Discount tokens are one of the new innovations made possible at a large scale within a blockchain based token economy. In short, discount tokens are digital assets that give their holders a specific claim to receive discounts on purchases of products or services from an organization — such as an enterprise, a cooperative, or a blockchain network. Unlike gift cards, discount tokens are not invalidated when used but remain active and in possession of the holders. The specific size of the discount that the token delivers for its owner is designed to grow in proportion with the overall utilization of the network. The discount token itself allows the holder to access the discount.1
This can be seen as a royalty model but instead of claims to a fixed stream of revenue, it’s rights to receive a proportion of total services offered. Given the growth in economic activity on the network, the owner may utilize more discount on the service they receive directly or sell/share the surplus. While simple in its essence, 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 thus work to discourage unconstructive price dynamics seen in other classes of crypto assets. The discount is fundamentally linked to the adoption and growth of the network.
The discount token enables next generation, technology-enabled mutual companies, and cooperatives while working to reduce speculation. While tokens themselves allow for transactions, capital formation, investment, and speculation, the discount token model is an interesting way to incentivize the growth of a crypto-powered network. The discount token is loyalty to the growth of the network, and not just for pure speculation because it is always better to hold a discount token if you are a user of the network rather than simply a speculator. This creates alignment between the customer and the provider that doesn’t occur with shareholders, with loans or bonds or other classical financial instruments used.2
The discount token model is applicable to a broad range of business models. Businesses that most benefit from it are those that desire and expect significant long-term business from its customers through ongoing subscriptions, recurrent fees, or frequent repeat purchases. For such dedicated customers the discount that the token offers means real money to them, but for others that have no great interest or use of the network, the token will have limited value.
The SweatBridge blockchain project is one of the strongest proponents of the model of a discount token. In their paper, they write about the reasons for using a discount token over a simple utility token.3 “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.”
Discount tokens are a good illustration of the kind of economic and financial innovation that is being unleashed with token economics. It is not just about making things faster and more efficient but discount tokens illustrate how we can really think about basic economic structures and incentives and then build currencies that work in totally different ways to the ones we have today, in so doing try to solve major economic issues – such as excessive financial speculation and better rewarding those that are actually interested in the development of the given economic network’s functionality.