Sweetbridge’s CEO Scott Nelson, Aleksandr Bulkin, and Michael Zargham proposed the discount token model, in which token holders get perpetual discounts on services. The idea was first defined in the Sweetbridge discount token whitepaper, “Raising Social Capital: Tokenizing a Customer-Driven Business An Introduction to Discount Token Economics.” Here’s how the paper defines discount tokens:
In brief, discount tokens are digital assets that give their holders a limited right to receive discounts on purchases of products or services from an organization — a company, a coop, or a blockchain network.
The authors of the paper hoped “that the introduction of a straightforward discount token archetype will foster responsible decentralized product development efforts, clarify regulatory concerns, drive greater transparency, and create better incentive alignments as compared to the older frameworks.”
In such a model, the token holder’s discount is mathematically equivalent to a revenue or free royalty when you use the services. Discount tokens can be applied to a broad range of decentralised organisations and networks, and they better align incentives between all investors, creators, and consumers than other token models do, claim proponents. Here’s how the now-defunct Sweetbridge explains the concept in the context of the overarching token space:
…It is clear that blockchain-based economic models offer an infinite design space with respect to incentive models within innovative organizational structures, and so responsible experimentation with token economics should be encouraged. As creators who desire to be both responsible and compliant, we find ourselves in search of a class of token economics that would (1) underlie a broad range of decentralized organizations and networks; (2) align incentives between investors (both early and late), creators, and consumers; (3) be demonstrably distinct from securities and Ponzi structures in the incentives they generate; and (4) align with existing regulatory precedent.
The discount token framework is designed to meet these requirements; while simple at its core, it has profound implications. In a discount token economy, creators and users of the network are clearly aligned, while passive investors and speculators find themselves at an economic disadvantage. This is because discount tokens are more economically valuable to users than passive investors and will discourage unhealthy price dynamics prevalent in other classes of cryptoassets.
In a discount token network, investors and speculators are placed at a disadvantage compared to the creators and users. In short, discount tokens are more economically valuable to users than passive investors. Discount tokens have a use that makes them more like property, such as residential real estate, than investments such as stocks. The user of a discount token receives both the value of ownership and the value of using the token to save on a product or service.
Many types of business models can incorporate a discount token, including those which require a significant investment in development of intellectual property, asset purchases or in need of long-term business from its customers through ongoing subscriptions, recurrent fees or frequent repeat purchases. A wide range of companies could incorporate a discount token. Sweetbridge, which believed that transitioning the backend of our economy with discount tokens would create a more efficient and decentralized world, highlighted a software-as-a-service (SaaS) business to demonstrate discount token economics:
As applied to an SaaS business, the tokens capture a share in the active use of the software, and thus their value is drawn from and realized by the use of it. A discount token is well-defined, even when the software provided is itself centralized and is thus particularly suited to crowdfunding projects the MVP of which consists of a centralized version of an application being iteratively decentralized.
Discount token holders save on purchases of products or services. When you own a discount token, you enjoy perks, such as discounts on transactions. One real world parallel might be sky miles. When you have sky miles, you save on plane tickets. There’s one key difference. While sky miles are spent or invalidated, discount tokens are not. The holder keeps them and enjoys increasing perks with each token over time. Sweetbridge continues:
The specific size of the discount that each token realizes for its owner is designed to grow in step with the overall utilization of the network. However, the maximum discount customers can receive is limited to a given percentage, which could sometimes be as high as 100%, making services effectively free for some. Notwithstanding the fact that some users may receive free services, the discount token model ensures that the total discounts networkwide never reach 100%, and thus the network always has sufficient funding to operate.
A discount token provides its owner with increasing discounts the more it is used or the more the holder acquires. In one model, a discount token could ensure services are discounted to the point of being free. In general, however, discount token models generally ensure total discounts never reach 100% across a network in order to ensure a network always has sufficient funding at its disposal.
The discount token model allows any transaction currency to be used, including ether, bitcoin, or another medium of exchange. The discount tokens incentives early adoption. Non-token holders might still access a discount token product in exchange for cash or crypto. In token structures other than the discount model, the network’s token is the only transaction currency used to access a given network. In these types of networks, the token appreciates as use of the network increases. Users, however, might not use a utility token in this model if they expect it to fluctuate in price and therefore create opportunities to profit from speculation.
Since a holder who expects a token to appreciate might hold said token, as opposed to spending it on a platform’s products or services, the discount token purposefully disincentives users from speculating. Instead, the discount token model incentivises users to hold the token in order to gain the benefits of a network and from the token’s increased value as said network grows. Early adopters, in particular, gain from network growth in the form of increased value of the discount token.
Discount tokens provide their holders access to the network and allow early users to benefit from the network effects generated as the product gains traction. Here, for every dollar spent by early participants, the discounts realized later in the network’s lifetime grow if the network utilization grows.
As demand for a discount token increases, and therefore conceivably its price, early adopters receive not profits, but increased access to the service. Discount tokens have both a use value and a resale value. The latter is accessible only to active holders. Sweetbridge foresaw that passive holders and speculators would be less inclined to hold these assets, because users realise value not available to speculators. As passive speculators hold the token, the more the users benefit due to tokens not being active in the system, which lowers the supply relative to demand.
As a growing user base demands the token, the discount token gains in fiat value without driving up the price of the services or products being provided. Early adopters can access the service and give or sell the service to others, “effectively making them co-owners of the network.” The network effect value is shared with the early investors in the form of increased access to the service.
Since discounts are linked to the growth of the network, they can increase along with adoption. Early adopters can access a service while also giving or selling their discount tokens, which effectively represents the service. The designers of the discount token model, Sweetbridge, argue this lifts holders to the status of co-owners on the network.
In a discount token design, the term “discount” means a fixed proportion of future network-wide use. The discount token represents a right to use that proportion. As economic activity grows, the owner might enjoy greater discounts or take profits by selling the token on the resale market.
In essence, the discount model offsets the costs of being a user. These perks help grow an organisation, platform or project. Overall returns to the active token holders (users) outweigh the returns to passive token holders (investors). That’s because the full value of the discount can only be realised via use of the product.
The discount token enables holders to use the discount, and fees don’t need to be paid in the discount token. That fees don’t need to be paid in the discount token tightens the supply of the discount token, which bolsters growth of the issuers platform or project. Aleksandr Bulkin compared discount tokens and utility currencies:
Consequently, an investor holding discount tokens for passive appreciation is by definition underutilizing them, only able to capture their resale value, but not the discount value.
The model can be applied to a diverse set of decentralised organisations and networks. It aligns incentives between investors (both early and late), creators, and consumers, and complies with securities law. The inventive incentives structure puts creators and users of a discount token first, and passive investors and speculators second.