A dual-token economy is a term used to describe crypto projects that maintain an ecosystem with two different types of tokens.
The rise of the dual-token model
In 2017 and 2018, there was an ICO wave to raise funds for crypto projects. This caught the attention of the SEC. The SEC decided that an ICO token was to be considered securities under US law — it should define ownership stake in the platform and offer benefits and revenue to its holders. This was a problem for many ICO tokens, which were mainly utility tokens for the platform e.g. to use as platform/gas fees.
Thus, many projects started implementing the dual token model for ICOs:
- Security token: Used to raise funds for the project, afford ownership stake and benefits to holders. Issued during ICO
- Utility token: Transactional token used across the project/network to perform particular functions. Can be issued before, during or after ICO.
Advantages of dual-token model
Today, dual-token models exist outside of the sole purpose of ICOs. A project might utilize a dual-token economy vis-a-vis a single token model to ensure smooth operations of the platform and encourage user participation.
Firstly, dual-token models help with the very practical reason of separating governance and utility. Think of a P2E project you know. Its in-game/utility token probably has no fixed cap, making it more suitable for daily game operations where there are multiple in-game actions. In contrast, its governance token probably has a cap to communicate ownership stake in a clearer way. Imagine using Axie Infinity’s in-game token SLP for governance. Your ownership percentage could be 8% today but drop to 5% tomorrow if more SLP is minted. Similarly, if governance token AXS is used as the utility token, the calculation of one in-game action would have many decimal places and is impractical for daily operations. Having two tokens ensures that each token is the most optimized for their functions.
Secondly, this model helps to reduce selling pressure of the main token and encourage sustainability. In an X2E project, its token is usually sold for profit once generated. If there is only one token, user participation would become heavily correlated with token price. Speculation would further affect its price. With a dual-token model, projects can accrue value to both tokens and incentivize users to hold on to their tokens for more rewards. Two tokens provide users with one token to speculate on and one token for utility, such that the platform can continue to function even if the former sees some price action.
Lastly, a dual-token model allows one token to be allocated for utility and one for fundraising and governance, especially in today’s rich venture capital landscape.
Examples of dual-token economies
Play-to-earn: Axie Infinity
Axie Infinity has in-game token SLP and governance token AXS. SLP is used primarily at the game level and AXS primarily at the meta level.
SLP is the native currency of Axie Infinity used to mint and breed Axies, buy in-game assets and earned as battle rewards. AXS is the governance token used by holders to vote on proposals to shape new game developments, and for staking to earn more AXS rewards. Some AXS is also required to breed Axies alongside SLP, which make the token indispensable to continue playing.
Stablecoin loan: MakerDAO
Crypto lender MakerDAO utilizes a dual-token economy with DAI and MKR. DAI, a crypto-backed stablecoin with a 1:1 peg to the US dollar, is used to provide loans to users after they deposit ETH collateral into Maker.
MKR acts as Maker’s governance token and contributes to stabilizing the value of DAI by managing the backing collateral.
Public blockchain: VeChainThor
VeChainThor positions itself as a public blockchain for business applications. It has main token VET and utility token VTHO.
VET is used to store crypto funds, exchange the funds, use them in various DApps on VeChainThor, and afford holders certain governance rights. VTHO is used as gas fees on the network and is automatically generated by holding VET.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
ApolloX is the leading decentralized solution shaping Web3 trading for retail and institutional traders. Its product suite consists of the biggest decentralized crypto derivatives exchange on BNB Chain, ApolloX DEX, and bespoke derivatives trading solution ApolloX DEX Engine. In 2022, ApolloX shifted to DAO governance.
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