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The Rise of the Dual Token Structure in the Crypto Market

January 10, 2019

Single issue utility tokens have dominated the ICO landscape.  These crypto assets, which represented the vast majority of ICO issues, raised over $10B over the last two years. Unfortunately, they suffered from a velocity problem. This velocity problem, along with the fact that ICO issuers violated SEC regulations, doomed the value of these utility tokens from the word “go.”

Velocity: The Bane of Single Issue Utility Tokens

As the value of Bitcoin and other ICOs exploded at the end of 2017, analysts and economists wanted to get a handle on how to value them. It wasn't just academics who were trying to figure this out; investment banks wanted to know as well. In November 2016, Canaccord Genuity Senior Analyst, Mike Graham, put together a detailed report in which he covered how to value Bitcoin effectively. In 2017, many crypto economists adopted the following formula as the “official” way to value new single issue token ICOs brought to market:

M = PQ/V

In this formula, M is the value of the crypto asset, PQ is the value of total sales in the market (think GDP) and V is Velocity (the number of times a crypto asset changes hands). There is an inverse correlation between V and M; the higher the velocity, the lower the value. For investors who purchased single utility tokens hoping to see a profit, this is an obvious problem. The more popular the token becomes, the lower its value over time. Beyond the regulatory risks, the ICO issuers had already subjected them too, purchasers of single-issue token ICOs were led to purchase assets that would plummet in value regardless of whether they were wildly successful or failed spectacularly. Heads or tails, the ICO issuer wins, and the buyer/purchaser is left holding the bag.  

Currency vs. Investment

Creating a crypto coin that serves as both a transactional vehicle and an investment vehicle is folly. Think about a $10 bill in your pocket right now. The real value of that bill is $10, whether you want to buy a Starbucks coffee, a new book, or any other good or service. The $10 is accepted everywhere. Everyone knows its value so that you can have frictionless transactions. It is not an investment vehicle. Sure, you could buy $10 in stock, but you would end up with shares, not actual transactional dollars; there is a difference for a reason. People invest in stocks and bonds hoping they will increase in value. They use cash specifically to make transactional purchases.

A New Method

At this point, it’s easy to see why so many ICOs and single-issue utility tokens have failed. This was an issue the CERES team faced early in our process. Initially, CERES planned on issuing single CERES coins to our investors. (Yes, we call them investors because CERES Coin is on pace to be a security offering that’s fully compliant with SEC rules, regulations, and exemptions). However, as we began to build out our CERES ecosystem, the velocity problem smacked us hard in the face. Our models showed us the problems facing single issue tokens. We saw that If our coin skyrocketed in value and traded with wild volatility, there would be no incentive for customers to use them nor for merchants to accept them.  If our coins were not being used, then the only way for our coins to have value would be to have investors HODL (hold on for dear life), which would leave us competing against every other failed ICO, blindly hoping our coin would win out. We would have failed in our mission to create a working blockchain transaction network for the legal cannabis industry. We had to design CERES to tamp out the volatility so customers and merchants would use our coins, and at the same time incentivize our investors to back CERES knowing now with a stable currency they would not see wild price appreciation in the coins. A dual crypto asset structure was needed: CERES Token as an investment vehicle and CERES Coin as a transaction vehicle.  Both Token and Coin would need to be qualified SEC securities.

Enter the dual token structure Security Token Offering (STO)

With dual token STOs, one crypto asset can function as an investment vehicle while the other can function as a transactional vehicle. We chose to call the investment vehicle a token and the transactional vehicle a coin. These structures work under a digitally collateralized STO (security token offering) that offers revenue participation benefits to the investors that are positively correlated to the velocity of the coin transactions. In other words, when the velocity of CERES Coin increases, our CERES Token investors make money.

CERES Coin is forging the path for dual structure STOs and a blockchain transaction network for the legal cannabis industry. With CERES, investors can purchase CERES Tokens to fuel investment in the cannabis industry. CERES Token investors will benefit from different revenue streams generated by CERES. One of those revenues streams will be the transaction fees from the utilization of CERES Coin. More transactions by CERES Coin means more revenue for CERES Token investors.  

By dividing the currency into two structures, CERES can split the incentives between buyers and investors. Users of CERES Coin benefit from an SEC qualified security that serves as a highly transparent, blockchain ledger backed medium of exchange that won’t fluctuate in price as dictated by the market. Customers, patients, processors, producers, and dispensaries in the highly regulated legal cannabis industry can use CERES Coin. Investors in CERES Tokens will benefit from an SEC qualified security, which generates revenue from the use of CERES Coins.  

To learn more about CERES Coin, or to become an investor, contact us at info@cerescoin.io.