The future of self-issued tokens

Four years ago, it looked like tokens were a dying breed. Then, they proliferated.

As FTX’s balance sheet comes out more and more, we see echos of the Luna / Terra incident from earlier this year.

In round numbers, FTX’s Thursday desperation balance sheet shows about $8.9 billion of customer liabilities against assets with a value of roughly $19.6 billion before last week’s crash, and roughly $9.6 billion after the crash (as of Thursday, per FTX’s numbers). Of that $19.6 billion of assets back in the good times, some $14.4 billion was in more-or-less FTX-associated tokens (FTT, SRM, SOL, MAPS). Only about $5.2 billion of assets — against $8.9 billion of customer liabilities — was in more-or-less normal financial stuff. (And even that was mostly in illiquid venture investments; only about $1 billion was in liquid cash, stock and cryptocurrencies — and half of that was Robinhood stock.) After the run on FTX, the FTX-associated stuff, predictably, crashed. The Thursday balance sheet valued the FTT, SRM, SOL and MAPS holdings at a combined $4.3 billion, and that number is still way too high. —Matt Levine

Like Luna / Terra, there is a circular nature to all of this — company issues token —> token price goes up —> company controls token reserves and accrues value constantly in some feedback loop that they control. In theory, the issuers are now incentivized to act reasonably i.e. not sell or steal those assets because then the markets wouldn’t value their token any longer, but that doesn’t keep them from adding implicit leverage to their holdings.

While there’s plenty to unpack in each specific scenario, it makes me wonder more broadly what the future of tokens will be. After the 2017 boom and bust , many thought tokens would fall out of favor, and projects would instead raise money via equity. However, we saw a sharp reversal of that with SushiSwap and the DeFi boom. Since, we’ve seen broad-based support of the token model as a means of creating network effects quickly.

Will people begin to question again — what really warrants its own token? What are the negative externalities of an entity issuing a token, as opposed to just the potential upsides? I’m certainly wondering that. A token creates immediate liquid upside for teams — that’s often proved to be a bad thing. At best, that stash of cash becomes an ecosystem fund which often masks lazy product development. At worst, the team gets distracted and/or runs off with the bag.

I’d love to see a renewed take on that question, in light of many of these incidents and broader learnings from the past few years. We’ve seen many token models in the wild now. A candid take would likely reveal that only a few of them actually create value beyond the token itself.