When the ERC20 tokens first appeared they took the world by storm. Why? Because they were quasi-stocks, a way to bet on the success of an enterprise without all the hurdles investing in traditional stocks involves.
Billions were sold to investors, trillions have been traded on the secondary markets… without there ever being a satisfactory answer to the question: how do we value tokens? Why do they even trade and have a market price?
Sure, price is always subjective and it is what a buyer is willing to pay. But when it comes to stocks it is clear why the price should rise when the business is doing well — being a shareholder gives you enforceable rights, including the right to a share of the profits. (You can then use discounted cash flows or another method to reason about fair value.)
There are no such rights when it comes to tokens. The issuer has no legal obligations to the investors. It is quite conceivable that the project becomes a success but the price of tokens goes to zero. For example, the team behind the project could simply abandon the token. Even if they do not officially abandon it, they might struggle to find a use (“utility”) for it, and simply do nothing with it forever.
Everyone is aware of this… still, tokens do trade and have a market price. Why?
We have proposed in a separate article that it is because tokens are the tokenized honor of the founders, a bet that if the project becomes a success the founders’ consciences will force them to find a way to connect the tokens with the success.
This seems to be working? The mechanism most projects currently seem to be converging on is token buybacks (and burns). Here is a partial list of projects that are (or were) doing it: BitMEX, FTX, Celsius, NEXO, Binance. There are more.
This signifies a clear trend. All attempts to tokenize shares of stock have so far failed due to regulatory issues. Efforts continue in various jurisdictions but it looks like progress will be hard and slow.
On the other hand, there is tangible progress from the other direction as tokens are becoming more and more stockenized. It is happening slowly and via trial and error.
At some point in the near future, rather than digitizing ancient stock-trading systems and procedures one by one, governments will simply recognize tokens as shares of stock, grant holders legal protections, and force more requirements on issuers.
Interestingly, the market is not waiting for it. Market expectations are already shaping the behaviour of participants in that direction without any threat of (state) force.