Dual-Token Economy and Model: Definition and Framework

Overview of the dual-token economic model

Traditionally, most cryptocurrency companies and projects launch a token. Some, like layer 1 and layer 2 blockchains, use it for transaction fees. Others, like most decentralized apps and DAOs, use them for governance. 

Dual Token Economy Model Definition
Dual Token Economy Model Definition | Source: Medium

However, some protocols have embraced a dual-token economic model. This straightforward model involves the issuance of two distinct tokens, each serving a unique purpose. 

That’s exactly what Axie Infinity did when creating their project. They minted two separate tokens: SLP and AXS. SLP is used as the in-game utility token, while AXS is the governance token of the ecosystem. 

This approach simplifies understanding the entity’s economic functionality, particularly for those new to the cryptocurrency space. The dual-token economic model has demonstrated its effectiveness in mitigating risks for investors. 

By separating the entity’s functionalities into two tokens, the impact of any changes or issues is contained, providing a more stable investment environment. 

Explanation of the concept and its significance in cryptocurrency

Benefits of Dual Token Model
Benefits of Dual Token Model | Source: Accubits 

The concept was first adopted in 2017 after the ICO boom in the United States. Many companies have used it, but the most prominent one remains until today, MakerDAO.

The protocol uses MKR as a governance token, allowing holders to vote and propose new laws. The DAI stablecoin is a stable store of value and a utility token in the ecosystem, facilitating lending and borrowing. 

This concept was created in 2017 to avoid regulatory problems associated with issuing a token that could be classified as a security token. 

This approach lets companies continue raising capital through ICOs without being flagged by the SEC as unlawfully selling securities. 

Implications for the future of cryptocurrency ecosystems

There’s a big chance that the dual-token economic model will be used more often in future cryptocurrency ecosystems. Besides the reduced risk for investors, this model allows protocols to control the economics of tokens in more detail. 

Platforms can regulate each token’s supply and demand dynamics by having separate tokens, providing greater flexibility. This, in turn, will create a healthier economic stance for investors and participants. 

Differences between primary and secondary tokens

Decentralized protocols and applications have two main reasons to issue a coin: governance and utility. 

With governance, people can vote on proposals, create new laws, and essentially participate in developing a protocol. 

When it comes to the utility, every given project can implement any utility in its token. However, most use the tokens for staking, paying transaction fees, and giving holders additional bonuses. 

Binance, for example, uses its BNB token to offer reduced CEX fees and pay transaction fees on its separate blockchain, BNB Chain. 

References

Dimitri, N. (2022). The Economic Value of Dual-Token Blockchains. Mathematics, 11(17), 3757. https://doi.org/10.3390/math11173757