its defense and its lifeblood. That is obviously going to require some novel thought and clever engineering.
We can’t stop with just de-financializing the network either. Financialization of assets and applications is a problem even in traditional finance, and blockchain provides even less natural resistance to its pull. Those applications are in fact typically the first source of growth and capital for a new blockchain platform today. So we need to find new ways to bootstrap more beneficial applications into our platform, to create a functional and interconnected ecosystem of them, and to favor the growth of those applications over quick-money schemes. Doing that certainly involves building a development environment that is mature, safe, and predictable enough for real-world finance, long-term business, and everyday users. But it also probably involves a lot of thinking about the nature of platform governance and its initial participants, not to mention economic incentives.
Solving these problems will not be easy to say the least. What makes blockchain technology so powerful is that it can do things that have, for the last 500 years of banking, required a vast amount of corporate, technological, legal, and social infrastructure, and so the problems with blockchain platforms may be just be a scale model of the problems of unregulated capitalism. Indeed the last 17 years of crypto look a lot like a speed run of financial history in miniature, starting with the invention of money and introduction of the core functions of finance and ending in a system that overwhelmingly benefits a small number of insiders and favors quick profit regardless of the collateral damage. Fixing blockchain may imply a re-think of capitalism itself, a miniature prototype of how it might work better for everyone.
Optimistically (and probably naively) I have a few thoughts that I hope might be worth laying out in a future article, at least at a tech level. I think there are some lessons we can learn from the early growth of the internet, which managed to scale and evolve into truly useful infrastructure while remaining inherently open and neutral. The incentives there were also economic, but much more nuanced than “deposit coin to send message” and “buy coins to operate a network node” (let alone Bitcoin’s “burn a bunch of energy to operate a network node, and get coins”).
For now, I know there are some intelligent people out there in crypto space with the right motivations who I’m sure can come up with some better ideas than me. If you really believe that crypto can be better, I think this is the problem to solve. You’re not going to get rich solving it, but if you believe in the original ideals of crypto that’s kind of the point.