The Future of Utility Tokens Under an Expanding Howey Test

Protocols like Uniswap and Compound created the governance token standard, but voter apathy is endemic. Low participation (<5% of token supply) makes them a weak utility argument against the Howey Test.

• Key Benefit 1: Realigns token utility with core protocol activity, not just signaling.
• Key Benefit 2: Creates a verifiable, non-financial consumptive use case.

Pioneered by Livepeer (LPT) and The Graph (GRT), this model requires staking tokens to perform network work (transcoding, indexing). Revenue is earned in the native token, creating a service-for-payment loop.

• Key Benefit 1: Utility is provably consumptive—tokens are burned/delegated for a service.
• Key Benefit 2: Creates a circular economy independent of secondary market speculation.

Tokens that offer a simple fee discount (e.g., early models) are a weak utility. The SEC views this as a mere rebate on a service, failing the "efforts of others" prong as value accrual is purely financial.

• Key Benefit 1: Highlights the insufficiency of passive financial benefits as a defense.
• Key Benefit 2: Forces a deeper integration of the token into protocol mechanics.

Protocols like Frax Finance (FXS) and MakerDAO (MKR) use protocol revenue to buy and burn tokens or distribute fees directly to stakers. This ties token value to protocol performance, not just discount access.

• Key Benefit 1: Creates a direct, verifiable link between protocol revenue and token holder value.
• Key Benefit 2: Shifts narrative from 'discount' to 'equity-like' value accrual through deflation.

Simple token staking for inflationary rewards is the epitome of the Howey Test. The expectation of profit is derived solely from the work of the protocol developers and the broader ecosystem.

• Key Benefit 1: Clarifies that not all 'staking' is created equal under the law.
• Key Benefit 2: Necessitates staking models that require active service provision.

EigenLayer's restaking paradigm repurposes staked ETH or LSTs to provide cryptoeconomic security to other protocols (AVSs). The utility is the provision of a measurable security service, not passive yield.

• Key Benefit 1: Utility is the provision of decentralized security, a bona fide service.
• Key Benefit 2: Creates a new, non-financial primitive (cryptoeconomic security) that tokens can power.

The SEC's new stance renders the old defense obsolete. Airdrops to insiders, roadmap-driven price speculation, and founder control are now direct liabilities. The legal burden of proof has shifted from the regulator to the project.

• Key Risk: Founder liability for secondary market sales.
• Key Shift: Must prove decentralization at launch, not as a future goal.

Token function must be inseparable from protocol mechanics. Think fee payment, governance slashing, or computational bond—not just a discount coupon. This creates a defensible 'consumptive use' argument.

• Model: Ethereum's ETH for gas, Maker's MKR for governance/vault risk.
• Metric: Aim for >70% of token supply actively staked/bonded in core protocol functions.

Separate the 'product' token from the 'governance' token. Use a minimal, non-appreciative governance token (like Curve's veCRV) for parameter votes, while the core utility token handles protocol throughput. This isolates regulatory attack surfaces.

• Reference: Curve Finance's veTokenomics.
• Tactic: Governance token airdrops should be meritocratic (e.g., to active protocol users, not VCs).

Design tokens that would retain core utility if the founding team vanished. This means fully on-chain, immutable logic and community-run governance. The protocol must be a finished product, not a startup equity proxy.

• Benchmark: Uniswap's UNI, while not a security, still struggles with this test post-launch.
• Requirement: All core functions must be live and immutable at TGE.

Replace speculative token rewards with non-transferable reputation (Soulbound Tokens) for contributions. This aligns incentives without creating a security. The value accrues to the user's on-chain resume, not a tradeable asset.

• Framework: EigenLayer's restaking, but for social/development capital.
• Outcome: Builds a Sybil-resistant contributor graph as the real asset.

If all else fails, structure the token as a pre-paid service credit with a capped supply and fixed utility price. This mimics a software license, not an investment. The key is eliminating secondary market profit expectation.

• Example: Filecoin's storage market credits, but more rigid.
• Constraint: Must enforce use-it-or-lose-it mechanics with no resale speculation.