Understanding Discount Token Models for Blockchain Projects | by Clayton Roche | Medium

Introduction

Here I will cover three types of discount tokens. A discount token model is one where users can purchase or hold your token to receive a discount against FIAT payments.

Each of these discount tokens costs the company revenue in the future. It is important that companies don’t offer discounts that will sink them, which can be inherently challenging without real data.

(I will talk a lot about token velocity. The nuances are too complicated to put here, but the short story is that slowing token velocity will increase token value.)

Three Models of Discount Tokens

This table is an overview of the three models, followed by an explanation of each.

image

Membership Access Discount Token

This type of token gives users access to a service or tier of membership if they hold or stake a specified number of tokens. CoinFi, a platform for crypto-tools, uses this model. In order to gain access to the advanced tools, users must stake a fixed number of CoinFi tokens. This is not strictly a discount, because there is no FIAT payment option in this example.

The purpose of this design is to reward investors by slowing token velocity and increasing use demand of the token.

Pros —

  • Slows token velocity
  • Rewards investors
  • Appeals to investors (Popular in forums, for instance)
  • Rewards early adopters
  • Can be combined easily with other velocity factors

Cons —

  • Service could become prohibitively expensive if token value increases
  • The company does not receive any fiat revenue from this mechanism
  • Exposure to volatility may discourage membership
  • Changing hold requirements could upset users and investors but be necessary as conditions change

Ideal Applications — What is nice about this mechanism is that you can add it together with other token features as a way to appeal to investors and create uses for your token. However, it will not provide your company with any revenue — Only the appreciation of tokens you already hold. For this reason, a membership tier should have a zero marginal cost for each additional member. CoinFi achieves this because members simply gain access to a suite of tools and information, presumably the only cost being bandwidth.

Alternative Models — Instead of a fixed number of tokens, you could require a variable amount based on the FIAT value of the tokens. This will have a stabilizing effect on your market price: As the value falls, people will have to purchase more tokens to maintain membership, but as it increases, people will be able to sell off excess tokens. Consider carefully if your customers will tolerate this.

You could also offer a FIAT payment method alongside the token-staking requirement. The intention would be that users could try your service, but once they decided to be long-term members, could opt to make the larger investment.

Use Discount Token

These types of tokens give users a discount when they pay using the platform’s token. The most well-known example is Binance, which currently gives a 50% discount on trading fees when those fees are paid with the BNB token.

Pros —

  • Will increase use of the token
  • May result in token value appreciation
  • Appeals to investors

Cons —

  • Use of token for discounts has a potential to be high velocity and therefore a limited increase in token price
  • Must be well calibrated
  • Could have a high cost to future revenues:

It is possible that just before using a service, customers will buy the tokens with FIAT, pay using those tokens, and they will be cashed out by the company. Consider this example where we assume that FIAT is tied up in tokens for 24 hours:

  • Annual token velocity: 365
  • Annual fee payments: $1 bn
  • Discount to fees: 20%
  • FIAT residually tied into the token: 1/365 * $1bn = $2.7m
  • Fees lost: $200m
In this example, the company loses $200m in revenues, but the total fiat tied into the tokens is only $2.7m!

Ideal Applications — An ideal product to use this mechanism is one where its customers make many small transactions spread out over time. This will encourage them to buy a larger amount of tokens than they need for a single transaction, and thus slow velocity further.

Before you dismiss this model because of the example above, consider if your company can adjust prices based on how many users use the token as payment. If everyone paid with tokens, the price could simply drift upwards to a new equilibrium. As a rule of thumb, I advise a discount amount in the neighborhood of 10%-20% if it will be combined with other mechanisms.

SweetBridge Discount Token

The SweetBridge token is designed to reward investors with the service itself. I will give a brief explanation here and include some resources at the end. I suggest their academic whitepaper on the topic if you wish to use this model.

This type of token gives its holder a percentage discount of a service or membership. The amount of this discount is proportionate to the size of the network and the number of tokens held.

How a SB discount token works:

  • Holders of the token get a percentage discount on the service
  • The amount of discount can be capped, or can potentially go as high as 100%
  • The discount amount depends on the revenues of the company and how many tokens held.

I’m sure it would be to the designer’s chagrin to hear this description, but the easiest way I can describe the SB discount token is this:

The SweetBridge discount token model is a security token that pays dividends in coupons.

As the revenue of the company goes up, so does the amount of discount that each token gives its holder. This means that an early investor of 100 tokens may, after 1 year, receive a discount of 20%. If the company’s revenue goes up 500% by year 2, that same investor could access the service for free.

The total discount afforded by all the tokens in supply will be only a percentage of the total revenue, by design. This means that while the value of the discount will increase per-token, the total percentage cost to the company will remain stable. This is identical to a dividend-paying stock, where the dividend percentage remains stable but the total payout increases as the company becomes more profitable.

Pros

  • Token holders that also use the service have their incentives aligned with the success of the company
  • Product users have more to gain than pure speculators
  • The value of the token has a fundamental value (when the business is generating revenue)

Cons —

  • Somewhat more complicated to explain and sell to investors
  • Investors may avoid it if they don’t want to use the product
  • Only suited to certain types of products

Ideal Applications — The SB discount token model would work best for products where customers are loyal and use the service for a long time. B2B applications are the easiest to picture. For example, there is a project with a token meant to help property managers process tenant applications, a service they paid for with fees. If property managers invested in this token early, those early investors could eventually come to receive that service entirely for free.

More generally, any subscription membership services would work: SaaS, media, regular product delivery, and so on.

This token could be perceived as only attracting investors who also want your service. Indeed, this perception is a risk. The reality is that, before the product is live, the benefit to speculators and potential users is actually the same: speculative. Once the product goes live, the tokens will tend towards users of the products, as they are the ones who have the most to gain over pure speculators. Speculative investors should be happy to invest in this model if it is properly explained to them.

Conclusion

I would caution any company using a discount token model to think carefully about the level of discount they are providing. Pure startups will not know their revenue and costs, and may be excited to attract investors by offering high discounts that they may struggle to live with.

These three discount token models each have their place, and when properly applied, can serve you during the investment period and through the lifetime of your business. Carefully deciding which to use, and what level of discount to apply, is the art of token design.

Resources

Clayton Roche is an investor image consultant and token designer based in SE Asia.