Community tokens: business model of the future or blockchain gimmick?
28. February 2022
Lennart Caroli, Alexander Herzog, Nico Joos, Luca Weisskopf & Kaan Yildiz
Reading time: 6 minutes
Those who don't deal with blockchains and cryptocurrencies on a daily basis are probably not yet familiar with community tokens. But that could change soon. This tool is already finding initial acceptance among soccer clubs. But what exactly are tokens? Could they also be used as a reward system in the business environment? And what does a community need to generate added value for every participant?
We are a team of five business informatics students from the University of Applied Sciences Northwestern Switzerland (FHNW) and have been dealing with exactly these questions as part of a project work for the Qudits.
What are tokens?
Crypto tokens are digital assets on the blockchain that represent a fungible (i.e., an exchangeable, non-unique) and tradable currency. They are created, stored, and traded digitally and can be used as an investment, store of value, or for purchase. Unlike crypto-coins, which reside on the blockchain on which they were created, tokens are not tied to a blockchain but are created on a pre-existing network. Ether, for example, is the original coin of the Ethereum network, but other tokens such as Tether or Uniswap also use the Ethereum network.
Crypto coins are similar to money in a bank account. Your assets are not tied to a single bill or coin until you withdraw them. Tokens, on the other hand, are a static representation of a specific asset you own. Once you send a token to another person, it leaves your account and is transferred to another person's account. This exchange is enabled by "smart contracts," blockchain applications that automatically perform actions such as trading or transfers when certain conditions are met.
The most common way to buy tokens is to use cryptocurrency exchanges like Binance or Coinbase. On these websites, users can check the value of coins and tokens, trade crypto as well as regular currencies, manage their wallets, and generally simplify the whole process of sending or purchasing currencies. These platforms offer a wide range of coins and tokens, but some are distributed through different applications. For example, some mobile application users receive tokens for actively using these services. Tokens can sometimes even replace other things like stocks or shares. "Security tokens," for example, are an asset that symbolizes partial ownership of a company and therefore function like stocks or share certificates.
A community, i.e. a group of individuals with similar intentions and goals (e.g. professional, social or geographical), offers advantages in many respects. Of course, it also takes some preparation to build it up optimally:
The first step is to define the audience. In order to communicate properly and adapted to the members, it must first be clear who belongs in this community.
Subsequently, it is important to define a common vision. A group of people is strengthened by the same thinking and the same search for ideas.
A community needs a defined communication channel.
A central point in community building is to ensure enthusiasm among the members. All potential and existing customers must feel needed, because they are an important aspect of the overall project.
There are numerous projects on the blockchain but also numerous scams. Last but not least, transparency is therefore the most important quality in the token phenomenon that a project can bring.
Key success factors of a strong community
Another important aspect is to create tailored incentives. During our research, we focused on the following three subtopics:
Social Incentives: Create incentive through social value, for example, a collectible with a certain value that people are proud to own.
Vision Incentives: Create incentive through a suitable vision. Throughout human history, there have been communities that have succeeded without profit-driven incentives. These communities were usually driven by ideologies. Visionary incentives can work very well for long-term projects, but are less suitable for short-term projects.
Economic Incentives: Create incentive through an economic value. This does not require a strategy to be developed because a job is done in exchange for economic value. As everyone benefits from this performance-based system, more skills are automatically added and knowledge is shared.
Use Case: FC Basel Fan Token
Fan tokens are currently gaining more and more attention. This is also noticeable in the sports industry. Many sports clubs are in the process of issueing their own fan tokens.
The basic principle is simple: by owning a Fan Token, the user is given the right to participate in various votes that decide, for example, what the captain's wristband will look like for the coming season. While fans are given a way to incorporate their opinions into the day-to-day operations of the club, they can also profit from price fluctuations (comparable to the stock market). Some see this as an investment opportunity. The club benefits on the one hand by generating attention, and on the other hand financially. As the issuer, they not only earn from the initial sale of the tokens, but are also offended by each subsequent transaction to a certain percentage, i.e. the club receives a share of the transaction fees every time a token changes hands.
In German-speaking countries, BSC Young Boys is currently the only club that has published Fan Tokens (as of February 2022). It is possible that more clubs will join in the future and we would like to present what this could look like using FC Basel as an example.
To generate fan tokens and put them into circulation in tranches, there are various approaches: On the one hand, there is the possibility of taking care of the technical details oneself, on the other hand, there is the possibility of entering into a partnership in order to facilitate the process steps. Currently, Socios is probably the largest platform offering fan tokens. A partnership is recommended in most cases, as very few clubs have the technical knowledge to take care of everything themselves. A partnership with Socios is essentially free, but there is a contractual agreement on how many percentages of the proceeds go to which party. Upon issuance, a fixed amount of tokens is set to be issued over a predetermined period of time.
To create a successful project, a community must be brought together and animated. A club already has a basic interest of fans who are loyal to the club. It is important here that the fans are introduced to the topic of "fan tokens". It should be made as easy as possible for an interested party to find out about the topic, buy and sell Fan Tokens, and participate in voting. Simplicity should be the highest priority, even if it means more effort for the club itself. Advertisements should be placed on various platforms to draw the attention of the broad masses to the project. In addition to the classic media such as TV and radio, the stadium itself is also an ideal advertising platform for FC Basel.
Potential NFTs (non-fungible tokens, i.e. unique objects stored on the blockchain) can also be considered. Various clubs, such as BSC YB, have already published the first NFTs, which are digital autograph cards of players. However, in view of the simplicity mentioned above, we would generally recommend to deal with the topic of NFTs only after a successful fan token implementation.
Conclusion and outlook
Community tokens are becoming more and more popular and deserve their rightful place in the digital world. There are endless projects that are already working with tokens today and many more will follow. We believe that the possibilities of community tokens bring a much greater advantage compared to the potential risks. The main risk is fraud, which can be a problem in almost any novel and innovative project. The benefits of community tokens include the decentralized storage of the tokens and the ability to create value with like-minded individuals through the token. The past has shown that fan token projects for various clubs can be quite successful.
Finally, a brief digression into the private sector: It might be more difficult to form a community in a company, because you have a smaller "solid" core compared to the fans of a club. The incentives would therefore be primarily financial. With creative solutions on how to also create further incentives and build a solid community, we see enormous potential in the use of community tokens for this sector as well. For example, this could be the beginning of a decentralized company: The CEO no longer distributes tasks to his employees in a linear fashion, but instead creates orders that can be accepted by any person within the company. If an employee accepts an order and completes it successfully, this person receives a sum of company tokens defined in the order. These company tokens can then be exchanged for "real" money and represent the monthly salary. With this company structure, the only question is which people are authorized to create orders and who is allowed to accept them. We are therefore looking forward to the future of community tokens and are curious to find out how companies will solve these issues when they are implemented.
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