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Are DeFi Projects Restoring The Reputation of Utility Tokens?

Utility tokens lost much of their luster following the 2017 ICO frenzy, as numerous tokens lacking a solid value proposition eventually faded away. Rather than providing true value to token-holders, many of these were designed simply for the purpose of raising funds for project teams, in a short-lived cash-grab.

Despite the bad rap, utility tokens still hold amazing potential – something that the DeFi ecosystem seems to be rapidly reviving.

DeFi platforms, with their inherent need for decentralized governance and controls, present the ultimate use case for utility tokens. This has resulted in the recent rise of DeFi tokens with carefully-designed economics, use-cases, and issuance, in a way that provides long-term value to both the token-holders and the project teams.

So, what is it that separates a good utility token from a bad one?

Fair And Sustainable Token Distribution

The way a utility token sale is executed is extremely crucial to the success of the project.

Token sale economics must carefully be constructed, rewarding token buyers in proportion to the risk that they are taking. Incentives must also be considered to encourage long-term holding or use of the tokens by investors. 

Here are a few ways that utility token distribution can be more effectively managed:

Token lockups

Token lockups are quite self-explanatory – tokens owned by project founders and early investors are made “locked up”, usually via a smart contract, for a set period of time. This prevents tokens from being dumped on the open market in the early stages of the project. 

Bridge tolls

A token bridge toll is best-described as a fee incurred by early investors if they attempt to sell within a certain time-frame. This is similar in nature to a token lockup, in the sense that it deters early investors and team members from selling their tokens. Instead of an outright lockup, however, it is discouraged by a fee.   

Bonding curves

Bonding curves are generally used as a way of selling tokens for lower prices to early investors, and progressively higher prices to later investors. 

This compensates early investors for their extra risk, as well as encouraging participation in the sale.

A hybrid model

An ideal way of construction a utility token sale would be to implement a combination of the above mechanisms. Plutus DeFi – a privacy-focused aggregator of DeFi lending platforms – has done exactly this, with what they call a “hybrid bridge-bonding curve”. This starts out by using a bridge-toll function for seed-round investors, and then incorporates an exponential bonding curve for later investors.

By combining both the bridge toll and bonding curve features, Plutus DeFi’s PLT token price is set up to remain as stable as possible in the early stages of the project, while later investors are protected from early-stage investors dumping tokens.

Tangible Utility And Value

Some of the very first iterations of utility tokens had a single function: they were required as payment for accessing and using a platform or service. 

This one-dimensional nature raises barriers to using the platform for anyone who cannot easily obtain the token, and provides no other value to token holders.

Through DeFi, we are starting to see utility tokens evolve to become more multi-dimensional, offering more value than just platform access. 

Here are some value propositions that can be added to a standard utility token:

Governance and voting

DeFi platforms require decentralized governance, if they are to continue to adjust and evolve over time. Decentralized governance requires tokens with voting rights, to fairly effect changes in a protocol like supported assets, features, and parameters such as fees.

Voting rights are extremely important for major users or stakeholders, since they are directly affected by these decisions. The most-established example of a token with governance rights is Maker’s MKR token, which is used to vote for changes in the Maker protocol.

Supply control via burns

Another way to add value to a utility token is through a reduction of the supply through token burns. Aave – a very popular DeFi lending platform – is a good example of a platform which does token burns, which are funded by its fees. 

By allocating 80% of its share of platform fees to buy and burn its native LEND tokens, Aave slowly reduces the total supply of tokens, raising the value of the remaining tokens. 

Sharing profits with token holders

Sharing profits with token holders is an excellent way to bring value to the utility token. An easy way to do this is to redirect a portion of platform fees back to token holders, through a staking mechanism.
Aave, mentioned above, will soon move from the token-burn model to sharing profits directly to token-holders, via a staking mechanism. 

Providing discounts with a token payment

Shifting from enforcing ALL payments to be made with token, to encouraging use of the token by providing a discount to payments made in that token is also a very useful move.

This removes barriers to using the platform or service, allowing for easier access and wider adoption. The token still has plenty of use, however this use is encouraged, rather than forced. 


DeFi tokens may have found the “sweet spot” for utility tokens, finally combining tangible use cases with strong economic models for token sales. By facilitating value creation for token holders and project teams alike, the utility token may be back thanks to DeFi  – and better than ever.

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