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Terrible tokenomics: Yellowcoin

Selling tokens is now an accepted way to raise investment capital for IT projects, at least for speculative blockchain ventures. Tokens are not like shares an a company; they do not pay dividends or confer voting rights. Sometimes they can be used to buy the product or service, on the off-chance the company ever gets it to market. But sometimes it is neither of those, and issuers come up with creative ways to assure investors that success of the venture will somehow translate to demand for the tokens. Welcome to tokenomics!

AI yellow is a global business directory which has enough eyes on it that 1.4 businesses pay to be in it. Each country is a franchise operation and members are paid commissions for getting new listings. Overall it seems like a respectable and successful business. I've always thought that a business directory is a great context for a complementary currency discount system so I was keen to find out about this one.

Last week they launched an ICO (the process of issuing tokens and selling them into circulation). I read the white paper which is supposed to explain what the tokens do and why it is a good investment.

The paper had the tone of a once-in-lifetime offer, and contained much vague wording and misleading information, such as a chart showing the exponential growth of the cryptocurrency market capitalization 2017-2025; and several assertions like this:

As a result of the massive AiYellow eco-System, YTC has a truly unique expectation of appreciation...Bitcoin started in 2009 at $.003 USD. Today it is between $6,000 / $8,000 USD.
This kind of shilling is so irresponsible that it must have been deemed necessary to include the following paragraph on the final page:
Certain statements, estimates and financial information contained in this white paper constitute forward-looking statements or information. Such forward-looking statements or information involve known and unknown risks and uncertainties, which may cause actual events or results to differ materially from the estimates or the results implied or expressed in such forward-looking statements.

Too much time is spent extolling the virtues of Bitcoin which is irrelevant, and Ethereum, which is merely the accounting engine. A large part of the paper is devoted to explaining the game mechanics they designed to try to maximise the sales revenue. Even that seems tacky and over-complicated, basically there are about ten rounds of sales getting progressively more expensive.

But I want to focus on the tokenomics. On the first 2 readings I couldn't work out what the token was actually for apart from raising capital of course. Several use cases are given from making private transfers to banking the un-banked which any crypto could be used for, but the key was in these bulletpoints, which seemed to repeat each other despite being in the same set.

  1. Merchants in the eco-System will accept the YTC-Token for $1.00 USD
  2. ...
  3. All merchants in the AiYellow eco-System will accept the YTC Tokens as a form of barter. There is a minimum value ($1 USD) agreed to by contract, with the merchants. This ($1 USD) value places a true floor on the fluctuation of the YTC Token value.

I had to be told that this meant AI Yellow guaranteed to accept the tokens instead of advertising subscriptions. That means merchants will probably accept a few, but it's not clear if tokens will be redeemed faster than that. If so, purchasing tokens at between $0.02 and $0.15 would be a very good deal. Merchants would probably accept the token at $1 without coercion and be glad of the extra trade. But AI Yellow is unlikely to commit to buying back great numbers of tokens that they sold for pennies. They would have to prevent arbitrageurs, if tokens fell below $1 on the free market, buying them up and redeeming them immediately, taking the tokens out of circulation and draining the cash reserve.

If the tokens aren't continuously used as a medium of exchange or held by speculators but redeemed by merchants, it could mean serious cash outflow from company coffers.

So why would anyone pass these tokens around instead of money? Once the person who purchased the token at a discount has spent it, all the speculative gains have been realised. So there is an incentive system which seems to build in discounts, though its not clear if AI Yellow of the merchants end up funding that.

Merchant incentives for making purchases with YTC tokens also appear.

and there's no way of knowing if that incentive will be strong enough: $1 cash will always be more useful to a company than $1 in discount vouchers.

There's no reason for speculators to hold on to these tokens either. If they are backed by $1, then they are unlikely ever to have more than $1 purchasing power.

What the whole tokenomics seems to be ignorant of, is that the best way to make a medium of exchange circulate is to issue it as credit. Then the units are always in demand by the people who spent them into circulation, and no centralised backing is needed.

This token sale could easily be a money-grab by the company, by appealing to everyone else's greed, indeed the vagueness of the paper suggests that and prevents me from assessing the token dynamics themselves. But AI Yellow is a going concern and unlikely to fleece its customers intentionally. It is clear enough who stands to gain but not who is shouldering the risk of the tokens running out of momentum. The company will create incentives to keep the tokens moving, but there's no way to know if it will be enough. A pilot scheme would have been wise.

PDF icon Yellowcoin_white_paper.pdf6.72 MB

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