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MakerDAO Polls Users on Fresh Fee Increase to 7.4 Percent as Stablecoin Wobbles

The move follows several fee hikes aiming to improve the dollar peg of Maker’s Dai stablecoin.

Decentralized Autonomous Organization (DAO) MakerDAO (Maker) has upped its demands to increase one of its network fees, this time to 7.5 percent, the company confirmed in a blog post on March 18.

Maker, which issues USD-pegged stablecoin Dai (DAI), is seeking to improve the cryptocurrency’s stability.

The organization aims to do so by raising its so-called Stability Fee, a charge levied by Maker participants when Dai is used for loans on its network.

As Cointelegraph reported, March had already seen a governance poll ask users to approve a fee hike of up to 5.5 percent, which users subsequently approved. A new poll, which began March 18 and will run through March 21, wants to boost this figure yet again.

“Based on last week’s governance call, the MakerDAO community is moving forward with a Governance Poll to gauge sentiment for an additional Stability Fee increase,” Maker explained in the blog post.

Developers had previously stated that earlier increases had not impacted negatively on the Maker ecosystem.

Speaking to tech news publication BreakerMag, CEO Rune Christensen continued the calm tone over Dai, admitting its inexact dollar peg would likely continue.

“It’s never exactly at $1. You can always buy it for slightly above $1 and sell it for slightly below. But it’s much closer to $1 now,” he said.

At press time, Dai was trading at $0.9938 per coin, while Maker’s MKR averaged around $706.30 on major exchanges.

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MakerDao Users Vote to Raise Stablecoin DAI’s ‘Stability Fee’ by 2%

Decentralized Autonomous Organization MakerDao will raise the DAI stability fee by 2% to 3.5%, according to the results of a recent vote.

Users of blockchain organization MakerDao (Maker) have voted to raise the so-called stability fee for Maker’s Dai (DAI) stablecoin to 3.5 percent, according to the results of a recent poll, completed on March 7.

MakerDao, a Decentralized Autonomous Organization (DAO) based on the Ethereum (ETH) blockchain, first opened voting on the matter to users on March. 4.

Accordingly, the firm announced on Thursday that users had voted yes to the proposal to increase the stability fee by 2 percent — from 1.5 percent to 3.5 percent — “ until the trend in the [Dai’s] peg has been corrected.” According to Maker, one of the key factors behind proposing the increase was that Dai’s $1 peg had been slipping, with the coin’s price trading below the price mark on exchanges.

DAI is a ERC-20-based stablecoin that is designed to maintain 1:1 peg with the U.S. dollar. Dai is partly used for loans through a Maker-managed structure collateralized debt position (CDP).

In the proposal, MakerDao stated that “incentivizing CDP closures through a Stability Fee increase (thereby reducing outstanding Dai) is strongly viewed as the appropriate action.”

The proposal also notes that the stability fee was already increased twice in February, each time by 0.5 percent. However, according to the proposal, the effect of the combined increase of 1 percent was negligible.

Maker’s governance utility token MKR is currently ranked 16th largest cryptocurrency on CoinMarketCap. The token is down around 1 percent over the day, trading at around $675 at press time.

For its part, DAI is trading at $0.991 at press time, down a fraction of a percent over the past 24 hours.

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MakerDAO Users Vote on ‘Stability Fee’ Increase as DAI Stablecoin Peg Wobbles

The plans, which would continue a practice begun in February, aim to shore up the exchange rate of USD-pegged Dai.

Decentralized Autonomous Organization (DAO) MakerDao (Maker) will let users vote on whether or not to raise a fee used within its Dai (DAI) stablecoin, the organization confirmed in a blog post on Mar. 4.

Dai, which is a USD-backed stablecoin, is different from Maker’s utility token, MKR, which is trading at $678 by press time. The stablecoin DAI is in part used for loans via a structure administered by Maker known as a collateralized debt position (CDP).

Now, in order to correct trailing exchange rates for Dai, which have dropped below $1, developers want to introduce a hike in the fees Maker collects when Dai is created through said CDPs.

Known as the “Stability Fee,” the current cut is 1.5 percent, having risen from 0.5 percent in February.

However, this time the fee could subsequently rise as high as 5.5 percent, depending on the success of an initial hike to 3.5 percent, which users will vote on this week.

“Informal discussions with several large Dai market makers have suggested that inventory levels have run high, and balance sheet capacity has diminished,” the blog post explains, continuing:

“Informal polling through various community channels has also shown strong support for an increase.”

Maker suggests the impact of fee increases will not be off-putting, and could even be temporary, depending on future market conditions.

The MKR token rebounded significantly in price through last month, after hitting lows of $364 on Feb. 1. The token is currently the sixteenth-largest cryptocurrency by market cap, according to CoinMarketCap.

At press time, DAI is trading at $0.99, down about half a percent on the day.

As Cointelegraph reported, in September 2018, American venture capital fund Andreessen Horowitz invested $15 million in Maker, acquiring 6 percent of the total MKR token supply.

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The 'Dark DAO' Threat: Vote Vulnerability Could Undermine Crypto Elections

Malicious cartels just might be lurking on your blockchain.

At least, that’s the latest finding from Cornell University researchers Philip Daian, Tyler Kell, Ian Miers and Ari Juels, who reached the conclusion in a paper published last week on a vote manipulation scheme it termed a dark decentralized autonomous organization, or “dark DAO.”

Describing the dark DAO as an entity set up using smart contracts, it would be undetectable, buying users votes in order to overwhelm governance systems, issue false signals or engage in market manipulation. According to the paper, such an attack would have far reaching-consequences in that it’s applicable to any project that uses a form of governance in which those who own the coins would have a say in decisions.

Adding weight to the finding, is that this distinction applies to an increasingly large amount of cryptocurrencies, including those with valuations in the billions.

Projects like EOS, Tezos, Tron, Decred and Polkadot, for instance, have all deployed various forms of blockchain voting in an effort to formalize decision-making on their software.

Several of these systems rely on a technology called delegated proof-of-stake, which requires a certain number of nodes to be chosen to validate transactions on the network. As such, token holders are allowed to stake their coins – basically posting them to the blockchain to prove they control them – in an effort to make their votes go further.

Others seek to overcome the governance hurdles faced by major blockchains by allowing stakeholders to vote on technical changes – or what Tezos calls a “self-amending crypto ledger.”

And while some of these projects have already hit roadblocks in their experimentation, according to the Cornell researchers, a dark DAO could cause havoc in a way that surpasses what’s happened in the past.

“The whole decentralization enterprise is founded on democratic ideals, so voting seems a natural governance mechanism,” Juels told CoinDesk. “Unfortunately, it’s hard to get right and until a catastrophe occurs, people tend to assume that theoretical problems won’t materialize.”

The co-author pointed to The DAO hack in 2016, where a malicious user drained 3.6 million ether from the first DAO built on ethereum, adding:

“In a post-2016 world, the fact that election systems can and will be subverted should be crystal clear.”

Past precedent

According to the researchers, this particular dilemma is another case where entrepreneurs in the blockchains space seem to be turning a blind eye to past analysis.

Ethereum founder Vitalik Buterin and ethereum researcher Vlad Zamfir, for example, have criticized on-chain voting mechanisms as “plutocracies,” whereby the wealthy – those that own more coins – rule.

The paper states:

“The blockchain space today, with predictable results, continues its tradition of ignoring decades of study and instead opts to implement the most naive possible form of voting.”

According to the paper, a dark DAO works by essentially dominating voter participation, which is especially disconcerting since many of these votes have suffered from low turnout.

One of the “attack flavors” the paper describes is that of the impact of “trusted hardware.” Because such hardware allows computation to occur in an “enclave” or private setting during which time it’s still submitting proofs, the authors argue this would allow nefarious actors to participate in the attacks without their identity being revealed.

This also means that the manipulated votes couldn’t be detected either.

“Potentially nobody, not even the DAO’s creator, can determine the DAO’s number of participants, the total amount of money pledged to the attack or the precise logic of the attack,” the paper states.

Such a cartel could overwhelm a cryptocurrency, “covertly collecting coins until it reaches some hidden threshold, and then telling its members to short the currency,” it continues.

More attacks

But that’s not to say that systems different than those employed by on-chain governance blockchains are particularly safe either.

For instance, the researchers also detail a bribery attack that could be committed against ethereum’s signaling tool, called Carbon Vote. (A proof of concept for the attack was published to correspond to the release of the paper.)

In this example, a smart contract simply offers to buy votes and can do this in a private or a public way.

The blog post warns that as blockchains begin communicating with each other – also known as interoperability – such incentive-based attacks between competing blockchains are likely to become more frequent.

“In a world with only one smart contract system, ethereum, internal incentives may lead to stable equilibria,” the paper states, adding:

“With two players, and the underdog incentivized to launch a bribery attack to destroy their competitors, such equilibria can be disrupted, changed and destroyed.”

While Jake Yocom-Piatt from Decred acknowledges that these kinds of attacks stand to be highly problematic in the future, the issue is one for both systems that deploy both on-chain and off-chain voting mechanisms.

He told CoinDesk: “It is difficult to defend against vote buying, and it is currently an open research topic how to best defend against it.”

Mitigating the threat

Speaking to CoinDesk, representatives from several on-chain governance projects – Decred, Polkadot and Tezos – said a crucial defense strategy is to raise the cost of attack.

Arthur Breitman, co-founder of the Tezos project, said, “At the end of the day, the only viable protection mechanism is ensuring that decisions involve sufficient skin in the game to ensure accountability to the network.”

Breitman also said that research into futarchy, in which decisions are made by future markets, could help on-chain governance going forward.

But according to the paper, the only defense against such attacks is more trusted hardware, “to know a user has access to their own key material (and therefore cannot be coerced or bribed), some assurance is required that the user has seen their key.”

Still, Juels noted that the reliance on trusted hardware will seem “anathema to a lot of the cryptocurrency community.” As such, he suggested the possibility of “social mitigations” or “community-implemented deterrence to election subversion.”

However, he and Daian warned of the complexity here.

“The mitigations for such threats are primarily social, in many cases imperfect, and in many cases likely complex enough to introduce additional vulnerabilities or attacks,” Daian told CoinDesk.

According to Daian, oversights of this type are common within the industry:

“In general, the blockchain space is extremely myopic: many of the ideas currently being put forward are not sustainable long-term, and only work because the systems being secured are either small or uninteresting to sufficiently motivated adversaries.”

Yet, the Cornell researchers plan to publish another article soon to discuss other available schemes that could eliminate, or at least diminish, the chance of these attacks being perpetrated.

Daian said, “I would strongly caution against direct reliance on any voting scheme vulnerable to vote buying or coercion in decision making.”

Not scared of the dark

Still, while ominous, other researchers don’t seem particularly fazed by the paper.

Griff Green from Giveth, an ethereum-based charity organization, said that little experimentation has gone into smart contract-based autonomous organizations since The DAO hack in 2016. As such, the likelihood that a group has created a dark DAO is slim, according to him.

“DAOs are built to decentralize decision making across stakeholders over shared resources. If that shared resource is ‘circumventing an on-chain election’ then sure, of course, it might be done one day, but we don’t even really have DAOs out in the wild yet,” he told CoinDesk.

“There is no foundation to really draw any conclusions on how DAOs can be used to circumvent other DAOs in their own elections,” he continued, dismissing the paper as “mental masturbation.”

Luke Duncan from Aragon, an ethereum application for building DAOs, seemed similarly calm.

While he admits the connotation around dark DAOs is negative, the industry is interested in protecting the privacy of organizations or individuals using the technology, so looked at in a different way, the research could point to positives.

He added:

“With any of these powerful technologies there’s how it can be used for useful applications and censorship resistance and then how people can use the same techniques to do more nefarious things.”

Dark water image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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EOS CTO Proposes Rehauling Constitution as Disputes Over Governance Continue

Chief Technical Officer (CTO) of blockchain protocol EOS Dan Larimer has proposed rehauling the project’s existing constitution to limit so-called arbitrators’ powers, in an EOSGov Telegram chat today, June 27.

Larimer’s proposal comes in response to recent controversies surrounding the structure of governance on the EOS blockchain, in which three distinct groups work to ‘keep one another in check,’ as defined by the project’s current constitution.

These three groups in the EOS ecosystem are the so-called Block Producers (BPs) – the equivalent of miners on the Bitcoin (BTC) blockchain – the arbitrators (EOS Core Arbitration Forum (ECAF)) and Token-Holders.

The ECAF in particular has drawn criticism over the reportedly opaque nature of its role and powers, thrown into relief by a series of mishaps that have occurred since the EOS mainnet first went live June 15.

In the recent Telegram discussion, Larimer argued that “forcing people into an unknown arbitration system for undefined reasons is a fast way to cause people to run.

He proposed that arbitrators’ role should be limited to cases where there is a “strong foundation with very clear and defined failure points that can be arbitrated” – in his opinion, only where there is a “code – intent mismatch.”

June’s arbitration mishaps have caused an outcry from prominent crypto industry members, including Charlie Shrem and Nick Szabo.

One recent incident saw the Block Producers reportedly receive an emergency ECAF order to refuse to process transactions for 27 accounts – “pending further review of the claims by an Arbitrator,” with the “logic and reasoning” for the order to be posted at a later date.

On June 24, EOS BP New York said it could not “with confidence execute any subsequent statements claiming to be a valid ECAF opinion,” after a further – apparently fake – ECAF order had been issued.

As Dogecoin creator, Jackson Palmer, remarked on Twitter yesterday, Larimer is effectively today suggesting to “scrap[…] the entire [EOS] ‘constitution’ and start[…] over.”

Crypto persona WhalePanda said the proposal was basically “a similar governance model like $ETH where the foundation bails out big losses/hacks/DAO-ish events… but more centralized.”

Since going live this month, the EOS network has faced technical issues, on top of the furore over arbitration matters.

EOS is currently the fifth largest cryptocurrency on CoinMarketCap, with a market cap of $7.2 bln. The coin has seen an over 4 percent growth over the past 24 hours to press time, trading at $8.07.

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Vitalik Buterin Talks About DAO Like Forks, Sharding and More

Vitalik Buterin, one of the most important figures in the cryptocurrency world, and Ethereum’s founder, talked about scalability, forks and more. During a meeting at the Wang Feng’s Ten Questions show he said that Hybrid Casper may still launch before sharding.

The main intention was to create Casper as a smart contract on Ethereum, to make the design as easy to build as possible. And at the same time, the team was going to keep working on sharding.

Buterin commented about it:

“The new roadmap is still ‘Casper then sharding,’ but the first version of Casper is modified so that it is ‘along the way’ to a full Casper and sharding implementation.”

At the moment, there is no estimative date for when casper or sharding might be launched.

Vitalik Buterin

Fred Wang decided to ask about what a BTC core developer said about migrating their code to platforms like GitLab.so. Buterin explained that, for him, it is very unhealthy when companies see their business model as being VC followed.

“At this point, I think it is very possible that Ethereum will never see any more coin recoveries, because there are enough cases that are politically contentious that any attempt to set a bar will lead to people just below the bar complaining that they were not included,” commented Buterin.

Back in November 2017, Ethereum’s second most popular client, Parity, has been hacked and 500,000 ETH have been blocked. At the time of the hack, these ETH were worth $150 million dollars.

In order to unlock the frozen funds, Parity explained that they backed the idea to make a hard fork if the community decided to support it. But even at this moment, Vitalik Buterin did not like the idea. Instead, Buterin stated that the best solution was to allow private key holders to withdraw their Ether.

But then, he explained that there is a possibility to see a ‘cleanup’ of the chain to restore some funds.

“Though it is also possible that when we move to sharding, there will be some kind of one-time ‘cleanup’ of the public chain that will restore funds to as many people as possible. That said, I do think tit is my place to make that decision or even heavily influence it,” he commented.

Moreover, he gave his opinion about the future of the cryptocurrency space. He said that he would like to see a stabilized industry and more projects working in order to have better products.

Buterin stated:

“I expect that over the next few years the industry will stabilize, and we will see fewer tokens issued and more projects that pay more attention to providing value, and there will be more correlation between fundamental value and price.”

At the moment of writing this article, Ethereum (ETH) is the second most important cryptocurrency in the market, being traded around $450 dollars at press time. In general the virtual currency market is operating in a downtrend and most of the assets are losing between 3% and 10%.

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Ethereum Classic Upgrades Network Protocol to Ensure Mining Remains Viable

Ethereum Classic (ETC) has now successfully implemented a protocol upgrade that will ensure that mining remains viable in future, according to ETC Block Explorer data yesterday, May 29.

The fork, dubbed ECIP-1041, has removed the so-called “Difficulty Bomb” feature from the ETC network at block 5,900,000. The ‘bomb’ was a component of the original Ethereum (ETH) code that was designed to exponentially increase the difficulty of mining to the point where it would become impractically slow, thereby triggering the need to transition to a Proof-of-Stake (PoS) consensus algorithm. This feature has commonly been referred to as the ‘Ethereum Ice Age,’ because it would essentially ‘freeze’ block validations.  

Ethereum Classic formed after Ethereum hard-forked from the original blockchain in 2016 over disagreements in how to handle the DAO hack.

The ECIP-1041 protocol upgrade will not result in an AirDrop, nor in the creation of a new token.

For its part, in October 2017 Ethereum acted to postpone the difficulty bomb by over a year, as the Foundation continues to lay the groundwork for the transition to its hybrid PoS system, Casper.

Once Ethereum moves to PoS, ETC’s network – which reportedly has no plans to transition to PoS – could potentially hope to inherit a significant part of the mining hashpower dedicated to ETH in its current form.

The PoS-PoW debate continues to divide the crypto community. Just this week, a Brazilian researcher calculated that it could take just $55 mln to hack Ethereum Classic’s network to make $1 bln profit, arguing that the network’s PoW algorithm was more vulnerable to a 51% attack than previously assumed.

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PBoC Director Bullish On Blockchain, But Sees Potential In More Centralization

The director of the Institute of Digital Currency at the People’s Bank of China (PBoC), Yao Qian, believes that while Blockchain has benefits, its shortcomings need to be resolved in order for it to “become the financial infrastructure of the future,” according to an opinion piece by Qian published by state-owned media outlet Yicai today, April 27.

After listing the benefits of Blockchain technology – its security, reliability, use of smart contracts and a peer-to-peer system – Qian notes that “it is precisely because the blockchain technology mainly served Bitcoin in the early stage [why] in some aspects it has obvious shortcomings and deficiencies.” The main problems, according to Qian, are an inability to scale and needs for improvement of data privacy and the governance mechanism.

In the opinion piece, Qian writes that since the “public chain cannot be ‘shut down,’ it’s error repair is also extremely tricky”:

“Once a problem occurs, especially a security hole, it will be very deadly.”

If one relaxed the decentralization of Blockchain, “many problems could be solved,” Qian notes:

“For example, in a multi-center system such as a coalition chain, upgrading the bottom of the blockchain by shutting down the system, or emergency intervention, rolling back data, etc., are available means when necessary. These methods help to control risks and correct mistakes. For regular code upgrades, controllable intelligent contract replacement is achieved by separating code and data, and combining multi-layer smart contract structures.”

Qian references the DAO hack of 2016, when around $60 mln in Ethereum (ETH) was stolen, as highlighting how when problems arise, they “cannot be repaired by shutting down the system and centralizing upgrades as a centralized system does.” The lack of centralized governance mechanisms also means that “problems can only be resolved through soft forks or hard forks, which will eventually lead to confusion and division.”

In the future, Qian sees “various blockchain systems hav[ing] different levels of decentralization to meet the specific needs of different scenarios.”

Solutions to the problems that Qian has identified in the current state of Blockchain technology are a potential addition of the verification methods used by military control systems or chip design, as well as “avoid[ing] human errors as much as possible through mathematical proof.”

Qian concludes by writing that “the blockchain belongs to the public and serves the public interest”:

“The blockchain should not be owned by anyone, let alone a small fraction of the super-rich. Therefore, some people are opposed to the governance of the chain.

Overall, the governance mechanism on the chain is still in the process of controversy and exploration. There is not yet a unified opinion and we need further attention and research.”

Cointelegraph recently reported that the election of a pro-market economist to head the PBoC could have a positive impact on the Chinese cryptocurrency sector. Qian also notes that Chinese president Xi Jinping recently spoke of the need for China to focus on tech development:

“We must resolve to maintain our perseverance, identify the focus, and accelerate the promotion of core technologies in the field of information.”

In early March, the now-former head of the PBoC said that Blockchain technology should not “spread too rapidly” in order to prevent a negative effect on financial stability. The new governor, Yi Gang, who was appointed in mid-March, is reported to have spoken positively of Bitcoin, calling it “inspiring” and stating that it gives “ordinary people [the] freedom to participate.”

The debate over whether Blockchain and Bitcoin as entities must always go together was raised earlier this month by the CEO of Lightning Labs, who challenged the “Blockchain over Bitcoin” narrative. The separation of the two concepts has been practiced by central banks like the Reserve Bank of India, which promotes Blockchain innovation while saying that cryptocurrencies can destabilize the traditional financial system.

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Ethereum Proposal To “Resurrect” Disabled $360 Mln Parity Contract Shut Down

A week-long vote on a proposal in regards to the Parity hack wallet reversal, which proposed to restore a disabled contract to unfreeze 587 wallets holding 513,774.16 Ethereum (ETH), has ended with a majority “no” vote today, April 24.

In November of last year, a Parity user “accidentally killed” the Parity multisig library by activating a vulnerability to become the owner of the library, and then self-destructing it. Prior to that, the library had been “fixed and re-deployed” with the vulnerability after Parity was hacked of around 150,000 ETH in July 2017.

In response to the accidental freezure of the ETH funds, Parity wrote in a blog post that they are working on Ethereum Improvement Proposals (EIP) that could propose ways to unblock the funds.

EIP-999 presented on April 4 and written in regards to the frozen ETH “suggests restoring the WalletLibrary by a patched version to allow the owners of the dependent multi-signature wallets regain access to their assets.” EIP-999 received 330 “no” votes, 300 “yes” votes, and 9 “don’t care.”

Voting was a “coin vote,” which in this case allowed those with the dead, affected wallets to be able to vote with the ETH in those wallets just by signing the message, according to a Reddit post by user x_ETHeREAL_x. Before the vote was over, x_ETHeREAL_x posted that “the reason “yes” is winning has nothing to do with community sentiment”

“It is Parity, the original ethereum foundation members now part of parity, and even their own self-destructed wallet voting. Do not be fooled — this has nothing to do with “community” sentiment!”

The debate over whether to return lost or stolen funds to users versus maintaining the immutability of the Blockchain has been around since the DAO hack of around $60 mln in June of 2016.

The subsequent fork to restore users’ money led to a split off of Ethereum Classic – which kept the money with the hackers – by crypto enthusiasts that believed a return of the funds via a fork shouldn’t be used in any case.

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Legitimising the ICO Token: Finding Utility Over Security

Startup fundraising, in the traditional VC methodology, was flipped on its head in 2017 when a boom in ICO creation saw hundreds of companies forming on the Blockchain with its attached digital currency being born in the form of an investable token. However, this crowdfunding platform which exploded at a rapid rate has finally been hauled in by regulators and authorities who have noticed a few worrying trends. Bodies like the SEC have had a closer look at the tokens coming out of ICOs and in most cases declared them securities.

Suddenly, what is essentially an attempt to fundraise is subject to federal laws and the company, which is supposedly trying to create something innovative with the help of Blockchain technology, is expanding vast amounts of energy just trying to be by the books. But, there is a way around this. Not all tokens being developed off the Blockchain need to be of a nature that leads them to being classed as securities. There are a few other types of tokens that can be built off the Blockchain, including utility tokens.

While there are more than just two types of tokens, including equity, work, share-like and asset-backed, it is important to hone in on two types that can be used to define a new token coming through an ICO- the utility and the security token. In understanding the difference between the two, ICOs can choose a direction that can work better for them on a path of least regulation.

Securities Token

Towards the end of July last year, the SEC, on catching up to the ICO craze, dealt a telling blow to ICO regulation going forward. Looking back at the DAO tokens from 2016, the SEC declared that ICO tokens may be securities and subject to federal securities laws.

It was never intended for ICO tokens to be securities, but SEC chairman Jay Clayton noted that every ICO token the SEC has seen so far is considered a security and explained that if a crypto-asset issued by a company increases in value over time depending on the performance of the company, it is considered a security. “You can call it a coin, but if it functions like a security, it’s a security.” He added:

“Prospective purchasers are being sold on the potential for tokens to increase in value,  with the ability to lock in those increases by reselling the tokens on a secondary market  or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.”

So, by definition, a security token can be found by employing the Howey Test. This test seeks to find if a token has the following attributes- does it offer an opportunity to contribute money and to share in the profits of an enterprise managed and partly owned by respondents? And, secondly, does the scheme involve an investment of money in a common enterprise with profits to come solely from the efforts of others?

Clearly, the most common tokens seen coming out of the majority of ICOs fall into this categorization and thus come under federal law.

Utility Tokens

On the flip side, there is another style of token that can serve a role in many cases where security tokens are being sought at the peril of the company insighting the ire of securities regulators. A utility token can be defined “to represent future access to a company’s product or service. The defining characteristic of utility tokens is that they are not designed as investments; if properly structured, this feature exempts utility tokens them from federal laws governing securities.”

There are already some highly successful utility tokens, as Vinny Lingham explains the use of utility tokens for Civic, his identity verification coin. “Civic has created one bln utility tokens that provide access to identity verification-related services in a decentralized, token-based ecosystem,” Ligham wrote on his blog. These tokens represent a unit of account for the network. The bigger the network grows, the more utility in the token,  and because the number of tokens is fixed. As the size of the network and transaction volumes within it grows, this will create demand for the tokens.”

As if to highlight the underutilization of utility tokens, it was reported that of 226 ICOs, only 20 are used in the running of their networks, that is to say, they are utility tokens, according to Token Report.  Storj is another example of a company that utilizes utility tokens, as their co-founder and chief strategy officer Shawn Wilkinson explains: “The Storj tokens we released allow people to use space on the network. We raised half a million dollars through the token crowdsale, and in 2015.” He adds:

“For many companies, utility appears to be an afterthought, but for a token to be successfully adopted into the community, it is the most critical component. With the amount of tokens on the market today, and new ones being launched every day, it’s clear there is a bubble, though the size of it might be debatable. When the market slows, the tokens that have no utility will ultimately not have any value at all.”

Utility tokens can be further explained as coupons for the company and the service it is developing. A real-world example is something like retailers accepting pre-orders of video games that have not been released. It is a token that differs from the usual ICO token that many are used to, and while it is not a perfect fit for every company, there already have been instances where utility tokens have filled a role in place of security tokens letting the Blockchain solution focus on its primary goal. This was seen with Filecoin which raised $52 mln.

Choosing utility over security

Of course, as easy as it sounds, choosing a utility token over a ‘normal’ security token to avoid the SEC, there is more to it than that. Some companies will rely on the securities nature of their token, but the standing on it is, there are a lot of companies that won’t.

There are an array of different types of utility tokens, each with different characteristics that could encompass an ICOs’ needs. If the company cannot find a place in any of the below categorizations, then they have a case for building a securities token. However, if the token can fall into them, then really, there is no need to create a new native token which could lead them through a regulatory minefield. It is first important to divide tokens into fungible or non-fungible.

Utility fungible and non-fungible tokens

These types of tokens are ones which are simply interchangeable for one another. The fungible nature of it means that the asset, good or token is interchangeable with one of equal value, and it does not matter about its individuality. Gold is often cited as a fungible asset as an ounce of gold, regardless if it is in coins, ingots or dust, is still worth the same thing.

Thus, in terms of a fungible utility token, where they are interchanged for one another, we can see more categorization. For instance, on the Blockchain, there is the possibility for the System Incentive Token, which essentially are used to get people on the network to perform a desired behavior. A company that bases its ICO around this operation does not need a native app and can operate with a host of other tokens.

The same goes for a voter token which is another situation where Blockchain and tokens come into play, but again, there is no need for a native securities style token for this. These governance tokens enable those on the network to vote, and clearly, a utility token is sufficient for this. In a similar vein, membership tokens are also classic examples of utility fungible tokens as again, the token is just being used to access the platform, and utilize the services.

On the other side of assets, a non-fungible item is one that is unique, such as land, or in the Blockchain space- CryptoKitties.Utility Non-Fungible Tokens are thus mostly used to determine ownership of a specific token or digital asset. So, with a number of ICOs, on face value, clearly fitting into the above-mentioned categories, one has to ask why they decided on a native securities-style token which will lead to regulatory pressures?

Beyond the definition

The definitions of security token and utility token, and even the other ones which are a little more niche are still definitions from a pre-Blockchain era.

Dejun Qian, founder of Fusion and the creator of QTUM, which currently sits in the top 20 on Coinmarketcap, explains that tokens are still a very new and unique Idea, and while people try and pigeonhole them, they should really be defined individually.

“The reason people try to figure out if token is a security or a utility is because people are thinking which laws the token needs to be compliant with. When people say that the token is a utility, it means that the token is designed and embedded in the Blockchain infrastructure. Naturally, it can then serve as a very important part in the Blockchain. It is very creative and can then also provide a lot if different opportunities for the Blockchain.”

But in Qian opinion, we should transcend the bold security vs. utility perspective: “On the other side, there is the token which is regarded as a security. We have current laws covering the securities industry, and there are a lot of things we need to comply with, so people think about it in a similar way. I think we need to put more effort on the utility side, and even something else far beyond only security vs. utility. Because from my perspective, tokens are neither security or utility, it is a new thing and we cannot put a new thing in an existing framework, to determine what it is.”